This is a super interesting and thought provoking essay. Thanks for writing it! Although it does feel overstated in this essay, I really like the core point of how trust makes things better, and how there are costs to enable transactions when trust is absence (police, lawyers). It’s new, plausible and powerful: a combination I don’t come across all that often.
“Markets!” my econ professor would proclaim in a thick Armenian accent. “If only they were a machine! People would love a machine where you can put in wheat and pick out a helicopter.”
That is a marvelous machine.
Wow. It never clicked to me like this. Thanks.
Someone who has done an intro class to economics could probably argue that the markets would correct for this. Isn’t crooked carpenters a great opportunity for honest ones to increase their market share?
No. Not if the consumer never realizes what happens, which they usually don’t – because of asymmetries of information. Usually, the customer only sees the wholesome, friendly-looking attitude – and gives a rave review after being exploited.
100%. I’ve realized this more and more as I’ve grown older and seen many examples of it.
One sticks out. I worked for a company that builds software for other companies. Ie. one of our projects was building the mobile app for CVS. They charge like $150/hr for developer time, pay developers $40k/year, consistently deliver projects that are late and flawed, and have constant chaos internally.
I was a naive 22 year old when I worked there. It boggled my mind that they stayed in business! How do they survive? I get that inefficiency might last for a little while, but surely they’ll be discovered as imposters and go out of business eventually, right? Well, it’s sort of the opposite. They get to say on their website that they built the mobile app for CVS. Boom: social proof. My understanding is that it’s this sort of positive feedback cycle of social proof that keeps the money flowing in. That along with, as you say, asymmetries of information.
Asymmetries of information are fundamentally a good thing. If you know something that I don’t, we can pool our knowledge and achieve things that are too complex for a single mind.
Nitpick, but I think what you meant to say is that given the existence of information asymmetry, it’s good that people can work together. If you could wave a magic wand I think you’d probably want to just transmit the knowledge to the less knowledgeable person.
And the few things they do produce in-house – say food – might not even be the things where they have a comparative advantage.
It’s great to see you note this! It’s always seemed weird to me that in our hyper-specialized society, people still cook so much. Cooking in bulk is more efficient. Why are there not places where you could get a huge pot of chili for like $1.50?
In his podcast, Adam Ragusea talks about how in east Asia it’s often cheaper to eat out than to cook at home and so lower income people mostly eat out. I just re-watched it and am not really seeing a coherent explanation. “Rice” is the one word explanation. He goes into the history and stuff. But rice is cheap in the west too. He mentions labor, but talks about how that doesn’t explain it because countries like Japan don’t have cheap labor.
This is a super interesting and thought provoking essay. Thanks for writing it! Although it does feel overstated in this essay, I really like the core point of how trust makes things better, and how there are costs to enable transactions when trust is absence (police, lawyers). It’s new, plausible and powerful: a combination I don’t come across all that often.
Wow. It never clicked to me like this. Thanks.
100%. I’ve realized this more and more as I’ve grown older and seen many examples of it.
One sticks out. I worked for a company that builds software for other companies. Ie. one of our projects was building the mobile app for CVS. They charge like $150/hr for developer time, pay developers $40k/year, consistently deliver projects that are late and flawed, and have constant chaos internally.
I was a naive 22 year old when I worked there. It boggled my mind that they stayed in business! How do they survive? I get that inefficiency might last for a little while, but surely they’ll be discovered as imposters and go out of business eventually, right? Well, it’s sort of the opposite. They get to say on their website that they built the mobile app for CVS. Boom: social proof. My understanding is that it’s this sort of positive feedback cycle of social proof that keeps the money flowing in. That along with, as you say, asymmetries of information.
Nitpick, but I think what you meant to say is that given the existence of information asymmetry, it’s good that people can work together. If you could wave a magic wand I think you’d probably want to just transmit the knowledge to the less knowledgeable person.
It’s great to see you note this! It’s always seemed weird to me that in our hyper-specialized society, people still cook so much. Cooking in bulk is more efficient. Why are there not places where you could get a huge pot of chili for like $1.50?
In his podcast, Adam Ragusea talks about how in east Asia it’s often cheaper to eat out than to cook at home and so lower income people mostly eat out. I just re-watched it and am not really seeing a coherent explanation. “Rice” is the one word explanation. He goes into the history and stuff. But rice is cheap in the west too. He mentions labor, but talks about how that doesn’t explain it because countries like Japan don’t have cheap labor.