Why restaurants make you wait so long

Felix Salmon, on the economics of waiting for a table at a restaurant:

… In theory, a no-reservations policy creates, in economic terms, a huge price hike for the restaurant’s customers: The cost of their wasted time and increased inconvenience has to be added to the amount at the bottom of the check. Such a policy should therefore result in less business for the eatery in question. In practice, however, things seem to work the other way: The more that a restaurant makes its customers wait, the more popular it becomes.

… what explains this phenomenon? The answer comes from an internalization of other economic concepts. First of all, there’s the idea that if something is selling out, it’s underpriced. There’s an hour-long line for falafels? In that case, they must be a bargain! People are waiting for over an hour to eat at Al di Là or Shake Shack? That must be an indication of quality!

What’s happening here is that restaurants are making their popularity visible and turning it into a signaling device. If you take reservations and you’re very popular, all that happens is that it becomes harder to get a reservation. If you don’t take reservations and you’re very popular, then everyone can see how popular you are — and all those people are likely to be curious as to what all the fuss is about. …

There’s also a behavioral-economics perspective to this: The more you invest into something, the more you tend to get out of it. That’s why expensive wine tastes better than cheap wine, even if you would have preferred the cheaper wine in a blind tasting. A $79 foie gras appetizer in Paris tastes that much better for being expensive. And once you’ve waited an hour and half just to be seated in a restaurant, you’re going to be more excited to eat its food — not to mention hungrier.

Retrospective: Inside Job.

(Full text. 11 September 2010.)

Analyze ‘The Inside Job’ using the lens of any TWO of the following 3 theoreticians: Simmel, Marx or Veblen.

Inside Job analyzes the 2008 financial crisis in a step-by-step approach. In ‘How we got here’, I observe Marxist elements—a crisis developed from structural contradictions. In tracing the blame to individuals, many economic actors, critics, and academics made comments that could have come out of Veblen’s mouth though perhaps with less flair than Veblen. 

Marxist theory of crisis deals with structural contradictions. Crises occur when relations of production no longer support economic growth and productivity. This is inherent in capitalism as surplus is extracted from the exploitation of labor and crises are thus inevitable that as that class relationship, one of conflict, is not sustainable along with growth. The 2008 crisis is also called the ‘subprime crisis’—a crisis of the sale of derivatives generated from indiscriminate lending. From a Marxist perspective, the need for loans illustrates the unsustainable nature of capitalism and one of its inherent contradictions. As capitalists seek greater productivity, wages are depressed, employment is reduced, and they are unable to actualize profits from production as the workers have no means to consume, thus the need for loans to sustain capitalism. 

Marx is not against capitalism. Instead, he views capitalism as a natural development and it is inherent in any system (a.k.a. mode of production) to have contradictions along class interactions. At critical levels, class conflict would cause a change in the system. Meanwhile, capitalism is a positive development as it enhances productivity and breaks down barriers between markets as capitalists seek greater profits. In late capitalism, however, the system is no longer productive. Inside Job traces the start of financialization to the 1980s when manufacturing in the U.S. declined (partially due to the fall of the Berlin Wall and the opening up of China)—it is irrational to continue manufacturing in the U.S. as profits are not maximized (i.e. cost is not minimized). The development of the financial market can then be construed an attempt by the capitalist class to prolong the system but it is irrational and is based on more exploitation which only serves to further imbalance the system. 

Inside Job presents instances in which regulators chose to not regulate even though they were warned of the potential crash. The way for there to be an illusion of growth is profit-making and for that to happen non-capitalists have to be exploited; policies favoring regulation would lessen exploitation but lowers profits and capitalism would then fail. Yet, the crash now is a result non-regulation: both ways, capitalism cannot survive—the inherent conflict calls for systemic change.

Veblen agrees that the capitalism is characterized by exploitation of the lower classes by powerful capitalists. However, his explanation for the origins of capitalism differs from Marxist materialism. Marx proposes that modes of production shape social relations, but Veblen can be said to suggest that social relations and individual agency shape structure. Veblen assumes that individuals seek status and prestige. In a primitive society, those are gained through manual labor but when the society becomes predatory, as when it seeks expansion through acquisition, predators gain status. One way to gain status and prestige is to emulate and thus the structure is reinforced as more people begin to emulate the predatory class and exploitation (predation) is aggravated. Financial capitalists belong to the predatory class.

The predatory class is characterized by conspicuous consumption (both individually and vicariously) and leisure. Predators gain through capturing productive units for the sole purpose of profit-making and do not produce anything of value, anything that would contribute to long-term growth. The Inside Job labels subprime mortgages ‘predatory loans’, directly referencing the predatory nature of the financial market. The ‘financial product’ is not value-added as it passes through the system—essentially passing on bad loans to more and more people and at each level the deal-maker gains from selling nothing real.

Why are these predatory capitalists part of Veblen’s leisure class and not just exploitative capitalist class of Marxist theory? Marxist theory describes capitalists who are rationally trying to maximize profits—people who would make money to gain more money. The economic actors portrayed in the Inside Job do not care about making more money but the SPENDING of money—the display of wealth. This is observed in their habits, for example hiring prostitutes for $1000/hr. There is a need to display wealth through conspicuous consumption as that is the manifestation of status and prestige—money is the means to an end, not an end in itself. As Veblen notes, the competition is not between individuals but also between institutions. The defense of Marxist rationality does not even survive at the institutional level. As an interviewee commented, when the interviewer noted that one of the banks had 6 aircrafts, it is all about having more and bigger things than the other banks.

Veblen talks about the ‘dead weight of funded capital’ which refers to the inertia to change experienced by developed societies as they fall prey to their own success in a paradox of development. In a socially advanced society, existing physical and social infrastructure deters change even if it is rational. Mancur Olson, in The Rise and Decline of Nations, develops Veblen’s idea and notes that powerful economic coalitions have access to central power. This capture of the state is observed in many instances illustrated in Inside Job. Interest groups influence decision-making and there is a revolving door of employment between politics/government and the financial sector. As Robert Gnaizda comments in the movie, ‘it’s a Wall Street government.’

Like Marx who values productivity, Veblen praises engineers whose creations benefit the society. When asked why corruption is more prevalent in finance than in companies such as Google, an interviewee in Inside Job replies that the high tech industry is creative (implying that it thus does not have to resort to corruption); profits are reaped in the long run and are dependent on the long term well-being of the company. In comparison, the bonus culture in banking rewards short term individual profits and these individuals get away with their wealth intact when crisis strikes; there is no vested interest in safeguarding the companies or the investors. 

The solution is change. Marx would foresee that the engine of change will be a revolution fuelled by the unhappiness of the exploited class. There is little hint in Inside Job that that is indeed happening. The closest we get to that Marxist idea of class conflict is in the lawsuits against financial institutions. The exploited come together, forming a kind of class consciousness Marx argues is needed for there to be revolution, to go against the financial capitalists but they are still working within the legal system which complements capitalism (think compensation).

What the interviewees in the Inside Job propose instead seems more Veblenian. Andrew Sheng asks the question at the end, ‘Why should real engineers who build real bridges be paid less than financial engineers?’ Veblen calls for a technocratic revolution—for the engineers, who can produce real growth, to take the lead. Even if this is not a political lead, real industries that focus on innovation and creation such as based in Silicon Valley should become the main economic engine. If being a creator becomes high-status, then more would emulate and economic growth will be stimulated. In this way, capitalism is prolonged as engineering feats increase productivity and help the U.S. maintain its economic leadership.