Amartya Sen & the price of fish

 Amartya Sen tells the following story about what sparked his interest in Economics. Read it through and take a moment to firstly identify what elementary mistake he is making and secondly identify the reason we can be sure he is lying 

Sen's mistake is to fail to understand that what was happening represented price-discrimination. His lie was to suggest that he thought volatility was linked to Uncertainty- which is his own misunderstanding of a much later literature.

Markets are social phenomenon. In India, local vendors of perishable produce act like a cartel. There is a tradeoff between price and quality because inventory deteriorates rapidly. Customers are poor and price sensitive. This means that some items disappear from most local markets when there is a supply shock. Indians of the older generation were aware that good quality items only came into the local bazaar at festival time. Only richer localities could preserve inventory or turn around high quality perishable items fast enough. 

Sen may not have been aware of this sociological aspect to Indian markets. But he did study price theory at University in India. He should have known that the supply of fish was inelastic because, at that time, refrigeration was not a possibility. A football result could affect demand but not supply but this would be a transitory and localized phenomenon. 

Sen, even as a child, was a cretin because he did not realize that if football results were predictable, there would either be little interest in watching games or, at least, no cause for celebration at the outcome.

I suppose Sen has some hazy idea that volatility is linked to Knightian Uncertainty. This is not the case.  Indeed, in retail markets we would expect to see greater price rigidity the more Knightian Uncertainty obtains. But, in this case, there is no Knightian uncertainty whatsoever. There are only three possible states of the world- we win, we lose, we draw.

 Even if everybody has the correct probability distribution, there would still be price spikes if there were a convention of celebrating victories with fish banquets. Furthermore, fish sellers in the locality, who as a group have a local monopoly, will 'price discriminate' on the basis of the market segmentation Sen alludes to- viz. the 'common knowledge' as to which type of fish will confer extra utility for those celebrating their side's victory. The losing side might be offered a cheap price as a consolation for their loss. 

To be fair, Sen did not teach price theory. But people who don't understand price theory should not teach any type of economics. 

Was there really any price volatility of the sort Sen describes? No. The supply of fish was subject to exogenous shocks which caused volatility at the wholesale level. At the retail level, there was more quality than price volatility for institutional reasons. 

However, for socially sanctioned 'sumptuary consumption'- e.g. during festivals or other celebrations- there was localized price-discrimination by fish sellers who acted as an informal cartel. They understood that the utility of consuming your favorite food item goes up if you are celebrating. This also means sellers part with fresher and thus better quality fish because there has been an upward adjustment of the Muth rational market clearing price. 

However, you might buy cheap 'comfort food' if you are in the dumps- though this may be an afterthought once you have drowned your sorrows thoroughly. The fish will be less fresh and more highly spiced but, after a few drinks, that has its own appeal.

 Since one football club was associated with demand for one type of fish, fish-sellers could 'segment the market'. Sen might not have been able to understand this as a child. He might have asked 'why is this fish suddenly more expensive?' His Mum might have replied, 'the fans of such and such team want to banquet on their favorite type of fish. In their euphoria, they are willing to pay more and so these cunning fish sellers- who are all in league- are taking advantage of their elation.' Most kids have enough theory of mind to understand this explanation. They get used to parents saying 'we won't buy this for you now. We will wait till after the festival when the demand goes down.' This is an example of market segmentation by time. Sen never became capable of understanding even this simple phenomenon which is taught to High School kids. No wonder he was so atrocious an Economist that he got a Nobel for being a darkie.