Scott Sumner  

The economy is more subtle and complex than you might assume

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I recall a story that scientists are often unable to explain the "tricks" performed by magicians. Scientists tend to be smart, but also rather linear thinkers. They are not used to their test tubes trying to deceive them. Something similar occurs in economics. I was reminded of this when reading a post on why women often pay more for things like haircuts and dry cleaning.

One thing that kind of bothered me about the post is that it ignored the highly competitive nature of these industries. In highly competitive industries, prices are very closely tied to costs. So if women pay more for services then presumably it costs businesses more to serve them.

I recall a debate on this in class, where I speculated that perhaps it costs more for dry cleaners to clean women's clothing. One student had actually worked at a dry cleaner and told me that women paid more even if they wore men's shirts. The student had a big smile on his face---how could I explain that!

I'm also a somewhat linear thinker, easily fooled by magicians, so normally I would not have been able to "explain that." But in this case my personal life offered a hypothesis. When I pick up dry cleaning I just stick it in the closet, without looking at it. My wife looks at it carefully, and often notices things that need to be redone by the cleaner. If the two genders differ in terms of how picky they are about dry cleaning quality (which is an unproven hypothesis, but at least plausible) then dry cleaners would have a cost justification for charging women more, even for the same shirt.

The economy operates in very subtle ways, and often when I read academic studies of issues like discrimination, the techniques seem incredibly naive to me. They might put in all the attributes of male and female labor productivity they can think of, and then simply assume than any unexplained residual must be due to "discrimination." And they do this in cases where there is no obvious reason to assume discrimination. It would be like a scientist assuming that magicians created a white rabbit out of thin air, at the snap of their fingers, because they can't think of any other explanation of how it got into the black hat!

The point of this post is not to claim discrimination does not occur---indeed I believe blacks are discriminated against in the labor market---but rather to point out that we cannot rely on academic studies of discrimination. They are no more reliable than scientific studies of magicians. I focus more on economic theory, combined with real world market failures that might be expected to lead to discrimination.

These subtle side effects explain why many government regulations that look good at first glance, are actually counterproductive.

HT: Tyler Cowen.


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CATEGORIES: Microeconomics



COMMENTS (13 to date)
TravisV writes:

Re: discrimination, it might be useful to discuss Gary Becker's insights.

http://econlog.econlib.org/archives/2014/04/donald_sterling.html

http://www.economist.com/news/finance-and-economics/21601841-economists-everywhere-should-mourn-passing-gary-becker-great-trailblazer

Yancey Ward writes:

I don't think I would ever describe your thinking as linear. That is one of the reasons I am a faithful reader.

Kevin Erdmann writes:

It's anti-market bias applied to a scientific context.

It's like Richard Dawkins' response to religious believers when they say that atheism is untenable. He says, there have been 10,000 gods in human history and he and believers agree to be atheists regarding 9,999 of them.

I feel the same way when I take a position against coercing employers to solve social problems. People say, "You're not against prejudice?" Yet, the staunchest activist agrees that we can be openly prejudiced about our family, our friends, our public positions, our career choices, our spouses, etc. There is just this one area where they change their standards.

The most widely accepted prejudice is the anti-market prejudice, so, as with most targets of prejudice, we judge employers and productive owners against our ideals.

So, when analysis is being formed, researchers are thinking of the market, because that is the target we are permitted to imagine coercing. The other variables are just the details that have to be filled in to achieve validity to determine if coercion can be justified.

Anti-market bias is so strong. I mean, capitalists were on the right (but losing) side of Plessy v. Ferguson, Jackie Robinson was drafted when the army was still segregated, Greyhound busses were firebombed while taking people to protest segregated city busses in Alabama, the commercial arts have been in the forefront of tolerance norms, etc., etc. etc., and yet we still get this:

http://blackorchidcollective.files.wordpress.com/2012/06/pic5.jpg

Is there a limit to what those marchers would be willing to take for granted?

Dan Hill writes:

The other response to the dry cleaning example is to explore the supposedly unexploited business opportunity.

"So you're planning to open a chain of women only dry cleaners?"

"No. Why would I do that?"

"Because you've just claimed the entire industry is making excess profits on women's dry cleaning. You can undercut them, steal all their female customers and and still make out like a bandit."

Funny, all I hear is the sound of crickets ...

Works just as well for the supposed gender wage gap too.

Jeff writes:

Framing instances of price discrimination and varying elasticities as good vs. evil or wrongs to be righted is just emotionally satisfying, I suspect. Which is sad, because the author could have given women some practical advice on how to save some money. Instead there's just some dubious ranting about this nebulous thing called society oppressing people via voluntary transactions.

Lorenzo from Oz writes:

Or they could go and ask business folk why they charge women more. Economists tend to forget that Ronald Coase came up with what later came to be called "transaction costs" because he went and asked business folk what they considered when deciding whether to produce in-house or not. There is a difference between asking about motive--which just invites to be handed rationalisations--and asking what do you consider when ...?

(And yes, I just stick my dry-cleaning in the closet too.)

stubydoo writes:

The reason why they still charge more for women's shirts regardless of complexity is because women's shirts are still more delicate on average, and they have to be able to write up a price list somehow. Both their staff and customers would get bewildered if they had to price in all of the variations of shirt design that affect how hard they are to press. Pricing by gender is the best simplification for providing a sweet spot in the tradeoff between matching price to cost and having simplicity of their menu. And even though it clearly can seem discriminatory against women in individual cases, you'd have to presume that it is fair on overage - if that were not the case, there really would be a proper arbitrage opportunity out there.

Nathan W writes:

I suspect that women are more attuned to quality in these industries, and are more interested in getting what they pay for at decent quality than finding the lowest price in town.

Unless referring to people who are in very high-end and snobbish business where every piece of dog hair or sign of sub hundred dollar haircuts could be the nail in the coffin for the next deal ... That men will more easily opt for cheap haircuts or cut rate dry cleaning services is probably no surprise to most women.

When I go to Chinatown and get a haircut for $5-7, where women pay at least twice the price, my assumption is that the business must work that much harder to find a competent hair dresser who can fill the needs of women, whereas all I need is anyone willing to operate clippers for 5-10 minutes. I get what I pay for. So do the women, even though they pay twice the price.

Scott Sumner writes:

Everyone, Thanks for all the good comments---especially Yancey. :)

warren meyer writes:

It is amazing to me how much the process of thinking Mr. Sumner describes matches parts of the climate debate.

Most alarming climate forecasts are based on the period from 1978 to 1998. During this 20 year period world temperatures rose about a half degree C. People may say they are talking about temperature increases since 1950, but most if not all of those increases occurred from 1978-1998. Temperatures were mostly flat or down before and since.

A key, if not the key, argument for CO2-driven catastrophic warming that is based on actual historic data (rather than on theory or models) is that temperatures rose in this 20 year period farther and faster than would be possible by any natural causes, and thus must have been driven by man-made CO2. Essentially what scientists said was, "we have considered every possible natural cause of warming that we can think of, and these are not enough to cause this warming, so the warming must be unnatural."

I was struck just how similar this process was to what Mr. Sumner describes. Most skeptics, by the way, agree that some of this warming may have been driven by manmade CO2 but at the same time argue that there were many potential natural effects (e.g. ocean cycles) that were not considered in this original analysis, thus causing future forecasts of warming to be exaggerated.

Kitty_T writes:

Nathan - My understanding (from a few years involved with the industry) is just the opposite: cutting men's hair is actually more difficult to do well. The short length (few women with "short" hair wear their hair as short as the average man's cut) means that error or sloppiness shows up much more noticeably in the finished product - there is no tolerance for a lack of precision. That's hard, particularly when stylists tend to focus on improving their (profitable) highlighting technique rather than their clipper-over-comb.

Men, very sensibly, won't pay much for a mediocre haircut, which is mostly what's on offer at salons. Men might as well get a cut from a half trained kid just out of school for $8 at Supercuts, because it is not appreciably worse than the $35 cut they'd get at a traditional salon charging full freight. So salons charge men less to keep them at all.

Actual barber shops are a totally different animal, really a distinct business model, and barbers generally receive very different training than cosmetologists. Alas, they seem to be a dying breed.

Scott Sumner writes:

Warren, One difference is that there is no plausible model predicting that women would pay more than men for haircuts or dry cleaning of equal cost. But there is a plausible model predicting global warming. So the burden of proof is different.

But I do see your analogy.

Gordon writes:

Normally, when economists talk about prices acting as a signal, they mean it in terms of providing information about supply and demand. But, to many people, prices act as a signal in terms of quality of good or service delivered.

I assume price acting as a signal of quality happens in areas in which people believe they're dealing with non-perfect substitutes. And when it comes to non-perfect substitutes, high levels of competition won't make a difference in bringing price levels down.

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