13 replies to this topic

[Jonathan Day]

Classical economics works from the premise that each actor in an economic system, whether an individual or a firm, seeks to maximise financial profit. Firms, accordingly, produce the goods and services that customers demand.

The real world only rarely resembles the world of the economist, that place “where a $10 bill is never found on the sidewalk, because someone has already stopped to pick it up.” Sometimes firms produce certain goods and services not because customers want them but because they enjoy producing them. Typically, these firms are privately held, since their owners are then free to pay for their production preferences by realising a lower than “optimal” rate of return.

Fiona Scott Morton (an economist at Yale) and Joel Podolny (a sociologist now at Harvard) wrote an interesting paper on the motivation of owners in the California Wine Industry. Click here to view the paper, which is long but readable even if you skip the maths. Or if you are really in a hurry, here is an excerpt from the abstract:

We model and measure motivations of California winery owners, and analyze their effects on quality and price. We find utility-maximizers are more likely to produce high quality and set higher quality-adjusted prices. Profit-oriented owners are less likely to produce high quality wines. These results that the presence of hobbyists who enjoy producing high quality may lower financial returns in the segment and discourage profit maximizers from locating there.

In other words: some winemakers, the profit-oriented owners, are in it for the money. Others, the utility-maximizers, are in the wine business “for love”; they enjoy making good wine, and don’t care that this leads to lower financial returns. Winemaking is therefore a difficult industry if you are in it purely for the money, since your competitors may be in it for love and thereby either underprice you or release more wine into the market than profit seeking logic would dictate.

Scott Morton and Podolny suggest that similar results would be obtained if one studied opinion magazines, films, bars or horse racing. What about restaurants?

I find the authors’ analysis and conclusions persuasive. They give further confirmation to the view (see this thread for discussion) that restaurants are “a bad business” and generally an inappropriate vehicle for a passive investor, i.e. one who derives no personal pleasure from owning a restaurant and is simply looking to make money.

And what about food writing? It’s true that some talented people manage earn a living doing this, but are they not competing with those of us who do it for love, e.g. spending large amounts of time posting on eGullet (sometimes at great length) for rewards other than money?

[inventolux]

Many chefs, (Thomas Keller, Daniel Boulud, Charlie Trotter, Pierre Gagniare, Ferran & Alberto Adria) Im sure there are thousands more great examples, believe in something similar. Do what you love and the money will come later.

I believe that even if the money never comes, who cares? Im not in my profession to make a quick buck, that would be suicide in my opinion. Foodwriters are artists and I believe like chefs, will be rewarded down the line as the mainstream public begin to support the industry more. Unfortunately, we spend too much time supporting things like disney's new 500,000 square foot all you can eat taco bar with 2 miles of sneeze guards. We need to keep pressing on with the culinary uprising that has begun. We must continue to educate and gain the interest of the public in what this infectious disease we call gastronomy is all about. If we dont, we will wind up where we started. Nowhere.

[QUOTE]To risk nothing is to risk everything - Descartes

[vengroff]

First, by way of introduction, I'm not an ecomomist and I rarely read the academic literature in the area.

After reading the article, I couldn't help but wonder why this isn't just a special case of a much broader general theory that I'm sure other economists have come up with by now. The theory, as I would state it, is that the spectrum of choice available to economic agents is a high-dimensional non-linear space, as is the space of economic outcomes those choices map to. Each agent has their own view of how this space maps to utility. Standard mathematical, statistical and computational methods that scientists and engineers have used for years can be applied to analyzing the form of these utility functions, e.g. the nature of gradients and the shapes of isosurfaces. This can be done either theoretically or by analyzing survey data. My guess is that what you would find is that small private concerns, subject only to the desires of their owners, will have all sorts of unusually shaped utility functions. Larger concerns, especially those with broad based or public ownership, will necessarily orient themselves towards utility functions that are almost perfectly linear in profitability and all but ignore other variables.. The simple reason is that money is the most fungable asset available, and can be most easily transformed into the personal utilities that match the preferences of a diverse set of owners. That's why we have money in the first place, isn't it?

Sorry that this has nothing really to do with restaurants of food writers per se. I was just surprised to learn that this is the kind of work that Ivy League economists do.

[Jonathan Day]

In practice it turns out that the utility functions (preferences) of consumers, owners and managers are easy to conceive but hard to model. Large firms suffer from the conflict between shareholders and managers; the latter typically have preferences for longevity as well as profitability, and senior managers receive substantial private benefit when a firm is larger -- corporate jets, meals at 3-star restaurants at company expense, etc.

Your fungibility argument also explains why equity shareholders (as opposed to debtholders, employees, senior managers, customers) are typically the owners of large firms: this group is usually more homogeneous than any other, and its uniform preferences, for dividends, cash, growth, make for easier governance.

The motivations and preferences of small business owners are very interesting and not all that well studied. Joel Podolny (a sociologist who has become adept at economic thinking) did a similar analysis of Silicon Valley start-up firms.

My sense from posts in many eGullet threads is that restaurateurs are like winemakers: for many, the "love" motivation (the desire to run a place according to one's personal sensibilities and standards) is very strong, and that most independent restaurateurs are not particularly oriented toward profit. I would guess that food writers are in a similar situation. I can imagine a successful lawyer leaving a white shoe law firm to be a food writer; it's hard to imagine someone going in the opposite direction.

[Fat Guy]

Classical economics works from the premise that each actor in an economic system, whether an individual or a firm, seeks to maximise financial profit.

Either that's not the premise of classical economics, or classical economics is based on a stupid premise. The only people I've met who truly seek to maximize financial profit above all else are borderline sociopaths who represent an extremely small percentage of the people I know. Most people I care to associate with seek to maximize their happiness. Money is one way to further that goal, because it gives you access to possessions, education, security, etc. -- things that can contribute to happiness. But as soon as the pursuit of money starts reducing happiness, an intelligent and sane person should say enough is enough. It's good economics.

I wouldn't be a food writer if I had to be homeless, sick, and starving in order to pursue this career. But as long as I have a nice enough place to live, access to good medical care, enough money to feed my dog (I don't particularly need money to feed myself; the big fringe benefit of my chosen career is that I dine like a billionaire even though I have the income of an assistant preschool teacher), and a working Internet connection, I'm where I need to be.

[Jonathan Day]

Strictly speaking, actors maximise utility.

However in most economic models, utility is equated to money, in part because it makes the maths simpler.

Economic theory has little direct connection with the real world or real people. It assumes, for example, that people would rather not work (effort has "negative utility"). It assumes that people are mutually opportunistic (I would pick my best friend's pocket if I didn't fear that a policeman might be lurking around the corner).

It is a heuristic device, a lens through which one can view behaviour. A useful lens for all that.

[John Whiting]

The first thing that occurs to me is that most of the chefs and food writers we're discussing wouldn't understand a word of it. Nor need they. They are being driven by an inner compulsion that makes it impossible for them to do otherwise. We've discussed ad infinitum the motivations of chefs. Food writers? How do you earn a living writing about fine food in a society in which it is truly valued only by a small minority? John Thorne (who has been one of our honored guests) is said by some to be America's greatest living food writer. But a couple of years ago he turned down a celebratory dinner invitation for an elder peer whom he admired because (he said) he couldn't afford appropriate clothing. And I think he meant it.

Edited for spelling.

Edited by John Whiting, 16 June 2003 - 07:36 AM.

[bourdain]

"Writing is like prostitution.
First you do it for love.
Then you do it for a few friends..
Finally, you do it for money "

--Moliere

[tighe]

Strictly speaking, actors maximise utility.

However in most economic models, utility is equated to money, in part because it makes the maths simpler.

Economic theory has little direct connection with the real world or real people. It assumes, for example, that people would rather not work (effort has "negative utility"). It assumes that people are mutually opportunistic (I would pick my best friend's pocket if I didn't fear that a policeman might be lurking around the corner).

It is a heuristic device, a lens through which one can view behaviour. A useful lens for all that.

I don't know what your background or training in economics is, so I hope this will not come off as overly patronizing, but as a professional economist, these statements are like fingernails on a blackboard to me.

The first statement is a partial correction of your initial misstatement. Economic theory assumes that individuals maximize utility subject to whatever constraints they face while firms are assumed to maximize profit (or minimize loss). How is this divorced from the real world?? Yes the math becomes more difficult, but I can easily construct a utility function whereby the level of utility of the individual inquestion is actually increased by giving all of their money to charity and becoming an ascetic. This is what I like to call the "Mother Teresa" utility function.

Economic theory definitely does not assume that people would rather not work, it only assumes that if an additional hour of leisure provides more utility than an additional hour of work, people will choose leisure. Again, I can construct a utility function for a workaholic that derives little or no utility from leisure.

Your example of picking your friends pocket is, I believe, a misstatement of the Prisoner's Dilemma and or an oversimplification of the theories of marginal utilities and negative externalities.

So why do people go into the food and wine industry where incomes are generally low. The most obvious reason is what has already been discussed, that it is in fact their 'utility maximizing' decision, that is they derive substantial 'well-being' out of being in the particular business. Another, which I believe is very common, is that people make decisions based on insufficient and/or inaccurate information about what their earning potential in the food and wine business really is. The market structure in these industries is esstentially monpolistic competition, that is competitive firms that offer slightly differentiated products. I think aspiring wine-makers, chefs, etc. often misjudge their ability of differentiating themselves from the competition and therefore capturing monopoly profits for their business. This leaves their postion in the market much closer to the competitive end of the market structure spectrum and any economist will tell you that in the long-run, economic profits in a competitive market are zero (and we're all dead, as Mr Keynes said).

Edited by tighe, 18 June 2003 - 02:38 PM.

[Chef Fowke]

Not to simplify this topic....

'If you’re going to take the time to do something well you might as well do it for money as well'.

[Jonathan Day]

Thanks for your clarifying post, Tighe. I am a user of economic models, not an originator of them, so I concede right now your superior professional grip on the theory.

The first statement is a partial correction of your initial misstatement.  Economic theory assumes that individuals maximize utility subject to whatever constraints they face while firms are assumed to maximize profit (or minimize loss).  How is this divorced from the real world??  Yes the math becomes more difficult, but I can easily construct a utility function whereby the level of utility of the individual inquestion is actually increased by giving all of their money to charity and becoming an ascetic.  This is what I like to call the "Mother Teresa" utility function.

Firms almost never pursue a simple profit objective; they worry about all sorts of other things as well: longevity of the business, private benefit for senior executives (e.g. social status), etc.

Economic theory definitely does not assume that people would rather not work, it only assumes that if an additional hour of leisure provides more utility than an additional hour of work, people will choose leisure.  Again, I can construct a utility function for a workaholic that derives little or no utility from leisure.

Of course. But would you not agree that most models in incentive theory assume that effort has negative utility, which must be "compensated" for financially? The practical assumption is that most people are neither workaholics nor Mother Teresas.

Your example of picking your friends pocket is, I believe, a misstatement of the Prisoner's Dilemma and or an oversimplification of the theories of marginal utilities and negative externalities.

I don't think it is a misstatement of the Prisoner's Dilemma. Are you saying that a law-abiding society is an externality and that I refrain from theft simply because of long-run self-interest in maintaining this? You could follow the reasoning in Mancur Olson's work, e.g. the early chapters of Power and Prosperity in his model of stationary vs roving bandits. Or -- far simpler and more convincing in my view -- you could say that most people refrain from these activities because they think it is the right thing to do.

So why do people go into the food and wine industry where incomes are generally low.  The most obvious reason is what has already been discussed, that it is in fact their 'utility maximizing' decision, that is they derive substantial 'well-being' out of being in the particular business.  Another, which I believe is very common, is that people make decisions based on insufficient and/or inaccurate information about what their earning potential in the food and wine business really is.  The market structure in these industries is esstentially monpolistic competition, that is competitive firms that offer slightly differentiated products.  I think aspiring wine-makers, chefs, etc. often misjudge their ability of differentiating themselves from the competition and therefore capturing monopoly profits for their business.  This leaves their postion in the market much closer to the competitive end of the market structure spectrum and any economist will tell you that in the long-run, economic profits in a competitive market are zero (and we're all dead, as Mr Keynes said).

See a related thread about the restaurant business as a "winner takes all" system.

[francesco]

Jonathan,

Firms almost never pursue a simple profit objective; they worry about all sorts of other things as well: longevity of the business, private benefit for senior executives (e.g. social status), etc.

As another professional economist: these things, are all well-known and studied by a large number of members of the profession. Economics has the unenviable task, just like any social science, of modelling the most complex thing there is: human behavior. Every time some reality is modelled, the trade-offs faced have to do with tractability on the one hand (which requires simplification) and not leaving out crucial assumptions on the one hand (which requires not simplifying too much). So if a macroeconomist writes down a model which requires the representation of a whole economy, tractability requires that he write down firms as individual agents which maximize profits because at that level of aggregation, this is an acceptable assumption. However, if what we need to model is compensation packages for managers of a publicly-traded firm, then assuming that, for example, these managers try to maximize long-term profts is clearly something that will generally not be accepted. In the end, the difference between good theory and bad theory is that the former manages to simplify enough to generate interesting insights while not making assumptions which are crucial for the theory while being debatable as a description of the reality that we want to model.

But would you not agree that most models in incentive theory assume that effort has negative utility, which must be "compensated" for financially?  The practical assumption is that most people are neither workaholics nor Mother Teresas.

Most models do make that assumption because while clearly false in a literal sense, it allows us to gain many insights into incentive behavior. In other words, many of these models do capture some of the phenomena we observe. Sometimes, to capture some other phenomena, we do need to make different assumptions but before that, economists try to see how far you can get with the old one (that effort is costly). It can be argued that in some cases this is not possible and that different assumptions are needed. For example:

http://econ.lse.ac.u...s/motivated.pdf

I don't think it is a misstatement of the Prisoner's Dilemma. Are you saying that a law-abiding society is an externality and that I refrain from theft simply because of long-run self-interest in maintaining this? You could follow the reasoning in Mancur Olson's work, e.g. the early chapters of Power and Prosperity in his model of stationary vs roving bandits. Or -- far simpler and more convincing in my view -- you could say that most people refrain from these activities because they think it is the right thing to do.

This debate has been going on for a very long time and the answer is that probably a combination of your current wealth, the possible amount of money you can steal and the risk of getting caught that are stopping you from making that decision. If my best friend's pockets contained a million dollars and I had absolute certainty of impunity, I doubt I would refrain from stealing the money.

Francesco

PS looking you up on the web, I noticed we have some acquaintances in common. While neither of them was my dissertation advisor, I was once teaching assistant for both John Roberts and Joel Podolny for an MBA class they taught together: the world is small indeed!

[tighe]

Leave it to a macroeconomist to bail me out. What he said.....

[Jonathan Day]

If my best friend's pockets contained a million dollars and I had absolute certainty of impunity, I doubt I would refrain from stealing the money.

Santa Claus, the tooth fairy, a practical economist, and an old drunk are walking down the street together when they simultaneously spot a hundred dollar bill. Who gets it? The old drunk, of course; the other three are mythical creatures.

Wasn't there a series of experiments in which students proved both to expect others to be more opportunistic and to behave more opportunistically themselves after taking an introductory economics course than before?

Regardless of impunity, I wouldn't steal the money, and frankly I doubt that you would either. The economists I have known and collaborated with are scrupulously honest. But we should stop debating economics and economists and go back to food.