The problem with attempts to make everything in life more scientific is that reality hates generalisation. You can try to formulate universal laws, but in any complex system even the smallest contextual difference or hidden asymmetry can be enough to rewrite those laws completely.
Economics refers to something called ‘the market’, the laws of which supposedly govern all economic activity. In reality, anyone exposed to commerce soon realises that different markets follow wildly different rules.
With airline seats, it is widely observed that ‘scarcity bias’ drives sales – hence the message ‘only three seats left at this price’. But this does not work for vegetables. It’s very difficult to sell the last tomato in a tray because customers infer that since no one else wanted it, it must be a bit manky. That’s why supermarkets shrewdly keep vegetable displays permanently full.
In most markets, all other things being equal, people prefer paying less rather than more. But even this seemingly obvious law has exceptions. There are, for instance, luxury goods whose value lies largely in their costliness. Unfortunately, for different reasons, the property market is also one of the exceptions. Most people effectively work out the maximum they can afford to spend and then look for houses at that price. High property prices do not predominantly arise from supply and demand. They are largely driven by easy access to large loans at low interest rates, combined with a mentality of: ‘This is the only chance I’ll get in life to make £200k tax free – I’m all in.’
A large amount of economic activity happens not because it is optimal, but because it is easy
Generally I agree with the economic principle that people know best how to spend their own money. But even that runs up against what I call Dylanomics. As Bob Dylan wrote in the song ‘Brownsville Girl’: ‘People don’t do what they believe in/ They just do what’s most convenient, then they repent.’ A large amount of economic activity happens not because it is optimal, but because it is easy.
Consider four things you could do with £300:
1) Buy a pair of insanely expensive shoes.
2) Replace a leaking wash basin in your home.
3) Pool the £300 with six neighbours to resurface your shared drive.
4) Pool the £300 with 100 neighbours to repair potholes along five miles of local road.
The first involves a minute’s work. The second, probably a much better use of £300, is a fairly major pain: you will have to take a day off work and tediously discuss the shape of taps with your spouse. Option three will take months to agree, and then one of your neighbours will refuse to pay. Option four is basically impossible. So, following Dylanomics, you go and buy the shoes, the least valuable but easiest of the four choices.
I once saw a photograph of a Chinese provincial home. The owner had a fabulous LCD TV rigged up to a satellite dish, but defecated in a hole in the garden. To me, this seemed an odd set of priorities. But it’s Dylanomincs again. Installing a huge TV can be done alone in a day. Installing drains requires coordination with everyone else in town.
This is why I find the ideological obsession with tax cuts silly. Taxes are necessary to overcome the co-ordination problems involved in creating certain collective goods. And since there exists a sensible ratio of money spent collectively vs money spent individually that would most benefit society, some level of taxation is healthy – not necessarily the lowest one possible.
A sensible political promise might be: ‘We shall raise taxes slightly, but give you far more control over how they are spent.’ It is a phrase I have never heard spoken. Why?
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