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In the previous installment of Ayn Rand and Video Games I examined the effects of isolation and a top heavy society to show the destabilizing effects it could have on society. In this installment I will examine the role human nature plays in a free market. But first I will include a brief review for those that have forgotten or haven’t read part 1 of this series. Those that remember the previous post can skip the section labeled Background and move on to The Market section.

Background

This series examines the theories of Ayn Rand through the lens of the game BioShock. BioShock is a first person shooter but the plot is crouched in commentary on Ayn Rand. So I am going to use the game as a spring board for discussion of Ayn Rand. The following is a bit of background plot for the game BioShock.

In 1946 an industrialist and electrical engineer Andrew Ryan establishes Rapture, a city under the Atlantic ocean in order to free himself and society from those he labels as parasites.

To build a city at the bottom of the sea! Insanity. But where else could we be free from the clutching hand of the Parasites? Where else could we build an economy that they would not try to control, a society that they would not try to destroy? It was not impossible to build Rapture at the bottom of the sea. It was impossible to build it anywhere else.” – Andrew Ryan

A man has choices, I chose the impossible. I built a city where the artists would not fear the censor, where the scientist would not be bound by petty morality, where the great would not be constrained by the small.” -Andrew Ryan

Well Andrew Ryan succeeded in building Rapture and creating a society free from parasites, moochers, looters and those that would use force to take the property of another. This leads to great prosperity and advancement for Rapture, in particular scientific advancement leaps decades forward in a few short years. Unfortunately the society founded by Andrew Ryan was unstable and would collapse less than 15 years after being established.

Previously I examined how isolation and a top heavy society can create destabilizing effects on the society. For a full discusion of those issues see Ayn Rand and Video Games Part 1: Initial Conditions.

The Market

Adam Smith’s idea that markets could be self-regulating due to individuals acting in their own self interest was brilliant and revolutionary. That idea alone irrevocably altered economics, philosophy and political theory. Individuals acting in their own interest can regulate a market simply through their choices in the market place. In a free market there is always pressure from consumers for lower prices since lower prices directly benefit the consumer and each consumer is acting in their own interest. So if all things are equal a consumer should opt to chose the least expensive choice for a product. Though not all things are equal, some products are better quality, others have better customer service, some products have different features. But the same basic idea still applies. Consumers measure the choices of products against their personal value judgements about features of the products. Some decide they prefer lower cost and lower quality whereas others chose higher cost and high quality. Regardless each individual weighs the product and price to determine the value of the product for them then they chose the best value.

I believe in no God, no invisible man in the sky. But there is something more powerful than each of us, a combination of our efforts, a Great Chain of industry that unites us. But it is only when we struggle in our own interest that the chain pulls society in the right direction. The chain is too powerful and too mysterious for any government to guide.

– Andrew Ryan

Consumers picking the best value pushes the market to supply those types of products. That is because business is also focused on self interest. It is in the interest of the business to produce products which the consumers will purchase so that the business can make money. Businesses that create products which appeal to the most people will be able to earn more money since more consumers will want those products. Thus consumers drive of the market through their choices in the market.

Now if a company creates a product that is poor quality and high costs compared to other similar products then that company will be driven out of business. People will not chose to spend more in order to get less. Also if a company creates a product that ends up hurting people then people will decide not to purchase those products which forces the company to stop producing those products. Likewise if the company engages in practices that consumers find negative then they will opt to purchase products from another company. Thus the market is able to regulate itself through the individual self-interested actions of the consumers. This mechanism of market self-regulation has become central to the idea of a free market system.

Human Nature

The idea of market self-regulation is a good one and it can be shown to have effects in the market. Companies do try to produce items which the consumers want. When consumer choices shift then companies shift in response. An excellent example is the smart phone market. Prior to the iPhone there was no real market for smart phones. Yeah there was Blackberry but few people even wanted one. After the iPhone came out and companies realized the amount of demand for smart phones they began developing their own versions. Now we have many smart phones with different features and apps and everything. The smart phone market was driven by the consumers after the initial release of the iPhone. Markets can and do respond to consumer choices.

Though there are several requirements in order for consumers to drive a market. First there must be choices for the consumer, second the consumer must be well informed about the product and third the consumer must rationally evaluate their choices.

The consumer’s choice between competing products can drive changes in the market like the smart phone example above. Also if a product is not necessary then the consumer always has the choice of purchasing the product or not. If fact this is probably more common than people think, products fail every day because nobody wanted to buy them. Those just fade away and are replaced by other products. But if the product is necessary and there is no choice then consumers can’t drive the market which means the market can’t self-regulate.This is a current problem with health care. Everybody needs health care at some point or another but we have few choices. Most people get health insurance through their work so they have no choice of insurance plans or companies. Also people are restricted on what providers they can see under their plan which further restricts consumer choice. Since consumers have little choice they can exert minimal influence on health care because their choices of providers no longer reflect the consumer’s judgement of value, instead it only reflects the necessity of health care. If health care consumers were free to choose insurance plans and providers then those businesses with the best value would pull in more people and grow larger whereas those businesses that provide poor health care would loose clients. Thus it would push the best up while pushing the worst down. For a more detailed discussion of this you should read my post “The Market, Transparency and Medical Costs“. But the primary point here is that consumer choice is required for consumers to drive the market and thus is needed for the market to self-regulate.

As mentioned in part 1 of this series isolation and a top heavy society have the potential of reducing competition and choice for consumers. Reduced choices in turn reduce the influence of consumers over the market.

Well Informed Consumers

The next requirement for a market to self-regulate is that the consumers be informed about their choices. It is a basic assumption that for a free market to operate consumers need to be informed about the products. It is not possible for a consumer to determine the value of a product as compared to another similar option unless they know about both products. Even a basic comparison of two products requires that the consumer knows the cost of each and the quality of each. Then the consumer can weigh the cost and quality of both products against each other to determine which is best for the consumer. But in determining quality the consumer may need to know more specifics about the product like durability, cost of repair, usefulness and much more. Without being well informed on the cost or quality of a product it is impossible for a consumer to rationally compare two products. There are two factors that may prevent a consumer from being well informed; time constraints and knowledge constraints.

Time is a major constraint for most of us. We only have so much time in the day and plenty to accomplish. On top of that we all use a wide variety of products. It takes a good deal of time to research each and every item we buy. So most people don’t research most items. Few people care to research extensively about something like ketchup to decide which one to buy. Instead frequently our evaluation is based on personal experience, we try a few types of ketchup (or catsup) then decide what we prefer. This is a reasonable method though has flaws. Personal experience is limited, you can only evaluate functional aspects through this method. So if you care about where your products come from or the conduct of the business providing them then personal experience will be of no use. For that you have to do some real research. Also personal experience is limited to the small sample you have experienced which may not be representative of the whole. But for normal everyday issues like ketchup or soda it is completely reasonable to go with personal experience.

Though some people select the products they purchase based on their moral code. Some will not purchase cosmetics that were tested on animals. Some do not condone the sale of fur. Some people will boycott or support a business over a political or social issue. In those cases it could take extensive research to ensure compliance with the moral conditions. For most people product choices have no moral bearing.

In reality most people do not spend any time investigating the products they use unless the product is of particular importance like a car or a home. Even then many people do not spend a lot time researching the product and even less time researching the producer of that product. This can cause issues with a market self-regulating. Take for example clothing made in sweat shops. Most people tend to think sweat shops are bad but they still buy products made in sweat shops. That is because clothing is not important enough to those people for them to spend time researching the companies that produce clothing. This is especially true when the negative consequences of production are distant from the consumer either physically, psychologically or temporally. If a company abuses it’s employees but they are in another state or country then few consumers really care when it comes to making purchases. Also if the consequences are difficult to comprehend like the risky financial instruments which were a major cause of the recession then they are unlikely to effect consumers choice of purchases since they can’t fully grasp the consequences. Additionally if the consequences are temporally distant such as slowly degrading the environment through CO2 output then few people will take that into account. By our very nature humans have a strong tendency to focus on the immediate moment as opposed to the distant future. Yes we are able to focus on the future but overall we tend to focus on the here and now. So if a company’s method of production will result in negative future consequences then it is far less likely to influence consumer behavior.

When you put all of this together it is clear that markets can self-regulate but don’t always self regulate. That is because consumers are not always well-informed about their consumption choices which means that consumers do not drive the market in those areas.

Rational Consumers

In order for a free market to self-regulate it is necessary for the consumers to rationally evaluate the products and their choices. They must weight the costs and benefits of each product. Also they must consider any pertinent factors about the company producing the products. Then they must compare all of their choices to determine the best fit for their particular situation and needs.

Unfortunately humans are not rational creatures, we are emotional creatures that can be rational on occasion. Research is showing more and more than people spend most of their time on auto-pilot. We don’t really think about what we are buying at the store, we are simply getting groceries. We don’t really think deeply about our actions as we go about our daily lives instead we just react in our normal manner to normal events. Most of the time we don’t have any real reason to invest more thought into our actions so it doesn’t matter.

Furthermore there are a variety of mental shortcuts that we take when reasoning. Those shortcuts save us time and energy but cost us accuracy since they can lead to incorrect evaluations. These shortcuts are quite beneficial especially when we have to make very quick decisions that can have massive consequences. In life and death situations you don’t want to waste the time over-thinking things rather you want to  react.

But cognitive shortcuts can get us in trouble at other times. Marketing and business have spent a great deal of time and money to develop methods for convincing consumers to purchase their products. It is in the best interest of a business to sell as much of their product as possible so they exploit the cognitive shortcuts that are inherent in our psyche. To a business it doesn’t matter if you buy their product for a moral reason or due to manipulation because in the end you bought the product. The 6 fundamental principles of persuasion that are used are reciprocity, scarcity, consistency, social proof, authority and liking. You see these all the time. A company may give you a free sample in the hopes that you reciprocate by purchases that product. Some offer products only for a limited time or in limited quantities in order to increase scarcity. Others offer testimonials in order to build the idea that many other people enjoy their product thus you should too. You see ads that involve authority figures or those in the trappings of authority promoting a product. Also it is not uncommon for salesmen to try and develop a positive rapport so they can use your liking of them to convince you to purchase from them. All of these can get consumers to purchase a product without having to make the rational argument for the product, instead they exploit facets of our psyche to obtain compliance. If you would like to learn more about these 6 principles of persuasion I recommend you get “Influence: The Psychology of Persuasion” by Robert Cialdini PhD. Cialdini is a world leader in persuasion research and is the person who directly taught me these principles.

The problem is that when business uses persuasive tactics to influence our behavior then they can bypass rational evaluation of that choices. Yet rational evaluation is necessary if consumers are to drive the market. Thus business can flip around the equation so that they drive the market instead of consumers.

Conclusion

Self-regulating free markets are possible but only if the consumers have choices and are rationally well-informed about the products. The problems is that these 3 conditions are not always met. Sometimes consumers lack choices. It may be due to a monopoly or it may be due to the nature of a specific industry like health insurance in the US. Also not all consumers are well-informed. Most people don’t care to spend the time researching every product which limits the consumer’s ability to drive the market. Finally consumers are not always rational. We may be rational when something is important to us but otherwise humans tend to run on auto-pilot. On top of that companies have a vested interest in exploiting non-rational cognitive shortcuts in order to increase sales. So when all is said and done consumers can drive  a market but frequently don’t.

 

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