I have been making a mistake for most of my life. See, I’m an economist, and one of the things that attracted me to economics is the notion of the “ideal economy.”
Of course, there are valid objections to the use of markets. There are people who cheat and commit fraud, and there are problems with information and market power and externalities. Sometime consumers make mistakes. In fact, some of those mistakes, as my friend and Duke colleague Dan Ariely is fond of telling me, raise questions about the very nature of our “model” of consumption.
In his book Predictably Irrational, Dan makes two main points. First, consumers are not “rational,” at least not in the sense economists assume. Consumers have trouble choosing among several alternatives; new product prices are arbitrary; and people are seduced by “free” stuff. Second, sellers and marketers know that consumers are predictably irrational, and they take advantage of that weakness by advertising, packaging, and carefully framed comparisons.
So what’s the mistake I’ve been making for most of my life? I’ve been trying to defend the perfection of markets. I’ve been sucked in to the notion that markets are “ideal”: “Markets aren’t so bad!” “Consumers are generally better off!” and so on. Friends, if you have been defending the perfection of markets you have been played for a sap. Stop it.
The simple fact is that people can be hoodwinked. People. Human beings. The results of behavioral economists and psychologists such as Dan Ariely, Richard Thaler, and others are correct, and persuasive. But when someone uses those results to criticize markets – and stops there – they are not playing fair. Because the criticism of markets always has to be in reference to some other system: markets are bad, compared to what?