The Tyranny of the Market

Joel Waldfogel argues that markets, too, lead to a tyranny of the minority, much like libertarians and other small government types accuse democracy of producing. But Waldfogel premises his argument on bad economics. This is not to say that Waldfogel is a bad economist - to the contrary, he's an exceptional economist using bad  standard economic analysis of market comptition.

Waldfogel uses Nike shoes and the American Indians to prove his point. American Indians, who tend to have wider feet, until recently were unable to buy shoes specifically to fit their niche demands. Why did it take Nike so long to fulfill this niche market? Had markets effectively worked, this niche market would have been satisfied long ago. But instead, Nike produced shoes only for the majority player(s) in the market - people with small width feet.

The important question, however, is why Indian entrepreneurs didn't capitalize on this niche market long ago. Unlike Nike, it was the Indians who obviously had the localized knowledge of the problem and that their wants were underserved. So why didn't tribal entrepreneurs exploit this profit opportunity and produce a wider shoe? I wonder if the lack of markets and market culture in the Indian community had anything to do with their own neglect. In the end, it was only through fortuitous discovery (Kirznerian entrepreneurship) that Nike stumbled upon this unexploited profit opportunity?

Would we argue that markets fail if an American company failed to capitalize on an unmet demand of some Amazonian Indian tribe?

Where I have observed Waldfogel's argument come alive is in the market for textbooks. Principles textbooks are homogeneous. At dinner recently with the author of a new and heavily marketed textbook and the local rep from the publisher, I inquired about the homogeneity in this market and why it is that every book begins from the position of equilibrium and then proceeds to define market competition as firms that produce the same homogeneous good and enter and exit that specific market, seeking to compete away any economic profits. In other words, life begins miraculously at equilibrium and the role of market competition is simply maintaining stasis by producing more of the same bags of flour that every other firm is producing. Any deviation from this market equilibrium is defined as a failure of the market ala Akerlof, Stiglitz, etc.

I further asked, why there isn't a textbook for a standard principles class that begins with life in chaos and disorder. We then proceed to learn how market competition overcomes much of the information problems and other frictions inherent in social organization to bring about social cooperation through the spontaneous coordination of individual behavior. We then learn how market competition brings about the allocation of scarce resources, moving towards an ever-elusive and never attainable market equilibrium. The result is that markets produce vast amounts of wealth, not just for the wealthy, but for the common person as well. Market competition is thus defined as a dynamic process of disrupting equilibrium through entrepreneurial action, constantly seeking to better the human condition, either by discovery of new goods and services (pharmaceuticals, energy efficient cars and homes, etc.), further product differentiation (i.e., the iPod, large screen televisions, CDs and DVDs, computers, etc.) or by discovering new means of minimizing - yet never negating - transaction costs (ala Wal-Mart, Netflix, etc).  I  was told by both the author and the rep what I already knew:  the  majority of the profession doesn't  teach it, hence it's not a profitable venture for the textbook company. The result is the homogeneous principles text we see today. (This goes for other texts as well.)

The problem is, the buying and selling of textbooks is not undertaken within conventional market structures. Professors choose the text from which they wish to teach and students are then required to purchase that book. If given the choice, my guess is that the vast majority of students would choose a less formalistic text that deals more with economic concepts and less with methodology because it's more relevant to their lives and because in my experience that's the approach most students prefer their principles courses be taught. Paul Heyne put out such a book long ago (now authored by Pete Boettke and Dave Prychitko), but its use is limited. It's my experience that students prefer to learn more Coase and Alchian and less Samuelson.

In competitive markets there will always be entrepreneurs seeking to fill niche demands as long as doing so is can be done efficiently and thus profitably. And if not, there will be plenty of people seeing to make it so. Where we find Waldfogel's complaint valid we're bound to find either a lack of markets or government intervention used to deter entrepreneurial discovery. (And here.)

Comments

[Brian Pitt]

This incredibly shrewd post touches on why economists cannot neglect the "intellectual messiness" of social structure. And why, methinks, mainstream economists are more interested in demonstrating that they are conversant with advanced calculus than economic principles.

Btw, David Gordon has a wonderful economic text that surpasses the understanding of most graduate level economic students.