Thursday, December 27, 2018

What Would Market "Perfection" Look Like?

Max Gulker, writing at the American Institute for Economic Research, asserts: "Markets are not perfect, but markets are essential."

The piece is a response to this tweet from Niskanen Center president Jerry Taylor:

Gulker alludes to the economic concept of "perfect competition" and his take is quite interesting, but I'm going to take a different tack vis a vis "perfection" here.

While I usually discuss actually free markets versus the state-coercion-tainted markets we actually have, here I instead assert that each and every market transaction, state-coercion-tainted or not, is, and markets such therefore are, in fact "perfect" in the sense of being "Brought to consummation or completeness; completed; not defective nor redundant; having all the properties or qualities requisite to its nature and kind; without flaw, fault, or blemish; without error; mature; whole; pure; sound; right; correct" on the only metric that really matters. That is:

In any market transaction, all parties perceive themselves as better off due to the transaction than they would have been absent the transaction.

Let's take the example from Taylor's tweet: Places that rent (including "rent to own") furniture, appliances, etc.

The deals they offer are not "good." But they are "perfect." That is, the people renting refrigerators and televisions from them want those refrigerators and televisions more than they want the money they have in their pockets; and the rental places want that money more than they want to keep the fridges and TVs sitting unprofitably in their warehouses. Everyone may not be as happy with the transactions as they would have been with other, but for whatever reason unavailable, transactions ... but they're happier with the available transactions than they would have been without them.

Do I recommend the "rent to own" places? Nope, not for most applications. By the time you've gained ownership of a particular thing from them, you'll have paid four or five times its cash on the barrelhead price. So if you can pay cash at a regular store, or get reasonable financing terms, that's preferable. But if you only need something for a very short time, or if you just can't scrape together the cash and really, really, really need X now, it may make sense.

In the distant past, I've considered doing business with these places twice.

Once I did so. I needed to furnish a new apartment for a few weeks until I had time to get out and find used/inexpensive stuff -- I was working a lot of overtime, I had company coming, and wanted I furniture in there NOW more than I wanted the money it cost to rent the stuff. So, a perfect transaction.

Once I didn't. I needed a working computer. Looking at the rental prices on what they were offering, I calculated that two months of rental fees equaled what I would pay for the computer I needed. So I reverted from Windoze to a DOS box for a couple of months, saved my money, and bought a newer PC when I could instead. What they were offering at the price they were offering wasn't worth as much to me as they wanted for it, and I was willing to do without a GUI for a little while (this was the mid-1990s), so we just didn't do the deal. A perfect non-transaction.

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