Saturday, November 26, 2011

A Market Forces Thanks Giving

I've mentioned Graeber's notion of homo economicus as being like a sociopath at an orgy before; but, this post via on the rational application of the iron laws of supply and demand makes the point in a more elegant way:
First, whatever Alice has spent preparing the turkey is a sunk cost, and irrelevant to deciding what to do next.

Second, Alice would be better of selling the turkey to either Dives or Lazarus than keeping it for herself, and either trade would also benefit the buyer, so that's a win-win. Either trade would be Pareto-improving. However, neither trade is strictly better for everyone than the other: if she sells to Lazarus, Dives is disappointed, and if she sells to Dives, Lazarus starves. Of course, if we are being exact, Lazarus starves to death whether Alice keeps the turkey or sells it to Dives, so that trade makes Lazarus no worse off.

Third, Lazarus can only offer ten cents. Since Dives would be willing to spend up to $5000, Alice will prefer to sell to Dives. Since Dives, being a rational agent, knows how much Lazarus can pay, he will offer 11 cents, which Alice will accept as the superior offer. (Alternately, we add in a Walrasian auctioneer, and reach this price by tatonnement.) The market clears, Alice is 11 cents better off, Dives enjoys a consumer surplus of $4999.89, and Lazarus starves to death in the street, clutching his dime. Nothing can be changed without making someone worse off, so this is Pareto optimal.
Neoliberalism in a nutshell: they don't want you to starve it's just the logic of market forces at work.

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