Is Money Really the Best Measure of Value?

Full Transcript

Note: Transcripts are generated by machine and lightly edited by humans. They may contain errors.

Kevin Cool: If we want a more equitable world then we need to consider the different ways people value money.

Aziz: I like it because I can work whenever I like. I’m not a morning person. I used to be a cab driver for five years, and the car was sitting in the garage so I decided just to do Uber with my car. It’s just sitting there.

Kevin Cool: Meet Aziz. He’s an Uber driver in Chicago. Driving his red Toyota Yaris around the city most afternoons and evenings, and he’s been doing it a long time.

Aziz: I start 2013 so it’s almost 10 years.

Kevin Cool: Aziz has driven more than 20,000 Uber trips in those 10 years.

Aziz: So with Uber you just drive and more relaxing of driving. Not like that stress. Yeah, a lot of cab drivers, they were killed just for 50 bucks, but now, with Uber I don’t carry cash with me. It’s good. Yeah, it’s more safe, and you can drive whenever you are. If it’s busy in the summer I can stay in the summer. With Uber it’s more safe for me.

Kevin Cool: For Aziz, one of the biggest benefits of working for Uber is the control and choice he has. When he works, where he drives and which rides he accepts.

Aziz: So sometimes, I drive to Indiana or Michigan. I have no problems driving around. I drive south, north, west, northeast … the lake.

Kevin Cool: Aziz, like a number of the Uber drivers we met in Chicago, just wants to stay busy keeping the back seat of his car full of passengers for as much time as possible. The more rides with less down time affects what he takes home at the end of the day. Yet all the drivers we spoke to are very aware of the incentive prices for both drivers and passengers like surge pricing for different parts of the city.

Aziz: Now, I said it depends — what do you call it? When it’s busy, full charge, and if it’s not busy, they will get a price. You can make like between 20 bucks per hour until if it’s busy you can reach 30 or 35 per hour. So holidays like Thanksgiving we can do when it’s — only when the weather is bad like snowing it’s like people gave us work so you can make some extra money. It shows here like you are in the summer, and if it’s busy I stay there. Why I have to come to downtown because it’s busy in downtown or the surcharges? Sometimes, it’s like surcharge is very high in the south.

Kevin Cool: Price incentives determine where drivers like Aziz pick up rides, but if the only people who can afford those surge prices are in the wealthier parts of Chicago, is that fair for the people who need cars just as much in poorer neighborhoods on the South Side?

Higher prices are easier to stomach for people with lots of money, but what if these incentives could also help people who value money differently? It may sound simple, but it’s not something that conventional economics usually takes into account.

I’m Kevin Cool, Senior Editor at the GSB. Today, we explore the differences in how people value money and how those differences affect market dynamics with Mohammad Akbarpour, associate professor of Economics.

Mohammad Akbarpour: Really, one of the most fundamental questions of economics I try to answer in the project of economics is how to allocate scarce resources. If you read the classics like, “The Wealth of Nations,” the Karl Marx books from left and right this question of how to allocate the scarce resources, and who should get what, and why is a fundamental question of economic sciences.

And the most accepted, widely-recognized answer to this question is the market mechanism. It’s the free market. So if someone is willing to pay more than me for the good they have to get it. So let’s find the market-clearing price, the price at which the supply of something is equal to the demand and let the market work.

What we did in this paper was really to ask the very same question with one extra assumption. And the extra assumption was: different people have different marginal value for money. The whole idea of Econ 101 when you have supply curve, and demand curve, and the intersection of supply and demand curve will give you the market equilibrium, and that’s the point that the total value is maximized. That’s a picture that pretty much everyone who has taken one class in Economics has seen.

That idea that market equilibrium maximizes the total value, total surplus, or even total welfare comes from the belief that getting one dollar from me, and giving it to Elon Musk, is welfare-neutral. That one dollar has the same value for Elon Musk or Mohammad.

If we do not believe in this, which I do find an uncontroversial assumption, although we can talk about that like there is a fundamental philosophical critique to this assumption, if we believe that different people have different marginal values for cash then we should immediately believe that if you’re willing to pay more for something, that does not mean that the social welfare is maximized for giving a good to you. Because it could be that you are rich.

Once we believe in this one assumption and add it to the classic models, then we can ask the question of how to allocate the scarce resources in this way. And it turns out that with that one assumption, we can identify conditions under which free market remains efficient, and optimal, and fair, but that’s not always the case.

There would be many, many cases in which you want to start using non-market allocation mechanisms. And by non-market allocation mechanisms I mean things such as rationing, running a lottery, people waiting in the queue, and allocating the good for free like the allocation of vaccines.

Kevin Cool: So I want to ask you about a few examples in which this plays out, but the one I want to start with is Taylor Swift. I understand you just recently went to a Taylor Swift concert. Is that right?

Mohammad Akbarpour: Yeah, that’s right. I did not plan to, but I had a free ticket.

Kevin Cool: So you didn’t have to make the decision about how much it was, quote, unquote, worth, right? Yeah, but this does seem like a place where the free market failed or at least was flawed. There were some people who paid 70 times the face value. Seven-zero times the face value for a ticket. And, of course, legions of fans who were priced out and were angry about that. I know it’s just concert tickets, but what can we learn from these exorbitant prices and the calls for change that resulted?

Mohammad Akbarpour: Well, I should start by saying that this is really difficult problem. As we are sitting here multiple economists are thinking about the problem of ticket allocation because it’s a really difficult problem. So everything starts by this observation that if Taylor Swift concert tickets are allocated completely by some competitive equilibrium or free markets, then people who are going to be able to go to this concert are not necessarily people who love Taylor Swift the most.

This is again, should be uncontroversial. In fact, that’s the reason that Taylor Swift has started Very Fine Fans. And saying that if you are a Very Fine Fan now you can get the ticket before other people at lower prices. This is also the case for say, WorkUP. Whoever is happy to wake up at 5:00 a.m. and be the first person who signs in, in that website can get it.

FIFA for the World Cup decided that, “We are going to allocate tickets by lottery.” So everyone puts their name down for a hundred-dollar ticket, and then, “We are going to allocate it with lottery and 10 percent of people are going to get it.” These are all allocation mechanisms that Econ 101, the supply and demand curve, would tell you they are wrong. There is someone who was willing to pay more for this ticket, and you did not give the ticket to them.

And yet, policymakers do that, and in this paper, if you like, in this sequence of papers and research agenda that I started with my fantastic co-authors, Piotr Dworczak and Scott Kominers basically, our idea was people are doing it out there in the world. Some economists think that that is wrong. Could we actually make sense of this policy decision based on economic principles? Based on first principles.

And we could do that by just adding one feature to the model which is different people have different marginal value for money. So if someone is willing to pay $1,000 for a Taylor Swift concert they do not necessarily get more value from going to Taylor Swift concert than someone who is willing to pay $500.

Kevin Cool: Another example. A lot of the people who went to these concerts probably arrived in a Lyft or an Uber. And you’ve done some work looking at ride-sharing companies and how those mechanisms or how the market works in that. First of all, what is wrong with that market that needs to be fixed, and what would you propose as a remedy?

Mohammad Akbarpour: One thing that we discovered in the mathematics of the model was that there are two different types of inequality that can change the way you regulate a market. One type of inequality is the inequality across two sides of the market. In the Uber example that you just said or Lyft example, drivers are systematically poorer than riders.

That’s a fact that you can look at their tax returns. It’s clear that the typical Uber passenger is, on average, more well-off than a typical Uber driver. So that’s what we call the cross-saving equality. The other type of inequality is with inside inequality. Within riders. Some riders are rich, some riders are poor.

And these two different types of inequality give rise to two different policies or different types of policy outcomes. Within the framework of your question, drivers are systematically poorer than riders. And then, if you go to Chicago, riders of South Side Chicago are actually much poorer than riders of Lincoln Park, which is a much more well-off neighborhood.

And then when we take that observation that’s like basically, distribution of marginal values for cash which comes from the distribution of inequality into the model we will see that policies such as increased prices under Lincoln Park, because passengers are much less price-sensitive, and decreased prices on the South Side because passengers are very price-sensitive. And, in fact, you might even start getting negative revenue on the South Side. It doesn’t make sense for you to have business there. But if you have some redistributive goal, if you care about the utility of these people, too, then a policy that increases prices here and decreases prices here can start making sense.

Another policy that can start making sense is to detach the price of drivers and passengers. Instead of saying that the price is $100, and I’m going to get 40 percent of it as Uber as the platform you can set a higher price for riders, a lower price for drivers you will generate some revenue that is more than what you could do otherwise because now, you can charge riders much more. And then, you can use that revenue to give drivers benefits like such as health insurance and stuff like that as part of their compensation.

And I should emphasize, these are policies that are optimal if you are a social planner thinking about welfare, or a regulator who wants to actually maximize welfare. From an Uber perspective, if their only objective is revenue then it’s unclear that this is a good policy.

But I believe and working with different companies, I believe that even companies, even if it’s only about their own long term stock value, they do care about consumer welfare. They do care about actually creating a great PR, making sure that they are a company known as a good company. And in that case, if they want to help drivers this is the way they can do that.

Kevin Cool: You’re listening to “If/Then,” a podcast from Stanford Graduate School of Business. We’ll continue our conversation after the break.

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Kevin Cool: So you’re making an economic argument here, but it seems to me that it’s possible that someone would interpret this as a political argument. It’s redistributing money in a way from the rich to the poor. Have you had any pushback on that in that regard?

Mohammad Akbarpour: A lot of pushback. The very first few economists whom I really appreciate we talked about this idea, they were like very much against it because of several reasons. And let me actually get into some of the detail.

The first reason is what we are doing here is what a classic economist would call an interpersonal utility comparison, which means I’m saying that if I give one dollar to you versus one dollar to me this will generate more utility in your brain. This is going to give you more happiness than if I give it to Elon Musk.

I’m basically making a comparison of what happens in your brain. There is no reason to believe that actually, maybe Elon Musk is still as happier with getting one dollar than you. How do I know that? This is a really subtle philosophical critique. That’s why economists historically were really against interpersonal utility comparison. They were like, “The only thing we can observe is willingness to pay. How much you’re willing to pay for this tea. And if you are willing to pay more you probably enjoy it more.”

Kevin Cool: So the market is determining what happens?

Mohammad Akbarpour: Exactly.

Kevin Cool: Yeah, right.

Mohammad Akbarpour: So we are here in this paper, we are making these sequence of papers. We are making interpersonal utility comparisons. We are saying, “No, one dollar for an average American is more valuable than one dollar for Elon Musk,” and we are happy to take that stand.

The second critique, which is much more fundamental, is economists are actually not against redistribution. They believe — or at least some economists, I would call them market fundamentalists — they believe that the right way to do a distribution is through the tax system. It’s not through redistribution through markets that we do. It’s not distorting markets or that we suggest that it is sometimes optimal.

They say, “Let the markets work. If you want to actually have the poor tax the rich, and then redistribute using all kinds of redistributive policies from lump sum transfer, to free insurance, to free school.” All the social and welfare systems that we have in the United States and everywhere in the world.

What we’re doing in the very first part of our very first paper in this agenda is to actually debunk this by showing that if people have private information about how much they value something, if I know that the value of this concert ticket or value of this cancer treatment for me is a million dollars, but you don’t know that as the market-maker or as the regulator, then we show that actually, this result that the optimal path is to let the market work and redistribute. And we argue that this is a private information in pretty much any market. You really don’t know how much someone values a piece of vaccine, a dose of vaccine, or a cancer treatment, or a Taylor Swift concert.

Second argument is yes, it’s amazing if we could have an optimal tax system, but that’s really a political outcome. Can we really control the whole tax system? Like Democrats have an ideal tax point. Republicans have a different ideal tax point, and we can never be at the optimal tax system which makes distorting markets irrelevant.

So what we do here is to say, “Hey, we cannot change the tax system in short term or medium term, so let’s take that as given. And then given the tax system, how should we design a market? How should we allocate public housing? How should we allocate healthcare? How should we allocate even concert tickets?” And then, we can identify conditions under which market distortion makes sense.

Kevin Cool: Is one of the goals of your research to help solve inequality? And do you think more economists should be pursuing research with that goal in mind?

Mohammad Akbarpour: They say academia is the opposite of the military. Military people do what you tell them and academia people do not listen to anyone. So I cannot really tell what economists should work on. I think what we are doing is alleviating the problem of inequality. Solving the problem of inequality really comes at a macro level. That’s my view that you have to have the government and society who believes, “I don’t want to live in a society that’s extremely unequal.”

And then, the tax system, the welfare system is going to take care of that. So the reason that Scandinavia is a much more equal country than United States is not because of market distortions. It’s because the society as a whole and the government has decided, “We want to have a really, really progressive tax system.”

That doesn’t mean that Scandinavia is in a better situation than United States. That’s really a choice. A social choice of a society. Maybe in America we love to have a country that accepts some high-level of inequality in the name of innovation and growth. That’s a separate question.

So I think solving inequality comes at that level so what we’re doing in this paper is to take inequality as given, and then think about the question of, “How can you alleviate this problem that inequality exists through tools that you have in the market?” And it turns out that what we find is that for most of the day-to-day goods, for yogurt, for oat milk, for a car you actually don’t want to have market distortions.

The paper and this agenda mathematically we prove, and then we can look at data as well, that you want to start having market distortions for goods in which people do not have a huge valuation in their taste. So the social planner kind of knows, the regulator knows that the value of one dose of vaccine for different people with the same observables cannot be that massively different.

A better example is cancer treatment. If you and I both have some kind of cancer, probably both of us would like to get the best treatment equally. There is no reason for me to love my life significantly more than you. So if someone is willing to pay a million dollars for a cancer treatment and someone is willing to pay $10,000 for the cancer treatment I would argue most of the difference comes from the fact that the first one is much richer. It’s a budget constraint more than an actual value.

And the paper says for these types of goods, goods in which variation and willingness to pay can be mostly explained by variation in wealth. You want to have non-market mechanisms. So we are not solving the problem of inequality, but we are alleviating this problem for these types of goods that we refer to as essential goods.

Kevin Cool: Are you optimistic that policymakers, regulators could be persuaded that we have tools to make markets more fair or that that should happen?

Mohammad Akbarpour: I think it’s to some extent already happening in a lot of places. So one in every 10 almost houses in New York City are public houses. This is a redistributive program. Fifty percent of Amsterdam housing is public so we are already seeing this happening in practice.

What I’m optimistic we are going to do more and more with more data and more analysis is that policymakers and regulators start thinking about this problem more rigorously and identify the best policies instead of just some policy that we think might work.

Kevin Cool: What drew you to first of all, become an economist and to this research in particular?

Mohammad Akbarpour: The economics really came from the fact that I always loved mathematics, and I also loved looking at humans. Reading novels. Thinking about psychology. “Brothers Karamazov” was my favorite novel, and I realized that economics is somehow a great mix of thinking about humans and mathematics.

I came to Stanford University as a PhD student in the School of Engineering. And then, I got a few economics classes, and I fell in love with economics, and then I switched to economics. So that’s how it really all started for me thinking about economics.

This particular research I was uncomfortable by this assumption. From day one I saw it. This fact that the whole economics builds on the fact that moving one dollar from A to B or at least the whole Econ 101 is welfare-neutral. And coming from Iran I was kind of in the middle class myself, but I had a lot of family members in a really small city five hours away from the capital who are really, really poor.

And it was so clear that one dollar to them is significantly different than one dollar to people that I was surrounded with in Tehran in my university. So all of those really existed in my brain and I was uncomfortable with this question. And then, with my two fantastic co-authors they had different personal experiences and we were talking about these topics.

And we were like, “Do we want to commit the crime and do interpersonal utility comparison?” And we wrote the papers. I do remember that when I told this to one of my friends who is also an economist he was like, “I think with probability five percent this paper is going to start a whole new way of thinking. And with probability 95 percent people are going to laugh at you.” And I was like, “I will take that bet.”

Kevin Cool: You’ll take the five percent?

Mohammad Akbarpour: Yeah.

Kevin Cool: Yeah.

Mohammad Akbarpour: I will take the five percent. Life is too short to get the risk-less papers.

Kevin Cool: “If/Then” is produced by Jesse Baker and Eric Nuzum of Magnificent Noise for Stanford Graduate School of Business. Our show is produced by Jim Colgan and Julia Natt. Mixing and sound design by Kristin Mueller. From Stanford GSB, Jenny Luna, Sorel Husbands Denholtz, and Elizabeth Wyleczuk-Stern.

If you enjoyed this conversation we’d appreciate you sharing this with others who might be interested and hope you’ll try some of the other episodes in this series. For more on our professors and their research or to discover more podcasts coming out of Stanford GSB visit our website at gsb.stanford.edu. Find more on our YouTube channel. You can follow us on social media at StanfordGSB. I’m Kevin Cool.