This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission
By Brian Davidson*
In a project last year, I recorded how often my neighbours in the office offered to make drinks, and how often they accepted drinks made by others. I found that not everybody was pulling their weight. Laura was a drinks-making machine. Kevin and Jo less so.
Apart from, perhaps, offering some amusement, I had hoped that, in carrying out my study and publishing the results, I might pressure some of my colleagues to make more drinks. It didn’t really work.
That’s right. The knowledge that I kept an up-to-the-minute spreadsheet listing the drink-making offers both made and received by my immediate neighbours, and that I wasn’t afraid to use it, was still not enough to cajole certain individuals into doing their bit.
Now imagine there is a country whose economy is reliant on exports to another country, and another country whose leader is a Tariff Man, yet the first country doesn’t even try and pretend that it is making an effort to address Tariff Man’s gripes. Crazy right?
My complaint was that the drinks trade needs to be fair. It needs to be reciprocal. In doing so I became the Fathom equivalent of Donald Trump telling China that he wants to achieve a more balanced trade relationship. No quips here people! Those who think that trade between the US and China flows mainly in one direction because China has a comparative advantage in so many sectors, and that I am naturally gifted at drinks making so it is the natural order of things for me to make more drinks, are wrong. I suck at making drinks.
So, I left the group. That’s right. I quit the drink-making-for-your-desk-buddies equivalent of the WTO. It didn’t go down too well with other desk members. Some in the office even started to talk. Fears of an office-wide slowdown in drink making began to escalate. Panic ensued. Markets tanked.
Economists might say that this was an example of ‘market failure’. And a costly one at that. These can occur for many reasons. One is a lack of information. Think Nobel Prize winner George Akerlof and his theory that an asymmetry of information between buyers and sellers of used cars leads to a “market for lemons”.
Buyers of second-hand cars cannot know how the previous owner has treated the car, nor can they have any idea about the reliability of the internal parts. In his theory, Mr Akerlof notes that since a buyer of a second-hand car will not know whether the car they are buying is reliable (a ‘peach’) or unreliable (a ‘lemon’), the price they would be willing to pay would lie somewhere between the value of a peach and a lemon. But this would cause the sellers of peaches to hold on to their cars, since the price they would be offered would be less than its worth. Gradually, such a process would result in peaches being withdrawn from the market, leaving only lemons behind. In this way, the bad drives out the good.
Such a market failure happens because of a lack of information. Interestingly, in my tea-making example, the market failure occurred because of the information, rather than through a lack of it.
The breakdown of the drinks-making market in the presence of full information is somewhat unusual and seems somewhat irrational. Could there be a rational explanation? Perhaps by naming and shaming, I generated feelings of embarrassment, leading to withdrawal, and a lack of cooperation? It might also be an example of markets (and the economy) behaving in a way that is not taught in the textbooks (and in a way that is not always rational). Food (or drink) for thought, certainly.
There is some good news though.
Scroll forward one year, and although I’m officially out of the club, the drinks are still flowing. My desk buddies and I still use the same group chat to ask each other if we would like a drink. The chat is called the Coolest Foursome Ever! Some of them even shower me with drink-making offers while I’m eating my lunch, knowing that I’m obviously not going to say yes to a coffee while I’m eating my lunch. They might be having me on, but two can play this game: sometimes I accept a drink even though I don’t even want one. Just to make a point. Maybe I am just a big softie, but I usually still offer to make drinks for others when I go to kitchen.
The bottom line: the trade dispute rumbles on, but the drinks continue to flow… Make of that what you will.
Brian Davidson is a senior economist at Fathom Consulting in London, England. This article is a re-post from Fathom Consulting's Thank Fathom its Friday: "A sideways look at economics". It is here with permission