Saturday, September 13, 2014

Too crazy

Today's WSJ includes Peter Thiel's "Competition is for losers ... Only one thing can allow a business to transcend the daily brute struggle for survival: brute profits."  He also notes "Economists use two simplified models ... perfect competition and monopoly." Ugh!

Too many economists (and their textbooks and their other writings) are guilty of all this. But are serious people (in our out of the field)? To be sure, some economics texts, beginning with Alchian and Allen to Paul Heyne (later Heyne, Boettke and Prychitko), were much more careful. "Monopoly" (just one seller or source) exists where it is protected by law (public schools for people too poor to send kids to private schools or to home-school). Otherwise any market-power (successful product differentiation) and any profits are fleeting and must be maintained via steady hard work. Surely Thiel knows that this is what business people do all day.

Apple was pressed to introduce new product last week; they could not rest on any "monopoly" advantage -- and they were surely not "perfect competitors." Advertising and clever merchandising are never enough; the buyers are not that stupid. Consumers' tastes are subjective and formed in mysterious ways. They constantly consider possible substitutes; there are no "perfect" substitutes, only good ones and not so good ones. That distinction is again a complex and personal one ("in the eye of the beholder").

Were any of this not so, staying  in business would be pretty simple.

Economists and others have been turning people off for much to long by belaboring implausible models and approaches. Economic thinking is actually indispensable; bizarre claims too numerous to count are made all over the place by people who remain innocent of economic thinking. But many remain in this state because the models and textbooks they had been exposed to were too crazy to take seriously.