Beautiful Imperfection

Markets do not operate like computer programs. They are not cleanly executed, easily monitored, or reliably predicted. Markets are, in a word, sloppy.

In our introductory economic textbooks, we pretend that they are. This lets us simplify and understand the world. Much like a beginning physics student will assume a lack of air friction while studying moving objects, the economics student pretends that prices are nailed to equilibrium points. He pretends that prices for the same good are uniform, and that everybody knows what all the prices are.

But just as the physicist one day recognizes that air resistance can make or break a vehicles performance, the economist sees that market imperfections have serious effects on market outcomes. In fact, market inefficiency is much of what policy-makers are looking at today. They want something to fix, and the economy seems like a perfect candidate.

Here's a cursory list of some of these inefficiencies: Prices are not uniform. Not everyone is aware of competing prices. The same type of goods and services vary enormously in quality. People act (even financially) for emotional reasons. Information (about prices, quality of services, or available alternatives) is not evenly distributed among society.

Economists must look at the systems and institutions by which resources are allocated and determine whether they are promoting the common welfare in terms of efficiency (creating the most, best wealth) and equity (fairness, justice). So is all this acceptable?

Market inefficiencies can help and hurt. When do they hurt? When they fail to enable intelligent people to create technologies and ideas. When they prevent competition from pushing firms to the limits of efficiency and quality. When asymmetrical information prevents consumers from knowing if the companies they patronize are dealing fairly with them.

But I stand by the help these imperfections bring, which redeem them, which make them laudable. The market's evolution is constantly weeding out the bad. We are always becoming better able to efficiently allocate resources. Companies are being forced to act more competitively. The rising economic status of the consumer has made his voice so loud that companies must bend to his or her will. So the bad is fading away… but the imperfections themselves will always remain in some form, for good purpose.

That's because we are humans. We cannot attain anything perfect. Even a perfectly engineered, coordinated system would be subject to human error, and a true market falls short in the same way. Human action, no matter how systemized, has serious limits—thank our biology and the physical state of the universe for that. So what on earth is so great about the imperfections?

Can a computer program change? Can it adjust itself to be fair? No. It is deterministic—what is going to happen is predestined and perfectly efficient (if it's well designed). If a market were that way, the poor would be screwed. Those who possess inferior intelligence levels only by reason of their DNA would be screwed. The smartest people, who could afford the most advanced education would rise to the top of the economic hierarchy which was predetermined before they were even born. The below average in intelligence, who never went to the best schools, who weren't born with trust funds in their names, would remain in mediocrity.

What does this have to do with market imperfection? Everything. If you are average in wealth and intelligence, you can exploit opportunities that no one else has yet exploited. You can target clients with a slightly different product than your competitor offers. Your business won't be automatically crushed by the more efficient megacorporation from different state, and your job won't necessarily be nabbed by an overseas worker who works at a lower cost. All you need is to be more willing to search out the crevices for needs that haven't been met by the more efficient or productive economic agents.

You can view the sloppiness in our economy to be a vice. You can also view every little splotch as an opportunity for some enterprising, determined individual to make his mark on the world by filling the niche no one else had yet claimed. The moment everything becomes hyper-efficient, there is no such thing as opportunity. There is only the brute fact that as a human with intelligence x, stamina y, a personality z will fit into a predestined position in the economic sphere.

Is that justice? No. It is bondage.

I find it remarkable, though. Really, who would have thought that imperfection itself would be one of the most beautiful elements in the spontaneous social order that we call the economy?