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Methods of Information Under the Market Process

Economic Piece by Josh L. Ascough

Advertisement has often been the aspect of the market most attacked; both by supposed supporters of the market and detractors of the market economy.

Decrees of false information, wasteful spending and other wide sweeping accusations are made against advertisers and their methods of marketing a product, but these are claims that can only hold artificial weight to them if our economic models are that of general equilibrium and perfect competition; in addition most arguments against advertising are based on ex-post the consumers choice to consume the product.

I’ve gone into criticisms of the general equilibrium theory and perfect competition before, so I won’t make this piece another critique; you can find the full piece here – https://croydonconstitutionalists.uk/marshallian-curve/ – but to summarise, the general equilibrium model relies on assuming a state of affairs where all economic actors are fully aware at all times of various economic activities: i.e. a degree of omniscience; perfect information. Under this model it acknowledges ignorance to which is optimal (we know what we are ignorant of, but the cost of information is higher than the benefit), but assumes away the possibility; or the high likelihood of an absence of information (we don’t know what we are ignorant of). The perfect competition model proposes that competition is a state of affairs where there is a certain number of buyers and sellers all buying (selling) the same quantities and qualities at the same price; no one sells higher because it would be economic suicide, and no one sells lower because he could sell the same quantity at the set market rate.

These two states of affairs not only assume no possibility of any absence of information, but deny the possibility of any entrepreneurial activity.

Let’s get back to the matter.

Advertisements are often criticised for pressuring consumers to buy particular products, providing over the top, loud commercials that could’ve been made for less, if they just got to the point with what they’re selling, and for providing no “relevant” information.

These criticisms are seldom legitimate when we analyse the market; including advertisement as a process, and when we acknowledge the role of discovery brought about by entrepreneurs.

I spoke earlier about arguments against advertisement to be based ex-post the consumer’s choice to purchase the product. The question to ask is: how did our consumer come to be aware of the product? What led to the decision to buy rather than to abstain? For the answer we need to look ex-ante the consumer’s activity and decision; furthermore we require acknowledging that at any time, the market can be filled with utter ignorance from economic actors, and to remember that we are in a process of disequilibrium where (successful) entrepreneurial activity tends to bring us closer to positions of equilibrium.

“Advertisers don’t just have to tell consumers that there is a product to buy; they need to make their adverts eye-catching in order for the consumer to discover the possibility of owning the product”

Advertisers don’t just have to tell consumers that there is a product to buy; they need to make their adverts eye-catching in order for the consumer to discover the possibility of owning the product. If we suppose a seller of petrol for cars, displaying a sign outside his establishment which says: “Petrol for sale. Lower than other sellers. £1 per litre”. An omniscience external observer would say he has made a clear concise advert for his product; if consumers don’t buy it is because the cost of finding this sign is too high. But humans are not omniscient, nor are they always on a deliberate search; our petrol seller requires making his advertising venture eye-catching not just to those already searching for petrol but to those who (a) don’t know that they need petrol, and (b) do not know that they don’t know they can buy petrol for a low price. Though the physical qualities of the product exist, and the seller is aware of what he can sell, to those who are not alert to its possibilities the product may as well not exist.

Where a seller decides to advertise also plays an important role in how many consumers will discover the product. If we suppose in a community none of the residence drive, because all sellers they are aware of have too high a price; leading to everyone either walking or cycling, no one is going to be searching for petrol and so an entrepreneurial producer, who can sell petrol for a fraction of the price of other sellers, cannot simply put a sign outside his business. In order for consumers to enter a process of discovery, our seller has to stand out.

Many times people will point to how simple advertisement was many years ago. They will point to old black and white adverts on television sets showing the product, its price and the brand. But this again is an ex-post argument, from the point after the advertisement has occurred.

I’d like to explain the ex-ante present advertisement argument with a little hypothesis:

Imagine if you will a school hallway where the walls are blank. Each day students walk to and from classrooms completely ignoring the blank walls. A student; let us call him George, finds there are no after-school clubs available, and so creates a chess club. George is unable to inform all the students of the school by talking to them, because he too has classes to attend. Supposing he is an alert individual, he comes to the discovery that he can place a poster on the blank wall informing students of the new after-school club; it will be the only poster on the blank wall, and so is likely to be discovered by his fellow students. This will not just be noticed by students who also know they wanted an after-school club, but possibly by those who hold an absence of information over the enjoy-ability of an after-school club, and by those who may not have known what chess even is; since there’s been no after-school clubs where they could see students playing chess.

Sooner or later, more students start advertising on the blank walls for a variety of things; some for clubs, events, and some for student-to-student tutoring. Because everyone is advertising with plain white paper and black text, many go unnoticed until one student makes the entrepreneurial discovery that he can use plain red paper with black text, and it is discovered by students etc.

As the process goes on, students find new ways to make their advertisements more noticeable.

This ex-ante look at the process informs us that when advertisement is absent, not a lot needs to be shown in order for the product to be noticed, but as more and more people advertise what they wish to inform others of, they require finding new ways of standing out and being eye-catching.

There are two final areas I wish to go into before we conclude; these will be with respect to the subjectivity of value and diminishing marginal utility on the part of consumers, and how these can affect our perspective of advertisement.

Due to value being subjective, the attractiveness of an advertisement can be affected by the value judgements of an individual; either by pre-existing tastes towards a general subject while holding an absence of information to the specific heterogeneous product, or by a known judgement towards a specific product.

To give an example for a better explanation, I hold no value for anything to do with football; I find the game dull, and so anytime an advertisement for football comes on; whether it’s a live match, a videogame or memorabilia, I find it irritating and a waste of time. If it is a new product to do with football, then I have discovered a new product I have zero interest in.

I am however a fan of snooker and pool, and so an advertisement for a live game will either (a) lead me to the discovery of the new possibility of satisfying a want for engaging in the game, or (b) if I had been on a deliberate search for a live match, will have allowed me to become informed of the whereabouts of a product I had known my ignorance of.

Diminishing marginal utility can also play a role with how attractive advertisement may be for specific products.

To give an illustration we take a look at figure 1.1:

In the diagram the vertical axis shows Marginal Utility, with the horizontal axis showing the Quantity of units consumed. As more quantities of the good are consumed, it reaches a peak where satisfaction is highest at MU8/Q6. After this point the marginal utility of the good begins to drop, and further consumption of the good will be unsatisfactory; as shown by Q8. An example of this could be the consumption of alcohol. At the start of a drinking session the consumption of unit 1 may not satisfy the want/need fully, as more and more units are consumed there will be a peak when total satisfaction has been reached. After this point; let us say unit 6, the marginal utility for further alcohol drops, and the want/need to satisfy the thirst for alcohol diminishes.

If an advertisement was to be seen ex-post the consumption of a satisfactory level of alcohol, it is likely the drinker will find little utility and value in further consumption.

This can also be translated into a change in tastes, as shown in figure 1.2:

A man who has achieved satisfaction of a want/need to consume alcohol, may find himself impelled to act in order to satisfy the want/need for food. A change in tastes simply refers to a reordering of the positions of items on the consumer’s scale of value; or ordinal ranking of goods.

This will lead to the altering of our individual consumer’s marginal utility of the unit(s) of some good to lower positions, while the marginal utility of some other good (in our case of the drinker, food) will be higher. Now our drinker is seeking to move expenditure from the lower ranked good (alcohol), to the higher ranked good (food).

In our diagram, the drinker had satisfied his want/need for alcohol at point P2. This indicates that a move from P2 to P3 along the opportunity line AB. Since our drinker’s tastes have changed, and shifted away from DP2 of Y, towards that of X, he has shifted to a position of DP3 of X, and so our consumer acts to achieve the situation of P3; i.e. the consumption of food.

To translate this back to advertisement, if our drinker is now seeking to satisfy P3, then advertisements for food will lead to a discovery of how/where to satisfy a want/need.

To conclude our look into advertisement, it is axiomatic that not all advertisements will appeal to every individual; it is not the purpose of this piece to make such an argument. It is to try and show that advertisement; like many areas of economics, is epistemic, and, to a degree, hold an entrepreneurial element of discovery to them. The world is full of scattered pieces of information in a realm of disequilibrium; advertisements, just like prices, play an important role in attempting to coordinate the expectations, actions, and value judgements of subjective individuals.

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Economics Piece by Josh L. Ascough

Universal Basic Income has become a hot topic in recent years; propping up in the news and mentioned by politicians from time to time.

The standard definition of UBI is a government program where every adult citizen receives a set amount of money on a regular basis; either weekly or monthly. The goal; as stated by supporters of the measure is to alleviate poverty, and to ensure every adult; even if unemployed, has some form of income to support them.

It is quite standard for the majority of supporters of UBI to be of a, Social Democrat position. There are however some Conservative-esque arguments in favour of UBI. These Conservative-esque arguments tend to be more based in deterministic elements of automation, and tend to believe UBI a possible ex-post rather than ex-ante; with the basis of: “if automation is inevitable, there should be a UBI on the table when that time comes.”

There are standard arguments against UBI to do with the ethics of redistribution, but I’m only interested in briefly talking about the economic pros and cons.

This pro/con dynamic really can be broken down to ideal and practical.

The pro of UBI, would be if we got rid of everything and replaced it with UBI. When I say get rid of everything; I mean abolish the NHS, Disability Benefits, Child Tax Credits, Government/Public Schools, and every other form of the welfare state, and replaced it with a UBI program, which gives people the finances and allows them to decide how they’re going to use it, based on their own ordinal ranking and marginal utility.

We would still have the ethical problems of redistribution, however, if it were an automatic program of transferring income to person A, the program would be less costly than all the current programs we have. Most of our welfare programs take up a lot of time and therefore resources, due to lots of bureaucracies and civil servants involved; so instead of welfare 1 going to person A, form 1 for welfare 1 goes to civil servant 1, to be forwarded to bureaucrat 5, so form for welfare 1.5 can be signed by civil servant 7 etc.

This means the idealistic pro of UBI, is that we would in principle have less civil servants and bureaucrats; thereby reducing the overall cost of welfare.

The con of UBI is very much a practical problem. There are other cons to UBI such as the effects of price increases, particularly if the program sees MV (money velocity) rise, but since our pro is an idealistic one, it comes logically that our primary con is a practical one.

The practical problem of UBI is that it is very unlikely that these other programs would be abolished and replaced with a single, simple UBI system, because it would be political suicide. Even if a politician explained to people very clearly and said: “We’re getting rid of the welfare state, including the NHS and replacing it with a UBI. This way money goes directly to people so they can choose for themselves where they want it to go, in terms of what they need to support themselves. All the money is going to go directly to the citizens.” It would still be political suicide, because then bureaucrat’s and civil servant’s jobs would be at risk. Under a UBI, there would be little argument in favour of having so many bureaucrats and civil servants, since money goes directly to people rather than to programs.

The likelihood is, if UBI was instituted, it would be on top of all our current programs; adding to the overall cost rather than seeing a reduction and a simplification in the idealistic.

Libertarians aren’t against welfare per se, it all depends where said welfare is coming from; for example a government program is coerced on to people, and forced extraction; or, extortion breeds resentment among people and violates property rights; whereas charity is voluntary and breeds compassion.

The UK is a very charitable country. The most recent, everyday example being the late Captain Tom Moore, Captain Moore raised roughly £32.8 million on a JustGiving page for the NHS, simply by walking back and forth in his garden. This was a sum of money raised in a nation with a progressive tax system, and under circumstances where large numbers of the population had become unemployed due to lockdown; imagine how much more could’ve been raised with a low flat tax system, and where large numbers of people weren’t forced into unemployment. It’s more than likely at least £100 million could’ve been raised.

As stated above, the UK is a very charitable nation, but one problem facing people receiving help is the absence of information; people don’t know there are charities out there that can help them. It’s anecdotal, but I recently came to the discovery of a private healthcare charity in the UK called The Benenden Charitable Trust; because humans aren’t omniscient, it is more than likely there are charities out there that could help people, but those people don’t know they exist.

This is where local government could play a role.

Local governments could advertise charities that operate within their borough, to help people become aware of charities that could help them. This wouldn’t do anything about the apparent stigma attached to asking for help however; nor is this something the government should get involved in because this would result in government’s watching what people spend and knowing every tiny private detail, and forcing them into accepting help. The stigma is something that could theoretically be lessened if people see what help is out there.

This short piece should not be seen as any form of argument for or against UBI, it should be seen purely for what it is; looking at the costs and benefits of a UBI program.

A State of Affairs vs A Process of Discovery

Image source: AmosWEB is Economics: Encyclonomic WEB*pedia

Economics Piece by Josh L. Ascough

The standard theory of the market as it is expressed in the classic supply and demand curve, also known as the Marshallian curve or cross, notes that the price gravitates towards the quantity supplied by the quantity demanded, and that this ensure a state of equilibrium.

Figure 1

This is undeniably a very useful tool for giving a 30 minute talk on economics for a short and sweet answer; but it’s all wrong.

The claim that the Marshallian Cross is wrong does not invalidate the value in the basic demonstration it provides; nor the utility gotten out of a short answer to a question of market activity, but it is very much like taking a photo of a couple at point A, then a few minutes later at point B. We are skipping the market process and assuming perfect states of equilibrium. In fact, further analysis of the cross allows us to realise, that we violate the possibility of disequilibrium, and in so doing, the entrepreneur.

Let us examine this in more detail in the next few diagrams:

Figure 2

In our diagram we suppose, firstly, that the price is above equilibrium, where there is excess supply (Ex S) over the quantity demanded (QD). What does this do to the price?  – It forces it down.

In our second point, we suppose that there is an excess demand (Ex D) over the quantity supplied (QS) this has the same effect but in reverse by forcing the price up.

Notice how under the curve, we assume two things:

• That we are consistently in equilibrium.
• That there is always a single price.

Under the Neo-Classical view, everything that is to be known is already known; man is omniscient. He has access to perfect knowledge and he need merely to analyse the data he already knows; there is no room for discovery of unknowns, nor room for the entrepreneur. The entrepreneur to our curve is an analytical pest.

I mentioned above the assumption of there always being a single price, below we can see a quite comical examination of what is meant by this:

Figure 3

Under the equilibrium model and the Marshallian Cross, we are hypothetically assuming that with each supply curve, there is an equal demand curve running parallel to it. In fact every demand curve assumes an equal supply curve running parallel to it also; thereby consistently assuming the hypothetical to reality, that being only a single price is constant, and there is no possibility of two or more prices existing for the same product.

“It is a fundamental law of Economics that there is a single price for a product. However, this is a tendency. The reason to say it is a tendency is due to the fact that at any time, the market can be filled with ignorance”

It is a fundamental law of Economics that there is a single price for a product. However, this is a tendency. The reason to say it is a tendency is due to the fact that at any time, the market can be filled with ignorance; either optimal ignorance, whereby you know you lack information but the cost outweighs the benefit of acquiring said information, or further, the ignorance may be based in the absence of information (not knowing what you don’t know).

If there is no optimal ignorance, nor absence of information for a particular consumer good, input or resource, then the tendency for pricing signal’s to converge to a single price occurs.

To give an example, I am optimally ignorant of how to speak Korean. I would like to know how to speak and understand it, but I have analysed the cost in terms of resources and time are too great, and would be better spent on ventures I value more highly.

I would give an example of where I personally have an absence of information…but I don’t know what it is.

Further examination of this gap to which is ignored and incompatible with the equilibrium state of affairs is detailed below:

Figure 4

In the diagram shown above, under the Neo-Classical equilibrium context, we assume a quantity of QR. The question is what is the highest price that is low enough, to get consumers to buy this quantity? The answer is the top left noted as HP. Following this, what is the lowest price which is high enough to get suppliers to offer this quantity? The answer is the bottom left LP. This indicates; under an Austrian perspective rather than a Neo-Classical perspective, as shown in the greyed out section, that there is a gap.

A wider examination of this gap can be explained before moving on further:

We suppose two examples: Sellers selling a good; let’s say shoes, for £10 at the LP quadrant. Buyers who are late to the market, or hold a high marginal utility for shoes find they cannot acquire shoes, but would be more than willing to pay £17 for shoes. The second example, being that sellers selling shoes in the HP quadrant, are selling shoes for £20. Buyers with lower expendable income, or whose marginal utility is lower, cannot afford the shoes at £20, but would be willing and able to buy at £16. There is an absence of information for both buyers of the HP and LP, and sellers of the LP and HP. Sellers (buyers) of the LP are unaware they can sell (buy) at a higher price, and buyers (sellers) are unaware they can buy (sell) at a lower price.

We have a situation where two prices for the same good prevails because of ignorance.

“This is where the entrepreneur comes in. A sharp individual sees there is an unexploited opportunity by seeing the price difference. If they are sharp; as we have assumed, they will see there is opportunity for pure entrepreneurial profit”

This is where the entrepreneur comes in. A sharp individual sees there is an unexploited opportunity by seeing the price difference. If they are sharp; as we have assumed, they will see there is opportunity for pure entrepreneurial profit. The entrepreneur will buy shoes from LP for £10, and sell to buyers from both HP and LP for £15. Buyers from LP who were willing to pay £17 will gladly pay the £15, and buyers from HP who could not afford £20, but were willing to pay £16, will be able to satisfy their needs/wants by purchasing the shoes for £15. Additionally, sellers from LP will see they made a critical error as they could have sold for a higher price, and sellers from HP will see they could have sold more for a lower price; ergo, the market through entrepreneurial alertness has moved from disequilibrium to a position closer to equilibrium.

The market is in positions closer to disequilibrium positions, and the entrepreneur through the incentive for profit, discovers these gaps and brings prices closer to that of the tendency of a single price.

The market process is one of discovery; rather than an equilibrium state of affairs.

Competition Under The Market Process

Taking into consideration our examination of Neo-Classical Equilibrium, and the market as a process of discovery, what does the equilibrium state of affairs and the market process of discovery have to say about competition?

The Neo-Classical has a stark difference in terms with regards to competition as compared to the layman, and that of the process of discovery.

Under the equilibrium theory of the market as a state of affairs, the definition is classed as Perfect Competition. Perfect competition is a state of affairs, where we have an unlimited number of buyers and sellers; all sellers are selling at the exact same price, and all buyers are buying at the exact same quantities. All decisions, quantities, and production methods are known, and so everyone is constrained into this state of affairs, due to nothing else to discover.

Under perfect competition, no seller attempts to sell for a higher price, because a single market price is established and it would be suicide, and no seller equally attempts to sell for a lower price, because he knows for the set single price he can sell the exact same quantity. Furthermore, buyers do not attempt to bid a higher price because they know they can purchase the same quantity for the single price, and buyers do not attempt to acquire a lower price, because they will not acquire the products they desire.

Under the equilibrium theory of the market as a state of affairs, all quantities demanded and quantities sold are perfectly inelastic; they are static.

This theory of competition, ironically, has no semblance of any form of competition; under the layman sense or that of the market as a process of discovery.

Under the equilibrium state of affairs, everything is already known, and nobody can buy or seller at higher or lower prices, and so there is no competition.

Additionally, this state leaves no room for the entrepreneur.

I have mentioned the market as a process of discovery several times; what is it that is meant by this with regards to competition?

Competition under the market as a process, is simply freedom of entry.

“Under freedom of entry, there are no privileges in the form of institutional blockage into the market. A man can be a very successful entrepreneurial producer, but is constantly looking over his shoulder because at any point, another could enter the market”

Under freedom of entry, there are no privileges in the form of institutional blockage into the market. A man can be a very successful entrepreneurial producer, but is constantly looking over his shoulder because at any point, another could enter the market and undermine his product by selling at a price, quantity, or quality that is more appealing to consumers.

If we look back at our example of the entrepreneur buying shoes for £10 and selling for £15, because other sellers held an absence of information, and had not seen an opportunity for profit, we can understand the role competition plays in the market as a process of discovery. The market is flooded with ignorance from various economic actors, who overlook opportunities due to an absence of information and a lack of omniscience. These unseen opportunities; if our entrepreneur is sharp, are discovered, either through active search for opportunities or through a sharp eye where no search was active, and merely saw what was unseen by others.

What is required for the market to operate as a process, is decentralised discovery. What is required for competition within the market process, is freedom of entry.

Sources:

• Israel Kirzner: Competition and Entrepreneurship (pp. 10-11, 13, 20, 26, 28, 37-40.)
• Israel Kirzner: Discovery, Capitalism and Distributive Justice (pp. 8, 23-31.)
• Israel Kirzner: Competition, Economic Planning and the Knowledge Problem (pp. 9-10.)
• Entrepreneurship and the Market Process with Israel Kirzner (2011) YouTube video, added by Foundation for Economic Education [Online]