Economic Lessons from Veep

Markets require trial and error, not intelligent choices

There are two standard ways to imagine how politics operates. The first was portrayed in the show The West Wing. Everyone is smart and works hard to do what is right. Within economics, this is the benevolent social planner model of politics that one sometimes finds in public finance.

The second image comes from House of Cards. An evil mastermind is ruthlessly doing what is best for himself. Within economics, this is a naive version of public choice. Politics always leads to terrible outcomes for voters.

But as many people have pointed out, politics is actually like Veep. Everyone is an idiot. They are scheming, sure. But most of the time, they fail. The people within politics just aren’t that smart, even though they are selfish, and there are too many obstacles in the way.

A similar divide occurs between people when they think about markets. There is a way to look at markets, and here I’m especially thinking about Big Tech, where everything is always wonderful. Big Tech gives us all these great new inventions and drives the world forward.

The House of Cards vision of markets sees malicious—dare I say, anticompetitive—behavior everywhere it looks. Every move a company makes should be viewed with suspicion. Nothing the companies do is actually about making better products for consumers. They have even developed elaborate collusion schemes where they get millions of people to invest in index funds.

But if we view politics as Veep (as I think we generally should), we need to model everyone the same, regardless of where they are. So we need to have a Veep understanding of market behavior as well (maybe without so much swearing).

What do I mean by a Veep view of markets? I simply mean that people in markets are not super wise. An extreme version assumes that people make random decisions; they are not playing 4-dimensional chess. As Frank Easterbrook put it,

Wisdom lags far behind the market. It is useful for many purposes to think of market behavior as random. Firms try dozens of practices. Most of them are flops, and the firms must try something else or disappear. Other practices offer something extra to consumers-they reduce costs or improve quality-and so they survive. In a competitive struggle the firms that use the best practices survive. Mistakes are buried.

As Armen Alchian pointed out in his great article on evolution, the important part is not that any person is super-rational and calculates optimal business decisions, but that the profit and loss system weeds out those who choose decisions that lose money. We are left with a systemic process that may lead to beneficial outcomes, even though no one can explain why.

Thomas Sowell's Knowledge and Decisions is a masterful exposition of the difference between systemic processes and intentions. It’s my favorite book of economic theory, but I’ll avoid quoting too much.

The fitness or accuracy of these systemic adaptations may be revealed primarily—or even exclusively—in results rather than in articulated rationality. But because man insists on some articulated explanation after the fact, an explanation which overlooks the crucial role of time may emerge as a wholly different-and wholly fallacious-depiction of what has happened.

Who could argue with that? Of course, we should judge things by the results.

Here is why understanding the Veep model of markets is so important. People are often not okay with a situation unless there is an articulated rational reason for it. People, including policymakers, want an explanation.

Unlike most theoretical issues that interest me about how we think about markets, this one is actually relevant. Whether we have a House of Cards or Veep view of markets has implications for antitrust. Again, as Easterbrook explains

The gale of creative destruction produces victims before it produces economic theories and proof of what is beneficial. The antitrust laws invite these victims to take their grievances to court. They hire lawyers who know less about the businesses than the people they represent. As the case arrives in court, the judge sees a business practice that has caused a formerly successful business to fail or to be deprived of a profitable opportunity ("foreclosure"). The judge knows even less about the business than the lawyers. At first hearing, the failure or lost opportunity is bound to seem a reduction in competition. Fewer competitors remain, and fewness is the definition of monopoly (or at least oligopoly). The defendant is unlikely to have a good explanation for its success. The time is not ripe. When the defendant lacks a powerful explanation for its conduct, and the evidence points to "exclusion," a judge is likely to conclude: "Why not prohibit this practice? If it is anticompetitive, the prohibition will be beneficial. If it is not anticompetitive, the prohibition will be harmless; the defendant cannot tell me why the practice is essential to efficiency."

The problem of articulation in antitrust may get worse soon. The current antitrust legislation making its way through the Senate bans “self-preferencing” when a company prioritizes its own related products. When Google places its Google Maps at the top of a search result, that’s self-preferencing. There are a lot of other mundane examples.

Firms can still self-preference as long as they can show that the practice was necessary to enhance the product's core functionality.

There is that silly demand for rationality again. As I argued a few months ago in the Boston Globe with Sam Bowman, this is not how market decisions work!

It is better to think of decisions as random, as in Alchian and Easterbrook, and that the systemic processes weed out money-making firms from money-losing firms. For antitrust enforcers to demand such articulation of rationality from the targeted firms would hinder the systemic market process and once again turn antitrust into a policy at war with itself.