Random Developments

Or, tales from a 3^rd world economy.

The recently deceased American economist Milton Friedman was one of the strongest defenders of free market economies, with very limited (or no) participation of the government in economic matters. Free economies are essential to guarantee political and social freedom for the population and to solve social problems that are not addressed, or are made worse, by other systems.

Latin America is frequently used by detractors of the free market and liberalism as a “counter-example”, or almost as a disproof of Friedman’s theories. According to critics, the failure of Latin American countries to generate and distribute wealth proves that liberal policies do not work to benefit the population as a whole. This argument is wrong and is based on a very severe fallacy. Let me tell you a story.

In Brazil, bread is commonly bought from bakeries in the form of small 50-gram French rolls; it’s also more commonly bought from the local corner bakery than from large supermarkets or bakery chains. This is such a regular staple that bakeries were, until recently, required by law to sell 50-gram rolls; the price of bread was also regulated until not too long ago.

If you think about it, you’ll agree that there’s not a visually appreciable difference between a 50-gram roll and, say, a 45-gram roll (or, for that matter, a 55-gram one). Bakers will undoubtedly notice that as well. There are two opposing economic incentives working to make sure that rolls, on average, will weigh approximately 50 grams: heavier rolls will cause the baker to lose money, and lighter ones will eventually get him fined by the local equivalent of the Consumer Affairs office (and possibly gain him a reputation among his neighbours of being cheaters). If you are familiar with the way Brazil works, you’ll notice that one of these incentives is much stronger than the other: the chance that any particular baker will get fined for underselling bread is very, very small.

The result of that was, of course, that a fair number of bakers would sell bread that was under the 50-gram weight limit. There were complaints, fines were given, but the problem was more or less endemic (apparently). Regular audits were finding rolls that were up to 8% (4 grams) lighter that they should. The government decided it was time to act, and it did. Not, as one might expect, by increasing the resources used to audit bakeries, or by imposing heavier fines; the solution that was adopted was to require all bakeries to sell bread by weight, not by unit, and to weigh the bread in front of the customer.

Now, even if you exclude the possibility of a cheating baker, a 50-gram roll will very rarely weigh exactly 50 grams. Without any testing, I would expect the weights to fall on a bell curve (a normal distribution) centred somewhat close to 50 grams and extending some 10% in either direction. Also, as honest bakers would usually get the bread to be slightly above 50 grams to avoid problems with auditors (and customers), the centre of the curve would actually sit somewhat above 50 grams.

What is the result of that? Well, the immediate result is that now customers don’t know beforehand how much they will pay for bread (because, you see, bakers will not cut bread to fit the weight required by the customer; customers will still ask for the number of rolls they want, and will only afterwards be told the price). A secondary result is that the economic incentives affecting bakers have changed: they now have a strong incentive to make bread rolls that are heavier than 50 grams, because that will make them more money (and will cost consumers more money, of course). This would cause the average weight of the rolls to go up, and the average expenditure to get a given number of rolls to also go up (and this has actually happened). A side-effect is that customers who shop from honest bakers will, in effect, have to start paying for a weight excess they were getting for free.

And, of course, customers are complaining. Public opinion polls made before the change said that 70% of the customers would prefer the new method, but now that it’s been in use for a month 89% of them want the old way back (yes, there’s a lesson here somewhere). The louder complaints refer to the impossibility of going to the bakery with the exact change to get bread, of course; that is a common problem for lower-income customers, who may not even have any more cash to pay for heavier rolls. But there’s an interesting complaint that I don’t think anyone expected: warm (recently baked) bread is heavier, because the rolls lose water by evaporation as they cool down. And I don’t think requiring bakers to only sell cold bread would be a popular move.

I’m pretty sure many bakeries would like to cater to what customers want and offer both possibilities (by weight or by unit), but now that would be illegal and subject to a R$50,000 (A$30,300) fine, even if the choice was given to the customer. However, due to the outcry, Senate is now considering a bill to require bakeries to offer both options. Of course, why allow an option when force works so much better?

So, there you go. Next time someone mentions Latin America as a proof that liberalism and free markets do not work, tell them this story and ask: if you can’t even sell bread without the Senate getting involved, can you really call this a liberal economy?

As I said, I started watching BSG somewhat late; I finished season 1 just after Channel Ten started showing season 2, and have been catching up with the episodes since. And this weekend I did it: I watched the sixth episode of the third season (”Torn”), and had a very weird feeling afterwards: there were no episodes left to watch! (until next week, that is) That’s a first for me.

About the latest episodes (possible spoilers ahead): the start of season 3 redeems any problems from the end of season 2. Episode 4 (”Exodus pt 2″), in particular, is probably the single best TV episode of any genre of the last several years. Although… it’s a bit odd that, at the end of episode 5, we’re almost back to the middle of season 2: Laura is the president, there’s only one battlestar, Adama Jr. is the CAG, Thigh is drunk… even the number of survivors is sharply down from the peak reached right after the Pegasus showed up. At least Thigh’s very annoying wife is gone.

The “cylon disease” plot shows some promise; I still can’t quite figure out what Baltar plans to do, but probably the best guide is what Lt Gaeta (is he still an official?) said: his ability for self-preservation has no match. He may now be about to realise that staying with the cylons is not the best way to do that.

Waiting for the next episode…