Fairy Tales and Perfect Markets
Most modern fairy tales have very misleading endings. There’s a phrase they almost all end with – you can probably already guess what I’m thinking: “And they all lived happily ever after!”
What’s misleading about this? It implies that in life, there’s some kind of end state you can reach called “happily ever after” where the classic pursuit of happiness is, well, completed. Play your cards right, and you will reach the state of “happily ever after” where your continued life satisfaction is locked in. Of course, in the real world, things don’t work that way. The pursuit of happiness is what the philosopher Kieran Setiya calls an atelic activity in his conversation with Russ Roberts on EconTalk. Telic activities are completable and are time-bounded – planning a vacation with friends, for example. An atelic activity is one that is open ended, not time-bounded, and has no defined completion point – friendship would be an example of that. Friendships may end for various reasons, but there really isn’t a sensible point where you can say, “We have fully completed the activity of friendship!” Friendships are ever-ongoing processes. So, too, is happiness.
If happiness were a telic activity, one that was completable once a particular end point was reached, we would cease to actually do much of anything. Ludwig von Mises was right when he argued that all human activity is ultimately driven by some sort of deficiency or dissatisfaction. We act because we anticipate it will create a new set of circumstances we prefer more, to replace our current circumstances we prefer less. A life where total satisfaction was fully and permanently achieved would be a life where nothing actually happens anymore. As fairy tale endings go, that one is pretty grim. (Yes, I did intend that pun, and I am appropriately pleased with myself for it.)
If Mises’s work undercuts the idea of “happily ever after,” there are a couple of other Austrian economists who undercut two other fairy tales in mainstream economics. I’m thinking about F. A. Hayek on “perfect competition,” and Israel Kirzner on “market equilibrium.”
Hayek pointed out that in mainstream models of perfect competition, there is no actual competition occurring. For example, when thinking about how businesses compete with each other, one of the first things that comes to mind is price competition – I try to gain an edge on my competitors by offering lower prices than they do. But in the perfectly competitive model, every business is a “price taker” – that is, they have no options about the price they set, and everyone sets the same price as everyone else. Prices are of course just one way firms can compete with each other, but the larger point is that competition is an active and ongoing process, and that in perfectly competitive models, no such process takes place.
Kirzner makes a parallel point about market equilibrium and market process in his book Competition and Entrepreneurship. Kirzner sets out to describe a theory of market process that stands in contrast to the mainstream idea of market equilibrium. Central to his theory of market process is the entrepreneur and their alertness to opportunities. Entrepreneurs acting on opportunities helps supply the information and competitive pressure that drives economic process forward. But this kind of activity doesn’t exist in equilibrium analysis. As Kirzner notes:
In markets with perfect competition, no competition actually takes place, and in markets that have reached general equilibrium, there is no market process being carried out. Nothing really happens anymore in such a world – everything is stable and static.
Of course, in the real world, markets are never perfectly competitive, nor are they ever in a state of equilibrium. But just as it is a mistake to view life satisfaction through a lens of achieving a state of “happily ever after,” it is also a mistake to judge the economic system by how closely it resembles perfectly competitive markets in a state of general equilibrium. According to much mainstream economic theory, markets falling short of perfect competition, or existing out of an equilibrium state, is a sign that there is a problem with the market itself, perhaps necessitating a solution to be imposed by the state. But wiser minds realize that markets not being perfectly competitive or in a state of perfect equilibrium isn’t a problem to be solved – it’s the whole point of having markets to begin with.
Mar 7 2023 at 2:11pm
I agree with your overall point, but have a couple of thoughts on the “happily ever after” phrase. Nobody believes in it as a temporal concept (except maybe an occasional bleary-eyed romantic). When it comes out in a reading or a story-telling, I’ve heard people say “yeah, until next time” or “if ‘ever after’ means 3 weeks” or something similarly cynical. The other thought is that, as you point out, the phrase is a feature of modern fairy tales, which distinguishes them from their darker predecessors. I wonder if, during the renaissance, when people started to dare hope for a life that wasn’t completely miserable all the time, stories at the time needed to reflect this hope. Stories work best when they amplify our fears and aspirations. So you can sort of understand why they would invent a phrase like that.
Mar 8 2023 at 10:49am
I certainly wouldn’t claim that the misunderstood notion of “happily ever after” I’m describing is universal, but I do think it exists in more than just overly romantic types. One example that comes to mind was an interview I head a while back with the actor Rob Lowe. He was describing how he had fallen into something like this. It was around the time of him beginning the show The West Wing. He realized that he had basically accomplished all he had ever dreamed and more – he was a famous actor, a household name, he was headlining a new show in a prime time slot, and he was acting alongside Martin Sheen, whom he had always idolized. And yet, he wasn’t feeling the way he thought he was supposed to. He’d accomplished all his goals, and he thought that meant he was supposed to just be happy now – as though achieving everything you’ve set out to do means happiness will therefore also be achieved. While I don’t think everyone has that experience, I think it’s not all that uncommon either. People will reach a point where they realize they have everything they wanted out of life, and find themselves confused that they still haven’t reached their proverbial “happily ever after.” This is actually one common catalyst for a mid-life crisis – “I’ve done everything I set out to do and everything I was supposed to do, but I’m still not happy!” This is a sign that they’ve internalized the idea that happiness is a state you achieve once you’ve ticked off all the right boxes on a checklist, rather than an atelic, ongoing process.
Your idea about why fairy tales shifted from their gruesome origins towards a more hopeful direction seems plausible to me, although I can’t say for sure. I’m sure somewhere out there is a book on the history of folklore with an answer to that question!
Mar 7 2023 at 2:41pm
Kevin, “But wiser minds realize that markets not being perfectly competitive or in a state of perfect equilibrium isn’t a problem to be solved – it’s the whole point of having markets to begin with.” Bang on! Markets that are not perfectly competitive are where profits are found. I was market-maker on the CBOE, trading options. That there was a spread between bid and offer meant the only price takers, vis a vis other market-makers and me, were agents who sold to our bid and bought at our offer. Of course the best bid and best offer were simultaneously displayed at every post for the public to observe.
Mar 7 2023 at 3:45pm
Nice post! The “happily ever after” framing really works to illustrate the differences between dynamic and static equilibrium/optimization. And, yeah, the grim pun is pretty spot-on, too.
The post also triggered a number of thoughts tangential to the thesis:
Tell that to the National Park Service.
“There are no happy endings – because nothing ends.” Schmendrick, The Last Unicorn (1982).
Affective (or hedonic) forecasting refers to a cognitive bias whereby people overestimate how events will influence their future happiness or sorrow. A contrasting theory (wrongly attributed to Lincoln) holds that “folks are usually about as happy as they make up their minds to be.” Affective forecasting research lends support to the idea that a person’s happiness depends less on external events than on some kind of internal disposition (although it is less clear that people can alter their happiness through volition).
How would humans develop a systemic inclination to believe falsehoods? I presume this dynamic has/had adaptive qualities. And I surmise that the quality is motivation: People work harder to influence events in their lives if they believe that doing so will alter how happy they will be in the future. It is the (false) belief in the potential reward, not the reward itself, that motivates the adaptive behavior. And the fact that the reward is repeatedly withheld never seems to dampen people’s motivation to pursue it.
Knut P. Heen
Mar 8 2023 at 11:30am
You compete on costs/profits in the perfect competition model (not price). The point is that everyone face the same market price, but a supplier with lower costs will obtain more profit. Marginal cost equals price, must not be confused with the idea that all competitors have the same total costs and same profit. If a firm finds a cheaper way to produce, it will expand the production until it again hits marginal cost = price at a higher quantity produced. The firm produces more at a lower cost and obtains a higher profit than its competitors. The number of competitors is by assumption so large that the increased production does not impact the market price (the demand curve is flat from the perspective of the firm). The incentive to cut costs in the monopoly model, however, is weaker because expanding production when you face a downward sloping demand curve reduces the price. Hence, some of the benefit from cutting costs falls to the consumer in the form of a lower market price. I think these models captures the idea of competition fairly well.
The idea that perfect competition is some ideal that should be pursued is as stupid as trying to force real gases to follow Boyle’s law (of an ideal gas). If everyone competes at producing potato, who produces tomato? There is a budget of people in the world. The only way to increase competition is to have more babies.
Capt. J Parker
Mar 8 2023 at 1:11pm
This is just wrong. Of course there is competition taking place. Each firm is competing for a share of buyers at the equilibrium market price (among other things.) The need to compete for buyers is exactly what makes each firm a price taker.
Such a thesis confuses the premise that no single firm is able to achieve a competitive advantage with the idea that no competition taking place. It’s like saying that because the offense wasn’t able to move the football an inch after 4 downs that both teams stopped competing.
Sure, there’s plenty of real world economic activity that the econ 101 perfectly competitive market model doesn’t capture. Competition between firms is not one of them.
This reminds me of a similar piece of nonsense spewed at me in my Micro 101 for non-economics majors course may years ago. The nonsense was that in a perfectly competitive market where firms increase output until their marginal cost equals the market price, there are no “profits.” And this, of course, confused “profit” with production surplus. I’m sad to report that is was at a university with a big time economics department. However, the Solo’s and Samuelson’s couldn’t be bothered with teaching Micro 101 to engineers and physicists so grad student instructors taught most of the course. Still, an unforgivable error in retrospect.