Year of Economics #5.1 and #5.2 Asymmetrical information / Fire engines

Year of Economics – September 26, 2003 – 5.1: The Problem of Asymmetrical Information (A Brief Digression)


Dear Abhay,

Can we revisit the classic axiom of the baker and the bread?

A person goes to the baker and buys a loaf of bread. One can conclude from the very occurrence of this event, that both the person and the baker have benefited from the exchange.

I began my last correspondence with this parable, from Deirdre McCloskey’s book The Secret Sins of Economics. She notes that it has become the foundation for free-market theorizing: since the baker offers the bread voluntarily and the customer purchases it voluntarily, they must both benefit from the exchange. Therefore, the free market benefits all participants. (Otherwise, why would they participate?) I would like to accept for the moment the retroactive qualifiers added in attempts to keep the parable true: that people enter into exchanges voluntarily, that people behave rationally, etc. I want to focus instead on another qualifier which, as I understand it, economists added still later: if information is symmetrical.

1. What is asymmetrical information?

I understand this to mean that both participants benefit from the exchange as long as they share the same information about the commodities exchanged and the exchange itself. As long as the customer knows everything relevant about the bread that the baker knows, and as long as the baker knows everything relevant about the customer’s finances that the customer knows, and as long as both share the same information about the price of bread – the exchange remains beneficial. I have added the word relevant because obviously the baker usually knows more about the bread than the customer, but not all of that information is relevant to the exchange. If the baker knows, however, that the bread is defective because of some baking error, yet this information remains unknown to the customer who pays the regular price, the exchange has become less beneficial to the customer. If the customer writes a check for the bread, knowing that the bank account has a zero balance, but this information remains unknown to the baker, the exchange becomes non-beneficial to the baker. If only one of them knows that the value of bread has changed radically because of market conditions, the exchange becomes less beneficial to the other. Each of these circumstances, I think, exemplifies how asymmetrical information disrupts the mutually beneficial market.

Assuming I am correct in my analysis, my first question is this: how does asymmetrical information differ from lying?

Thirty years ago, the economist Joseph Stiglitz researched problems of asymmetrical information in work that won him the Nobel in 2001. He explored common situations in which one party to a transaction knows more than the other party. Typically, when I take out a life insurance policy, I know more about my health than the insurance company. The company may try to draw conclusions about my health based on a statistical analysis of me. But my knowledge of my health does not become lying unless I deliberately misinform the company in some way relevant to the exchange. This reminds me of Rod Steiger, in the 1970 disaster film Airport, taking out a life insurance policy with the intention of detonating a bomb on an airplane, killing himself and destroying the evidence of his asymmetrical information, so his widow will collect the premium and no longer live in poverty. A more quotidian example occurred in our household yesterday, when Lin received a mail-order product she had ordered last week. To her surprise, a sheet of New Testament Bible quotations accompanied the receipt. She immediately returned the item, not wanting to support a business that proselytizes, revealing its intentions only after the sale. Stiglitz showed that asymmetrical information can lead to complete market failure. But did he in doing so show that asymmetrical information equals lying? Or did he simply suggest that asymmetrical information, which may or may not involve lying, still paralyzes markets? Furthermore, even if we assume that “asymmetrical information” is an economic formulation of a concept, and “lying” is an ethical formulation of the same concept, why would I seek a meeting place between the two?

2. What is lying?

When a question like this comes up, I turn to the philosophy I feel most akin to, and of which I have a modestly more thorough understanding than economics – Buddhism. Buddhism defines right speech with the clarity of its typically negative articulation: to abstain from false speech.

Herein someone avoids false speech and abstains from it. He speaks the truth, is devoted to truth, reliable, worthy of confidence, not a deceiver of people. Being at a meeting, or amongst people, or in the midst of his relatives, or in a society, or in a king’s court, and called upon and asked as witness to tell what he knows, he answers, if he knows nothing: “I know nothing,” and if he knows, he answers: “I know”; if he has seen nothing, he answers: “I have seen nothing,” and if he has seen, he answers: “I have seen.” Thus he never knowingly speaks a lie, either for the sake of his own advantage, or for the sake of another person’s advantage, or for the sake of any advantage whatsoever.

From the point of view of Buddhism, all cases of false speech have a deceptive intention in common. The nature of false speech depends on the deceptive intention, which can take three forms: greed, aversion, or delusion. Greed as motive results in the lie aimed at gaining some personal advantage for oneself or those close to oneself – material wealth, position, respect, or admiration. With hatred as the motive, false speech takes the form of the malicious lie, intended to hurt and damage others. The motive of delusion results in a less pernicious falsehood: the irrational lie, the compulsive lie, the interesting exaggeration, lying for the sake of a joke. The Buddhist stricture against lying rests upon several reasons. First, lying disrupts social cohesion. People can live together in society only in an atmosphere of mutual trust, where they have reason to believe that others will speak the truth; by destroying the grounds for trust and inducing mass suspicion, widespread lying becomes the harbinger of a fall from social solidarity to chaos. But lying has equally dangerous personal consequences. Lies tend to proliferate. Lying once and finding our word suspect, we feel compelled to lie again to defend our credibility, to paint a consistent picture of events. So the process repeats itself: the lies multiply until they lock us into a cage of falsehoods from which it is difficult to escape. The lie thus offers a miniature paradigm for the process of subjective illusion. Truthful speech attempts to establish a correspondence between our own inner being and the nature of phenomena. This correspondence allows the occurrence of wisdom. More than an ethical principal, the Buddhist devotion to truthful speech is a matter of taking a stand on reality rather than on illusion, on the possibility of wisdom rather than the fantasies of desire.

When I read of Stiglitz’s work on the economic consequences of asymmetrical information, it reminded me of the Buddhist doctrine on the consequences of false speech. Stiglitz’s articulation, however, struck me as even more unforgiving. For Stiglitz, I would venture, the motivation (greed, aversion, delusion), and form of the lie does not matter. It is the actual asymmetry, the imbalance of information, that disrupts the exchange. In this respect, any manner of preserving the asymmetry, whether lying or simply withholding information, has the same destructive economic effect.

I realize the absurdity of me, the eternal beginner, writing on the economics of Joseph Stiglitz. I have tried to speak from the point at which ignorance becomes knowledge. This intention produces misstatements, restatements, understatements, overstatements, and half-understandings. Nevertheless, before I turn this problem over to you for a more informed economic response, I will push it one step further.

3. The public’s innumeracy

I am not content to practice economics sub specie aeterni, dehistoricized, from the viewpoint of eternity. Therefore I want to raise the issue of what has been called the Bush Tax Cut. In a debate with Vice President Al Gore, candidate George W. Bush, speaking of his tax plan, said, “most of the tax reductions go to the people at the bottom end of the economic ladder.” The economist Paul Krugman has called this kind of statement Mr. Bush’s “willingness to trust in the public’s innumeracy.” (Around this time, the Bush team began accusing candidate Gore of “serial exaggeration.”) Statements of this sort have proliferated into the Bush presidency. As the tax plan has played out, only the wealthiest will receive reductions in future years. The rest of us received a check for a few hundred dollars, which we had to pay back at the next tax collection time. Still, many public economists refer to this as a tax cut. It seems to me more like a loan. Now people debate the efficacy of tax reduction (for multi-millionaires) as a strategy for job creation.

In today’s political turmoil of wars and terrorism, it may not occur to people to wonder if a tax cut is a tax cut. Apologists in the daily papers, too numerous to refute individually, seem “to trust in the public’s innumeracy” on economic issues. Maybe we will have time to examine some of their arguments in the future. For now, I want to focus on the topic: assymetrical information.

I want to raise the issue of the administration’s obsession with secrecy. One can argue the advantages of government secrets, or the rights of the government to keep secrets, but none would debate that this administration has them. Does overt secrecy in itself represent assymetrical information? It seems to me that it must, particularly as one party in the exchange knows that the other party is withholding information. In addition to the secrecy, the pattern of statements (President Bush: “most of the tax reductions go to the people at the bottom end of the economic ladder,” or Vice President Cheney: “I have no financial interest in Halliburton of any kind and haven’t had, now, for over three years” when he received $162,392 in 2002 from Halliburton, the corporation in charge of rebuilding Iraq) suggest, if not lying, at least a willingness to mislead and trust in ignorance. These statements (false speech), coupled with the withheld information (secrecy), would seem to me to produce an atmosphere of mutual mistrust, regarding exchanges in which the Executive Branch is a party. Taxation represents such an exchange, as does the role of cabinet appointments, such as head of the Securities and Exchange Commission, in overseeing corporate investments and markets.

So here are my questions to you.

Does the asymmetrical information of the Bush administration have an adverse effect on markets?

Is lying bad for the economy?

I look forward as always to your response,
Matthew

Year Of Economics 5.2 - Four fire engines, two police cars and an ambulance (Response to a digression). September 29, 2003.

My dear Matthew,

1.
We start in the cafeteria. A busy time of the day there. Groups of students sit glued to giant TV screens swallowing large mouthfuls of tasteless cafeteria fare. Suddenly one student runs to a garbage can and starts vomiting violently. Another runs to him and fusses over him. 30 seconds later, another student starts vomiting. Every 30 seconds a new vomiting sound is heard. Soon the cafeteria is full of students leaning over oversized garbage cans. The spell cast by the drone of the large TV sets is broken. Everyone is fully present. The air is dense with the sublime impotence of awareness. The students leave their garbage cans and return to their tables. They have spent three years taking the shit we feed them. They've just recycled it.

2.
Consider the possibility for the existence of a market for lies. Economists say a market exists when potential buyers and sellers of something are in communication. Let us begin with a state of equilibrium or position of rest. The laws of supply and demand say that this position would be maintained indefinitely unless the supply or demand conditions change.

In a democracy, we narrow down or zoom in to certain individuals who we believe best represent the interests of our society and elect them. The people they then appoint share that same characteristic: they are the chosen few. Their actions then, have a reverse or broadening effect, a zooming out, a magnifying effect.

Now suppose we have a sudden increase in the quality and quantity of lies being circulated by people in public office. While the lie of the average person resonates in his or her own circle of interaction, the lie of the public official acts as what economists would call a multiplier.

3.
A student screams: my purse! They've taken my purse...we see two young men running with the screaming student behind them. The Dean and business office manager spring into action. The two robbers are chased by two middle-aged men in suits, down the corridor, even as one of the students calls to the other, Ricky, my man, run! They are after us! No one else moves. They stare at the garbage cans as if they, the garbage cans, being temporally first in the chain of events are somehow causally linked as well. Once the TV watching has ceased, it is difficult to make sense of the world.

4.
Let us return to the possibility of a market for lies. We notice a marked increase in the frequency and magnitude of lies being blatantly circulated by public officials such as our President. This would cause an increase in the supply of lies. Because of the multiplier effect, there would be a tremendous increase in the supply of lies. An elementary principle of economics states that when the supply of something increases, its price will drop. Under the present political conditions, lying is cheap and getting cheaper!

5.
Ronald is sitting next to me. We are of course still in the cafeteria. A beautiful woman approaches him, says I'm sorry, and pours her extra large yellow icy drink on his head. Ronald sits there with no visible change in expression. Now a large bald student approaches Ronald, empties a custard-style fruit yogurt on his head and proceeds to massage it into his curly hair. I watch Ronald and the bald man in fascination and so does everyone else. As if we had each paid our nickels to peep through the hole to watch.

6.
We have so far only considered the possibility of supply changing. We have logically followed the effects of changing supply on the price of lies. Now we can meditate upon the further effect of prices on the amounts or magnitudes of lies that will be demanded by society in the long run.

In the case of lies, the falling prices will stimulate greater quantities of lies to be demanded. In economic terms, the quantity demanded (though for technical reasons not the demand) of lies will increase over time. People will accept, even want, more lies over time.

7.
We are in the library now and for a long time nothing happens. Then I hear the thickly accented voice of Gloria, my student from Mexico: I don't feel too good. Gloria is pregnant and due in March. Soon the two young men at her table are leading her carefully towards the exit. I hear whispers. Water...broke...hospital. Suddenly a woman in her thirties (not a group member, takes charge and is ordering everyone around. No don't do that she scolds the young men helping Gloria and scatters them with a regal wave of her hand. This woman is now cooing to Gloria. You sit right here.....honey is this your first......no you go get the car and you go get her stuff.....I just felt a contraction!

8.
We observe an increasing disregard for truth in public office and cases such as that of Eric Schaeffer, the Environmental Protection Agency's director of civil enforcement convince us that truth-sayers must resign from office. Truth is becoming a rare commodity. In terms of the economics of supply and demand, the supply of truth decreases. Through the operation of the multiplier, there is a significant reduction in the supply of truth. Now applying the elementary principle of economics in reverse, we notice that the price will rise. Truth is expensive and getting more so.

9.
The strange situations I have described in this letter are site-specific performance pieces performed by my students all over the campus of our little technical college.

Groups of students were instructed to do something unexpected, create an informational asymmetry, and to blur the lines between performance and everyday life, between performer and audience, and intended audience and unintended audience. They were to think of their pieces as social interventions, experiments. They were to note, measure, and reflect on the responses to their works.

10.
In the case of truth, the rising prices will reduce the quantities of truth demanded. In economic terms, the quantity demanded (though, once again, not the demand) of truth will decrease over time. People will reject, want less of, truth over time.

11.
Given the informational asymmetry (only the students performing were aware that the strange occurrences were performances), onlookers chose to do one of three things. Firstly, a large number of people simply watched, as voyeurs stumbling onto unsettling scenes. Secondly, some people chose to get involved, but in a way where they were in charge. They simply did not ask if they could be of help, or offer their services, instead choosing to direct. Thirdly, some people chose neither to simply watch nor direct the proceedings but to call emergency services without announcing their actions. No one said: I have called 911. They chose to do it in secrecy. And we ended up with four police cars, two fire engines, and an ambulance.

12.
Asymmetric information is a destabilizing force. Lies are a form of asymmetric information. Therefore lies are destabilizing.

However lies may be applied towards constructive or destructive purposes. What my students are doing in their performances is a form of lying. They stage situations in public places that are destabilizing. This destabilization, however, is brief and has as its ultimate purpose the creation of a greater awareness of place. Students debrief onlookers as soon as the performances are over and openly discuss matters with the unknowing participants. My students and I sincerely believe that these destabilizing interventions have a positive effect in the fact that the equilibrium that we shatter (media induced ennui) is a harmful one. Our lying moves our college community out of its negative equilibrium and towards a positive equilibrium.

An article in this week’s issue of Scientific American on the Economics of Child Labor, describes the possibility of two equilibria. One is negative, at a low wage, forcing the family to send the children to work. The other takes place at a wage that is high enough to support the entire family’s needs, allowing the children to be educated instead. This is the positive equilibrium. Both equilibria are efficient by economic standards but one is crippling in its effects while the other is life affirming. It makes sense to destabilize the system when it is stuck at the negative equilibrium.

The blatant and open lying of public officials in our democracy destabilizes our economy, polity, and society from a place of positive equilibrium that took over two hundred years to create. I join George Akerlof (who shared the 2001 Nobel prize in economics with Michael Spence and Joseph Stiglitz for the concept of asymmetric information) in calling for civil disobedience to protest what he calls the worst government since the founding of this country. The American media largely refused to carry his rallying call. I found out only from reading German newspapers.


Sincerely,

Abhay

Year of Economics #5 and #6 Bread Problem / Capabilities

Year of Economics #5 The Bread Problem

Dear Abhay,

I recently encountered a classic axiom of economics, which I have restated here:

A person goes to the baker and buys a loaf of bread. One can conclude from the very occurrence of this event, that both the person and the baker have benefited from the exchange.

This axiom must appear very basic to you. It has become the foundation of free market thinking, although qualifiers have been added: if both the person and the baker enter the exchange voluntarily; if information is symmetrical; etc. Nevertheless, since the baker offers the bread and the person purchases it, the exchange leaves them both better off. Therefore, the free market benefits all who participate in it.

I think I understand the axiom as it has been stated. I also realize that greater economic minds than mine have challenged it, revised it, or dismissed it. Still it has fascinated me as a kind of cuneiform – a fragment of foreign thought requiring decoding – and I have found myself unable to stop analyzing it.

Year of Economics – September 11, 2003 – 5: The Bread Problem

This is an artist as an artist should be, modest in requirements: wanting only two things, bread and art…
– Friedrich Nietzsche, Twilight of the Idols, Maxims and Arrows #17

Part 1: commodities

A) I go to the baker and buy a loaf of bread. I benefit from the exchange because I need a loaf of bread to eat, and I have money. I transform my money into bread. I am happier than before.

B) I am a baker. I have baked some bread. It cost me x to bake it. I am not myself hungry for bread. A person comes in and buys my bread for a price x + y. I have made a profit in the amount of y. With this profit I can 1) bake another loaf of bread tomorrow, and 2) buy some cheese from the dairy. I am happier than before.

It seems that the basis of this axiom, as in many economic formulations, rests in the whether argument, not the how much argument. Since it happened it must mean both individuals benefit. If they did not benefit, they would not have participated. How much or how little they benefit does not effect the truth of the axiom. But I wonder about a third aspect, beyond whether and how much. I wonder about the aspect of what. Does the truth of the axiom shift depending on the quality of the benefit?

C) I go to the baker and buy five baguettes. I benefit from the exchange because I attach the five baguettes to my head. I transform my money into art. I am happier than before.

This press release describes a recent performance presented in Ireland by Japanese artist Orimoto Tatsumi.

Japanese performance artist comes to Belfast.

At 3pm during the afternoon of Saturday 16 March Tatsumi Orimoto will perform Bread-Man, a performance that involves the artist, with the help of his assistant walking the length of Royal Avenue with numerous baguettes and loaves tied around his head, obscuring his face. As he meanders his way down the busy street Orimoto executes a series of everyday movements: shaking hands, pointing and bowing.

Orimoto, originally trained in painting, started working in performance when he moved to New York in the 1970's and was influenced by the avant-guard Fluxus Group. He has been doing his Bread-Man performance since 1989 in cities across the world, including New York, London, Moscow, Kathmandu, Hamburg and Tokyo. This will be his first visit to Ireland.

Why bread? He claims to love the shape of European bread loaves and is intrigued by the Christian belief of bread representing the body of Christ. He simply wants to surprise people and never fails to provoke some kind of reaction whether excitement, anger, hilarity, nervousness or confusion.

Let us now revisit our bakery axiom, with an additional customer. Customer number one looks at a baguette and sees his lunch. He has lunch associations with the shape, color, and smell of a fresh baguette. It appeals to him as food. Customer number two looks at the baguette and sees art. He has sculptural associations with the shape, color, and smell. It does not appeal to him as food. He has read that the dominant religion of this country believes bread can transubstantiate into the body of a deity. The word in this country’s language, bread, rhymes with another word, head. If he buys all five available baguettes, he can cover his own head with the bread and become a figure, a mundane version of the deity. But the other customer asks for one of the baguettes. This will only leave four, not enough bread to cover his head. Customer number two has no use for four baguettes. He must have five. He taps customer number one on the shoulder, “Excuse me, please. I need all five baguettes,” says customer number two. “Will you settle for a couple of rolls instead?”

At this point, I anticipate an objection to my line of reasoning. More experienced economic thinkers, as I have noted, have destabilized the bakery axiom in more sophisticated manners, and this bizarre performance art anecdote has no bearing on either the whether or the how much of the proposal. This notion of the what, the quality of the benefit, remains entirely irrelevant. Still, it seems to me that an important development has occurred. We have challenged the singularity of bread, and proposed instead its multiplicity. By this I mean that bread, the commodity, can function as food (lunch), art (sculpture), clothing (mask), poetry (image), and even religious relic (in the ritual of the church, or the ceremonial meal). Each form requires breadness, yet each form differs radically from each other form. We can think of bread as existing in several allotropic variations – its chemical composition remains the same, but its function can change as drastically as those of a lump of charcoal and a diamond. In each variation it has a distinct value, just as diamond and charcoal, chemically the same, have different values. Now a couple of questions arise. First question: Do all commodities have this multiple nature? Second question: Does the what of the form of benefit, contingent on the form of the commodity’s variation, alter the nature of the exchange itself, including the benefit of all involved?

Part 2: exchanges

In Montgomery Alabama on December 1st, 1955, from the economic standpoint, any citizen could step onto a bus and participate in the same mutually beneficial exchange. For the price of a fare, a citizen received transportation. Any other complications – where in the bus one sat; whether one stood instead of sitting – were and still are, from a free market viewpoint, irrelevant. One had the choice of paying the fare and receiving transportation, or not paying the fare and not riding the bus. That is, since the exchange was voluntary, if one concluded for whatever reason it lacked benefit, (one bought a car, for example, and preferred driving) one could choose not to participate. The binary thinking of free market economics suggests that the exchange either happens or it does not. On December 1st, 1955, however, Rosa Parks arrived at a different conclusion.

State and local laws of Alabama at the time required bus segregation through a complex, game-like set of rules. A non-white person could sit anywhere on the bus in the absence of white people or in a not-crowded bus. Should the seats fill up, however, law required the non-white person to move to the back, and give up the seats near the front of the bus to a white person, should the white person ask for it. I remain hazy on how these laws defined white vs. non-white and front vs. back. In any case, on December 1st, 1955, Rosa Parks, an African-American seamstress, refused to give up her seat to a white (non-black) man, and was duly arrested.

Economically, she had come to the conclusion that two exchanges in fact transpired regularly on Montgomery buses; one for white people, and another for non-white people. The white exchange was clearly preferential to the non-white exchange in that it allowed greater choice, thus greater benefit. The non-white exchange allowed less choice in that it introduced a secondary transaction, seat relinquishing, which was a) not mutually beneficial (uncompensated) and b) not voluntary (mandatory). In a sense then, she concluded that her participation in the less preferential of these dual exchanges produced a new non-binary exchange condition. She pays the fare and receives the transportation, so the exchange happens. Clearly, however, the exchange involves more than merely transportation, since a parallel exchange occurs with more benefit (sitting rather than standing; sitting near the front, or exit) to its non-black participant. For her, this parallel exchange does not happen. Anybody who rides the Montgomery bus can only participate in one of these dual exchanges, because identity is singular. Nobody can participate in both, since nobody can be both black and white The fare-for-bus-ride exchange, therefore, both happens and does not happen for everyone. The exchange is not singular but multiple.

I will describe briefly the events that followed Rosa Parks’ refusal. While others had been arrested before her, she had served as secretary to the president of the NAACP (National Association for the Advancement of Colored People), and thus had a kind of celebrity. African American community leaders felt the need for a protest. An overflow crowd attended a meeting at the Dexter Avenue Baptist Church, where the young pastor, Dr. Martin Luther King, Jr., who had studied the methods of Gandhi, argued for a purely economic response. Given the percentage of African-American ridership, the Montgomery bus company could not afford to operate without their fares. The African-American citizens could therefore simply stop participating in the exchange until authorities standardized the terms of the exchange – that is, reduced its multiplicity. For example, the simple cooperation of whoever gets to the seat first has the right to sit there would need to replace the current rules of the game. The new standardized terms of exchange would clearly contradict the Alabama segregation laws. Therefore, the bus company’s return to economic stability would necessitate a negation of those laws. Obviously, I am rephrasing his argument a bit. In any event, convinced by Dr. King, on December 5th the majority of African-American residents of the city refused to ride buses. Most walked. Some who owned cars arranged rides for friends and strangers. Some rode mules. This continued for three hundred eighty-one days. During that time, community leaders formed the Montgomery Improvement Association and named Dr. King president. Car-pool drivers were arrested for picking up hitchhikers. Car pool riders waiting on street corners were arrested for loitering. On January 30th, 1956 Dr. King’s home was bombed. His family escaped without injury, and he arrived home to find an angry mob waiting. He told them, “We must learn to hate with love.” On November 13, 1956, the United States Supreme Court declared the bus segregation laws of Alabama illegal. On December 20th, federal injunctions were served on the city and bus company, which forced them to follow the ruling. On the morning of December 21st, Dr. King and Rev. Glen Smiley, a white minister, shared the front seat for a bus ride. The exchange had become less multiple, its multiplicity absorbed into the riders’ identities. Both men had become both white and black.

Part 3: circulation

It follows that Rosa Parks’ conclusion of the multiplicity of exchange also complicates the binary aspect of benefit itself, or the idea that one either benefits or does not, since she had been both benefiting and not, as had the white bus rider. The white rider, while no longer able to dictate where others sit, benefited from the 1956 stabilization of the rates of exchange, since the bus company did not a) increase his fare by a rate compensatory to its loss of African-American business; or b) go bankrupt. Furthermore, one benefits from riding a bus with contented people more than from riding a bus with disgruntled people. We could also make an argument about the dubious benefit previously received from demanding seat relinquishment, namely the inflation of a singular grandiose identity which requires the obeisance of the other, but that might make this letter even more philosophical.

At this point, however, we must examine the connection between benefit and voluntariness. We have said that since the baker and the consumer enter into the bread exchange willingly, this proves that the exchange benefits them. Conversely, it assumes that were either of them to enter into the exchange unwillingly, it would not benefit them. But is this true? If we consider the 1956 re-framing of the rules of bus riding as an exchange of sorts, I have just suggested that the non-black citizens of Montgomery benefited from an exchange that they entered unwillingly. In fact, many of them apparently actively resisted the exchange.

But if I argue that voluntariness does not in fact presume benefit, then I must argue the next, perhaps more difficult, question: theft.

Let us assume that Tatsumi Orimoto has stolen five baguettes for his performance. The baker does not receive the benefit of the price of the bread. He receives the innate advertising of the Bread-Man performance. By this I mean that people who see the performance will feel either hungry for a baguette afterwards, inspired to use bread in creative ways, or simply interested anew in bread in all its multiple forms. The performance may, on the other hand, provoke an aversion to baguettes, but one always runs that risk with advertising. Does the baker benefit more from the performance than the value of five baguettes?

The free market equating of price value with benefit once again reduces a multiple phenomenon in the direction of singularity. Presumably, the baker benefits from his customers being fed. If they are too hungry, or cannot afford his bread, they will perhaps be tempted to steal it for food. It would be more beneficial to him to give his bread away, or sell it at less than cost, than to risk a break-in and damage to his shop and maybe his life. Furthermore, in giving away bread now and then, he may receive the long term loyalty of grateful recipients, who repay him in whatever ways they can. Then there arises the question of the value of human life itself. If the baker can give away a loaf of bread to keep somebody alive, does he not benefit from that life, simply because life is more valuable than bread? None of this addresses the question of whether the baker benefits from his bread actually being stolen, except in that it perhaps challenges one more concept.

Maybe all exchanges include destabilizing circumstances – that is, aspects of happening and not happening at the same time. Maybe all the singular/multiple economic formulations stem from this one: ownership.

I propose that we engage a word from your last correspondence: circulation. We could then consider the circulatory aspect of mutually beneficial exchange.

I don’t know if this is what Adam Smith had in mind when he adopted William Harvey’s circulation idea, but as you know when we teach Goat Island performance workshops we deploy the idea of creative response. The basic concept is that the artist presents a work: x. The creative responder selects an aspect of that work which intersects his or her most inspired perceptions, and prompts such inspiration: x/y. The responder then constructs a new work entirely from the collision of the x/y material and his or her own aesthetics and intentions, memories, interests, creativity, input. This new work, x/yn , restarts the creative cycle. I am often struck in observing this technique how it resembles theft. The creator of the work x has no say in which aspect x/y the responder will select. It would be as if a shoemaker, inspired by a first sighting of a baguette, designed a baguette shaped pair of shoes. Would that be theft? Perhaps – and legally many cases of this kind are argued. But from the standpoint of creativity, the responder (second artist) restricts his or her possibilities to the domain proposed by the work of the first artist, while the first artist gives up control of his or her creation after its presentation. In this sense, both artists retain and relinquish ownership. The mediated freedom of the partial theft/partial ownership drives the creative engine. David Williams, an astute visitor to our summer workshop this year, proposed the idea that in creativity of this sort circulation replaces ownership. Each only owns the material for the duration of the interaction with it. A partial theft circulates that ownership into its next allotrope. This phenomenon keeps the work vital and inspired. It allows us to pay attention and to engage in the world.

Certainly transposing the circulation replaces ownership idea from performances like Orimoto’s to more traditionally economic situations poses certain problems. But I would argue that profit without circulation poses only short-term gain, and does not contribute to the aspects of the common good – the fabric of the community, interchange – that build a sustainable and creative society. As Amartya Sen has said, if I understand him correctly, one measure of the economic wealth of a society is its capacity for individuals to develop. That is, if I do not know how to read, what I need from my social structure is the capacity to learn to read – the capacity for my own development. There is no measurable economic indicator in the measure of the capacity for development, yet it clearly contributes to the well-being of all, not just the one who learns to read.

Furthermore I believe Sen has also said that those who cannot read in fact often tend to devalue reading as an activity. We devalue what we do not know how to participate in. In this sense, one might see a baguette for the first time and say, “This is terrible. Who would ever wear such an ugly pair of shoes?” One must understand the commodity to some extent – have a way into it, an access point – in order to know that one desires to enter the exchange. Action produces preference.

All exchange has an element of collaboration that transcends the trade itself. It was the collaboration that the Montgomery Bus Boycott challenged, not the trade. Can we call this collaborative element – the free access, or agency, of each participating individual, to own temporarily that which is shared, then to pass it on – circulation?

Can we also say that when I ride the Division Street bus here in Chicago in the year 2003, the event has become multiple? It 1) circulates me through the city; 2) circulates my temporary ownership of a seat; and 3) circulates even my identity.

I eagerly await your response.

Until next time,
Matthew


Year of Economics 6 - Capabilities
10/6/2003

My dear Matthew,

1.
In Haruki Murakami’s short story, The Second Bakery Attack, a young, recently married couple who have yet to “establish a precise conjugal understanding with regard to the rules of dietary behavior” decide to attack a bakery and steal bread. Their late night drive through Tokyo streets, Yoyogi, Shinjuku, Yotsuya, Akasaka, leads them eventually to…… a McDonalds instead of a bakery.

What interests me here is not the second bakery attack but the first one. Yes, it turns out that the husband has robbed a bakery before. Or at least, he has tried and only partially succeeded. This is what happens in the first bakery attack: Our hero and a friend attempt to rob a bakery. The baker makes them an offer. If they would only sit down and listen to Wagner on the baker’s gramophone, the baker would give them bread.

It is not clear to our young couple whether that counts as stealing. The baker gave the would be robbers bread in exchange for listening to Wagner. The friends had set out to steal bread but were not sure whether the bread they did obtain was stolen (because that was their intention) or an exchange (because they had listened to the baker’s music).

The question of whether people make decisions based on what they choose or prefer is an important, but neglected, issue in economics. Economist Paul Samuelson’s famous Revealed Preference theory is a theory of demand based solely on what people actually choose rather than the more slippery (and infinitely more fascinating) concept of what people prefer. In the example of the first bakery attack the friends settle for an exchange: listening to Wagner is exchanged for bread. Modern economics, following Samuelson’s lead, would argue that that the exchange occurred because that’s what the participants in the exchange wanted. The friends wanted bread and the baker wanted to share his love of music. The exchange made both parties better off.

What is being missed here as you so ably pointed out my dear Matthew, is the question of what, or in other words the quality of the benefit. The friends want bread and they get bread. But they do not get bread in the manner in which they wanted it. They wanted to steal bread but were frustrated in their attempt to steal it. They got bread instead. Which is not the same thing!

Let me reintroduce here a concept created by Amartya Sen that you referred to earlier in our correspondence: capabilities. Sen finds most of mainstream economics to be stuck in the assumption that the possession of commodities reveal’s economic welfare. Our friends got bread, so they are better off, according to conventional economics. But Sen asks us to focus on people’s capacities to do things as a measure of welfare. The young friends have bread but are frustrated in their preference to do something: steal.

Choice and preference are not one and the same. Our friends prefer to rob the baker. But they end up choosing to participate in a very unclear situation that seems to be an exchange. To say that the friends are better off from having the bread is to miss the essential ingredients of the transaction they were involving themselves in when they entered the bakery. The transaction they preferred involved robbing the baker. From a capabilities perspective, the peculiar manner in which the preferences of the friends are frustrated while at the same time their choices are satisfied involves a slight of hand: stolen bread is replaced by given bread. What is the difference asks mainstream economics? There is no difference between stolen bread and given bread. Bread is bread! The difference seemingly disappears when we focus on the commodity rather than the capability. In this transaction the friends are made worse off (their capacities are thwarted) while at the same time they are made better off (given bread).

2.
The arguments of the dominant school of economics today, known as mainstream economics or the neoclassical school, are tautological or circular.

If I trade with you voluntarily, why do I do so? The neoclassical answer lies in its faith in rational economic man. It means that people constantly compare costs and benefits and choose to maximize their net benefits even at a cost to others. Why? Simply because it is assumed to be so. Once we accept this assumption, it is easy to see that rational economic man would only engage in trade if his net benefits increased. Hence, if we observe people engaged in an exchange, they must benefit from it. This is circular reasoning. The results are nothing but a restating of the assumptions.

Mainstream economics has clung on to the idea of rational economic man even as its most brilliant thinkers have modified it or even discarded it. Much of the recent work of George Akerlof, one of the original thinkers on informational asymmetry, has focused on the idea of near-rational behavior. He has shown that in most cases it is not rational to be completely rational! Amartya Sen has gone even further in discarding of the concept of rational economic man. He has renamed the idea rational economic fools.

3.
Rosa Parks preferred to ride with dignity aboard the city bus. The fact that she rode, possibly for years, under the oppressive conditions imposed on her, that effectively robbed her of her dignity tells us something about her choices but little about her preferences.

On December 1st 1955, however, in an attempt to unite preference and choice, she decided to steal her dignity back. Of course her actions were intolerable to the authorities. The official position was one of outrage. Here was the woman who had, for years before that date, chosen to travel aboard a segregated bus. But her choice until then had nothing to do with her preferences.

In fact a large percentage of travelers on the bus were black. In riding the bus they had voluntarily chosen to travel under conditions of apartheid. After all they didn’t have to travel by bus. They could always walk. However, it would be absurd to suggest that these men and women preferred to do so under conditions of apartheid just because they chose to do so.

4.
We can usefully apply the theory of games to the situation that emerged in Montgomery, Alabama. Imagine a simple two-step game which the white man (who asked Rosa Parks to vacate her seat) and Rosa Parks play. These are the two steps:

Step 1: The white man has 100 status points that he can keep to himself or share. The white man makes Rosa Parks an offer. The offer is a number between 0 and 100. If he offers Rosa Parks 40 points he gets 60 and so on (the total always being 100).

The number 0 means that the receiver does not ride the bus. Receiving a number between 1 and 100 means that the receiver does ride the bus, and the numerical value indicates the relative status of the receiver.

Step 2: Rosa Parks either accepts or rejects the white man’s offer of status points. If Rosa Parks accepts the offer, she rides the bus with the status points she has accepted. A low level of status points would create the kind of segregation that did, in fact, exist in Alabama then. She could ride the bus, however she could be asked to vacate her seat anytime the bus was crowded. If Rosa Parks rejects the offer of status points, she will not be allowed to ride the bus and will have to walk.

Now let us see how this game will be played out. Economists have traditionally used the concept of rational economic man as the underlying motivation behind human action involving choice. The rational white man will act in a way that will maximize his status points. He should, at first glance offer Rosa Parks 0 status points, keeping the maximum possible (100) for himself. However, there is a problem. With 0 status points, Rosa Parks and all her fellow black passengers will no longer travel on the bus. This will cause a substantial drop in revenues for the bus company and its eventual bankruptcy. So the rational white man makes an offer of 1 status points to Rosa Parks (and hence 99 to himself).

Rosa Parks prefers to be treated with dignity. However turning that preference into a choice would mean that she has to walk. So Rosa Parks responds to this offer by accepting it and she rides the bus under a system of segregation.

So the game is played out thus until December 1st 1955:

Step 1 The white man offers Rosa Parks 1 status point, giving himself 99.
Step 2 Rosa Parks chooses to accept this offer.
Outcome Rosa Parks rides the bus under a degrading and degenerate system of segregation.

Economists call such a situation a Nash equilibrium. Neither player can improve his or her status by unilateral changes. Such a situation will tend to persist unless a change is made to the game itself. And that is precisely what happened on December 1st 1955: Rosa Parks changed the game itself by making a credible stand.

Imagine our game is extended another step, not in the obvious direction (by adding step 3), but by adding a Step 0. In other words, we are asking, how would the game change if Rosa Parks could make a credible stand of the minimum status points she is willing to accept before the game is played? This is what the (modified) game would look like:

Step 0: Rosa Parks makes it clear that she will accept nothing less than X status points. If fewer points are offered to her, she will reject the offer.

Step 1: The white man makes Rosa Parks an offer of status points which is equal to X (Rosa Park’s minimum) knowing that any offer below X will be rejected and will lead to Rosa Parks and others of her race choosing to walk instead of riding the bus which in turn will lead to the eventual bankruptcy of the bus company.

Step 2: Rosa Parks accepts the offer if the status points offered are greater than or equal to X. If not, she rejects the offer.

If Rosa Parks motivation could be explained in terms of the concept of rational economic man, what would she choose as her minimum status points, X? She would, as a maximizing agent, choose a minimum of 99 points! Given her ability to make a credible stand at step 0, she knows that the white man will offer her the level of X in Step 1. However, that was not how the game played out in real life.

Rosa Park’s motivation in using Gandhian civil disobedience was never to maximize her status. It was always her intention rather to equalize it. So even though the inherently maximizing concept of rational economic man proved useful in our understanding of the game as it was played prior to December 1st 1955, it must be discarded as a human motivator in order to understand how segregation was brought to an end in the Alabama bus system.

Rosa Parks then, being motivated not by the principle of maximization, but by the deeper and older principle of equalization, sets X, her minimum acceptable status points equal to 50, giving the white man an equal number of points.

So the (modified) game is played out thus between December 1st 1955 and December 21st 1956:

Step 0 Rosa Parks makes a credible stand that she will not accept less than 50 status points, leaving an equal number for the white man.
Step 1 The white man offers Rosa Parks 50 status points, giving himself the other 50.
Step 2 Rosa Parks chooses to accept this offer.
Outcome Rosa Parks rides the bus on equal terms with the white man.

5.
I remember a brilliant lecture given by Amartya Sen at the Delhi School of Economics where I studied in the late 1980s. In an overcrowded lecture hall Sen challenged conventional economics by asking the following question which I have rephrased slightly: If I always read the Times of India, and the Times alone, does it affect my welfare whether the Indian Express and the Hindu (other prominent daily newspapers) exist? As we have seen before, mainstream or neoclassical economists, by calling people’s choices revealed preferences, commonly treat people’s choices as being interchangeable with their preferences.

Suppose Rosa Parks always sat at the back of the bus. Suppose that was her choice. Would an apartheid law requiring her to sit at the back of the bus have any effect on her choice? No. But would a repeal of such a law make a difference to Rosa Park’s welfare? Common sense suggests, of course! With the conventional economic lens we can see no difference between the two situations. For in both cases, Rosa Parks continues to consume the back seat of the bus. What has changed are her capabilities. Sen would argue that even if she never chooses to sit in the front of the bus, the repeal of the apartheid law would expand her set of capabilities, which in turn would undoubtedly improve her welfare.

6.
Ownership makes people treat all things as if they were rival products. A rival product is one whose use by one person makes it unavailable for use by another. Only a small percent of what we use each day falls under this category. The winding Alameda Creek bird sanctuary that I ride my bicycle through to work each day is not consumed by me, but rather is available to all the trail riders equally. My riding through it does not diminish it. Similarly, my breathing clean air, enjoying the warm sun, or even rolling my bicycle onto the BART train does not diminish anyone else’s capacity for enjoyment of the very same things I am enjoying.

R. K. Narayan, the great Indian novelist, traveled across America in the late 1950s. In his Dateless Diary, he writes about riding a bus in the American south and encountering a curious case of self-imposed segregation. The bus was crowded and the only vacant seat was the one next the Narayan. An elderly white man chose to stand all the way, for over an hour, rather than take the empty seat next to Narayan.

A seat for two on a bus is not a rival product if only one seat is taken. The striking down of apartheid laws in Alabama asymmetrically transformed the seat into a rival product for the elderly white man: a two person seat being occupied by a single ‘black’ person was treated as if it was being consumed and hence unavailable to the white person.

Narayan preferred to have the elderly white man share his seat on the bus. He then chose to write about it. The elderly white man probably preferred to have Narayan vacate his seat. Instead, he chose to sand. In doing so, he missed out on sharing a seat with one of the greatest novelists of the twentieth century.

7.
The value of women’s education in the third world does not lie in its ability to change a social structure that took centuries to form. That is not the point at all. The value of education is simply to expand people’s capabilities even when they choose to maintain a traditional social structure.

My mother enrolled herself in a women’s college in Bombay in 1955. The S.I.E.S. Women’s University granted her, as well as thousands of other women of her generation, degrees in the Arts and Sciences. Most of those women, from my mother’s generation, chose to be married and became homemakers in traditional families as women had for generations before them. They cooked and cleaned and took care of children just as well as their mothers and grandmothers had before them.

But as a senior citizen, when my mother started facing physical abuse, she did not take the route her mother had taken before her: visiting the temple more often, quietly accepting her fate. She went to a social worker instead.

Abhay