Ugliness in a Beauty Contest

Whenever people mention Keynes nowadays–and it's often–it's as a first-string linebacker to bulk up their op-eds. And what invariably happens with linebackers happens to Keynes as well: the true skill disappears behind a truncated rundown of highlights. I've often thought we dismiss (or eulogise) Keynes-as-macroeconomist without circumspection. But, I think the real tragedy is our collective amnesia towards his microeconomics. In one of his more cogent observations, he articulates a common constraint on individuals, the Keynesian Beauty Contest.

The problem is, in sum, being forced to make decisions based on aggregate decisionmaking–with everyone else being forced to too. Think about it in terms of an alternate-world American Idol. There, each judge would be tasked with voting for the contestant most popular with his peers. But let's throw in a wrinkle: the judge most frequently correct in assessing this wins a raise. That means, every evening, the judges would be searching for an average–funnelling down the diversity of opinions into a rough abbreviation. And yet, the judgments that we'd hear would never probe that mean at all! The very fact that each judge knows what his counterparts seek–the aggregate mean–means their voting behaviour would account for that. They'd be voting to ascertain the average prediction of the average. And in fact, it iterates recursively. Knowing that decisions turn on averages of averages, the judges factor that in too.

Which brings me to the ugliness. Every actor here lacks his purported motive: teasing out demand for Idols. And even weirder: the more intense the competition, the farther away it drifts. The more successions we master–the more the forecasts tell–the less the reasons matter why we're locked in the arms race to begin with.

Now, this seems like an unlikely scenario. What is common, of course, is the supply-side responding to trends; suppliers do that all the time. But what's less familiar is the supplier selling his wares exclusively to competitors; what's rarer still is his sole demand coming from competitors; and what's rarest of all is his exchange for goods that all other consumers would consider cross-elastic to his, because he, by contrast, prefers those over his own.

But, you see, this happens all the time. Consider the infamous Abilene Paradox. Each "supplier," i.e., a source of opinion, offers a good (his share of the collective will) demanded by all the others. Likewise, each supplier prefers it to his own: every good that's non-domestically produced provides some untapped insight into this aggregate he never had before. Each supplier competes directly with the others: A's slice vies with B's in C's eyes. And C, in probing for an aggregate defined in equal parts, treats A's slice cross-elastically with B's. This lays the groundwork for a beauty contest--and the ugly arms race takes its course.

Yes, these are humans. And yes, their institutions aren't the same. But economies rest on the interplay of their parts; and so do the groups and markets that compose them.