It can be helpful to think of the Econ 101/homo economicus view of the world as something more akin to a secular religion.
And I don't mean that in a particularly bad way; most religions package a bunch of useful concepts (e.g., the golden rule) with some stuff that isn't literally true but does serve social and emotional needs in ways that the useful stuff gets passed down through the generations. As scholar Huston Smith put it, religion gives spirituality historical traction.
The notion that markets can drive efficiency is a valuable insight. But people for whom Econ 101 acts as a religion have a really hard time noticing when that effect gets swamped. This is pretty easy to spot these days because you'll find nominally pro-market people cheering oligopolies and monopolies, or getting upset at regulations that make markets more efficient. One easy test is how they feel about sustained high profits. To people who value markets for their ability to drive improvements through competition, that's a sign of something wrong, like insufficient price competition.
> The notion that markets can drive efficiency is a valuable insight. But people for whom Econ 101 acts as a religion have a really hard time noticing when that effect gets swamped.
US businesses, though, do not. The desired state is monopoly, or, failing that, oligopoly with three or less major players. The US is there in cellular communications, web search, banking, drugstores, social networks, movies...
This quote is great but is not a call for building inefficient businesses. An inefficient business invites competition (which is for losers). An equally nice saying is "your margin is my opportunity".
> An inefficient business invites competition (which is for losers)
Unless you reach the point where you have a monopoly and it's impossible to compete. At this point, you can become inefficient and still keep your monopoly. For a very long time, at least. And this is something we observe in software.
Yeah and that's mostly nonsense (but expedient). It's hard to compete with any large industry and still their inefficiency is your opportunity. See also Uber and friends against taxis (both impossible and illegal), SpaceX against Team USA (preposterous), everyone else against AOL (okay, that one was easy), Oracle (who?)... For one example, it's hard to compete against Google's core businesses but it's not like most here wouldn't be glad to find alternatives, any alternatives... Wait, alternative to what? The browser has clear dominance but that's not even Google's core business. Youtube is pretty dominant - but even then Facebook and Tik-tok beg to differ.
I'm not saying that "competition is for losers" is wrong. It's an excellent objective, to carve yourself a (large, comfortable) niche where you are the no-brainer solution. But it's no license to fall asleep.
Lately I've been wondering if the efficient market hypothesis was actually more true a century ago than it is now.
Not because anything fundamental has changed about economics, but because baselines have shifted to the point that what we expect an efficient market to look like may be very different from what what people expected it to look like in the early 20th century. So, basically, people's definition of "efficient" has subtly changed.
A century or so ago market economies hadn't caught on to the same extent. In the 1950s you had Khrushchev coming to visit Iowa to learn about US agricultural productivity. He visited family farms, talked to people about how they did things, and then went back home to tell the USSR's farmers that they needed to plant corn everywhere, including in places where the climate is not even remotely suitable for growing corn. All this time talking to family farmers about how they make their own decisions about the best use of their own land, and he somehow still failed to pick up on the idea that maybe the secret ingredient in the sauce was that the USA generally let farmers run their own farms.
Sure, the USA's capitalist economy still had charlatans, including agricultural charlatans, and wasteful fads for bad ideas, rent-seeking behavior, pork barrel politics, etc. But maybe it was still easy to see that situation as efficient at the time, because one's reference for comparison included being able to see the greater amount of damage that a planned economy allowed a charlatan like Lysenko to do from his position of power within the Soviet Academy of Sciences.
I think it absolutely was. Even 50+ years ago there was far more competition in any number of industries and investors looking at a particular widget maker could compare numerous companies and analyze the operations and strategy of each before picking which one(s) to invest in. Today we assume EMH when competition has become increasingly rare... so everyone from consumers to investors have fewer options yet somehow efficiency is supposed to exist.
Today most just pile into the megacaps and generally assume 'these guys are the biggest... they must be the best.' Sure, there's a small window of competition in the VC world where money piles into non-public companies for a few years before a winner is selected (often having nothing to do with having the best product/service or even being the most efficient or profitable... it's all about who scaled to the finish line the fastest) and either becomes the 800lb gorilla or gets gobbled up by one.
> Lately I've been wondering if the efficient market hypothesis was actually more true a century ago than it is now.
Probably.
A century ago, the companies which approached monopoly were in industries that had either huge economies of scale or very strong network effects. The United States Steel Corporation was an example of the first, and the Pennsylvania Railroad an example of the second. Even railroads were somewhat local monopolies - the Pennsylvania never merged with the Union Pacific. Not that the government at the time would have let them.
What changed?
- Better transport and communication. Selling to country-sized and world-sized markets became feasible.
- Computerization. Big companies used to have huge clerical plants of people pushing paper. Some of that paper pushing scaled faster than linearly, so the bigger the company, the worse it got. The administration system of big companies couldn't get out of its own way. It's forgotten now, but pre-computer, railroad companies had no idea where most of their shipments currently were. Paperwork was nailed to the side of boxcars and traveled with the load. As late as the 1960s, auto companies were struggling to figure out where their vehicles in transit on rail cars had gotten lost.
Today the mechanics of tracking everything is a non-problem. Walmart, Target, and Amazon work fine. Planetary-scale companies are possible and common.
- Bigger banks. Until the 1980s, US banks could not operate across state lines. Until the 1990s, nationwide banks did not exist in the US. This limited large business access to borrowed capital. Most companies were primarily funded by equity, supported by national stock markets.
I think the hypothesis was more true in the past, but mostly because both the necessary dependencies it is based on are less true today than in the past, and the products and services are more complex today.
Back when anybody could start building furniture the cost of entry was low and competition high. Switching costs were also low.
The cost of entry for a smartphone which is truly different are astronomical, many previously unregulated products are now strictly regulated, so costs of entry is no longer low and therefore competition is also low. For many services like software switching costs are very high. Firms need to be large to produce the complex products which introduces internal inefficiencies which are hard to avoid.
Realizing a day later that I misspoke in the first sentence. "Efficient market hypothesis" is something else; I should have said something like "idea that freer markets are more efficient".
> It can be helpful to think of the Econ 101/homo economicus view of the world as something more akin to a secular religion.
I find it much more common for people to dismiss Econ 101 principles religiously (e.g. less strict zoning will just create more luxury apartments that will actually make housing more expensive; demand subsidies to college education, an inelastic good, will make it more affordable).
> I find it much more common for people to dismiss Econ 101 principles religiously (e.g. less strict zoning will just create more luxury apartments that will actually make housing more expensive; demand subsidies to college education, an inelastic good, will make it more affordable).
I don't think any of that's religious. People believe subsidizing college education will make it cheaper because of common sense and lived experience of short-term effects (increasing subsidy to something generally does make it cheaper in the immediate), and people believe relaxing zoning will make housing more expensive because they see higher prices in places that have relaxed zoning than in neighbouring places that haven't.
That just sounds like "stubbornly" to me. People are often stubbornly wrong (or right), but in your examples I don't see anything that would make me call it religious in the sense of the comment you're replying to. Which, to be clear, is a set of given notions that they use to make sense of the world.
Econ 101 is the first semester of a multi year degree. By necessity it focuses on idealistic concepts. Nothing wrong with that—of course N-order effects, psychology, and information disparity, etc need to be taken into account in the real world.
Without this understanding one ends up in such a debate.
The problem is that so many people who only take Econ 101 seem to believe their understanding is analogous to understanding the physics of reality by learning Newton's laws and equations of motion.
But it isn't. Econ 101 is more analogous to Aristotelian physics, full of outright falsehoods, self-contradictions, things that sound right but have no basis in reality, and an abject failure and unwillingness to test anything and change your mind once you've seen contradictory results.
So you have millions upon millions shouting "regulation bad" with nary a whiff of systemic understanding.
Funnily, I think this is also true of most traditional religions. I have known a variety of thoughtful and sincere religious people over the years. They have studied extensively and deeply engaged with the human meaning of the words. But I've also met a lot of very shallowly religious people, either because they haven't bothered or because they work energetically to maintain a narrow take because it's socially or economically useful to them.
And of course there's an intersection in what I've heard called the "Supply Side Jesus" view.
> The problem is that so many people who only take Econ 101 seem to believe their understanding is analogous to understanding the physics of reality by learning Newton's laws and equations of motion.
This is in my opinion a bad analogy: if you have really understood these physics topics, your understanding of physics is surprisingly deep (I claim better than 99 % of the population) - classical mechanics is (unknown to many) an insanely deep rabbit hole.
You haven't demonstrated anything here. One would think in four paragraphs you'd be motivated to give > 0 details or reasoning. And no, political propaganda doesn't count.
The "political" is a forewarning to not bother without details. Others already strayed into that territory. As it stands the post is empty rhetoric and insults against a reasonably-well-understood subject studied over centuries.
It's insulting the 101 class much more than the subject. You could even take it as a compliment to the breadth of economics that a proper introduction takes longer.
I don't think you have much standing to complain about negative posts.
I'm also not defending it, although I might be willing to try if you asked nicely. My point is that that your complaint is pretty hollow. "Oh no, somebody posting for free on the internet didn't do the work I wanted! They must be bad!" I guess you get your kicks, but I think it's a pretty low value contribution, in that it is shot through with unearned contempt.
I got annoyed and responded in kind. So what? Backing up assertions with details is step zero of a worthwhile post. Taught in middle-school and not the responsibility of the reader.
The details never came out despite several subthreads.
If your priority is protocol over an attempt at truth you've made it clear. Been a while and I don't remember the original assertion so might as well save yourself the time.
hard to evaluate sustained high profits without context. is it due to continued innovation by the firm? or just rent seeking? both can be causes of profits but we should only be promoting one of those models
Sure, although I think it gets easier as time goes on; there a are lot of innovative people out there. But my point here is more about the reaction to it. If people say, "Well they're making lots of money, so they must be great innovators, great managers, and generally virtuous", then that's basically a religious answer. People who see markets as tools for efficiency will say, "Look at those sustained high profits. Is it really that nobody has figured out how to compete with them yet? Or are they misusing their market power or wealth in ways that limit competition?"
> One easy test is how they feel about sustained high profits. To people who value markets for their ability to drive improvements through competition, that's a sign of something wrong, like insufficient price competition.
We'd need more context. Those sustained profits are "money on the table". There may be real advantages to the company earning them, like sustained innovation or other quality, that others have trouble competing with. But if those profits are coincident with lots of lobbying and various shenanigans (controversially maybe including patents and copyright)... you'll get more sympathy.
And I don't mean that in a particularly bad way; most religions package a bunch of useful concepts (e.g., the golden rule) with some stuff that isn't literally true but does serve social and emotional needs in ways that the useful stuff gets passed down through the generations. As scholar Huston Smith put it, religion gives spirituality historical traction.
The notion that markets can drive efficiency is a valuable insight. But people for whom Econ 101 acts as a religion have a really hard time noticing when that effect gets swamped. This is pretty easy to spot these days because you'll find nominally pro-market people cheering oligopolies and monopolies, or getting upset at regulations that make markets more efficient. One easy test is how they feel about sustained high profits. To people who value markets for their ability to drive improvements through competition, that's a sign of something wrong, like insufficient price competition.