I was watching reality television today, specifically Project Runway, when it struck me, from the point of view of an amateur economist, how bizarre the fashion industry is. The fashion designers make their names from runway designs, some of which are never meant to be worn, and on-off custom designs. However, their income comes mainly from off the rack, ready to wear clothes, which often have almost nothing to do with their high-end designs, as well as fragrances and other secondary products which have even less connection.

The only industry I can imagine coming even close is the auto industry, in which several makers sponsor racing teams which (outside of NASCAR) drive custom vehicles having little relationship to their mass produced vehicles. However, the automotive industry is nowhere near as driven by racing crews as the fashion industry is by the fashion shows, so the analogy is imperfect.

So, why do I mention this?

Two reasons. First, because I am just fascinated by aberrations, and as an amateur economist this interests me. But second because it is a perfect example to show why modern academic economics is so quick to get things wrong.

You see, economists have decided advertising serves two purposes. First the informative function, telling you something is available and what the traits of this particular brand are. The the function of creating desire, convincing you you need this good. And, I would imagine, they would see the runway shows as advertising for clothing. However, as the points I mentioned above are true, the clothes sold have little relation to those shown, and yet demand is established through those shows, they would likely claim the market is "defective". As consumers should buy based upon the utility of the clothes, they should not be swayed by the quality, or popularity, of entirely unrelated clothing which just happens to share a designer. And, from such declarations, statements that in this or that industry the "free market breaks down", we often get regulators feeling justified in intervening. Likely fashion won't be one of those, but it is a great example of the argument.

The problem here, and the basis for many spurious "defective competition" arguments is the implicit assumption of innate value. Not that there is anything new in that belief. Marx's idiocies were based on the labor theory of value. Many utilitarian and utopian socialist theories had the same origin. Once you believe items have some innate value, no matter what the reason or origin, it is not hard to find the market doing "the wrong thing", and you can easily support claims of a "broken" market.

The simple fact is, an item's value is the same as its price. People understand that the price of an object is what someone will pay, but they don't understand that it has no value independent of its price. It may have a utility separate from price, but utility and value are not identical*. There are useful items which have no value in certain contexts. For example, in the days following hurricane Katrina, advanced supercomputer still had utility, but among the refugees, I doubt they had either a price or value, as they simply had no use for them, even if a supercomputer still had the same overall utility.

And that is the mistake of saying the market is broken. What that inevitably means is that the outcome disagrees with the speaker's assumptions. For example, using the fashion industry, the speaker would assume clothing is price by its quality and appearance, but finds instead it is priced by being associated with a designer whose other clothing is well received. But that does not matter. Whether buyers buy because of the inherent qualities of the goods, or the prestige they believe they get from buying them, they still establish the value of those goods. And it is based on nothing but the satisfaction they receive. Some may question why they get satisfaction from prestige rather than value, but that is not our decision to question. People are pleased by what pleases them, it is not the economist's job to ask why. We take valuations as a given and then determine what will give the greatest satisfaction. To do anything else is to court the many problems I described in "The Inherent Disappointment of Authoritarianism".

And that, really, is the root of most claims of "broken" markets and "defective" competition. It is not that the market does not function as it should, but that the speaker disagrees with the outcome, with the valuations which went into that outcome, in short, with the preference sof his fellows. But to say "I know better than them" is to proclaim one's arrogance, so such claims are instead tarted up in economic theory, perhaps some dubious mathematics, maybe littered with a slew of Greek letters, a little formal logic, and then put forth as somehow objective. But all the window dressing in the world will change the fact that such claims differ not one whit from the censors, the prohibitionist, and all the other busy bodies who tell us that everyone is behaving badly. It is not a broken market that upsets many, but the fact that a perfectly functioning market does not result in the outcome they would prefer.

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* I plead guilty to, in casual conversation, ignoring this distinction. If anyone followed my chat with Rich in the comments a few days ago will recall a monetarist who claimed gold and fiat currency both had value only because they were media of exchange. I argued that gold had value independent of its role as currency. I should have, instead, said it has utility, while fiat currency does not, and, in every case I know, that utility gave it value even when not used as currency, while printed paper tends to have value only when declared currency by the state. My compression of the argument into a sort of shorthand resulted in the inexact statement that gold, by being useful, has value. And that is technically incorrect.

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POSTSCRIPT

Yes, I watch Project Runway. My mother was watching it when we started living together and I found myself somehow intrigued. So feel free to mock. (I know not everyone will, but as I knew at least one question was forthcoming, I decided this was easier than answering every surprised comment.)