Wednesday, August 17, 2011

supermarket economics

I was reflecting on the analogies used by economists to illustrate core ideas such as market equilibrium, consumer preference theory, as well as more advanced topics such as the equation of marginal utilities to prices in product market equilibrium, when I began to realize how artificial the supermarket analogy is. (Loosely stated, the supermarket analogy argues that a shining example of how markets work is the supermarket -- a large group of consumers congregating together in order to take part in impersonal exchanges that leave them better off than they would have been if they had to bargain individually with the farmer or manufacturer. Supermarkets therefore increase market efficiency and hence social welfare.)

One example has caught my attention as being a particularly serious example of this fallacy -- Abba Lerner's discussion on product market equilibrium in The Economics of Control. Lerner goes so far as to say that the equation of people's psychological marginal utilities of goods to the prices of those goods, represented in the standard model of market equilibrium, is one of the great achievements of mainstream economics, validating the use of the model in understanding general equilibrium in any market economy. And you can find this story of the triumph of the supermarket analogy anywhere that core economics principles are explained (even Greg Mankiw uses them in his Principles text, e.g. where he asks whether the price of turkey in a supermarket is "just" according to the principles of welfare economics).

Indeed, supermarket analogies constitute a large enough set of ammunition for mainstream economists that I would label that set "supermarket economics", for lack of a better term. (Apparently that term has been used more commonly in other contexts...)

Supermarket economics is deeply flawed because it doesn't address people's most common interactions with economics ideas in their daily lives -- the economics of work and the economics of the home or family. In fact, I would argue that supermarket economics is intentionally used by mainstream economists to mask the more relevant facets of economic life that most people deal with on an ordinary basis.

Think about it like this: even if "supermarket economics" did hold, what percentage of your day is spent in a supermarket? Now what about at work, or at home, or with friends? One of Mankiw's 10 principles states that "markets are usually a good way to coordinate economic activity". But employers don't go around to various islands in a giant market looking for the "right worker" for a particular job, nor do our parents take bids from the highest bidder to see who will be fed on any particular day. Employers plan the coordination of their workforces, and direct their workers not through market incentives but through threats or just because they command authority in the workplace. These are experiences that most of us have everyday -- before we go to the supermarket to pick up tonight's dinner.

My central point is simple but highly relevant to a critique of bourgeois economics. Supermarkets are just an idealized version of an economy: they mask some of the most important aspects of economic life for ordinary people. Standing back and looking at the different economic activities we engage in, we see that direct, impersonal exchange is not the norm.

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