The Markets are Good

But not magic.  Mark Thoma has a great post on the how and why of when markets work, and when they fail.  I wish I'd written it, but since I didn't, I'll just pull a few quotes and suggest that its worth a read for next time you're arguing about deregulation.

In order to work their magical efficiency, markets need very special conditions to be present. There must be full information available to all participants. Product quality, locations and prices of alternative suppliers, every relevant piece of information must be known. Not quite sure if the wine is good or not? That's an information problem. Not sure if the used car has problems? Don't know where any gas stations are except the ones beside the freeway in a strange town? No way to monitor the quality of the building built in Iraq with U.S. aid? No way to be sure if consultants are worth the amount they are being paid? Information problems are common and they can cause substantial departures from the perfectly competitive, ideal outcome.

.....

The list goes on and on. In order for markets to work their magic, there can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and, importantly, property rights must be well-defined (and I probably missed a few). In general, the incentives that the market provides must be consistent with perfect competition, or nearly so in practical applications. When the incentives present in the marketplace are inconsistent with a competitive outcome, there is no reason to expect the private sector to be efficient.

Markets don't work just because we get out of the way. When government contracts are moved to the private sector without ensuring the proper incentives are in place, there will be problems - waste, inefficiency, higher prices than needed, etc. There is nothing special about markets that guarantees that managers or owners of companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned.

 

Marginal Utility of Wealth

Wow.  Every so often, you read something that completely re-frames your thoughts on something, or makes clear both a paradox and its explanation.  If you're an economist, you probably think in terms of marginal utility to wealth: as Bill Gates put it, after a certain point "it's the same hamburger."  This generally (always?) holds when we're talking about more of a good thing.

But when it's not about making your life better, but instead about making a bad thing stop, we see the reverse effect.  Imagine a pile of bills.  A huge pile of bills on your kitchen table.  Not just any kind, but the pink kind, that mean you'll have your utilities shut off next week if you don't pay, and the debt collectors are already calling you about your 5 credit cards, or would if you still had a phone.  Imagine how terrible that makes you feel.  If you're reading this blog, you've probably never faced this, or at least not lately, but even imagining it is not pleasant.  Now imagine paying one of your bills.  Feels better?  Nope, didn't think so.  Now the lights are on and the phone works, so the terrible situation is just that much clearer.

NOW imagine paying the last bill.  Wow, major relief.  You just experienced increasing marginal return to wealth, something that 5 years or so of economics background prepared me to more or less expect to never exist.  Now please excuse me while I re-examine most of my thoughts on povert.  Thank you Blogosphere!

Now, because I'm an econ nerd, here's what's happened to my implicit model of how people value stuff:

let u(x) be some log-type function such that du/dx is decreasing, approaching zero.

Before:

Utility= u(income)
Which looks like:

After:

let P be some constant of income that is needed to make the bulk of misery go away.  Perhaps it's the poverty level?

Let C be a value chosen between 0 and 1 by the individual to maximize their utility level at any given income level.

Utility = u(C*income)- max{0, u[P-(1-C)*income]})

Which has varying returns to wealth: some areas will have increasing returns to wealth, and some will have decreasing returns to wealth.  

Additionally, since the first term is "stuff you want" and the second term is "stuff you don't want" we can see c as a "indulgence" variable.  A higher C value means more indulgence, and a lower C means less indulgence.  This fully explains why "indulgent" choices make sense: if your demand function looks like this, you may well get more utility out of an "indulgent" choice of a $100 pair of sneakers than paying that nagging $100 utility bill that's 90 days past due.

I'm going to read up and see if anything in the "serious" econ literature explores this idea, and probably come up with a more detailed toy model of how wealth and utility might be related.

Jacques and Stairs

Jacques is a pretty quiet dog, only making a little noise when we leave him unattended, and he hasn't barked at much of anything or been cowered by other dogs, but it appears we've found his arch-nemesis.  Stairs.

On the way down to the ground level the first time we took him out he had absolutely no intention of going down the stairs. He comes when called.  He responds to a gentle tug on the leash.  He even puts all four feet on the ground when we chastise him for begging.  But there was no way he was coming up or down the stairs on his own.  He got down two stairs, and then turned right back around, walked back up, and lay down at the top when we tried to coax him down.

We carried him, but training is in order, since this is not a long-term solution.

Taking him home

This is a little out of order, but if you read the last post, you gathered that we took Jacques home.  Last night we went to his foster mom's house, put our new collar on him, signed a few papers and sat for a few photos, and then took him for a brief walk around the neighborhood where we picked him up.

Jacques has a different concept of what a walk looks like than I do though--his previous owners never taught him to heel, which means that he spent the entire walk at the end of his leash, doing his best to run beyond it.  I really do sympathize with his excitement at all the new smells all around, but this is a habit we'll need to break soon, because its not safe for him to be out of control around cars.  Eli gave me some good advice with vegetarian treat recipes, and if somebody has tips or experience with teaching a dog to heel, that would be awesome.

Once we finished walking, we stopped got in the car, and Mita did her best to keep him in her lap, but again, he was pretty excited by all the action outside the car, so this was a bit of a battle.  This means that travel will have to be in a carrier crate, since it's just not safe for him to be climbing on me or getting into my field of view when we're driving.