Why Error Correction is the Most Important Feature of a Political Economy

On Cafe Hayek, Don Boudreaux quotes from Arnold Kling’s new book, Specialization and Trade: A Re-Introduction to Economics. The quote:

What we should be comparing is not the existing market configuration with an ideal based on a simple model but the market process of error correction with the political process of error correction.

Yes, I agree.

Kling says well in one sentence what took me a couple hundred words.

Also, in my original Bottom-Up vs. Top-Down post, I used the terms “Power of Voice” and “Power of Exit.” I learned those from Arnold Kling.

I think the error correction process is the most important facet of a system. It’s typically ignored.  Discussions/arguments about public vs. private become a debate over semantics and nuance, much like many discussions over what communism, socialism, fascism and capitalism is.

The question shouldn’t be whether it’s public or private, or whether it’s communist or capitalist?

The question should be how well does the system correct for errors/failures?

Often, the answer is how much power of voice and power of exit the participants in the system have.

This week, David Legates wrote a piece worth reading, The Experiment: Capitalism vs Socialism. In it, he compares one of the best A/B tests on the subject ever — West and East Germany post World War II until reunification.

The improvement in the standard of living in East Germany’s socialist/communist state over the life of the separated country paled in comparison to West Germany’s capitalism.

Why? West German’s had more freedom, including power of voice and power of exit. East Germans did not. An example of East German’s low power of exit, from Legate’s column:

A wall of concrete, barbed wire and guard towers was built to separate the two halves of Berlin – and keep disgruntled Eastern citizens from defecting to the West. Many who tried to leave were shot.

Former British Prime Minister, Tony Blair famously said:

A simple way to take measure of a country is to look at how many want in. And how many want out.

In other words, watching how people exercise their power of exit can be telling.

If I could choose one subject for students to learn regarding political and economic systems, it would be how does it correct for errors and how to analyze that by considering the powers of voice and exit.

Political Theater at its Finest

Members of Congress are trying to get political play by grilling the Mylan CEO about the companies large hike in the price of it’s Epi-Pens.

I saw a video clip on one TV news shows where a Congressman accused the CEO of taking advantage of its monopoly status. What? No way! A monopoly is doing what every Econ 101 textbook predicts it to do and raises its prices? Get out of here. (Yes, the italics indicate sarcasm).

Instead of grilling the Mylan CEO for doing what monopolies do, Congress should grill the FDA for creating the monopoly in the first place, by not approving competitors to Mylan’s product and push it to do so, ASAP.

By the time everyone graduates high school, they should have some inkling that competition is the best way to hold businesses accountable, among many other benefits.

Sadly, too many people see the Mylan price hike and reflexively think more government intervention needed, not understanding that government intervention led to the problem in the first place, instead of reflexively thinking, Mylan needs competitors.

Low Wages at Walmart. Cause or Effect?

In this post at Cafe Hayek, Don Boudreaux addresses the idea that Walmart imposes costs on taxpayers because it pays low wages. This line of thinking says taxpayers “subsidize” Walmart’s low wages through the welfare benefits many of Walmart’s workers receive to help supplement their income.

While I think this line of thinking is tenuous, there may be more to it than Boudreaux lets on. I think it’s possible that, like most things, government action has created distortions in the low skilled labor market.

A way to test it would be to eliminate welfare benefits. If true, then Walmart may need to pay more to attract and keep workers. Problem solved.

My guess is that the pay distortion is minimal, though not non-existent. It may be on the order of adding a gallon of water to a good sized pond. The change in water level would be imperceptible.

I think there’s another larger distortion that the welfare benefits have created that would be undone if welfare benefits were eliminated.

On the margin, I think the presence of welfare benefits may have caused a number of folks to decide to stay in low-paying jobs that a generation or two ago were more suitable for actual entry-level workers like high school and college students, people just getting started and true part-timers looking to supplement another full-time salary in their home.

They decide to stay in a low-paying jobs this because what they earn from their job plus welfare benefits satisfies their needs.

So, the bigger distortion that might be undone by removing welfare benefits would be to see entry-level jobs turn back to entry level workers.

One other thing I would like to mention. While correspondents that Boudreaux addresses like to demonize Walmart for paying low wages, they say nothing of the benefits Walmart brings to society by enabling consumers to live cheaper.

I suspect that such correspondents might respond, Walmart’s inexpensive goods have been made possible on the backs of low wage workers!

If so, they wouldn’t be consistent with their original argument because they will have just admitted that consumers, not Walmart’s owners, receive the benefit of the low wages through low prices. And, so it would be consumers, not owners, who would need to pay the price of higher wages.

Slow Fast Food

Recently, being stuck in long and slow lines at the drive thrus of McDonald’s, In-N-Out Burger, Starbucks and other restaurants seems be the norm.

What’s going on? It seems like consistently long-lines are a sign of high demand and business success. So, why aren’t these businesses building more capacity to serve the high demand? Why aren’t other businesses looking at these successful business models more closely to copy them?

Some possible explanations

  1. I’m just happening to consistently see these businesses at their peak times and there really isn’t enough demand to justify increasing capacity — be it a heavy investment in opening new locations nearby or a more modest investment like expanding kitchens to pump out more orders per unit of time.
  2. There is high demand, but the companies are cautious to make investments to expand, thinking it may just be a short-term trend. Mark Perry’s Carpe Diem blog, posted a chart showing restaurant sales outstrip grocery store sales for the 17th straight month based on recent Census Bureau data, but prior to that, grocery sales were greater than restaurant sales.
  3. Other things are slowing the lines down.  I think a contributor to long lines at Chipotle and Starbucks has been the added  ability to order through their phone apps, which adds a third queue to the same production line that was previously just serving two queues (counter and drive thru).
  4. I’ve seen some internet posts speculating that companies are cracking down on schedules to manage labor expenses especially in regards to keeping their workers under the Obamacare thresholds for providing health insurance benefits and potential $15/hour minimum wage mandates. These may also increase the caution these companies have in expanding capacity in their low-skill labor intensive business models.

Could it be that distortions caused by health insurance and minimum wage mandates are the contributing to turning fast food slow?

Maybe it’s a bit of a mix of all these things: People eating out more, businesses reluctant to invest in expansion and also dealing with changes in health insurance and wage law, along with some fits and starts incorporating apps into their businesses.

Whatever is causing it, it’s annoying.

Thoughts on “Grit”

I just finished reading Angela Duckworth’s book, Grit: The Power of Passion and Perseverance.

I liked it. I have a few thoughts on it.

The first one is about how standouts approach the day to day hard work of practice. She comes to the conclusion that they just do it because they are motivated by the reward it brings later when they win a competition.

While I agree that stand outs are motivated by the eventual glory, I think there’s more to it.

Rather than just grunting it out, I think they may be more creative in their approach to the daily grind and more directed about what they work on.

They gain a good sense of where they are headed by observing in fine detail the folks they idolize. If they like basketball, they develop an affinity toward a few players and observe in detail how those players play and try to emulate them.

So, when they go to the driveway to practice, it isn’t just about generic hoop shooting. It’s about emulating the style of their favorites. A specific goal (shoot like LeBron), rather than a generic goal (practice for 45 minutes).

They are more creative about making the practice interesting while achieving small goals that build to their overall success.

Instead of taking a 100 random shots because their coach said to, they make small games out of it. They see how many free throws, jumpers or hook shots out of 10 they can make. When they get bored with one game, they alter the rules or change it up to keep it interesting.

They are also on the top end of objective evaluation and responding to their own performance. When they miss a few easy layups in a game, they go back to the driveway and do 200 layups to make sure that doesn’t happen again.

The government toolkit is a child’s toy

In this post on Cafe Hayek blog, Don Boudreaux takes down the idea some solutions are best suited for markets and some are best suited for government.

In this case, Dani Rodrick makes the argument in his book, Economic Rules, presenting it as if this is what smart people do, drawing on the analogy of finding the right tool for the job. Here’s Rodrick:

It is dogmatic and dangerous to assume that one solution or one approach is the answer to every problem.  Some problems call for the use of screwdrivers, others call for the use of hammers.  Only a benighted fool insists on using a screwdriver to hammer in nails and on using a hammer to insert screws.  The wise, non-ideological, enlightened, open-minded, reasonable, and scientifically aware person sometimes uses a screwdriver and other times uses a hammer.  What could be more reasonable?!

Yep, that sounds reasonable. But, consider Boudreaux’s reponse:

The error in this formulation is that markets are many tools.  Markets are a toolkit with far more tools in it than government has access to.  While government has only a few tools – mostly hammers (some sledge), saws, and clamps – the market is filled with many, almost countless, tools.  And the market’s tools are much more varied, nuanced, specialized, and creative than are the government’s simple set of tools.

That’s correct.

Government’s toolkit:

Government toolkit

The market’s toolkit:

Market's toolkit

 

Ordering at Chipotle

Here’s a way to increase the ordering line throughput at Chipotle y 10-20%: educate customers how to order.

Nobody seems to know how to say their order in way that doesn’t cause confusion and slow down the ordering process.

For example, if you order, “A chicken burrito with white rice and black beans,”you will likely need to confirm that you ordered a burrito and be asked again what kind of rice, beans and meat you would like.

Long ago, McDonald’s discovered that they could make food faster than customers could order from an ala carte menu.

A smart franchisee looking for a way to get more cars through his drive-thru lane at lunch innovated a simple tool to fix the problem: Value Meals.

Most people intuitively think Value Meals was a bundling to save customer’s some money and maybe get more people to order fries. It may have had those benefits, but its main purpose was to get more cars through the drive thru.

It’s quicker to say, “#1 with Diet Coke and a #2 with iced tea,” than to order each sandwich, fries and drink separately. Multiply that over a few hundred transactions per restaurant per day and thousands of restaurants and you get a lot more dollars in the register.

From what I gather at Chipotle, the process is set up to order one ingredient at a time. Though that isn’t intuitive to customers.

So, instead of saying, “Chicken burrito with white rice and black beans.” Say, “Burrito”. Then wait to be prompted for type of rice, beans and meat.

A good designer could build that process into Chipotle’s menu board to encourage that ordering process.

Here are a couple other tips for Chipotle.

Another issue seems to be how many orders a single person has. The de facto assumption by the burrito makers is that they are ordering one plate. So, they often go to the next person in line after you have ordered one thing, then you have to tell them that you aren’t done.

Perhaps, the burrito maker can ask you, how many meals are you ordering?

One last thing, when one person is ordering multiple meals,  it might be helpful for the burrito assembly line to put a marker at the start and end of an order, like the little rubber markers that go on the checkout belt in grocery stores.

Without those, each person in the assembly line is left to figure out where an order starts and stops, which takes up more time and causes more confusion. More than a few times, I’ve seen it where a plate had to be remade because inattentive customers and burrito makers put the stuff on the wrong plate.