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The Paradox of Choice: Why More is Less by Barry Schwartz Ecco Press, 2004 265 pp., $13.95, paper 
Preference, Belief, and Similarity: Selected Writings of Amos Tversky Ed. by Eldar Shafir MIT Press, 2004 1,021 pp., $60, paper |
Economics is the science of understanding choice in conditions of scarcity. We have scarce resources available to us (even Bill Gates, for whom time rather than money is likely the most constraining factor, experiences scarcity) and must decide how to spend those resources. Should I work more to earn money for a vacation at the beach or spread my leisure over the course of the year? Should the country buy guns or butter? Should we invest more in the search for the perfect mate or marry our current sweetheart? Economics has given us powerful insights into all these specific questions and many more. We know that incentives matter, that higher prices mean lower demand and greater supply, and that markets are the most effective means of allocating goods and services to their highest valued uses.
Despite these successes, economic reasoning generally and markets in particular have been under attack for centuries for getting choices "wrong." An early wave of criticism, only now receding, centered on markets' inability to get prices "right." Religious critics argued (and some continue to do so) that market prices varied from the "just price" and that excessive interest charges constituted usury. Karl Marx attacked the market economy for its extraction of "surplus value" from workers. Communists in the early 20th century attempted to substitute central planning for market-determined outcomes; some attempted to do so by substituting administratively-set prices for market prices to "correct" the price mechanism. Even in predominantly market economies such as the United States, regulators have "adjusted" regulated prices to accomplish various ends-regulated utility prices, for example, traditionally included extensive subsidies for favorite groups, paid for by higher charges for the less favored. Green critics of markets today seek to adjust prices of commodities such as oil to include "social" costs. For example, the green Left sees markets as undercharging consumers for the cost of their purchases—my consumption of a gallon of gasoline imposes costs on the rest of society that I do not pay, leading me to consume "too much" gasoline. Although the green critique is that prices are too low, while the red critique is that workers are paid too small a share of the price, these criticisms share a common theme: markets do not work because the prices of goods and labor are "wrong."
The problem with this type of critique is the lack of a consistent alternative to replace market prices. Calculating a "just" price turns out to be extraordinarily difficult. If the price is below market, then producers will make too little to satisfy demand, and if the price is above market, producers will produce more than demanded. The result is either rationing by means other than price or warehouses full of unwanted goods. Today, a similar problem plagues the green Left's attempts to calculate "social prices" for commodities. There is simply no non-arbitrary manner of calculating prices other than making use of the market. Of course not everyone is convinced, and one can still find plenty of advocates of just prices, surplus value, and social pricing. Nonetheless, price-based criticisms of market economies are no longer real threats to the dominance of markets.
As a result of this failure of price-based critiques of market economics, and the resounding success of market-based economies relative to the competition after the collapse of the Soviet empire revealed the truth about socialist economies, critics of markets have had to develop a new set of objections. Rather than focusing on a divergence between some hypothesized "true" price and observed prices, and thus a process flaw in the market mechanism, modern market-critiques focus on humans as market actors, postulating flaws in human nature that prevent markets from functioning efficiently. (To distinguish them from the price critiques, let's call these the "psychology-based criticisms.") Since the observation that human beings lack perfect reasoning is so obviously true as to be trite, the psychology-based critiques of market actors are much more powerful than the process criticism of the price critics. The two recent books reviewed here make strong cases for these psychology-based criticisms.
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