Wednesday, April 7, 2010

Common Misunderstandings

Rufus F is both entirely correct and utterly wrong in this post about market determination of value.

Let's start with where he is wrong:
My beef is really with people who try to take readings of the market as some sort of higher truth because they have no access to any other scales of value. Ultimately, I believe that cultural institutions should judge their endeavors by several metrics, including the economic, but if they invalidate all other scales of value in light of “what the market tells us”, they tend to make very foolish and short-sighted decisions. This is not the fault of economics, capitalism, consumption, or people who read Twilight novels instead of Proust: it’s the fault of decision-makers who don’t understand why market economics are a necessarily-limited heuristic, and instead treat the market as a sort of oracle.

The criticism that many, including Rufus F, make in regards to economics' agnosticism of other standards of value is terribly off-point. Economics says the market is the best way to determine what people are willing and able to pay for, which is to say that it is in the vast majority of cases the most efficient mechanism for determining what society's preferences are.

This is where people who don't like the results of the market's determination of preferences usually put up elections as superior alternative. There are a variety of pros and cons to elections, but overall the market is better at allocating resources for several reason. First, markets take into account how much people prefer something over another. Price has infinite potential values. Politics is almost always an up or down vote. Second, the market allows people to opt out. If you don't want a product, then you simply don't buy it. If your preference loses a referendum or election, then you are stuck picking up the tab. Third, markets react very quickly. They certainly react faster to changing preferences than election cycles.

So, after that digression, getting back to the main point. The market pools information about preferences quickly and efficiently. It doesn't say what those preferences ought to be, but rather what they are.

Rufus tries to offer a reasonable explanation:
all I’m saying is that, because economics is a necessarily-limited heuristic, it has to be supplemented by other standards of value- and moreover by other visions of a good life, a healthy culture, and the role of the institution in the life of the individual and within the society as a whole. Or you end up with universities that see education as little more than a market-driven consumer item and act accordingly.

Well, herein lies the rub. If the market determines is the best method of determining what the values of society are, then almost necessarily supplementing with other standards is to place a higher weight on certain people's, in this case the decision makers, preferences than others.

Rufus sums up with this:
I have another scale of value that I must articulate, even if it is “arrogant” or “elitist” or “unrealistic”. Because written on my heart is the knowledge that what they’re describing there is a society committing a sort of suicide, and I won’t take that as inevitable.

Well, since the market determines society's preferences. Or at least is the best mechanism we have available for determining society's preferences, then if Rufus' scale of value differs it probably is elitist. However, and this is an important point, that doesn't mean he's wrong. Perhaps his scales of value are in fact superior. The issue FLG often has is that attacking the market's values is off-base. It's shooting the messenger. What Rufus needs to do, if he disagrees with the market's values is to try and convince the members of society that his values are superior, not simply insert a greater weight to his preferences in the process.

Where he is entirely correct is on linear projections:
When I listen to these experts who say that, well, in 20 years, American libraries won’t have books, and it will no longer be legitimate in academia to study history, or foreign languages, or the classics, or to do philosophy; I do understand that they’re not describing an ‘ought’ or waging an attack- they’re just predicting. And, of course, their predictions are most likely dead wrong. And, yes, I know that these things still cost money, which I am told does not grow on trees.

These types of projections are idiotic. First of all, the law of diminishing returns kicks in. A quick growth in electronic books is largely the result of the replacement happening where electronic books have huge advantages over paper books, and perhaps more importantly the instant adoption by people who vastly prefer ebooks because those advantages are tremendously meaningful to them. For example, a traveling management consultant bookworm probably prefers a Kindle over paper books very strongly. But when you start getting toward more saturation the preferences for ebooks begin to dwindle.

Somewhat conversely, as each university removes offerings it increases the demand for other schools. If Penn State drops the German or Philosophy departments, then the demand for a place at schools that still offer them, say UPenn, goes up. FLG can envision a likely outcome whereby only the top 25 or 50 schools offer Classics majors, for example. This is how the market works. Unfortunately, as the example makes perfectly clear, when supply decreases, price increases. But it's not really the market's fault per se. It's only the messenger. Studying classics is perceived as an elite endeavor and will consequently be offered only at elite universities.

Now, you may be saying that studying classics isn't an elite endeavor. Fine. But the point is that it is perceived that way. To transition away from the classics example toward a more general examination of the difficulties the market poses for liberal arts, the problem still isn't the market. The problem is that many people do actually view education as an economic investment that leads to more money. Many people do want to studying something "practical." Or leaders and opinion columnist, stupidly in FLG's opinion, focus on math and science over the liberal arts because they mistakenly believe that math and science education is the key to economic growth.

Anyway, the point is not to blame the market, which is pooling preferences and information, but to change the public's opinions. Those are ultimately what drive the market's outcomes. There is a somewhat compelling argument that if college were less expensive, then students would feel less pressure to choose "practical majors." Perhaps this is true at the margins, but FLG doesn't see a huge increase in philosophy majors if college were free. (Sure, there's the case of France, but 1) FLG thinks this is largely a result of cultural factors and 2) do we really want to emulate the French university system?)

Lastly, if we follow what Rufus seems to be recommending, which seems to be rather than having universities cut empty philosophy or foreign language classes they should cut across the board to keep those departments around. So, full business classes would need to be cut to keep empty ancient philosophy classes going. This doesn't sound like the way any institution, even somewhat non-market-oriented one like a university, keeps solvent over the long run. If a university does decide to do that, then they need to figure out a way to attract students interested in majoring in philosophy. Or, better yet, make a compelling case to society for why students should major in philosophy in the first place.

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