Hayekian Prediction Markets?

David_J_Balan

10 Hayekian Prediction Markets?

15th Feb 2010

5 min read

10

I think I basically get the idea behind prediction markets. People take their money seriously, so the opinions of people who are confident enough to bet real money on those opinions deserve to be taken seriously as well. That kid on the schoolyard who was always saying "wanna bet?" might have been annoying but he also had a point: your willingness or unwillingness to bet does say something about how seriously your opinions ought to be taken. Furthermore, there are serious problems with the main alternative prediction method, which consists of asking experts what they think is going to happen. Almost nobody ever keeps track of whose predictions turned out to be right and then listens to those people more. Some predictions involve events that are so rare or so far in the future that there's no way for an expert to accumulate a track record at all. Some issues give experts incentives to be impressively wrong rather than boringly right. And so on. These are all good points, and they make enough sense to me to convince me that prediction markets deserve to be taken seriously and tested empirically. If they reliably produce better predictions than the alternatives, then they deserve to win the day.*

But there is a particular claim that is made about prediction markets that I am skeptical of. It starts with the well-known idea, usually associated with Friedrich on Hayek, that a major virtue of free markets is that there is all kinds of useful information spread out in local chunks throughout the economy, which individuals can usefully exploit but a central planner never could, which is reflected in market prices, and which in turn cause resources to be allocated efficiently. It then goes on to argue that prediction markets have a similar virtue. As an example, suppose there's a prediction market for a national election, and you happen to know that Candidate X is more popular in your little town than most people think. There's no way that some faraway expert could have known this or incorporated it into his or her prediction in any way, but it gives you an incentive to bet on Candidate X, which causes your local information to be reflected in the prediction market price. Lots and lots of people doing the same thing will cause lots and lots of such little local pieces of information, which couldn't have been obtained any other way, to also be reflected in the market price.

But it seems to me that this "Hayekian" mechanism should work a lot less well in the prediction market context than in the standard context. In the standard version, you benefit directly from a piece of local information that only you happen to have. If you know that a particular machine in your factory only works right if you kick it three times on the left side and then smack it twice on the top, then you can do that and directly reap the benefits, and the fact that you were able to do it (i.e., the fact that output in your particular industry is very slightly less scarce than someone who didn't know that trick would have thought) will be reflected in the market price. In contrast if you're the only one who knows that Candidate X is surprisingly popular in your little town (say because you're the mail carrier and you count yard signs along your route), could you really benefit from trading on that information? There are a number of barriers to your doing so. First, there are transactions costs associated with trading. Second, there is garden-variety risk aversion: if you're risk-averse then you won't want to invest a large share of your total wealth in this highly risky and urnhedged asset, which means that you won't bet much and so the price won't move much to reflect your information. Third, in order to believe that your little piece of local information constitutes a reason to bet on Candidate X, you'd have to believe that the current price accurately reflects all the *other* pieces of information besides yours. In some sense you should believe this: if you thought the price was off and you thought you knew which direction it was off, that would be a good reason to bet against the mispricing. But even if you had no actionable beliefs regarding a mispricing, you might just not have a lot of confidence that all the other information has been aggregated correctly. This would translate into another form of risk, and so risk-aversion would kick in once again. Fourth, there may be uncertainly about whether you really are the only one who knows knows your piece of local information (maybe the paper boy also noticed the yard signs, but then again maybe not). If you're not sure, then you're not sure to what extent that piece of information is already reflected in the current price. Again, you might have beliefs about this, and those beliefs might be right on average (though they might not) but it is yet another layer of uncertainty that should have an effect similar to ordinary risk aversion.

I asked Robin Hanson about this once at lunch a few years ago, and we had an interesting chat about it, along with some other George Mason folks. I won't try to summarize everyone's positions here (I'd feel obligated to ask their permission before I'd even try), but suffice it to say that I don't think he foreswore the Hayekian idea entirely as an argument in favor of prediction markets. And there is a quote by him here that seems to embrace it. In any case, I'd be interested to know what he thinks about it. And of course it matters whether or not this Hayekian claim is being made for prediction markets, and it matters whether the claim is correct, because whether or not prediction markets have this additional theoretical advantage should go into one's priors about their merits before evaluating whatever empirical evidence becomes available.

*The question is not purely an empirical one though. There are issues related to how susceptible prediction markets are to manipulation, how well they'll work when the people doing the betting about what will happen also have some influence over what does happen, whether they'll work for rare or distant events, or for big picture questions where in some states of the world there's no one around to pay out the winnings, and so on. So even a strong empirical finding that prediction markets work in more straightforward settings is not the last word on the subject, which means that there will be a continuing role for theoretical arguments even as more evidence comes in.

Personal Blog

10

New Comment

79 comments, sorted by

top scoring

Click to highlight new comments since: Today at 1:57 AM

Some comments are truncated due to high volume. (⌘F to expand all)Change truncation settings

[-]RobinHanson15y20

I'm not sure there is a clear enough claim here to agree or disagree with. Pretty much all institutions aggregate information in some way, and this includes all sorts of markets. This aggregation can include not just directly reflecting info contributed by participants, but also informing participants, who then combine that new info with their old info, and then contribute that new combined info. Certainly there are barriers to such aggregation, which include transaction costs and risk aversion. The important question is of course the relative ability... (read more)

2David_J_Balan15y

In the absence of decisive empirical evidence, the amount of credence to give to a particular prediction method (whether absolutely or relative to alternative methods) depends in part on what theoretical claims are being made for it, and on how well-supported those claims are. The articles that I linked to don't just say that prediction markets do reasonbly well in aggregating information, or that they do better than the alternatives. Rather, they make explicit reference to Hayek's famous argument which, as I understand it, involves a strong claim of incorporating lots of tiny pieces of information held locally by individuals. And without leaning too hard on a single quote, one of those articles seems to have you agreeing: I think there is a fairly clear question here of just how strong an absolute "Hayeakian information aggregation" claim you are making.

1RobinHanson15y

A standard debating tactic is to attribute overly strong claims to the other side, which seem easy to knock down. You don't have any concrete quotes of such overly strong claims, so you seem to be just assuming someone must have said something overly-strong somewhere. Re the quote from me, that quote doesn't say how much info gets aggregated from any given group.

6David_J_Balan15y

In the original post, I said regarding our sole conversation on the subject that I can reall: Then I added: That sentence had a link to an article that contained the quote in my comment above. Taken all together, does that really strike you as me "attibuting overly strong claims" to you? It sure doesn't strike me that way. I pointed out that you've said some things that seem to lean in a pretty "Hayekian" direction, explicitly acknowledged that I'm not certain to what extent you are making those kinds of claims on behalf of prediction markets (I'm still not), and asking you to clarify. If you think that's a debating tactic, then you and I have very different ideas of what a debating tactic is.

0magfrump15y

The debating tactic he seems to be referencing is that you seem to claim that large amounts of information will be added, while his claim is only that some information will be added ("don't think he forswore the Hayekian idea entirely" seems pretty weak). It also feels strongly like you are attacking the Hayekian idea, but not providing an attack; saying "I don't believe this" but not substantiating. In case people are falling to representation bias from your example, here's a way the prediction market could work out: One extremely ardent organizer or supporter from the town feels that with the amount of popularity she's experienced the candidate has a much better chance (perhaps due to selection bias from seeing the signs and speaking to reporters) than most predictors, she would see the prediction market as a better investment. And if the prediction markets were national in scope but more localized in specialized information (perhaps consider the recent Massachusetts senate race?), a local might have substantial reason to believe that they're local information would be better than national info.

[-]Stuart_Armstrong15y20

I'm not as hot on the Hayekian principle as economists were, but I don't see how any of the factors you suggest would be different between a prediction market and a normal stock market.

And normal stock markets are pretty good at allocating ressources, up until the moments where everything goes berserk, so there's no reason to suspect that prediction markets would be much different.

1David_J_Balan15y

The comparison in the post wasn't between prediction market prices and stock market prices, it was between prediction market prices and ordinary prices for goods and services. I hadn't thought about it before, but it seems to me that the points made in the post about prediction markets apply to stock markets as well. Note that this isn't an argument that prediction markets (or normal stock markets) don't work. It's an argument about whether they have this particular "Hayekian" virtue.

[-]SilasBarta15y00

Interesting: 40 comments, only 4 of which are visible by default...

*Not counting this one.

6gwern15y

Politics is the mindkiller. The community sees it as damage and routes attention around it...

-1Jack15y

I think you missed.

[-]taw15y-20

Highly relevant about Hayek.

The famous Hayekian argument is such nonsense I have no idea how it became famous in the first place. It basically attempts to prove that diseconomies of scale exist - disregarding simultaneous existence of economies of scale or any estimation of how big these diseconomies are - and this somehow means even slightest government regulation of market leads to economic inefficiency and ergo totalitarianism. Of course his definition of "central economic planning" includes every single corporation employing more than one per... (read more)

[-]Chronos15y150

Have you ever worked at Wal-mart? I have: I worked overnights as a shelf stocker for almost 5 years. The Soviet Union analogy is quite apt, although I'd peg it as closer to being a less gruesome version of the Great Leap Forward.

We'd joke to new hires about the Sam Walton statue in the basement. (The humor came from the non-existence of the basement, and the unease underlying the humor came from the fact we had posters instead of statues only because Bentonville was too cheap to spend more than $1.99 decorating the breakroom. In hushed tones, cracks about Chairman Mao were common between the better-read employees.)
Bentonville issued ridiculous edicts that completely ignored the situation on the ground in individual stores.
Edicts were replete with unrealistic quotas. For example, all employees were expected to stock 70 cases per hour, regardless of department: boxes full of tiny cosmetics bottles are treated identically to cardboard trays holding large blocks of Velveeta cheese (where the tray doubles as the customer display).
Edicts were inconsistently enforced. One week, the edict is to run backstock. A week later, the edict is to spend more time "zoning" (arr

... (read more)

6grouchymusicologist15y

The good old-fashioned "list of the insane things Wal-Mart employees are made to suffer" is a minor literary genre of which I will always be fond. But I do think you may be missing the point, which is that Wal-Mart is a highly profitable corporation and, from what I've read, one of the more systemically efficient organizations in human history, whereas the Soviet Union was an economic disaster from day one. Maybe it's as simple as good execution vs. bad execution, but notwithstanding inefficiencies and/or insanities at the level of what individual employees have to put up with, Wal-Mart does indeed seem to be getting the (faintly repulsive) job done.

3taw15y

Contrary to what everyone is absolutely certain of, Soviet Union was not an economic disaster. Russia and Eastern Europe were much poorer than USA and Western Europe before Soviet Union even started. During Communism economic growth in Soviet Union and other Communist countries was quite close to global average - and it doesn't change when you correct for initial income and supposed catch-up effect. The big loser economically were supposedly capitalist countries like India, Chile, Argentina (and most of South America), and UK. The big winner being East Asia, but Western Europe doing somewhat better than average. There's a helpful scatterplot in the paper linked. tl;dr Much higher starting point of Western Europe + better than global average growth of Western Europe together created illusion that Communist countries were unusually economically unsuccessful, while in fact they've been fairly unremarkable either way.

5teageegeepea15y

What about North vs South Korea? And were East vs West Germany so different? A point near the end of the linked paper seems in some ways to support Caplan's take on Soviet industrialization.

1taw15y

Theories that Soviet growth was fake are nonsense. If you don't trust GDP you can look at hard to fake proxies like life expectancy. * 1917 Russia - 29 years (last full year before the war) * 1953 Russia - 65 years (at time of death of Stalin) For comparison, during the same time life expectancy in Capitalist Mexico (closest dot on 1913 gapminder chart) grew only from 30 to 52.

8michaelkeenan15y

I think you need to think in more categories than just capitalist and communist.

1MichaelVassar15y

I have made your point about econ growth not being so low under Soviet system, if one even believes in economic growth as it's usually reported. I'm fantastically skeptical of Soviet life expectancy data from Stalin's life, especially when they are one year short of current (57 Year later!!!) figures. What was the population of the USSR in 1953 and in 1917? What birth rates were reported? Are the data even consistent?

2taw15y

What I have seen in this thread is an amazing collective display of this. Every single claim like that ("but Soviet gdp is not real", "what about East vs West Germany", "what about Stalin killing millions of people" etc. etc.) is refutable with modest effort. What will have no effect on anyone, as in any context only one of the claims is refuted, so people look at their lists of arguments - most still unrefuted - decide by proportion that Communism must have been an economic disaster, and forget about that particular problem and their original extremely low prior probability they attached to it. As for life expectancy, I'd bet you on intrade the data is self-consistent.

3MichaelVassar15y

Given the fact that Czarist Russia had poor organization, wars and revolutions create chaos and destroy information, contemporary people have difficulty agreeing to within a factor of two as to how many people the Gulags or Chinese Cultural Revolution killed, and Russian population numbers in 1960 may have been lies (see http://www.heinleinsociety.org/readersgroup/AIM_06-20-2002.html ) I am very skeptical of the claim but much less skeptical of its logical consistency. I'm seriously curious about the life expectancy consistency (and even more about Cuba's life expectancy legitimacy, but that's less easily checked) but not willing to do a serious analysis myself, as it sounds time-consuming. Don't want to set up an account on in-trade, but it you will do the analysis with even odds for $10 and propose a third party judge who I find credible to look over my counter-arguments and make a decision it would be worth my time to look over your data analysis and look for counter-arguments. My experience on Long Bets though makes me doubt that the third party judging etc can be done all that easily and in that satisfactory a manner, but it's worth a try. i definitely don't accept your claim that the other claims are refutable, but that doesn't deny me the opportunity to gain a some new factual knowledge cheaply or profitably.

0RobinZ15y

I'm confused - your link suggests one thing, but your comment text could mean the exact opposite. What are you arguing?

0knb15y

Describing Mexico under the PRI (Institutional Revolutionary Party), which was a member of the Socialist International, and nationalized large chunks of the economy, as "captialist" is something of a stretch.

-4taw15y

You are not allowed to do this kind of cherry picking. No country is fully Communist/Capitalist/Socialist/Whateverist so every time you dislike some results you recategorize a country. Criteria must be clear, automatic, and up-front. Also, half of the world is ruled by member parties of Socialist International. Socialist International = Social-Democrats = Capitalists.

1SilasBarta15y

= *falls out of chair*

1knb15y

I'm not cherry picking. Describing a largely nationalized economy as capitalist is false. If you had called it a socialist mixed economy, that would have been more accurate, as it is, you mentioned socialist mixed economies with largely nationalized production as "capitalist growth failures" which is obviously disingenuous. As I pointed out in my other comment, this is true of all of those other countries you mentioned as well. Again, as TGGP put it, you do need more categories, or else you might list countries with minimal property rights and nationalized production as capitalist just because they weren't a member of COMECON or whatever. Instead, it makes more since to list countries according to economic freedom, then measure the relevant statistics wealth/growth/quality of life statistics.

-1taw15y

Focusing on success stories of Capitalist growth (Western Europe and East Asia) and not on global average is simply wrong. South Korea and West Germany are atypically good performers for Capitalist world, which has its growth failure stories like India, Indonesia, Peru, Chile, Argentina, UK, and New Zealand (going from extreme poor to extreme rich). The paper does not include North Korea, but it's so atypical for a "Communist" country it really shouldn't be treated as one - it is more like an isolationist militaristic monarchy.

5teageegeepea15y

My point is not that East Germany and North Korea are typical communist countries, but that they can be easily compared to a neighboring capitalist country sharing much of the same culture and history: a "natural experiment" in the effect of policy differences. Also, I think life expectancy is very different from GDP. Death rates appear to go up during economic booms and down during recessions.

4taw15y

First, in the long term, GDP - life expectancy correlation is ridiculously high - just look at gapminder. Now back to the main subject. With Korea it's not much of a natural experiment - it involves two extreme outliers in their camps, so every explanation should also explain why North Korea was so much less successful than almost every Communist country, and why South Korea was so much more successful than almost every Capitalist country. Anyway, Germany. It is comparable enough to work as a "natural experiment" - but then: * West Germany got plenty of money from USA, while East Germany was looted by Soviets and forced to pay reparations * West Germany traded with rich countries, while East Germany traded with poor countries, and by argument of regional convergence mentioned in the paper we should expect West Germany to do much better. * East Germany was actually the richest Communist country, due to its atypically high starting point. And the big argument. According to data I've been able to find - almost all of the difference comes from very early time - in 1950 West Germany to East Germany GDP per capita ratio was 2.04:1.00. In 1989 it was almost identical 2.14:1.00. So 40 years hardly widened the gap, and 1950 gap can be easily blamed on harshness of Soviet occupation and reparations. German "natural experiment" provides very little support for Capitalism vs Communism economy. On the other hand it seems to show quite well (together with Japanese / South Korean etc. examples) that American/British occupation is much better thing to happen to you than Soviet occupation.

2knb15y

Most of those countries were not capitalist, but rather socialist mixed economies. New Zealand is actually rather capitalistic, and has respectable growth for an advanced economy and persistent low unemployment, so I'm not sure what you're getting at there. Here's Wikipedia on India: India liberalized starting in the 1980s but mostly since 1991. Growth accelerated rapidly after the state declared bankruptcy (basically) in 1990 and liberalization began. When Chile liberalized its economy, it went from one of the poorest to the wealthiest country in Latin America, which strongly refutes your hypothesis. Dividing countries into two categories, as TGGP says, is not the best option. Most countries aren't fully capitalist or communist but rather a mix. On the one extreme you have countries like Singapore, Switzerland and Hong Kong, on the other you have North Korea.

2Technologos15y

I think much of the problem here comes from something of an equivocation on the meaning of "economic disaster." A country can post high and growing GDP numbers without benefiting its citizens as much as a country with weaker numbers; the linked paper notes that Communism is good at maintaining top-line growth in an economy because it can simply mandate spending. In much the same way as US government spending can directly add to GDP growth (even if incurring substantial debt), the Soviet Union could make massive military expenditures even while running factories that produced goods not based on consumer desires but state beliefs about those desires or needs. In short, communism was not an economic disaster in that it effectively industrialized a great many nations and brought consistent top-line growth. It was an economic disaster in that state power allowed or created widespread famines and poor production of consumer goods.

0Chronos15y

Actually, I'm not by any stretch of the imagination convinced that Wal-mart is a highly profitable corporation by any long-term measure: that is, I'm quite convinced (probability greater than 0.99) that Wal-mart is sacrificing long-term growth and sustainability in favor of superficial short-term gains. Upper management is desperate to do anything to make the stock price budge, long term be damned. Eventually, this superficiality will expose itself as the house of cards it truly is. The recent news regarding firing over 10,000 employees at Sam's Club is salt in the wound here. You don't cut employees if you plan to proactively expand your business, you cut employees to entrench yourself and react defensively to the market moving around you. You especially don't cut your marketers and salespeople (which is what those people giving out free samples are... err, were... functioning as). You might shift a slice of your labor budget from a less effective strategy to a more effective one, but you don't simply drop the slice entirely and pocket the change. That will destroy the business, even if it pads the golden parachutes on the way out. And it's not like the job cuts are the only piece of evidence. Apparently, in the few years its been since I worked there, they've stopped hiring full-time employees entirely: now, all hires are part-time. Thus: second-rate health insurance (not that health insurance ought to come from employers in the first place), no retirement plan (not even the crappy Wal-mart stock they pawned off on full-time employees like me), and easier to fire people on a whim. But this has the hidden cost of needing to re-train people from scratch as the n00bs enter the revolving door, and it also sabotages the quality of labor by destroying any sense of loyalty to the company or enjoyment of the work environment. They then respond to falling labor quality by trying to wring even more out of the employees they have, creating a downward vicious spiral as the

5Eliezer Yudkowsky15y

http://money.cnn.com/2009/11/16/news/companies/berkshire_walmart/index.htm Buffett increased his stake in Walmart in Nov 2009.

0Chronos15y

And on the timescale of 5 or even 10 years, he may even be right. Yay for him.

4Chronos15y

I suppose I should qualify that, as it's a bit unfair to Buffett. Yes, Buffett is a professional investor and more expert than me at it, which counts for quite a bit. But he's also human, and humans don't do a very good job of anticipating economic activity beyond a horizon of a few years. Importantly, most humans have a laughably brief idea of what constitutes a "long term". I'd estimate that Buffett's bet constitutes quite a few bits of evidence toward the profitability of Wal-mart over, say, a 2 year time horizon. But I was already leaning in that direction, so it doesn't move my posterior probability by very much. In contrast, I'd estimate that it provides a much smaller number of bits over a 10-year horizon: if I had to name a number, I'd say 2 bits. That's a nudge in Buffett's direction, but not a very big one. Now, Wal-mart is not so foolish as to have played the derivatives shell games that exploded in the financial industry, nor do they have any substantial debt exposure. But I think a big source of risk, unconsidered in the standard analysis and probably unconsidered by Buffett, is their interdependence on China. Sidebar: Inflation triggers human biases: it causes people to miscalculate and believe they have more utilons merely because they have more money. (This is the essence of Keynesian stimulus: trick people into diverting their money from savings into spending. Regardless of whether you hold this is good or bad, it is what stimulus does.) Spending within an inflated economy is a complicated matter that I won't delve into, but international trade is where it gets interesting. Imagine two countries, A and B, which are trade partners. A injects a stimulus. People in A start buying more goods, including imported goods from B, with their freshly-printed money. This creates a trade imbalance between A and B. When this happens the buyer (implicitly or explicitly) exchanges A's currency for B's. On the currency exchange markets, B's currency goes up (d

4grouchymusicologist15y

I'm cautious of debating this on my much-less-than-perfect knowledge. You may well be right overall. But I wonder if you've given adequate consideration to the possibility that these kinds of practices may simply be nontraditional, but profitable, solutions to certain equations. Sure, there are hidden costs, but with a company like Wal-Mart, with its track record of ruthlessly squeezing money out of anything they possibly can, my first thought is that they simply calculated that the hidden costs don't outweigh the gains you enumerate.

1taw15y

Even if Wal-Mart fails at some point, it will not be because of resurgence of mom and pop stores, but because of other huge retail corporations.

0Jack15y

Did the Soviet Union even have superficial short-term gains?

3taw15y

Soviet Union performed fairly average economically. Russians are much much poorer than Americans and Western Europeans because they were much much poorer than Americans and Western Europeans in 1913 before Communism ever started. This holds true even when correcting for initial income - Soviet Union economic performance was not atypical for other countries with similar starting income. Relevant paper with all the data.

4Jayson_Virissimo15y

What explains the greater amount of wealth in America and Western Europe prior to 1913? Could capitalism be a partial explanation? Hong Kong and Singapore were much poorer than America and Western Europe prior to 1913, but now have equal or greater levels of wealth in addition to being more capitalist. Could capitalism also be a partial explanation in this case? If not, what is a more plausible explanation?

3mattnewport15y

I'm happy to see that the paper you link acknowledges in its opening sentence that "the human costs of communism in Eastern Europe were incalculably large". Ignoring the 20 million murdered by the communist regime in Russia in statistics on economic performance that include per capita income measures seems questionable to me however.

-2taw15y

This is cheap attempt at getting applause and deserves a downvote. Discussion is about economic efficiency of government control of economy, not about human rights under Communism, and these two are not obviously related as many Communist countries weren't particularly genocidal (and Lenin/Stalin/Mao's genocides existed in context of war), while many Capitalist countries were (~10M deaths due to African slave trade alone - that's a highly capitalist activity, Nazi Germany was mostly a Capitalist economy, etc.) and it's neither obvious that median Communist country was more genocidal than median Capitalist country, nor that economic growth and genocides are not directly related.

4thomblake15y

matthewnewport makes a good point which you seem to ignore. If you're talking about a per capita increase in wealth, and part of that increase can be accounted for via 20 million people killed (not mirrored in the US) for a country with a population of maybe 180 million or so to start, it doesn't necessarily make sense to say that their economic performance was the same. I haven't done the math though, so I have no opinion on whether there really is a significant difference there.

-3taw15y

That was the point? Sorry, I missed it as I never thought anyone would make a suggestion that stupid. Killing 20 million people - mostly in context of two world wars and civil war between them - cannot possibly increase standards of living of the rest. You basically look at massive destruction of human capital due to wars and revolutions and pretend it's somehow net positive... This is Malthusianism taken to ridiculous levels. So dropping a few nukes here and there would help the economy? In any case, even accepting an argument as retarded as that, it doesn't apply to the vast majority of Communist countries.

3CarlShulman15y

There's no need for language like that. Anyway, for countries where resource wealth (e.g. Russian oil and gas) is a big chunk of the economy, population can indeed have a big effect on per capita wealth (see Kuwait, Saudi Arabia). Likewise, if you have big wealth inequality, e.g. between peasant farmers and urbanites/factory workers, famines among poor farmers can easily raise per capita income.

2SilasBarta15y

Just an FYI: This position you're arguing against is exactly what Gregory Clark) argues in "A Farewell to Alms [sic]", minus the bit about destruction of capital. (See the links to reviews that summarize it.) While I don't agree with his thesis, it's a serious attempt to show that massive die-offs (like through plagues) increased per-capita income. He shows records in England of the prices for capital (wealth-producing) goods like cattle going down as the population went down, thus making it easier for someone to make a living. This was, of course, before the 18th-century, and in that time the world actually did match Malthus's theories because of the lack of technological breakthroughs necessary to sustain higher populations.

0thomblake15y

Name calling aside, you missed the point again. It's not Malthusianism, it's algebra. per capita wealth equals wealth divided by population By simple algebra, killing people without decreasing wealth increases per capita wealth, and thus a significant percentage of the population dying will artificially look like economic growth if you're measuring growth per capita.

1bgrah44915y

taw's question-wrapped-in-barbed wire is how you keep wealth level despite killing people, since presumably those people were adding to the economy by both producing and consuming goods.

0thomblake15y

That is a good question, but I don't see it in taw's comment, even between the lines. taw seemed to think someone was implying that the economy would actually get better by killing poor people, thus the reference to Malthus. I could easily contrive a scenario where one kills 20 million people without significantly decreasing wealth, and I noted that I don't know whether this was such a case. Note CarlShulman's observation below.

0Jack15y

Funny. I totally knew all that in the back of my head. I'm puzzled about why I didn't return any of that myself. Scary.

0CronoDAS15y

Compared to Russia under the Tsars, the Soviet Union was much wealthier.

5Bo10201015y

What amazed me when I entered the workforce is how dysfunctional even highly successful companies are - or at least how dysfunctional they seem to be. What you've described above is an entertaining read, but does it really depict anything unique to Wal-Mart? Other places I've worked: * Glorified their corporate leadership * Issued well-intentioned-but-tonedeaf "edicts," unrealistic quotas, or contradictory guidelines to regional offices * Scapegoated a person for not fulfilling some impossible set of requirements * Wallpapered over problems at the expense of doing real work for the sake of impressing superiors Working for Wal-Mart sounds like working for lots of companies. I suspect that hidden somewhere inside the nonsense are a few things they do well to make them successful, whereas other corporations do the same set of counterproductive things without that useful core.

3taw15y

Look at some freelancers and tiny companies and you'll see that severe problems and inefficiencies exist on both extremes of the size scale.

2Bo10201015y

They happen in the military and in all levels of academia, too. My point is that a small set of good practices can apparently overcome a wealth of bad ones.

1taw15y

And yet, in spite of the genuine diseconomies of scale which you mention, economies of scale for Wall-Mart seem ever larger, as it successfully competes in open market. Nobody denies that diseconomies of scale exist - it's just that very little follows from that.

[-]Chronos15y150

I'm not full up on Hayek specifically, but the Austrian point in general is that regulations create barriers that shift the average size of a corporation, and the shift is almost exclusively upward because it takes a larger company to hire lawyers to figure out what the regulations mean. This creates a selective pressure for larger corporations, due to an artificially imposed economy of scale.

Specifically, what is it about Wal-mart that is so economically scalable? Wal-mart is not like Intel: they don't make a ten billion dollar investment, then earn profit at zero marginal cost. They don't manufacture anything, therefore they don't benefit from manufacturing economies of scale. What is it about Wal-mart in particular that does have marginal cost approaching zero?

There are two components to that.

The first answer is: Wal-mart profits from the logistics of shipping via truck across the continental United States. Wal-mart has very effectively parlayed that core business competency into the specific niche application of big-box Wal-mart stores. If Wal-mart were to voluntarily cleave itself into two pieces along the logistics line, Wal-mart Shipping could take on other shipping tr... (read more)

[-]Chronos15y190

As a separate sidebar regarding logistics, it's interesting to note that Wal-mart's shipping component is effectively being subsidized by the federal government, by way of the U.S. Interstate system.

While I'm not so much of a libertarian that I think the Interstate system was a bad idea, it is important to note that the Interstate system created an entire category of business (shipping via truck) that directly harmed two existing industries (shipping via boat, shipping via train) and stunted the growth of a third (shipping via plane). This would be all fine and dandy if shipping via truck were more efficient after considering all externalities. But firstly you have the environmental cost of burning gasoline/diesel, including a not-insubstantial impact on the global climate. And secondly you have the more direct economic cost of road wear.

Road wear is a funny thing. The rule of thumb is that road damage accumulates with the fourth power of the weight per axle. A single car with passengers has perhaps 2,000 pounds spread evenly over two axles, for a road wear of O(10^12) times a tiny constant per mile driven. A large truck, of the kind used by Wal-mart, has perhaps 50,000 pound... (read more)

6Bo10201015y

Shout it from the rooftops! Similar lines of thought apply for employers and schools. I've been challenged by people who find out I'm a libertarian with arguments like "WELL WHAT ABOUT ROADS HUH? The Interstates are something government does well! How could we keep up highways without government?" I have to patiently explain "I'm not against government. Or public roads. I do think, however, that companies that make their profits off roads have an interest in their upkeep, and it would be more efficient if that interest was at least partially privatized."

1SilasBarta15y

For me, the problem regarding roads is not "who will build them?" or "who will pay for them?" That part's easy: 1) construction workers, and 2) those use use the roads, or, in cases of low-density roads where it's infeasible to collect or calculate tolls, the local HOA/merchant association. The hard part is: what happens to the rights of people today? It's extremely unfair to say, "hey, you have to start paying for this road now, which you previously had the unlimited right to use". So, the issue of weighing historical rights vs. egress/passthrough rights vs. road owners' rights is where the real difficulty lies.

0Bo10201015y

Wholly agree. However, it's easy to imagine fair ways to phase in changes - e.g. announce that in 20 years we're going to start charging for this road (or selling rights to it, or whatever). We'll pay you subsidies that decrease each year for the next 10 years after that. We would have had to re-do the road with your tax dollars by then anyway, so you're not worse off.

0SilasBarta15y

Right. Another way would be to take the toll revenues and from them, give each person enough to afford "average driving" so that you would only lose on net from driving more than usual. Etc. I agree that the problem is tractable, it's just that this is the most difficult part, and those that address it give it the least attention.

-1SilasBarta15y

Are you Kevin Carson in disguise? ;-) I've never understood the "IHS subsidizes Wal-Mart" argument. It would only be a subsidy if WM got access to it on preferential terms to the rest of us. But they don't. Whatever use of the IHS they make, everyone else had the same opportunity. It's not like WM stupidly built up their whole infrastructure and then one day said, "Oh crap! This will be an utter failure unless there's a free interstate highway system! Quick! Government! Build it with other people's money!" You calculation holds for anyone that uses large trucks, not just Wal-mart. Finally, though you may be able to show that trucks do not pay their share of upkeep, I still think the existing IHS management is a net burden to WM. If it were privately run, you could buy higher priority for your trucks. As it stands now, a truck has the same right to a chunk of the road as a random mouth-breather (or set of them taking the same space). In a privately run system, WM could pay for privileged access at critical times, eliminating significant uncertainty from their distribution network, and thus allowing them to operate even more efficiently. It's not at all clear that the unborne cost exceeds this potential benefit.

6wnoise15y

That doesn't pass the laugh test. It's not a subsidy specific to WM, no, but a structural subsidy to certain ways of doing business. Your argument is like saying corn subsidies don't subsidize corn farmers because anyone can choose to farm corn.

-5SilasBarta15y

3Chronos15y

Of course. The subsidy is implicit in the system, rather than explicit. It'd be quite the rare Wal-mart executive who could even have the conscious thought even flit across his mind. But a subsidy doesn't cease to become a subsidy merely because no one is lobbying (either for it or against it). While lobbying and subsidy correlate, neither is the exclusive cause of the other. But the fact remains that Wal-mart's business model relies on the fact that it can consume the highway system as a good, and do so in vast disproportion to the actual price paid for that good. If they had to pay in proportion to their actual consumption, they would not be profitable under their current model. (There may well be another model where they would be profitable, in a counterfactual world where highway use were metered. But, if counterfactual bets made coherent sense, I would bet money that Wal-mart's model in that world would include much greater use of rail.) It is immaterial whether or not Wal-mart's executives consciously recognize the premises underlying their model: namely, that shipping via truck excludes the cost of the highway. It is immaterial whether or not Congressional representatives consciously recognized that funding the Interstate system without metering would invent the trucking industry. The fact is, Congress did fund the Interstate system, they did invent the trucking industry, and Wal-mart does rely on the trucking industry axiomatically. This is one of those situations where evolutionary interdependencies and stare decisis (rather, the legislative counterpart thereof) conspire to create a lose-lose situation. Horn one: start charging for the highway system and thus destroy one industry, harm a bunch of others, and cause prices to spike for a decade or more. But maybe, twenty years from now, the infrastructure will be in place such that the economy is more efficient than it would have been otherwise. Horn two: continue paying for the highway system with federal

0SilasBarta15y

As I showed before, this is far from certain. Actually being able to buy road usage on a private market, launched from the current infrastructure, would also bestow enormous benefits on WM in terms of being able to better plan. And while some of their costs are borne by others, a lot of their taxes going to roads are also wasted. They gain in shifting cost to others, but lose in having the money that would have gone to road fees, go to useless pork road projects instead. Which effect is greater? I don't know, which is why I don't assume one of them is. And it's not that I deny the literal truth of the subsidy; I'm just saying it's a vacuous claim in this context. People bring up subsidies to show one side having an unfair advantage over another, while that doesn't follow here -- WM had to enter the market on equal terms to everyone else, and prices for goods had already adjusted to reflect the impact of the IHS -- they just made a better use of it. Had there been no IHS, the fouders of WM would have used their brains to work with whatever was there instead. So I don't see how this is an indictment of WM -- the harm lies in the shift of the structure of production to a less efficient one, not in a transfer of wealth to the Waltons.

4Chronos15y

This doesn't make sense, because dollars are fungible. If WM reaps a greater monetary value from the highway system than it spends on the highway system via taxes, WM comes out ahead. Then we're in violent agreement. I didn't intend the highway bit to be an indictment of WM, but a rebuttal of taw's comment: "And yet, in spite of the genuine diseconomies of scale which you mention, economies of scale for Wall-Mart seem ever larger, as it successfully competes in open market" I was attempting to convey the idea that that Wal-mart's current (but quite likely ephemeral) success is due to political accidents moreso than "economies of scale". The only "economy of scale" operating at Wal-mart is logistics and trucking, which doesn't scale very much: the planning scales somewhat, the trucking has already scaled as far as it can, and the trucking is on more precarious footing than it looks. Labor doesn't scale: making a Wal-mart store twice as big requires twice as many workers to keep the shelves full. Sales don't scale: selling twice as many goods provides economies of scale to the manufacturers, not to Wal-mart itself. If manufacturing economies of scale were at play, all retail prices would fall to equal those of Wal-mart: with their new infrastructure paid for, the manufacturers can turn around and sell their cheaper products to Wal-mart's competitors just as easily as they can sell to Wal-mart. The oligopsony price bullying (i.e. the Vlasic example) is not a proper "economy of scale" in this sense. If Wal-mart had a competitor of equal size, but Wal-mart's size remained unchanged, Wal-mart's economies of scale would be unchanged but its power to bully costs down would weaken. An economy of scale depends on size, not on market power.

0SilasBarta15y

No, because they could be getting even more value by spending the same money that they now spend on taxes, but have that money spent specifically for their benefit, rather than have it be thrown at whatever's politically popular. Yes, they get below cost road usage today, but road costs (due to government management) are also higher. So it could be that they pay $0.70 to get government to spend $1.00 for 1 unit of road usage, but without government involved in roads, they could buy that same unit of road usage for $0.60. It could go either way. (Glad to hear we're in agreement on the sense in which the IHS as such is a subsidy.) But the alternative(s?) to trucking are even more scale-dependent. What if they shipped goods by rail? That's more dependent on finding huge loads to ship at once. Air? Same thing.

-2taw15y

The point that regulations shift company size is completely different from Hayekian local information nonsense - but would also use some quantifying; and as far as I can tell regulations in retail are fairly low compared to most other fields. It has been my impression that libertarian/Austrian types really hate using numbers in their arguments, and prefer telling stories, but in economy you usually have effects both ways and it's only their relative size which indicates if something is a good idea or not.

[-]Chronos15y130

Ah, I managed to come up with a more concrete example of where Wal-mart is leaving local information on the table.

Wal-mart has large displays of featured items, internally known as COMAC. (No, I don't know what it stands for, either.) These items come in as a bulk shipment, go on the shelf for two weeks, then come down: anything left over goes on the shelf or into the backstock bins. (A little birdie told me that they've eliminated the backstock bins for almost all departments now, so I'm not sure what they do with the leftovers now.) They form the big islands in the middle of the wider aisles ("action alleys"), as well as the endcaps of each regular aisle.

Once upon a time, department managers were encouraged to choose their COMAC. The company would send out an internal memo of what the recommendations were, but there would be several slots available for local discretion. Also, several of the slots would be decided at the regional or even district level. I seem to vaguely recall that, in the distant past, COMAC didn't necessarily arrive automatically, and department managers could refuse to run a Bentonville-requested product in favor of something else.

This resulte... (read more)

0Chronos15y

Re: "telling stories"... When it comes to refusal to calculate, the Austrians seem closely akin to the people who claim that morality is "mysterious". They're looking at the mistakes of others (principally Keynes) and trying to reverse stupidity. Which is a shame, because they do have a few insights here and there that strike me as being so correct they're painfully obvious in hindsight.

8Matt_Simpson15y

I'm no Hayek scholar, but this looks like a straw man. First of all: Straight from Hayek's seminal article: So by "central economic planning" Hayek means... the government planning all economic activity. This is what I take Hayek's main points to be (largely from reading The Use of Knowledge in Society, linked above) * aggregating information is hard, especially for very large organizations * markets do a good job of aggregating information, relative to alternatives That's pretty much it, at least that relates to this discussion. Yes, this means there are diseconomies of scale. No this doesn't mean that there aren't economies of scale that are large enough to counter the diseconomies. note that on my reading, your point about Wal-Mart is a point in Hayek's favor. Wal-Mart, though large, is part of a larger market. btw, I won't vouch for those who think Hayek justifies extreme libertarianism. He doesn't. But he does rule out central planning ala The Soviet Union.

4teageegeepea15y

Many of Caplan's complaints are about Hayek's poor writing, and regarding his ideas Caplan has focused more on "scientism" than "the knowledge problem". A much more relevant Caplan post on that (probably aimed more at Mises, but applies to Hayek as well) is The Socialist Calculation Debate: Me Against the World I don't care for Austrian economics and don't bother to read Hayek in the original, but I think the insight discussed here has been useful. Lin Ostrom, James Scott and William Easterly have all gotten a lot of mileage out of it, and while I don't think she cited Hayek (haven't finished the book yet) Jane Jacobs did as well from a less academic perspective. I don't think Hayek believed any regulation leads to totalitarianism. On the contrary, I think he actually endorsed a number of them. For someone who thinks this problem does severely cut against Wal-Mart, see Kevin Carson.

0David_J_Balan15y

The post argues that the Hayekian argument works a lot less well for prediction markets than it does for regular goods and services markets. You raise a good question as to how well it works even there. I don't have too much to say about that: I think its fair to say that the argument is something that most economists are vaguely aware of, but not something we spend a lot of time thinking about. For what it's worth, the idea always struck me as kind of sensible, but not as remotely justifying the radical free market conclusions that some people have wanted to draw from it.

Moderation Log