Wednesday, July 22, 2015

If a market is missing, then make one!

Reply to: The Relationship Economy — Part II

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The owners of the machines earned their wealth by serving consumers better than their competitors did. Would it make sense to reverse the choices of consumers and give their money to the less beneficial competitors? If not, then why would it make sense to give their money to random producers? Redistributing money makes just as much sense as redistributing votes.

But it’s really cool that you’ve identified several “sectors” of productivity that the market doesn’t compensate. It’s really recommendable…  except for the part where you conclude that the government should take money from the most effective producers and give it to these uncompensated producers. Subverting the true will of the people really isn’t cool.

My guess is that the market didn’t compensate you for this story that you’ve taken the time and made the effort to produce and share on Medium. You’re an uncompensated producer. So you can add Medium to your list of uncompensated sectors. Therefore… we should take money from compensated producers and give it to you, me and everybody else who writes a story on Medium? We should override the decisions of consumers? We should divert their votes?

Here’s the mistake in your logic. Just because Medium doesn’t facilitate compensation… doesn’t mean that it can’t facilitate compensation. All it would have to do is add coin buttons next to the recommend button. Consumers of your stories could click the penny button or nickle button or dime button or quarter button and compensate you for your stories. Voila! Compensation! Assuming of course that some readers derive some value from your stories.

According to this story of yours, the only solution to missing markets is government intervention/redistribution. But in fact… there’s another solution… to make markets.

A market is missing? Yeah? Ok, so make one! That’s what being an entrepreneur is all about. You identify a deficiency… and you correct it. If what you identified was truly a deficiency… then consumers will compensate you accordingly. The greater the compensation, the greater the deficiency that you found and corrected.

Regarding the specifics of how you’d go about making markets for all the sectors you’ve identified… well…those would have to be worked out. The basic concept boils down to facilitation. Think Uber. They created an ap that facilitated connecting drivers with people needing transportation. They also facilitated compensation. They also facilitated rating. They made it stupid easy to trade with other people.

Medium already facilitates the connection… here we are! All it would have to do is facilitate the compensation.

The benefit of making markets, rather than having the government redistribute money, is that you don’t subvert the true will of the people. If the government was any good at determining the true value of productivity… then command economies (socialism) would work just as well as market economies. Command economies fail because allocations of society’s resources don’t accurately reflect society’s valuations. The only way allocations can accurately reflect valuations… is if we give consumers the opportunity to communicate their valuations. And that’s what consumer choice effectively accomplishes. How consumers spend their money communicates their valuations of other people’s productivity. A higher valuation provides the producer with more money… which gives them greater control/influence/power over society’s limited resources. This ensures maximum benefit for society. Hence the value of making a market rather than allowing additional government intervention.

Markets facilitate communication, governments distort communication.

One “minor” detail is that markets in the sectors you identified will probably be subject to the free-rider problem. There are lots of solutions to this problem. One of my favorites is to tie compensation with promotion. The more money somebody contributes to academic achievements… the higher their name/company/website will be displayed on your homepage. Plus, every academic achievement will probably have its own page… and to the right or left of the achievement you can display donors (name/company/website) sorted by the amount they contributed to that achievement.

With this system, you can help ensure that the academic achievements are actually relevant. It’s doubtful that there’s going to be much interest in contributing to achieving a degree in underwater basket weaving. But we can imagine law firms competing to reward law degrees. And Silicon Valley competing to reward technology degrees. Their contributions will help influence career decisions.

A market for academic achievements would clarify the demand for academic achievements. This information would help people make informed academic decisions. In the absence of this information, or if this information is distorted by government intervention, then the logical result is a garbage in, garbage out (GIGO) situation. We end up with degrees to nowhere just like we end up with bridges to nowhere and wars to nowhere.

Knowing society’s valuations of productivity is the only way we can put society’s limited resources to their most valuable uses.

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Where's Alvin Roth when you need him?

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