I said it last week, people righteously said that things are not worth to the customer what the customer will pay for them because poor people have less money than rich people, and no, sorry, that’s not how this works, that’s not how any of this works.
It seems easy to construct a scenario where this is untrue, or at least conflicts with an intuitive definition of “value”. If I’m trying to auction off a rare food item in a room with Jeff Bezos and a starving person with no money, Bezos can easily win the auction if he has the slightest desire for the food. A tiny rounding error on his fortune is more than the starving person’s entire life is worth (in a monetary sense). Bezos clearly puts a higher monetary value on the food, but it seems absurd to suggest that this is an example of the food being allocated to the person who values it the most. To use a more realistic example, it’s hard for me to agree that a billionaire values their tenth vacation home more than a homeless person who is in danger of freezing in the winter.
I’m generally in favor of free markets, and maybe allowing Jeff Bezos to do whatever he wants produces an overall better world than the alternative. However, it seems disingenuous to say that his vast fortune means that he can value an item of trivial importance more than other people value anything at all.
At the moment, the poor person and the rich person are both buying things. If the rich person buys more vaccine, that means they will buy less of the other things, so the poor person will be able to have more of them. So the question is about the ratios of how much the two guys care about the vaccine and how much they care about the other thing… and the answer is the rich guy will pay up for the vaccine when his vaccine:other ratio is higher than the other guys. This is the efficient allocation.
It might be the case that it is separately desirable to redistribute wealth from the rich guy to the poor guy. This would indeed allow the poor guy to buy more things. But, conditional on a certain wealth distribution, it is best to allow market forces to allocate goods within that distribution.
(For simplicity I have ignored macroeconomics in this post, but the same argument broadly goes through if you don’t.)
At the moment, the poor person and the rich person are both buying things. If the rich person buys more vaccine, that means they will buy less of the other things, so the poor person will be able to have more of them. So the question is about the ratios of how much the two guys care about the vaccine and how much they care about the other thing… and the answer is the rich guy will pay up for the vaccine when his vaccine:other ratio is higher than the other guys.
This is only true if the rich person is already spending as much money as possible, so an increase in spending on Item A must cause a decrease in spending on Item B. For someone like Jeff Bezos, an increase in spending on Item A probably just results in slightly less money spent by his great-grandchildren in 100 years.
It might be the case that it is separately desirable to redistribute wealth from the rich guy to the poor guy. This would indeed allow the poor guy to buy more things. But, conditional on a certain wealth distribution, it is best to allow market forces to allocate goods within that distribution.
I don’t see why this has to be true in all scenarios. If we want to make sure that the starving guy gets some of the food, can’t we just allocate the food to him directly, rather than having to give him enough money to win a bidding war with Jeff Bezos? Perhaps we desire a system where, in general, Jeff Bezos can use his money to do whatever he wants, but we have safeguards in place to prevent him from outbidding a starving guy on the food he needs to survive. I recognize that this may not be efficient in monetary terms, but it could be efficient in terms of overall human utility.
I think I disagree a bit with both (but what do I know).
For someone like Jeff Bezos, an increase in spending on Item A probably just results in slightly less money spent by his great-grandchildren in 100 years.
This doens’t seem to me to be the right way to think about it. Short term, the more he spends on Item A will result in lower spending on Item B, or lower investment in his companies, a lower transfer of money from him to someone else (like through lower savings). Or more money being spent overall if he just uses up cash he had hidden in his pillow; which increases prices for everyone (but this will be made up for in some future).
If we want to make sure that the starving guy gets some of the food, can’t we just allocate the food to him directly, rather than having to give him enough money to win a bidding war with Jeff Bezos?
Who produces the food and can set the prices? If it’s private companies, then they wouldn’t sell it to the state for cheaper than to Bezos, so it would be as expensive to the state as giving that same money to the poor and let them outbid Bezos. If the state owns the stuff, then [insert standard anti-socialism arguments]. If the prices are fixed by the state, then its inefficient and there may not enough production for all. If the prices fixed by the state but depend on the person—or on how many of X you have bought this month or stuff like that—then that introduces whole new types of messes.
I agree that in a very strict sense money spent on X definitionally cannot be spent on something else (you already spent it so don’t have it). But does that type of tautological view matter here? (And if that is not the basis of your point and I’m misunderstanding, sorry.)
This kind of reminds me of the old Richard Pryor movie Bruster’s Millions.
I suspect the numbers have change but at one point I recall Bezos had a new worth of 90 billion. Even with a paltry 1% return on total assets that’s like 900 million a year. Could you spend all that? I’m not sure I could really keep tracking of an income stream like that—I suspect I would often be doing the equivalent of dropping a million on the floor now and then and forgetting to pick it up for a week or so.
So the rich buying more vaccines doesn’t really equate to not buying enough of other things that prices for those other things drop enough to make more available to the poor (who are budget constrained much more realistically than are the rich).
I am under the impression that you are thinking something like: “Bezos has ~100 billion to spend. If he spends 1 million in X, then he has 1 million less to spend on the rest. But he won’t even get to spend it in his lifetime, so that extra million in X doesn’t change how much he would spend in Y. Therefore, it’s wrong to say that Y will become more available because Bezos spent in X.”.
I don’t think that’s the right way to think about all this. (Warning: oversimplification coming):
Bezos earns some income, say, in a year. Almost all of it will be spent. Most will be invested and not consumed, so it will still increase his net worth, but that demand for stuff is still there, affecting the economy. Bezos is already probably spending about as much as he can, and what he is not spending he is saving which probably means transferring it to someone else who will spend it. So, if he spends USD 10 in X, it’s reasonable imho to “expect” the economy to get USD 10 less spending in non-X stuff (on avg)
I said it last week, people righteously said that things are not worth to the customer what the customer will pay for them because poor people have less money than rich people, and no, sorry, that’s not how this works, that’s not how any of this works
I pointed out the error last week, too. I’m disappointed to see it doubled down on.
Agreed. To be fair to Zvi, he did make clear the sense in which he’s talking about “value” (those who value them most, as measured by their willingness to pay) [ETA: “their willingness and ability to pay” may have been better], but I fully agree that it’s not what most people mean intuitively by value.
I think what people intuitively mean is closer to: I value X more than you if: 1) I’d pay more for X in my situation than you’d pay for X in my situation. 2) I’d pay more for X in your situation than you’d pay for X in your situation.
(more generally, you could do some kind of summation over all situations in some domain)
The trouble, of course, is that definitions along these lines don’t particularly help in constructing efficient systems. (but I don’t think anyone was suggesting that they do)
Agreed on all points, except for about how clear the author was being about the use of the word “value”. Although he does make the reference to willingness to pay, his rhetorical point largely depends on people interpreting value in the colloquial sense. He writes, in the previous post:
If we’re not careful, next thing you know we’ll have an entire economy full of producing useful things and allocating them where they are valued most and can produce the most value. That would be the worst.
Imagine if you alter the phrasing to this, which is roughly equivalent under the “value = willingness + ability to pay” paradigm:
If we’re not careful, next thing you know we’ll have an entire economy full of producing useful things and allocating them to people who can pay the most money for them and where they can generate the mostwealth for those people. That would be the worst.
Many people might reasonably object to that scenario, even though it sounds silly when we phrase their objection as “I think we should allocate resources to people who value them less”. My own feelings are probably closer to the author’s than those of the hypothetical objectors, but I’d prefer it if we could avoid these kind of rhetorical techniques.
The market cares for individuals about as much as evolution does.
Yes. Bezos can bid more for the meal than the hungry drifter. Why is that the case? It’s because Bezos is instrumental to offering a useful service to literally billions of people and the drifter… isn’t.
It seems cruel. It is cruel. But it’s a cruel world we live in. It is perfectly possible for preventing Bezos from being mildly “hangry” at an inopportune time to alleviate more suffering worldwide than preventing one shiftless vagrant from starving to death.
And that’s not intuitively obvious because your social instincts are programmed for a world where you know everyone in your entire community personally and can see exactly what they’re contributing with your own eyes.
Set the situation in a small tribe where you’re choosing between feeding the shaman who knows where the watering holes are and what food is safe to eat and is obviously critical to the survival of everyone, or feeding the aged cripple who can barely walk unassisted and your social instincts will likely choose correctly. You’ll still be sad, but finite resources often means hard choices.
We use markets to decide things like this because they’re the most efficient way we know of to deal with the scope of the calculation being far too big for our puny brains to handle all at once. But that cuts us off from always being able to understand the why of the calculation result. And so when the market hands down a result that is painful to look at we reflexively want to call it a “market failure” and “correct” it.
But there are consequences for doing that. The fact that the immediate consequences of the market’s choice are obvious and the long-term consequences of overriding that choice are invisible (except with great effort) doesn’t mean that there are no costs. There is no free lunch. Every choice must be paid for. While you might sometimes “beat the market” and spot the more-optimal solution just the sheer difference in data-crunching capability means that, most of the time, you’re going to be wrong. Even if the consequences don’t hit for years. Even if you’ve stopped paying attention by the time the piper comes around to collect his due.
At the end of the day what keeps the system running is that 98% of us are decent people who care about others, even strangers. Jeff Bezos certainly could outbid the starving vagrant. But, unless this were the last meal in the world, would he? Likely not.
And if he did I expect he could be easily persuaded to purchase a more normal meal for the fellow—it’s a trivial cost to him and most normal people would get a good feeling from doing it.
And even if he didn’t, in a full economy that high bid lowers the cost of another meal and encourages an increase in meal production, so that 2% of selfish people are still at least pulling their own weight.
It’s not that a market always makes things perfect for everyone. It’s that, in the long run, it screws up less often that the other systems we currently know of.
To use a more realistic example, it’s hard for me to agree that a billionaire values their tenth vacation home more than a homeless person who is in danger of freezing in the winter.
I don’t see “value” as a feeling. A freezing person might desire a warm fire, but their value of it is limited by what can be expressed.
That said, a person is a complex asset, and so the starving person might trade in their “apparent plight” (e.g. begging).
For example, the caring seller of the last sandwich might value alleviating “apparent plight” more than millions of shares of AMZN. Whether they do or don’t exactly determines the value of an individuals suffering against some other asset, in terms of the last sandwich.
It seems easy to construct a scenario where this is untrue, or at least conflicts with an intuitive definition of “value”. If I’m trying to auction off a rare food item in a room with Jeff Bezos and a starving person with no money, Bezos can easily win the auction if he has the slightest desire for the food. A tiny rounding error on his fortune is more than the starving person’s entire life is worth (in a monetary sense). Bezos clearly puts a higher monetary value on the food, but it seems absurd to suggest that this is an example of the food being allocated to the person who values it the most. To use a more realistic example, it’s hard for me to agree that a billionaire values their tenth vacation home more than a homeless person who is in danger of freezing in the winter.
I’m generally in favor of free markets, and maybe allowing Jeff Bezos to do whatever he wants produces an overall better world than the alternative. However, it seems disingenuous to say that his vast fortune means that he can value an item of trivial importance more than other people value anything at all.
At the moment, the poor person and the rich person are both buying things. If the rich person buys more vaccine, that means they will buy less of the other things, so the poor person will be able to have more of them. So the question is about the ratios of how much the two guys care about the vaccine and how much they care about the other thing… and the answer is the rich guy will pay up for the vaccine when his vaccine:other ratio is higher than the other guys. This is the efficient allocation.
It might be the case that it is separately desirable to redistribute wealth from the rich guy to the poor guy. This would indeed allow the poor guy to buy more things. But, conditional on a certain wealth distribution, it is best to allow market forces to allocate goods within that distribution.
(For simplicity I have ignored macroeconomics in this post, but the same argument broadly goes through if you don’t.)
This is only true if the rich person is already spending as much money as possible, so an increase in spending on Item A must cause a decrease in spending on Item B. For someone like Jeff Bezos, an increase in spending on Item A probably just results in slightly less money spent by his great-grandchildren in 100 years.
I don’t see why this has to be true in all scenarios. If we want to make sure that the starving guy gets some of the food, can’t we just allocate the food to him directly, rather than having to give him enough money to win a bidding war with Jeff Bezos? Perhaps we desire a system where, in general, Jeff Bezos can use his money to do whatever he wants, but we have safeguards in place to prevent him from outbidding a starving guy on the food he needs to survive. I recognize that this may not be efficient in monetary terms, but it could be efficient in terms of overall human utility.
I think I disagree a bit with both (but what do I know).
This doens’t seem to me to be the right way to think about it. Short term, the more he spends on Item A will result in lower spending on Item B, or lower investment in his companies, a lower transfer of money from him to someone else (like through lower savings). Or more money being spent overall if he just uses up cash he had hidden in his pillow; which increases prices for everyone (but this will be made up for in some future).
Who produces the food and can set the prices? If it’s private companies, then they wouldn’t sell it to the state for cheaper than to Bezos, so it would be as expensive to the state as giving that same money to the poor and let them outbid Bezos. If the state owns the stuff, then [insert standard anti-socialism arguments]. If the prices are fixed by the state, then its inefficient and there may not enough production for all. If the prices fixed by the state but depend on the person—or on how many of X you have bought this month or stuff like that—then that introduces whole new types of messes.
I agree that in a very strict sense money spent on X definitionally cannot be spent on something else (you already spent it so don’t have it). But does that type of tautological view matter here? (And if that is not the basis of your point and I’m misunderstanding, sorry.)
This kind of reminds me of the old Richard Pryor movie Bruster’s Millions.
I suspect the numbers have change but at one point I recall Bezos had a new worth of 90 billion. Even with a paltry 1% return on total assets that’s like 900 million a year. Could you spend all that? I’m not sure I could really keep tracking of an income stream like that—I suspect I would often be doing the equivalent of dropping a million on the floor now and then and forgetting to pick it up for a week or so.
So the rich buying more vaccines doesn’t really equate to not buying enough of other things that prices for those other things drop enough to make more available to the poor (who are budget constrained much more realistically than are the rich).
Yeah, I wasn’t trying to be tautological.
I am under the impression that you are thinking something like: “Bezos has ~100 billion to spend. If he spends 1 million in X, then he has 1 million less to spend on the rest. But he won’t even get to spend it in his lifetime, so that extra million in X doesn’t change how much he would spend in Y. Therefore, it’s wrong to say that Y will become more available because Bezos spent in X.”.
I don’t think that’s the right way to think about all this. (Warning: oversimplification coming):
Bezos earns some income, say, in a year. Almost all of it will be spent. Most will be invested and not consumed, so it will still increase his net worth, but that demand for stuff is still there, affecting the economy. Bezos is already probably spending about as much as he can, and what he is not spending he is saving which probably means transferring it to someone else who will spend it. So, if he spends USD 10 in X, it’s reasonable imho to “expect” the economy to get USD 10 less spending in non-X stuff (on avg)
Are you saying there would be a causal link from the poor person’s vaccine:other ratio to the rich person’s purchasing decision? How does that work?
I pointed out the error last week, too. I’m disappointed to see it doubled down on.
Agreed. To be fair to Zvi, he did make clear the sense in which he’s talking about “value” (those who value them most, as measured by their willingness to pay) [ETA: “their willingness and ability to pay” may have been better], but I fully agree that it’s not what most people mean intuitively by value.
I think what people intuitively mean is closer to:
I value X more than you if:
1) I’d pay more for X in my situation than you’d pay for X in my situation.
2) I’d pay more for X in your situation than you’d pay for X in your situation.
(more generally, you could do some kind of summation over all situations in some domain)
The trouble, of course, is that definitions along these lines don’t particularly help in constructing efficient systems. (but I don’t think anyone was suggesting that they do)
Agreed on all points, except for about how clear the author was being about the use of the word “value”. Although he does make the reference to willingness to pay, his rhetorical point largely depends on people interpreting value in the colloquial sense. He writes, in the previous post:
Imagine if you alter the phrasing to this, which is roughly equivalent under the “value = willingness + ability to pay” paradigm:
Many people might reasonably object to that scenario, even though it sounds silly when we phrase their objection as “I think we should allocate resources to people who value them less”. My own feelings are probably closer to the author’s than those of the hypothetical objectors, but I’d prefer it if we could avoid these kind of rhetorical techniques.
The market cares for individuals about as much as evolution does.
Yes. Bezos can bid more for the meal than the hungry drifter. Why is that the case? It’s because Bezos is instrumental to offering a useful service to literally billions of people and the drifter… isn’t.
It seems cruel. It is cruel. But it’s a cruel world we live in. It is perfectly possible for preventing Bezos from being mildly “hangry” at an inopportune time to alleviate more suffering worldwide than preventing one shiftless vagrant from starving to death.
And that’s not intuitively obvious because your social instincts are programmed for a world where you know everyone in your entire community personally and can see exactly what they’re contributing with your own eyes.
Set the situation in a small tribe where you’re choosing between feeding the shaman who knows where the watering holes are and what food is safe to eat and is obviously critical to the survival of everyone, or feeding the aged cripple who can barely walk unassisted and your social instincts will likely choose correctly. You’ll still be sad, but finite resources often means hard choices.
We use markets to decide things like this because they’re the most efficient way we know of to deal with the scope of the calculation being far too big for our puny brains to handle all at once. But that cuts us off from always being able to understand the why of the calculation result. And so when the market hands down a result that is painful to look at we reflexively want to call it a “market failure” and “correct” it.
But there are consequences for doing that. The fact that the immediate consequences of the market’s choice are obvious and the long-term consequences of overriding that choice are invisible (except with great effort) doesn’t mean that there are no costs. There is no free lunch. Every choice must be paid for. While you might sometimes “beat the market” and spot the more-optimal solution just the sheer difference in data-crunching capability means that, most of the time, you’re going to be wrong. Even if the consequences don’t hit for years. Even if you’ve stopped paying attention by the time the piper comes around to collect his due.
At the end of the day what keeps the system running is that 98% of us are decent people who care about others, even strangers. Jeff Bezos certainly could outbid the starving vagrant. But, unless this were the last meal in the world, would he? Likely not.
And if he did I expect he could be easily persuaded to purchase a more normal meal for the fellow—it’s a trivial cost to him and most normal people would get a good feeling from doing it.
And even if he didn’t, in a full economy that high bid lowers the cost of another meal and encourages an increase in meal production, so that 2% of selfish people are still at least pulling their own weight.
It’s not that a market always makes things perfect for everyone. It’s that, in the long run, it screws up less often that the other systems we currently know of.
I don’t see “value” as a feeling. A freezing person might desire a warm fire, but their value of it is limited by what can be expressed.
That said, a person is a complex asset, and so the starving person might trade in their “apparent plight” (e.g. begging).
For example, the caring seller of the last sandwich might value alleviating “apparent plight” more than millions of shares of AMZN. Whether they do or don’t exactly determines the value of an individuals suffering against some other asset, in terms of the last sandwich.