Friday, 20 November 2015 13:38

Libertarian's Corner: Markets Don't Clear -- It Just Ain't So!

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Libertarian's Corner: Markets Don't Clear -- It Just Ain't So!

Joseph S. Fulda

Joseph Fulda is a freelance writer living in New York City. He is the author of Eight Steps Towards Libertarianism.

Steven Lubet, a distinguished legal scholar who has written a most excellent book, The Importance of Being Honest (NYU Press, 2008), digresses from law to economics in Chapter 38, "The Bedouin Horse Trade," and from there to the mistaken view that sometimes economics doesn't work, and markets don't clear. Well, it just ain't so! Here he is telling us the story that "proves" his claim:

Petra is Jordan's fabled "rose red city -- half as old as Time." The Nabateans, who built Petra during [B]iblical times, located their capital in an almost impregnable mountain stronghold. Even today, it is possible to enter Petra only by passing through the Bab es-Siq, a narrow gorge nearly a mile long and never more than a few meters wide.

. . .

To make access easier, not to mention more romantic, the route of the Bab es-Siq was for many years plied by hundreds of horses-for-hire. For seven Jordanian dinars [JD] . . . a [B]edouin guide would take you into the site on horseback and meet you later to take you out again. The standard price was fixed, and tickets for the horses were sold at the entry gates.
Tourists could also walk into the site and negotiate for a one-way horse on the way out. The return-only transactions were conducted on a cash basis -- no tickets, no fixed prices. Here is where economics failed me. The standard academic model predicts that horse prices should fall throughout the day. As nightfall approaches and the ranks of tourists thin, guides should become increasingly willing to bargain for rides out of the site. This did not turn out to be the case. Indeed, the bottom-line fee for a horse was surprisingly nonnegotiable, sharply contrary to what would appear to be the seller's rational best interest.

. . .

It was an economic theory-confounding phenomenon. Guides with horses gather at the entrance gate to Petra each morning, making themselves available to arriving tourists. . . . Of course, no horses linger at the terminal in the morning because the [B]edouins all gallop back to the site entrance immediately after depositing their incoming riders. . . .
Things change in the afternoon. As tourists stop arriving and start thinking about going back to their hotels, the horses begin to congregate in the theater plaza. Some of the guides are there to collect return tickets, but most are available for cash hiring. I know this because virtually all of the guides solicit all of the tourists, offering "Horse? Horse?" The scene is chaotic; there is nothing approaching a queue.
This is a market that should clear if economic theory is worth a damn. . . .
But here is how it really worked. The first price quoted for a return siq was invariably 7 JD. . . . No matter how resolutely I bargained, the price never fell below 4 JD. On each of our three days at Petra we were very nearly the last tourists to leave in the afternoon, with the horses often outnumbering the remaining pedestrians by at least two or three to one. Still, the price never dropped below four dinars.

He is puzzled at all this, and as he ponders the intricacies of the markets, he turns to his kids for help. What do they teach us? "[Y]ou didn't offer enough money, Daddy, and they thought that you didn't respect them." Counters Lubet: "But they still should have preferred the money to just standing around not working." The kids answer: "No, Daddy, they would rather stand around than take less than they were worth."

Concludes Lubet:

From a common sense perspective, the answer is painfully obvious. Pride. They were desert horsemen, after all. . . .

No subjectivist would care to deny that pride may play a role in human affairs, including economic matters, but these desert horsemen already do this sort of work and already show an inclination to bargain, and cannot possibly all be motivated by the same level of pride resulting in exactly 7 JD for a round-trip fare. Rather, the market clearing price is 7 JD; Lubet misunderstands what a clearing price is. In the case of services, it is not that all services get sold no matter what. Yes, the demand drops throughout the day, but, and this is the key, the supply schedule drops in tandem, because the desert horsemen, along with their horses, grow more and more tired as the day wanes. As the demand goes down, so does the willingness to supply. The last hour of work is harder than the next-to-last hour. As the demand falls, the willingness to supply falls, too, in perfect equilibrium. And, it doesn't require mathematics to see this.

But I do not want to leave the reader with the impression that Professor Lubet's book is not a great read, chock full of information and insight. It is. But chapter 38 is just not informed by the insight Lubet shows everywhere else in the book. For a favorable review of the book as a whole, see my forthcoming (Spring 2010) review in the Journal of Information Ethics. *

"Such is the irresistible nature of truth that all it asks, and all it wants, is the liberty of appearing." --Thomas Paine

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