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books economics

Competition and Predictably Irrational

I’ve picked up another book. It’s called “Predictably Irrational.” The author uses examples from experimental economics to teach us how we differ from how some economic models might suggest or assume we act. So far, there have been some interesting results, his discussion about the concept of “free” in particular is thought provoking.

One chapter is entitled “The fallacy of supply and demand.” Naturally, this caught my eye. He uses some experiments to show how ideas of what things are worth initially can be more or less arbitrarily set by advertising or other clever sales techniques. Ok, so far so good. The results are pretty convincing, but he doesn’t stop there. He then extrapolates these results into the idea that people’s thoughts on value are easily manipulated and therefore we can’t rely on markets and free markets ideas in general to bring about equitable trades since everyone is under the sway of the advertisers.

He’s way off. He left out a very important aspect of supply and demand, perhaps the most important one out there… competition. I am fully willing to believe that when confronted with a new thing, we don’t have a good idea of what it should cost or what value that thing has to us. His experiments show that that concept of value is easily skewed by all sorts of things. But a rational person doesn’t usually buy the first thing he sees, he checks around for prices. It is competition that tells us what we can expect to pay for something. Once we know that, we can figure out how we value that thing.

It isn’t clear to me what supply and demand even means without taking competition into account. So his chapter certainly doesn’t show any “fallacy” with that concept. Rational people check prices, who knew?

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