Traffic Jams and the Free Market

Rush hour traffic in Raleigh gives the mind a lot of time to idly wander, and so was born a thought along the lines of Daniel Klein’s Rinkonomics: the trafficonomy.

Traffic jams are in fact a lot like the free market. This is not a pejorative comparison, as if we could alleviate the jam. I say traffic jams and not traffic in general because most of us live in developed economies. An open road isn’t much of an economy; it’s more akin to picking up plenty which naturally exists all around you. In the market, a multitude of people compete with one another for scarce resources with the goal of achieving their own betterment. In a traffic jam, a multitude of cars are competing with one another for scarce road space with the goal of getting somewhere.

A common feature of all traffic jams is that open space doesn’t last very long. If it exists, a car from behind will move into it to better his own position. This has the result of equalizing all the lanes on the road: people take opportunities, which means you as an individual are about as likely to get ahead by staying in your own lane as you are meticulously moving around lanes, as experience nearly always corroborates. The wide opportunity-seeking spreads the benefits of moving forward over all those who seek them, which though there are some who move ahead a great deal and some who might even do worse than if they had stayed put, results in an average benefit that is rather small.

What this process does do, however, is optimize the pattern. Though traffic jams are often seen as the result of non-optimality, this is an exogenous non-optimality of the system. Given the roads, a traffic jam is always pareto optimally or near pareto optimally organized. There is no one who could be further ahead without someone being correspondingly further back, and no concerted effort among the drivers or ulterior design from above could improve the overall condition. The ambition of the individual drivers necessarily organizes it this way.

The economy works much the same way. People cannot cruise through life, picking their spoils and arriving at their destination without resistance, as through a highway at midnight. We encounter people after the same spoils we are after, and like a Hummer cannot legitimately plow over the Prius in front of him, we must settle such disputes without coercion.

A space in the economy, much like a space in traffic, is a practical invitation for someone to come in and take it. If it is a big and previously unnoticed space, many people can flow into it until the benefit of moving to that area is no longer worth the benefit. There is no more profitable space left. True innovation, much like finding extra space on the road, is comparatively rare.

But even where there are no spaces, a car can still better its position on the road. If the neighboring lane is moving faster than its own, the driver can force its way into the other lane. The movement of more ambitious drivers will tend to equalize the speed as well as the density of the lanes. But there are costs of doing so (risk of the new lane slowing down, ire of other drivers) which keep enough people out that lanes do indeed move faster than others at certain points.

In the same way, even when one has no capacity or inclination to innovate, one can still turn a profit by investment or speculation. If one sees that a certain commodity will be more expensive in the future than it is now – that is, if the neighboring lane seems to be moving faster than your own – then one can buy hordes of that commodity to sell later, moving into the other lane. This has the double effect of raising the current price and lowering the future price when it is sold – roughly equalizing the current and future price, as more people jump on. Thus, like shifting lanes in a traffic jam, expectation is already reality. By the time all but the first few speculators realize what has happened, the price is already at its expected level. Like any driver will tell you, moving around in a jam is usually useless and often detrimental. This is why index funds – unmanaged and constant bundles of stocks – do as well and often better than more meticulously managed funds. It’s exactly the same mechanism governing both traffic and the market.

As a last point to flesh out the analogy, the road itself is not the economy, nor is it the institutions that govern the economy. The road is the earth, and the physical state of its resources. Just as the road is exogenous to the driver, so the earth is exogenous to the economy. We can no more create more raw materials than a driver can create more road. Poorer countries will be more “jammed”, so to speak, than richer countries, as there are fewer resources to work with (though free trade can alleviate even this problem to some degree). But just as a traffic jam allocates road space optimally given the road, the free market allocates resources optimally given the earth’s resources.