“a system that did not ensure the survival of lucky accidents would lose most of its value”

In his book, Alchemy, Rory Sutherland explains Nassim Taleb’s Anti-Fragile well in terms of free markets (bold added):

It is never-mentioned, slightly embarrassing but nevertheless essential facet of free market capitalism that it does not care about reasons — in fact it will often reward lucky idiots. You can be a certifiable lunatic with an IQ of 80, but if you stumble blindly on an underserved market niche at the right moment, you will be handsomely rewarded. Equally you can have all the MBAs money can buy and, if you launch your genius idea a year too late (or too early), you will fail.

To people who see intelligence as the highest virtue, this all seems hopelessly unmeritocratic, but that’s what makes markets so brilliant; they are happy to reward and fund the necessary, regardless of the quality of reasoning. Perhaps people don’t ‘deserve’ to be rewarded for being lucky, but a system that did not ensure the survival of lucky accidents would lose most of its value. Evolutionary progress, after all, is the product of lucky accidents. Similarly, a system of businesses that kept empty restaurants, say, open through subsidy, simply because there seemed to be some good reasons for their continued existence, would not lead to happy outcomes.

The theory is that free markets are principally about maximising efficiency, but in truth, free markets are not efficient at all. Admiring capitalism for its efficiency is like admiring Bob Dylan for his singing voice: it is to hold a healthy opinion for an entirely ridiculous reason. The market mechanism is loosely efficient, but the idea that efficiency is its main virtue is surely wrong, because competition is highly inefficient. Where I live I can buy groceries from about eight different places; I’m sure it would much more efficient if Waitrose, M&S, Lidl and the rest were merged into one huge ‘Great Grocery Hall of The People’.

The missing metric here is semi-random variation. Truly free markets trade efficiency for market-tested innovation that is heavily reliant on luck. The reason this inefficient process is necessary is because most of the achievements of consumer capitalism were never planned and are explicable only in retrospect, if at all.

 

“Markets solve the same problem for different people in a different way”

(This is my first non-soccer post in awhile, but it will factor into a future post about soccer.)

The title is from Rory Sutherland on this Econtalk podcast (emphasis added):

…one of the things that annoys me about economics is that it likes markets for the wrong reason. Which is, that it likes free markets because they’re notionally efficient, whereas I like markets because they’re inventive. And, the two narratives–you know, it’s a perfectly–you can understand why free market people leapt on this idea of efficiency through competition. In fact, competition seems to be deeply wasteful if you look at it in a short time horizon. What’s magical about markets, of course, is that they solve problems through a process of kind of market-tested innovation.

Trial and error. But it’s a bit more than that too, because I think one of the extraordinary things markets do–which, I think this is one of the reasons I’m uncomfortable about economics trying to model itself on Newtonian physics–is quite often what markets find is more than one solution to the same problem. And I think if you approach business problems with the mentality of someone who is trying to make it look like physics, then one of the dangers is that you’re always trying to optimize something or find the single overarching solution that works for the average. And in many cases, I think markets and business do something much more ingenious than that. They solve the same problem for different people in a different way.

I’ve been trying to find words for this for a long time, but kept falling back on the not-so-compelling “competition is good because trial-and-error and solutions aren’t so obvious” yada.

His last sentence sums up what I’ve been trying to articulate.

Markets and businesses solve the same problem for different people in a different way.

That’s good. That gives more of us what we want.

What I like about McDonald’s, you may not like, and you might prefer Chipotle instead.

We both get more of what works best for us, instead of having to settle for what works for the average of us, which might not even represent real people.

For example, let’s say I’m age 50 and you are 30. Our average age is 40. Someone might solve a problem for a 40 year old, since that’s average.

But, in our small sample of two, a 40 year old doesn’t even exist. So, their solution isn’t good for either of us.