Monday, December 24, 2012

Christmas Spirit?

Imagine Macy's Santa Claus sending customers to Gimbels. But gentlemen, you cannot argue with success. Look at this: telegrams, messages, telephone calls -- the governor's wife, the mayor's wife. Over 500 thankful parents expressing undying gratitude to Macy's. Never in my entire career have I seen such a tremendous and immediate response to a merchandising policy,... and I'm positive, Frank, that if we expand our policy we'll expand our results as well. Therefore, from now on, not only will our Santa Claus continue in this manner, but I want every salesperson in this store to do precisely the same thing. If we haven't got exactly what the customer wants, we'll send him where he can get it. No high-pressuring and forcing a customer to take something he doesn't really want.
We'll be known as 'The Helpful Store.' 'The Friendly Store.' 'The Store With a Heart.' The store that places public service ahead of profits. And consequently we'll make more profits than ever before.
          -- Mr. Macy (Harry Antrim), Miracle on 34th Street.
Last week I saw Miracle on 34th Street all the way through for the first time. The movie is great feel good movie about generosity and faith. There are lots of good moments, but the above quote from Mr. Macy is an especially good one.

It brings up some interesting questions: Are firms being generous or profit maximizing when they provide a service you need, donate to charity, or promote Christmas spirit? Does it matter? Does it matter that Mr. Macy was partially or even primarily motivated by profits when promoting a new policy that benefited customers?

Well, if by "does it matter?" we mean: "is it more efficient?", then we can provide an answer. If Macy's is in a competitive market, then the answer is "it does not matter." Competitive markets efficiently allocate goods and services. The motive of each individual actor does not matter. In fact, in the movie, the fact that Macy's provided the service prompted Gimbels to also provide the service. Both business were in stiff competition with each other in order to attract customers. And how do you attract customers? You give them what they want.

One of the great things about a competitive market economy is that it is robust to greed. People get what they need and want even if the provider is personally a Scrooge. Providers don't have to be completely altruistic, or go out of their way to know what it is you want, or how much you value more of each good. In addition, consumers do not have to be relied upon to truthfully say how much they really need a little bit more, either. Prices sum up all this information about what people really need and want and what has to be given up for more to be provided in one little number. That is the magic of prices.

I would be remiss not to mention Adam Smith's famous quotation from The Wealth of Nations:
It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest....By directing that industry in such a manner as its produce may be of greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Here Smith is talking about the benefits of specialization and markets, but this short quotation leaves the mistaken impression that market economies promote or even require greed and selfishness to function. This is not true. 

The important point is that markets and prices aggregate information about peoples' wants and needs in a meaningful way and create a system where people get what they want even from others who don't personally care about them and may even be a world away.  

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