Sufficient to Holy Saturday morning is the evil thereof -- finally done with revising concluding paras of the 19th (or so rewrite of paper on securitization). If you care to read on, it includes references to bananas (twice), kidneys, hamburgers, cycle rickshaws.... The question of how to impose or induce standards goes beyond the regulation of financial transactions. The coordination of autonomous agents, whether or not through arm’s length markets, requires standards that restrict consideration of idiosyncratic attributes and preferences. As we saw in the introduction, market prices that effectively coordinate dispersed buyers and sellers of tin require standardized terms that restrict consideration of where and when the tin was mined. Standards that restrict consideration of granular information similarly support coordination outside arm’s length markets. For instance mechanisms developed by Roth and others to match residents and hospitals and kidney donors and recipients require extensive standardization of applications and allocation procedures. Reservation systems that reduce passengers to a booking number are essential to the efficient operation of airlines. Mass production requires extensive standardization of products, inputs, and operations. And standardizing interoperability protocols provides the foundation for compatible, complementary innovations, as we see with the internet At the same time standards that restrict consideration of granular information about case-specific details impose many costs. They can reduce choice and increase mismatches, encourage slacking and the gaming of incentives, impede rapid adjustments to changing circumstances, and stifle radical innovation. Additionally, standardization can increase collective exposures to misfortunes and mistakes. For example, standardizing on the Cavendish variety of bananas helps improve coordination across the supply chain (since the bananas ripen at similar rates), but mono-culture cultivation also increases vulnerability of the world’s supply to a single pathogen. Moreover standardization does not always emerge spontaneously. Many standards are collectively debated and agreed to in a planned and structured manner by organizations that include businesses, professional associations, legislatures, regulatory agencies, and courts. This planned collectivization affects not just intra-firm or administered activities (such as sick leaves administered by personnel departments and reporting standards established by accounting bodies) but also the pecuniary “market” transactions between autonomous buyers and sellers as Harsanyi and many others have shown. Without deliberate organizational interventions, for instance, terms and prices of transactions do not automatically converge to some putative optimum. Buyers can purchase hamburgers at the same price in any McDonald’s in Manhattan because the company’s management requires all its outlets in Manhattan to sell the hamburgers at identical prices; meanwhile (as observed on a recent visit), street vendors sell indistinguishable bananas on adjacent blocks at prices ranging from 20 to 50 cents per banana. Similarly, the NYC Taxi and Limousine Commission sets a Standard City Rate for all licensed taxis, while cycle rickshaws congregate outside Central Park with clearly posted fares ranging from $1.75 per minute to $4.00 per minute. Yet, private organizations and governments cannot make decisions about standardization that are so crucial in modern societies from first principles; a multifarious, ever-changing economy places limits on how much general “scientific knowledge” (as Hayek put it) of the costs and benefits we can expect to acquire. Deciding how and how much to standardize requires collective ongoing judgments about particular means under the specific circumstances at hand.
Posted on: Sat, 19 Apr 2014 15:56:02 +0000