Sunday, January 5, 2014

Emporiophobia!

For Christmas, my husband gave me a game called Forbidden Island. It is a "collaborative game," as opposed to a competitive game, created by "cooperative game master" Matt Leacock. Everyone wins or everyone loses. As my relatives and I puzzled our way through the rather lengthy game instructions, there was no end to the jokes about an economist playing a non-competitive game. I'm sure you can imagine.

The game, it turns out, is quite fun, and I've already been subjecting house guests to it (so be forewarned.) Forbidden Island came instantly to mind when I just came across a new article by Paul Rubin, an economics professor at Emory University. I was attracted to the article by the title, which introduces a fun new word: "Emporiophobia (Fear of Markets): Cooperation or Competition?" (Southern Economic Journal, forthcoming.) Though I find plenty to disagree with in the article, it is very thought-provoking and an enjoyable read. From the abstract:

Widespread emporiophobia (fear of markets) has important policy implications, as it leads voters to demand anti-market policies. There are many reasons for this anti-market attitude; however, economists could reduce emporiophobia if we stressed cooperation rather than competition in writings and policy discussions. In a sample of introductory textbooks, competition is mentioned on average eight times as often as cooperation. The fundamental economic unit is the transaction, and transactions are cooperative. The benefit of a market economy - increased consumer surplus - comes from cooperation through transactions, not from competition. Competition in a market economy is competition for the right to cooperate. Competition is important because it guarantees that the best cooperators will win and because it establishes the efficient terms for cooperation, but cooperation is fundamental. For most people, competition has negative connotations as it focuses on losers, while cooperation implies a win-win situation.
Emporiophobia is a made-up word, and my first instinct was to wonder if it described a made-up problem. Actual fear of markets isn't something I see much-- even in Berkeley, subsistence farming hasn't gotten trendy. But Rubin says fear of markets is "all around us."  He directs readers to Bryan Caplan's book, The Myth of the Rational Voter, for evidence of rampant emporiophobia. He also cites a recent article, "Economic Experts versus Average Americans" by Paola Sapienza and Luigi Zingales, and articles on anti-market bias in movies. When he begins to describe examples of emporiophobia, I realize that the term means something different than I thought:
"The statute books are full of laws limiting or restricting markets (minimum wages, farm price supports, occupational licensing laws, tariffs, numerous entry restrictions, anti-gouging regulations following disasters). Washington is packed with regulatory agencies whose purpose is to limit the functioning of markets. (I myself worked for two such agencies, the Federal Trade Commission, in the 'consumer protection' area, and the Consumer Product Safety Commission.)"
In other words, he classifies any desire to limit or regulate markets as fear of markets-- a fear that Rubin himself overcame. Rubin describes his own conversion from a young person who was "quite leftist, and even socialist, as was consistent with my demographic" to a "hard core believer in markets."

While I do not agree that  minimum wages, consumer protection, and the like exemplify a fear that needs to be alleviated, I do find discussions of the language and metaphors of economics very interesting. Rubin cites Deirdre McCloskey's classic work on rhetoric and metaphors in economics, and contributes his own analysis of the language in popular economics textbooks. He looks at the relative frequencies of the words "competition" and "cooperation" in a number of microeconomics texts.

Tyler Cowen and Alex Tabarrok's Modern principles: Microeconomics mentions competition 8 times as often as cooperation, which is about average. The highest ratio, 20.43, is Robert Frank and Ben Bernanke's Principles of Microeconomics. Greg Mankiw's Principles of Microeconomics and Paul Krugman and Robin Wells' Microeconomics have the lowest ratios, at 5.45 and 4.45, respectively. I don't find these ratios terribly surprising, since these are micro texts so they likely include multiple chapters on market structure: the differences between perfect competition, monopolistic competition, and monopoly. It would be interesting to look at macro texts. In my blog, which is more or less macro-focused, I can't recall using either term very frequently.

Why does Rubin care so much about the terms competition and cooperation? He explains, in a thoughful passage:
People engage in economic activities in order to maximize utility, and winning or losing (for example, having the largest market share, or the largest profit, or the highest income) is incidental to the actual goal, although some may gain utility from having the largest market share. Then characterizing behavior as competitive is metaphoric, and is not in general the best metaphor. “Competition” is a metaphor borrowed from sports, and it is not an appropriate metaphor for the economy.

The most fundamental economic act is the transaction...Moreover, as economists we know that all parties expect to benefit from a transaction, else it would not occur. Thus, a transaction is a cooperative act–an act benefitting all who voluntarily participate in it. The essence of economics is cooperation through transactions and markets. 
He also adds a smart discussion of the zero-sum thinking that can accompany the idea of competition. Zero-sum thinking, when applied inappropriately, is indeed a harmful misconception. Some of his applications, however, I find problematic. "It is natural for people to observe those who are unsuccessful (e.g., the poor, the homeless, failed businesses) and assume that these people are the losers from economic competition, and that their unfortunate position was caused by competition," he writes. He adds,
"Why are some people poor? The competitive metaphor says they are poor because they were outcompeted, and perhaps their wealth was expropriated by the rich. (The folk saying “The rich get richer and the poor get poorer” implies causality.) But economists know that this is not why people are poor. They are poor because they have little or nothing worthwhile to sell–no capital, no valuable marketable skills. That is, the poor are poor because they are unable to enter into cooperative relationships with others. We may feel sorry for someone who is poor, whether this is because they have lost in a competitive contest or because they are unwilling or unable to cooperate successfully with others...There is no external agent to blame for poverty if the poverty is caused by a lack of things to sell, rather than by losing in a competitive contest. The solution to poverty caused by a lack of something to sell is to increase the human capital of the poor, generally through increased education. 
This is an important point. Much harm is done by seeking villains who have caused poverty, generally by being viewed as outcompeting others. For one example, consider that the poor may not have much to sell, but they may have something. But if we view poverty as being caused by successful competitors exploiting the poor in markets, we may restrict the markets in which the poor do cooperate (for example, through usury laws or minimum wages) and actually reinforce their poverty."
First, increasing the human capital and education of the poor is certainly a noble goal, but is an unrestricted market likely to attain it in the near future? I find that unlikely. Second, exploitation and expropriation can and do exist, even in a free market. Even if we describe markets as cooperative, there is no guarantee of fair play. Third, even if we describe markets as cooperative, unreasonable levels of inequality still result. "Lack of things to sell" or inability to cooperate are unsatisfactory explanations of poverty, and I see no explanation of how an unrestricted market would address them. I can't say that I have a fool-proof solution to poverty, but I do think that seeking and implementing better policy solutions is necessary. In that sense, a healthy fear of markets is a good thing.

One final note. If I think back to my own introductory economics education, the "c" word that stood out most to me was neither competition nor cooperation, but coordination. After all, the invisible hand is one of the profession's most famous metaphors.

4 comments:

Dan Kervick said...

About nine years ago, I made a shift from academia to the corporate world, and I quickly learned about the reality of competition in corporate strategy and corporate life. The company president gave a talk in which he outlined the market positions and geographical reach of our firm vis-a-vis our chief competitors, and in which he directed us to the goal of going into our competitors "back yards" and taking market share away from them.

I agree that at the consumption end of things in a free enterprise market economy, the competition is incidental. But on the production and sales side inside the firm, the competition is extremely important, explicit and aggressive - at least based on my experience. It's a race to develop and exploit new markets before your competitors do, and to take shares of existing markets away from competitors. The competitors don't just lose market share as a side effect of your success in winning customers; rather, the competitors are to some degree analyzed and targeted, with competitive strategies developed that are explicitly aimed at countering competitors' strengths and defeating them.

We succeeded in defeating our chief competitor, and reducing them to insolvency - at which point we bought them.

There is also endless internal competition inside the capitalist firm for resources, power, position and prestige. This is also quite obvious and explicit.

Also, just an anecdote: the customers for the particular service I am involved with are publishing companies, and among them I have worked with many Christian publishers over the years. We sell tools for doing competitive research. From time to time I will joke, "I guess I shouldn't say your competitors in the Christian publishing world, but should say your colleagues. They always correct me.

Jenny Wang said...

Interesting, Carola. After reading the Rubin’s abstract, I realized that he described “emporiophobia” by the fear of market failures. Although government regulations can alleviate them, I think Rubin’s argument for cooperation through transactions as a way to remedy the problems with competitive market, has some inherent problems. For one, the economic man is rational, but he will maximize his own utility. But suppose he is in a group of men, and he sees an independent strategy that will yield higher utility than the group strategy. Will he cooperate with the group or act independently for his own selfish good? I think Rubin’s assumptions on greed and cooperation have overlapping conflicts. Cooperation creates positive market outcomes, but Rubin’s argument has game theory implications that are not sufficiently considered in his paper.

Carola Binder said...

Jenny, are you the Jenny Wang from my Econ 100B class over the summer? If so, I'd love to hear how you're doing-- drop me an email.

Matt Redmond said...

As far as the poor are concerned, obviously the problem is very complex. Many people are discussing "the poor", especially in the present political environment. However, it is interesting that people rarely mention that the term "poor" is actually relative, therefore "the poor" will always exist.

I guess that "the poor" can also be an objective term, if some limit is used to describe it. In that case, I would argue that the poor would still always exist due to the law of scarcity.

Matthew 26:11/Mark 14:7