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Have you ever wondered why the date you found on that online dating service wasn’t what you expected? Or why the used car you bought turned out to be an old junker? Or why the stock market crashed just after you bought in with both arms and both legs? Or how someone like Donald Trump became President of the United States?
The answer to these and many similar conundrums requires a fundamental understanding of the difference in information available to buyers and sellers. In most cases sellers know more about what they’re selling than buyers know about what they’re buying, a situation known as “asymmetric information”. While sellers are most often the beneficiaries of asymmetric information, sometimes buyers come out on top. We’ve all heard about knowledgeable art dealer who picked up a Van Gogh at a garage sale for a song. But that’s the exception that proves the rule. What we have here is a case of market failure, something economists don’t like to admit.
Years ago my thesis advisor at Berkeley, George Akerlof, wrote an article titled The Market For Lemons. Back then (1970) he had a hard time placing his article in first rate economic journal. He was right and the journal gatekeepers were wrong. He ultimately won the Nobel Prize in Economics for his efforts. His article used the market for used cars as an example. Obviously the seller knows how well the car has been taken care of while the buyer has no idea if the car is a lemon or not. Sellers of good cars will demand a high price. Buyers would be happy to pay a high price if they knew the car was pristine, but they have no way of knowing that it’s not a lemon and the seller has an incentive to mislead them. So, buyers offer a lower price for the best cars. Because of this, the best of the used cars don’t make it to market while the worst are offered for sale.
The best lack all conviction, while the worst
Are full of passionate intensity.
… W. B. Yeats The Second Coming
The same argument apparently holds true in the online dating market according to a recent article by Conor Clarke (Love Stinks: An Economic Manifesto) and in the market for financial assets according to Noah Smith (The Dirty Little Secret of Finance: Asymmetric Information). It holds in numerous other markets as well. It appears from recent and past events that we in the United States have a similar problem in the market for guns but in this case it is the buyers that seem to have the key information.
Professor Akerlof paid me the enormous complement of listening to a long argument I made about income inequality and unemployment that was based on the fluctuation of the duration of unemployment (number of months unemployed in a year). I thought it was true genius on my part (I was 24 and full of it back then). He went so far as to say that it was one of most interesting arguments he’d heard on the matter. His wife, Janet Yellen, went on to become Chairman of the Federal Reserve. What a privilege to know both of them back in those days!
The Market for Lemons, based on asymmetric information between buyers and sellers, is loosely related to another observation about how “bad money” drives out “good money” called Gresham’s Law. Suppose a “good and wise” king mints pure silver coins to be used as money in his kingdom. His successor, not so “good and wise” decides that he can print coins that are only 90% silver and get away with it thereby saving a load of silver for himself. As people become aware that there are debased coins masquerading as pure silver, they will hoard their pure silver coins, melt them down, and create their own debased coins to make a profit for themselves. Eventually all the pure silver coins will be converted to bad ones. Gresham’s Law was well known long before Thomas Gresham. The Greek playwright Aristophanes wrote about it in his play The Frogs. Aristophanes was directing his complaint at the incompetent rulers of his time.
In his play, two citizens of Athens descend into Hades for the purpose of resurrecting two well-respected politicians of the past to save the city-state from its current, corrupt rulers. The current rulers are said to be like the base-metal coins in circulation, while the rulers of the past are like the full-bodied, precious metal coins that formerly circulated. [Does this ring a bell today?]
from The Frogs
You know what I often think:
We treat our best men
The way we treat our mint
The silver and the golden
We were proud to invent
Genuine coins, no less,
Ringing true and tested
Both abroad and [in] Greece
And now they’re not employed
As if we were disgusted
And want to use instead
These shoddy coppers minted
Or the day before (as if that matters).
There is at least one other reason “the bad” drives out “the good.” It has to do with entropy, that gradual decline of order into disorder known as then Second Law of Thermodynamics. It takes work for intelligence to root out stupidity, for art to arise from randomness, and for the universe to hold itself together although eventually the universe and everything we know will disintegrate into a uniform cloud known as heat death or the steady state. Heat death is the point at which the universe has finally settled down completely (or almost completely), and nothing interesting ever happens again.
The eminent philosophers Flanders and Swann have a more up beat take on the heat death of the universe:
“Heat is work, and work’s a curse,
and all the heat in the universe,
is gonna cool down. ‘Cause it can’t increase,
then there’ll be no more work, and there’ll be perfect peace.
That’s entropy, man.”
Entropy, or something like it, is one subject of two great poems.
The Second Coming
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
I met a traveller from an antique land
Who said: ‘Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed:
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.’
On a personal note, It’s been almost a month since I posted on this site. The reason: sciatica. I’ve never had so much pain in my life. Maybe I’m just a wimp. Thankfully I’ve never experienced much in the way of pain. Now I don’t need to. This was enough.
My sciatica is better but the pain that lingers is like Gresham’s Law in economics, the bad health drives out the good. It’s hard to concentrate. Every morning I think “maybe today” but the day goes by without much serious thought. I am reminded of a quote from Andrei Sinyavsky that I will paraphrase as follows: A healthy body is like a beehive because its structure is both very light and very solid, with each cell linked to the other. If you destroy one cell of a beehive, everything else survives. But a sick body is like a sack tied with a knot. If you make a hole, everything falls out.”
Epicurus, a philosopher I’ve grown to admire over the years, would say: “So, don’t let a hole develop.”
True to his philosophy, Epicurus claimed to spend the last few days of life in pleasure, despite all the physical pain he was in. As he writes in his Letter to Idomeneus:
I have written this letter to you on a happy day to me, which is also the last day of my life. For I have been attacked by a painful inability to urinate, and also dysentery, so violent that nothing can be added to the violence of my sufferings. But the cheerfulness of my mind, which comes from the recollection of all my philosophical contemplation, counterbalances all these afflictions.
Here we see one of Epicurus’ techniques for obtaining happiness even in the most miserable situation: instead of dwelling on the pain, recollect one of those moments in the past when you were most happy. Through enough training of the mind, you will be able to achieve such vividness of imagination that you can relive these experiences and that happiness. Or, so says Epicurus. For Epicurus, it’s all about happiness.
So we must exercise ourselves in the things which bring happiness, since, if that be present, we have everything, and, if that be absent, all our actions are directed toward attaining it.