Last week I published a preliminary review of Dan Ariely's new bestseller, "Predictably Irrational," in which the author starts out by trying to establish that supply and demand equilibrium, the foundation of classical economic theory, is a "fallacy."  I believe I rebutted that argument, or at least showed that it's irrelevant because accountability still matters, no matter what the state of mind of the individual consumer when he or she makes a purchase.

Earlier this week, I finally finished the book.  While it was generally interesting and credible, I did still find that Ariely is making extrapolations of his research that are probably unfounded.  Chapter 4, for example, details some experiments on social norms vs. market norms as a motivational tool.  Social norms govern those tasks that are performed as a "favor" for those receiving the benefits, while market norms govern those tasks which are performed for money.  Ariely claims that social norms are more cost-effective, and his experiments seem to bear this out:  subjects performing tasks as a "favor" to the researchers perform about as well as those receiving substantial monetary compensation and much better than those receiving nominal compensation.

Ariely then extrapolates these findings to the real world, noting that monetary compensation can often be exorbitantly expensive and that companies who treat their workers and customers as "family" frequently get better results, both in productivity and in customer relations.  He also cautions that trying to transition abruptly from the "family" model to the market model can cause severe disruptions, such as when a bank that presents itself to customers as "family" suddenly charges a fee for an overdraft check.  The negative reaction to such an event, which is hardly how "family" members treat one another, can be worse than simply maintaining a non-family business environment with customers.  These conclusions I can buy, and they're worth noting.

However, Ariely steps over the line when he rhapsodizes over attending the "Burning Man" festival, an annual socialist gathering in Nevada where all goods and services are exchanged directly in a barter economy, saying, "Burning Man was the most accepting, social, and caring place I had ever been."  He seems to think that classical economists can learn something from this non-monetary economy, but he does go on to admit that "I'm not sure I could survive Burning Man for all 52 weeks of the year."  However, he clearly he thinks that a society relying more on social norms and less on market norms would be a better place.

Well, sure it would, professor, right up until the time that two people in this barter economy can't agree on what a fair exchange would be.  Is a massage worth two meals or vice versa or should they be exchanged one for one?  Or are some meals of sufficient quality that they're worth two massages but other, lesser quality meals only worth one?  These are the issues that the pricing system, relying on monetary exchange, works out quite well using that "fallacious" supply and demand mechanism.

But the ultimate blow to the Burning Man barter economy will come when someone receives good and services from other individuals and then refuses, for whatever reason, to pay them back at all - the freeloader!  It only takes one freeloading individual to turn the whole system on its head, because as soon as one person gets away with it, almost everyone else will see the advantage and try it, too.  And you know what these freeloaders will say:  I just can't pay you back, because I'm sick, hurt, depressed, etc. due to my bad childhood, mean people, bad judgment that wasn't really my fault, etc., and if you don't keep letting me freeload, well, then you just don't care, and that makes you one of the mean people, and you suck!

Of course, we've heard this kind of whining before, haven't we?  And since we're not at Burning Man, we know what to do about it, don't we?