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Hayek's Academic Triumph?
For years, the lefty leanings of the university have riled conservative activists. (This was recently linked on H&R, but be sure to read Jesse Walker v. David Horowitz here.) Now a few left-leaning economists are complaining that their discipline has been colonized by moustache-twisting free marketeers. According to the New York Times, Milton Friedman reigns supreme in econ departments across the country, and the Frankfurt Old Schoolers are being ignored:
For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.
But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the country, and practiced in Washington, questioning the profession's most cherished ideas about not interfering in the economy.
I find this very, very difficult to believe. A bit of meaningless anecdotal evidence: My alma mater's econ department was, one aggrieved professor told me, openly hostile to his pro-market views. And since then, it seems little has changed. According to its website, the department "has a highly distinguished faculty working within several different traditions in economics: Marxian, post-Keynesian, institutionalist, historical, non-Marxian radical political economy, and feminist economics." At UMass, the Hayekian revolution appears to be in its Provisional Government stage.
Economist and blogger Alex Tabarrok is also skeptical:
It beggars belief when economists at Princeton, Harvard and Berkeley claim that they are lone voices in the wilderness boldly striking heterodox positions against the hegemony of "free market economics."
David Card, for example, says "You lose your ticket as a certified economist if you don't say any kind of price regulation is bad and free trade is good." Really? Card and Krueger's famous paper on the minimum wage was a 1993 NBER working paper published in the AER in 1994. What happened then in 1995? Was Card decertified, drummed out of the profession, vilified by his peers? Hardly, in 1995 David Card was honored (deservedly imho) by the American Economic Association with the John Bates Clark medal.
Full post from Marginal Revolution here.
|7.12.07 @ 1:02PM|#
Those who doubt the naturally beneficial workings of the
market are considered either deluded or crazy.
I want to live in that world.
|7.12.07 @ 1:04PM|#
Kind of an aside, but how anti-intellecutal has our society
become when we insist that evidence that our view is correct is
that the foremost experts disagree with us?
I guess it's mostly conservatives who do this, but still...
Timothy|7.12.07 @ 1:09PM|#
If you're a Marxist you're a sociologist, there's not a bit of economics in you. And that's fine, be a sociologist then, you're welcome to it...but "feminist economics"? "Non-Marxist radical political economy?" Please, call back when you're actually doing some work.
|7.12.07 @ 1:13PM|#
Newsflash: Reason Magazine Acknowledges Wide Divergence of Views
about Economic Policy Among Professional Economists, Admits that
Previous Assertions about Non-Laissez Faire Positions Being Based
on Ignorage of Economics Were Bogus
Breaking...
Breaking...
Edward|7.12.07 @ 1:14PM|#
Becoming a new orthodoxy is a terrifying prospect for the bold readicals of capitalism, isn't it?
|7.12.07 @ 1:17PM|#
Anyway, Professor Duncan Black, an economist who writes a blog, has written a few posts about how right-leaning economists tend to be more politically active than left-leaning economists, which has produced an inaccurate belief among the public and politicians that there is a broad consensus among economists on political issues, when none exists.
ed|7.12.07 @ 1:17PM|#
I'm not an economist nor do I play one on the intertubes but my understanding of economics is that a free market is good when times are great and bad when times are rotten. At least that's what Katie Couric tells me.
|7.12.07 @ 1:19PM|#
Timothy-You're right to a degree, there is a tendency for sociologists to latch onto "economists" who have little following in economics. But for all his problems, and I would be ready, willing and able to discuss them, Marx is, and should be taken seriously as a social scientists and economist. What libertrians often seem to have difficulty in is acknowledging that while Marxist economics is not taken all that seriously in the field, niether is classical economics taken as orthodox. In fact, the recent upsurge in institutional economics (see Douglas North et al.) points to a resurgence in "sociological economics."
|7.12.07 @ 1:25PM|#
As a recent graduate from an econ. PhD I can actually contribute
something useful here, as opposed to snark:
While in my experience most academic economists lean to the left
politically, as much as the next prof, almost all would agree that
markets worked. This is particularly true of macroeconomists, who
have long since rejected Keynes and all his works and all his empty
promises, even if the textbooks haven't caught up. There is no
Phillips curve, inflation should be low (though we still argue
about what "low" is), and stable as possible. Nobody talks about
fine-tuning any more. Milton Friedman does reign supreme
there.
Among the microeconomists, it's not so true. It's easy to show that
on paper a certain trade/industrial policy might improve welfare
(for example) the real world's far more complicated. But your
average trade/IO guy knows the world's more complex, so he'll
invariably favour free trade and as little interference as possible
in markets in practice.
UMass is, thank God, an outlier, a backwater whose function is
mostly to keep Marxists off the streets.
Oh yes, economists were skeptical of Card-Kreuger. It didn't take
long for other labor economists (including David Neumark, at
Michigan State when I was there) to use improved data to debunk
Card-Kreuger with relatively little trouble. The debunking, of
course, wasn't as widely reported by non-economists with axes to
grind.
|7.12.07 @ 1:27PM|#
Marxist "economist" = intelligent design "scientist".
I'm comfortable with that.
LarryA|7.12.07 @ 1:36PM|#
Reason Magazine Acknowledges Wide Divergence of Views about
Economic Policy Among Professional Economists, Admits that Previous
Assertions about Non-Laissez Faire Positions Being Based on
Ignorance of Economics Were Bogus
Well, no. A free market economist would want all the other theories
taught in universities so knowledge of their principles becomes
widespread and the free market in ideas can sort out which
philosophies work in the real world.
Truth never fears competition.
D.A. Ridgely|7.12.07 @ 1:39PM|#
Let me see if I read Ottawa Reader's comments correctly: although academic economists lean left in their personal politics, macroeconomists are convinced that markets work while microeconomists favor free trade. Is that about it?
brian|7.12.07 @ 1:41PM|#
An Ottawa Reader
...This is particularly true of macroeconomists, who have long
since rejected Keynes and all his works and all his empty promises,
even if the textbooks haven't caught up.
I don't think so. Many economists may not be old school Keynesians,
but many are New Keynesians, who find that there are many reasons
why prices may adjust slowly (due to menu costs, efficiency wages,
etc.). This doesn't mean they're raving loons--many sensible
economists fall into this category, such as Greg Mankiw (a
libertarian by the way, who worked as W Bush's economic advisor
until he lost his job for stating his views on outsourcing).
Milton Friedman has had a profound impact on economics, and it
surely has shaped the thinking of economists, right and left.
Partially as a result of Friedman's work, economists do believe
that markets are wonderful, but that doesn't mean we should ignore
their failures. In his book "Peddling Prosperity," Paul Krugman, a
self-identified liberal, even says that he thinks that capitalism
is the best system known to man. Pointing out its flaws and coming
up with ways to fix them is not socialism--it's making capitalism
even better.
//sorry, most of that was not directed at you. just something that
came out.
|7.12.07 @ 1:44PM|#
I'm a firm believer in the Bullshit Principle, which states that
the more people you bullshit, the more you can pass your personal
beliefs off as "science."
Maybe it's just my own negative experiences with the subject, but I
never found any class I took in economics that had an element of
political economy to actually involve any sort of scientific
principle at all. It's all anecdotal and motivated by "fairness"
and shit like that. It should stop being called an economics class
and start being called a policy class on how to fuck up our economy
in the most politically acceptable way possible.
|7.12.07 @ 1:51PM|#
"questioning free-market orthodoxy is akin to expressing a
belief in intelligent design "
Cheap shot. I'll try one:
Listening to the NYTimes on anything economic is believing that . .
. hell . . . communism worked.
Matt|7.12.07 @ 1:51PM|#
In my experience with the undergraduate economics department at
UVa, the professors seemed to be much less likely to preach the
dogma of the academic left than professors in other departments.
This is not to say that there was a lack of debate; however, the
discussions in my economics classes seemed on the whole more
reasonable and sensible than those in many other classes.
It is my understanding that in the Duke lacrosse case, the
economics department was the one and only department to issue a
statement against the presumption of the players' guilt. This,
along with my experience at UVa, leads me to believe that at at
least some of our leading universities the economics department
tends to reject the typical far-left academic agenda. I can see how
this would engender some hatred in the Times, one of the leading
purveyors of said agenda.
Russ 2000|7.12.07 @ 1:52PM|#
The Bullshit Principle is still subject to the law of supply and demand. Economists come up with all sorts of formulas and charts because the demand for bullshit is so high.
Timothy|7.12.07 @ 1:55PM|#
MNG: Sure, there's a lot of divergence even among the
neoclassical set about all sorts of topical issues. It's not like
Austrianism gets a lot of play in neoclassical circles either, for
instance. And, still, while there's not a ton of debate over things
like NAIRU and monetary theory there's still a ton of disagreement
between the Monetarists and the Keynesians over policy choices or
what constitutes a "market failure" and that kind of thing.
The reason I'd offhand reject Marx's economics is that its based on
the Labor Theory of Value, which is pretty absurd really. It's the
same reason that while Ricardo's early marginalist insights are
still relevant a lot of the rest of it isn't (Ricardo has like a
95% Labor Theory of Value). I do think it's important to understand
where Marx was coming from, and to acknowledge that some of his
insights weren't too terrible: Yeah, factory workers in industrial
revolution England got shafted pretty bad. Yeah, sometimes there
are unequal power structures that can lead to bad outcomes...but
the solutions Marx proposes are so patently ridiculous and so
obviously discredited by the 20th century that anybody who takes
them seriously, at this point, is either willfully obtuse or a
complete quack.
|7.12.07 @ 1:55PM|#
D. A. Ridgely:
Left wasn't quite the right word. Marxists were blissfully rare.
But if you'd asked, they might have called themselves liberal.
Certainly the Republicans were the exception. Anti-bourgeois
feelings were there, if you scratched the surface.
I remember talking to my adviser after she'd been in Hong Kong.
She'd hated it.
Me: Sure I thought Hong Kong was a paragon of the free market. I
thought you'd like it.
Chair: Well, if crass commercialism's your bag...
But she could say this and I wouldn't expect her to oppose free
trade in her capacity as an economist. It was rather a matter of
taste, of the sort found among the sort of people who spend their
lives as academics. She knew capitalism works, but if money was
something she heavily valued, she wouldn't have been teaching,
would she?
Timothy|7.12.07 @ 1:56PM|#
Well, and there are still some pretty hard-core Keynesians out there with their Phillips Curve and their whatnot. But they're a religion kind of like the folks who don't get when the Laffer Curve matters and when it doesn't.
|7.12.07 @ 1:58PM|#
It is our own society's obsession with controlling others that
even allows these economic divisions to occur. If you reject the
idea that we should even manipulate our economy or the actions of
others, studying the economy from the standpoint of "what policies
make capitalism better?"(puke!) is pointless, and the only
purpose of studying economics in the first place is for personal
understanding and gain.
Of COURSE other theories are going to surface that suggest that we
can somehow improve our current economy and lives through more
policy... how else do you secure your ego, self importance, and
sense of place in history? Without such a mechanism, what would all
these people do if they couldn't directly and indirectly impose a
giant drain on society?
|7.12.07 @ 1:58PM|#
Economists come up with all sorts of formulas and charts
because the demand for bullshit is so high.
Bingo!
|7.12.07 @ 2:01PM|#
But they're a religion kind of like the folks who don't get
when the Laffer Curve matters and when it doesn't.
When does it matter and when does it not?
|7.12.07 @ 2:17PM|#
A big reason why Friedman has had such a strong influence on economics is because the policies that he advocated... wait for it... WORKED!
|7.12.07 @ 2:19PM|#
Brian:
Many economists may not be old school Keynesians, but many are
New Keynesians, who find that there are many reasons why prices may
adjust slowly (due to menu costs, efficiency wages, etc.). This
doesn't mean they're raving loons...
Nobody said they were. Price-stickiness exists, as does
wage-stickiness. But are they powerful enough to be a major source
of unemployment, enough to make activist monetary policy worth it?
Most economists no longer believe price-wage stickiness is the
only, or even necessarily a major, cause of business cycles. We're
all supply-siders now in that regard. As a result most central
banks in the developed world focus on inflation now, not
unemployment.
Many of us don't like the menu cost idea, in part because the cost
of changing menus and lists prices isn't nearly as big as it'd have
to be to make prices as sticky as they actually are.
Timothy|7.12.07 @ 2:23PM|#
Joshua: That depends. It probably doesn't matter for fairly low marginal tax rates, or taxes below the revenue maximizing rate. Of course, whether the government should be trying to maximize its revenue is another issue entirely :-) I say they can always make due with less. Point is, anyway, that cutting tax rates won't always spur increased productivity, but I don't really think that's a reason for not cutting taxes. "The government will just issue debt instead, which is the same as taxes in the future" is a better argument against cutting taxes...I don't know how to address that one really, it's probably true.
brian|7.12.07 @ 2:28PM|#
Reinmoose
how else do you secure your ego, self importance, and sense of
place in history? Without such a mechanism, what would all these
people do if they couldn't directly and indirectly impose a giant
drain on society
I think you hit on a very important problem here. It's so important
because people may not realize that they are affected by it. I've
noticed this myself as well.
Of COURSE other theories are going to surface that suggest that
we can somehow improve our current economy and lives through more
policy...
That's true, but all but the most ardent anarchist believes that
government can make the system better. It obviously starts with
defined property rights, which require government to enforce. It
then moves on to intellectual property rights (which many H&R
commenters seems to oppose, to my surprise), which are necessary
for people to be able to gain from their innovations. Milton
Friedman argued for government to correct "neighborhood effects,"
or externalities in today's economist lingo. While many of today's
libertarians seem to oppose Friedman's neighborhood effect
principle (I stand with Friedman on the issue), the concept of
property rights is government's way of making capitalism work
better. The same goes for neighborhood effects.
Basically what I am saying is that government makes capitalism
work. True, regulations, subsidies, and taxes hurt markets nearly
every time (Pigouvian taxes being an important exception), but
without government enforcing property rights and the like, markets
wouldn't work at all.
brian|7.12.07 @ 2:38PM|#
An Ottawa Reader
Nobody said they were. Price-stickiness exists, as does
wage-stickiness. But are they powerful enough to be a major source
of unemployment, enough to make activist monetary policy worth it?
Most economists no longer believe price-wage stickiness is the
only, or even necessarily a major, cause of business cycles. We're
all supply-siders now in that regard. As a result most central
banks in the developed world focus on inflation now, not
unemployment.
On the first part, Friedman put forth a strong argument against
active monetary policy (the fool-in-the-shower critique) which
makes a lot of sense. However, I feel that at the same time this
argument is to some extent self-contradictary. He tends to argue
that money is neutral, so the Federal Reserve cannot do anything
except create inflation. At the same time though, he blames the Fed
for the Great Depression. If the Fed can affect the economy, then
why can't it learn from the fool-in-the-shower problems of the past
to make effective policy now. If it cannot affect the economy, then
inflation really shouldn't matter, since prices adjust immediately
anyway, so what's the problem? Anywho, I'm rambling. Onto your next
point.
Many of us don't like the menu cost idea, in part because the
cost of changing menus and lists prices isn't nearly as big as it'd
have to be to make prices as sticky as they actually
are.
Greg Mankiw disagrees:
http://www.jstor.org/view/00335533/di951865/95p0118v/0
This is the famous menu cost paper where Mankiw argues that even
low menu costs can have disproportionately large effects on
price-stickiness.
|7.12.07 @ 2:42PM|#
It then moves on to intellectual property rights (which many
H&R commenters seems to oppose, to my surprise), which are
necessary for people to be able to gain from their
innovations.
FALSE. Fashion designers gain from their innovations despite having
no IP protection. So do many other artisans (dance choreographers
e.g.) and so would all others. IP is just a government created
monopoly weighing down the invisible hand of the market.
|7.12.07 @ 2:46PM|#
...but without government enforcing property rights and the
like, markets wouldn't work at all.
Perhaps. It's a good argument, but I think they'd work in part, if
for no other reason than they are the natural state of economic
transaction and by their very nature must work in some way. The
property rights (physical or intellectual) are designed to give
competitive advantage to the individual against other individuals
based on their own merit, as opposed to other amendments to
"improve" capitalism (like a minimum wage, which joe will tell you
is a fix for a "market failure"……), which are designed to give
undue advantage to the individual over those who out-merit him/her.
This isn't worded well, but I hope my intention comes across.
My biggest beef is that the beast has grown to unmanageable
proportions, which is only capable of self propagating. Higher
education has a stranglehold on the Democrats (and increasingly
Republicans), which they use to increase funding and other
opportunities for them to study more bullshit so they can have more
influence, get more funding, etc. etc. etc. One of the first things
we should learn as economists is "what is good for the individual
is not always good for the many," and yet we consistently ignore
this principle in an effort to use its violation to gain the favor
of the government.
brian|7.12.07 @ 2:58PM|#
Warren
FALSE. Fashion designers gain from their innovations despite having
no IP protection. So do many other artisans (dance choreographers
e.g.) and so would all others.
Maybe in an imperfect market. But the incentives are all wrong. If
markets were perfect, profits would be driven to zero where P=MC.
So if I invent the new Whosawhatsit at a large fixed cost to
myself, and everyone else comes in and copies the product, driving
their profits to zero, my profits are negative--i.e. I lose time
and money spent on inventing it. If I know that I'll lose money and
time by inventing the next big thing, why would I invent it? And
innovation in the economy comes crashing to a halt.
In an imperfect market, people will be able to make some positive
profit on their inventions, but the incentives are still wrong. If
my invention would bring great wealth to the world, but I only get
a tiny share of it because everyone gets to copy it, it still may
not be worth it to invent it. So innovation might not crash to a
halt, but it's definitely hindered without some type of way for me
to claim ownership.
Now I'll admit, giving patent-holders a monopoly on production
isn't optimal. That's where the idea of prizes for innovation came
in, but that's not the best solution either since it's difficult to
reward people in proportion to the quality of their invention. To
be honest, I don't know of the best solution. It's of great
interest to me though.
uncle sam|7.12.07 @ 3:01PM|#
I don't thik it helpful to say that markets are successful,
anymore than to claim that there is market failure. The market just
is, it's an arena, a realm. It rather like saying the physical
nature of the universe succeeds.
What we can say is whether political intervention succeeds, and
there's a lot to discuss about that. Sometimes, political
interention in the market seems to work, but upon further analysis,
we learn that it may have worked for some at the expense of
others.
The matter to address is how people participate in the market, that
is, whether their participation is done ethically or not.
Political intervention should always be regarded with suspicion as
the nature of it, if unmodified by collective sanction, is rather
the same as the criminal who robs people to feed his family.
The purpose of political intervention is to permit immoral behavior
while minimizing personal consequences. Guilt free extortion.
My definition of extortion: To gain a lesser value by threatening
destruction of a greater value.
brian|7.12.07 @ 3:02PM|#
Reinmoose
Maybe it's the afternoon slump, but everything in your post except
the quoted part went right over my head--sorry. So I'll just
respond to this part.
Perhaps. It's a good argument, but I think they'd work in part,
if for no other reason than they are the natural state of economic
transaction and by their very nature must work in some
way.
In absence of government enforcement of property rights, I could
see them working in part--but they would be incredibly easy to
break. It's true that they are the natural state of economic
transaction, but I don't think that is due to some type of "natural
law" (which I don't think exists in general). Instead, I think they
are the "natural state" simply because we have lived in a world in
which government has insured that. Maybe this makes me sound like a
statist (which I assure you--I am not), but I just can't see most
property rights being protected without a government.
|7.12.07 @ 3:13PM|#
Political intervention should always be regarded with
suspicion as the nature of it, if unmodified by collective
sanction, is rather the same as the criminal who robs people to
feed his family.
The purpose of political intervention is to permit immoral behavior
while minimizing personal consequences. Guilt free
extortion.
I agree with your assessment of the market as being a natural
phenomenon and all that.
The way I see it, political intervention should be suspect
because:
1. We know that political intervention for the benefits of some
must almost always (or always) result in some sort of expense for
others, and importantly almost always result in benefits for those
not immediately targeted by the policy. Therefore, the admitted
intended benefactors of a policy are not always going to be the
actual benefactors
2. If those implementing political intervention don't know or can't
accept this, then we have an idiot in power.
uncle sam|7.12.07 @ 3:14PM|#
Maybe this makes me sound like a statist (which I assure
you--I am not), but I just can't see most property rights being
protected without a government.
You should check into some Mario Vargas Llosa, I think it was he,
whose investigations into Soutth American economies detail the rise
of property rights and entitlement which arose among tenants of
unofficial slums.
What we might consider here is the possibility that humans can
develop ways to limit certain types of behavior (those which
violate rights) without a political hierarchy and sanctioned
extortion.
|7.12.07 @ 3:18PM|#
Michael C. Moynihan, if you are not sure if Milton Friedman has
reigned supreme in economics departments then you might not be the
right person to be disputing that Friedman has reigned supreme.
Cause apparently, you know little about what is being taught and by
whom.
You should have branched out from Reason and read TPM Cafe and Dani
Rodrik and Paul Krugman and Brad DeLong last month.
The New York Times article is behind the times. Reason is behind
the times behind the times.
Can we have better Libertarians please?
|7.12.07 @ 3:20PM|#
Actually Reason is behind the New York Times which was behind
TPM Cafe which was behind the Nation where Chris Hayes started this
discussion.
I do find it appalling you know none of this and didn't even
consider researching it before posting.
Better Libertarians please?
|7.12.07 @ 3:20PM|#
Maybe it's the afternoon slump, but everything in your post
except the quoted part went right over my head--sorry
It's ok, in rereading the first paragraph of that post and it
doesn't make much sense to me either. :)
Re: markets being 'natural law' or whatever, I would refer to what
uncle sam said. Maybe we're using different definitions? I figure
that whatever way that people function or exchange goods and
services in a naturally functioning economy is "the market" and so
I define it as 'natural law.' I'm not sure what other definition
you could use for it... maybe you're trying to get at the
usefulness of the natural economy to produce desirable outcomes
without some degree of protection of property rights? Which isn't
an argument about whether or not markets are the natural state of
economic transaction, but rather an argument about whether or not
anarchy could produce an optimal economy.
I think I need some sugar right about now...
OH LOOK! TAFFY!
|7.12.07 @ 3:30PM|#
Jonathon H,
Feminist economics is economics, applied to questions that involve
gender.
For example, a feminist economist might study whether the pay gap
is wider in certain industries or regions.
It's really not a plot to make you punch your house.
x,y|7.12.07 @ 3:37PM|#
Partially as a result of Friedman's work, economists do
believe that markets are wonderful, but that doesn't mean we should
ignore their failures. In his book "Peddling Prosperity," Paul
Krugman, a self-identified liberal, even says that he thinks that
capitalism is the best system known to man. Pointing out its flaws
and coming up with ways to fix them is not socialism--it's making
capitalism even better.
I wonder how many of these ideas involve government meddling in my
life.
x,y|7.12.07 @ 3:48PM|#
Feminist economics is economics, applied to questions that
involve gender.
For example, a feminist economist might study whether the pay gap
is wider in certain industries or regions.
Wouldn't this be gender economics?
Feminism, as far as I understand it, has a POV (loose or strong
depending on who you ask).
Akira MacKenzie|7.12.07 @ 3:54PM|#
I guess it all depends on how you define "free market." I suppose to hard-core leftist, anyone to the right of Trotsky is running-dog, robber- baron, capitalist pig dog.
brian|7.12.07 @ 4:02PM|#
Reinmoose
maybe you're trying to get at the usefulness of the natural economy
to produce desirable outcomes without some degree of protection of
property rights? Which isn't an argument about whether or not
markets are the natural state of economic transaction, but rather
an argument about whether or not anarchy could produce an optimal
economy.
Yes! That's exactly it. Thanks for making that distinction. Maybe I
wasn't clear about it--not just in writing, but in my own
head.
Anyway, that's exactly what I'm saying--that anarchy wouldn't
produce an optimal economy because property rights would not be
sufficiently protected.
Further, I think markets are the natural state of transaction
assuming property rights are unabridged. I just
don't think that that assumption holds in anarchy.
uncle sam
I know nothing about Mario Vargas Llosa. I'm wikipedia-ing him now.
Thanks for the tip.
brian|7.12.07 @ 4:06PM|#
x,y
I wonder how many of these ideas involve government meddling in my
life.
A legitimate concern. However, doesn't the government's protection
of property rights involve interfering with your life as
well?
Anarchists would say yes, so therefore the government cannot
enforce property rights. Libertarians would say yes, but it is an
acceptable price to pay for property rights.
I'm in the latter group.
uncle sam|7.12.07 @ 4:10PM|#
In duscussions of 'the market', it is easy to fall into the trap
of convention. The idea af market success and failure implies the
expectations of the speaker with regard to
desirable and undesirable outcomes.
Yes, we'd all like to see an end to poverty and freedom and justice
for all, but that is not the function of the market. The market is
not a created or evolved thing that has a function, but rather, is
the outcome of human behaviors in society.
The proper place for using terms failure and success is in
evaluating human behaviors which may be organized to achieve
specified goals.
Hence, the "War on Poverty" can be seen to have failed if poverty
continues to exist or increases, and even if poverty diminishes, we
would be hard put to be certain that such a war was the actual
cause rather than coincidental.
So when people speak of 'market failure' we should recognize that
they are referring to some outcome they desire without actually
doing anything themselves to bring it about, or their own failure,
if they have done something toward that goal.
One of the valued features of a free market, is that if someone
fails to effect said outcome, someone else may come along to
achieve the desire result.
|7.12.07 @ 4:38PM|#
I don't think so Uncle. I get the impression that market failure is well-defined with respect to measurable outcomes, usually regarding to efficiency, productivity, price, competition, and measurable well defined constructs like that.
|7.12.07 @ 4:49PM|#
The idea af market success and failure implies the
expectations of the speaker with regard to desirable and
undesirable outcomes.
The strictest definition of market failure is entirely
self-consistent and grounded in reality. A market fails when the
aggregate benefit to the participants of a market is not positive
or when the market does not come into existence even though the
benefit to the participants would be positive.
These are actually rare in the real world -- increasingly so every
day because new technologies allow better Coasian solutions -- so
all claims of market failure should be examined very carefully. But
market failure is a real thing.
|7.12.07 @ 4:54PM|#
Note that if you allow for externalities' involving those not
willingly in the market, you can label more conditions market
failures. Again, though, even these are rare.
But we all can agree that "the outcome of the market isn't what I
wanted" is a useless and outright harmful definition for market
failure.
uncle sam|7.12.07 @ 5:13PM|#
In which case, I expect they are indicating the failure of some
localized aspect, ie. the failure of participants to account for
all factors, the intervention of catastrophes, the lack of
knowledge. But in all such cases, it is not a failure of 'the
market' but an indication of human fallibility.
I am, in fact, implying that it's an erroneous concept which can
give people the idea that 'the market' is flawed, flawed in such a
way that requires 'fixing'.
What usually happens to be the case is that some political force
has distorted the correcting properties of the market and place the
blame on 'the market'.
Please, anyone, an example of "market failure".
|7.12.07 @ 5:20PM|#
Ancdotal evidence here from the university of colorado...
I'm a math and linguistics major but they make you take a bunch of
social science classes before you graduate. I'm finished with them
all, butI hated every one because every professor was a fucking
socialist. In writing, literature, and geography. It was just
assumed that government should interfere in the economy to create
greater equality. The questions were always phrased to make the
debate over how much government should do, not if it should do
anything it all.
My Geography book, when talking about Mao-Tse Tsung's reign, goes
on for paragraphs about how under his government improved literacy
and woman's rights. The famine that killed TENS OF MILLIONS of
people gets a line or two.
When mentioning the poverty of Latin America, it says that except
for a few well off countries like Barbados and Cuba most of the
rest are poor. Out of curiosity, I looked up the GDP per capita of
Barbados and found it to be $17,000 a year. Cuba's was $3,000,
sometimes less then other places the book made look like third
world hell holes.
And out of curiosity, I looked up Pinochet's name in the index. The
only information we are given about him is the CIA helped him gain
power and under his reign many were "tortured and killed for
protesting the loss of democracy". The economic impact of his
administration is given no mention.
The one exception to this indoctranation was my economics class,
were a professor with a PHD from Yale and a heavy Sweedish accent
showed us in graph and with a confidence that it was scientific
fact that free market policies led to the gretest well being. I
generally got a postive view of economics and decided that it was
the one social science where the lunatics were in charge.
I still hold on to the hope that the current state of academia is
just a passing phase of our civillization and truth will win out in
the long run.
uncle sam|7.12.07 @ 5:22PM|#
We can look at it another way.
If we think of the market as an evolutionary force, then, as in the
process of biological evolution, there are many results that don't
work out, but there are those successes that take hold and improve
matters over time.
So, it's like saying evolution is flawed because there are failures
in the competition for survival. Well, yeah, but that is how
evolution works.
The market, like evolution, is a trial and error process. If there
were no flawed outcomes in evolution, then we would have to give
serious consideration to a divine hand in the process.
Similarly, when people see flawed outcomes from market processes,
the imagine some sort of divine political intervention can keep
those processes on a smoothy, steady course.
|7.12.07 @ 5:25PM|#
But in all such cases, it is not a failure of 'the market'
but an indication of human fallibility.
It is an error to disregard the praxeological implications of being
human.
Please, anyone, an example of "market failure".
A company plans to build a factory. If the costs of the pollution
of the factory to those living near it exceed the benefit of the
factory to society, the factory should not be built -- its
construction and operation decreases the wealth of the world. If,
however, the benefits of the factory to society exceed the costs to
those living near it, it should be built, from the standpoint of
economic efficiency. However, those living near the factory should
be compensated out of the benefits of the factory. The people near
the factory are then paid more than the pollution troubles them,
the consumers of the factory product get something worth more to
them than the price they paid for it, and the operators of the
factory get a surplus for putting the whole deal together. Wealth
is created, and all are better off.
Unfortunately, it is usually hard to properly pay off the scattered
neighbors with their varying tolerances for the pollution. The
factory does not get built. The world does not get the benefits the
factory would produce. The market has failed.
uncle sam|7.12.07 @ 5:25PM|#
Grand Chalupa
I'm certain you meant 'where the lunatics were not
in charge'.
uncle sam|7.12.07 @ 5:32PM|#
Unfortunately, it is usually hard to properly pay off the
scattered neighbors with their varying tolerances for the
pollution. The factory does not get built. The world does not get
the benefits the factory would produce. The market has
failed.
Actually, that's an illustration of how the market works, or should
work.
An appropriate response would then be to: find a better location
for the factory; figure out how to reduce the pollution; or figure
out an efficient mode for paying the neighbors; something else
entirely; or some mix of the above.
I wouldn't call that a market failure, but rather a failure of the
participants to find a solution that works in that
instance.
uncle sam|7.12.07 @ 5:46PM|#
Benefit of the factory = X
cost of building/operating the factory + compensating for pollution
= Y
If X > Y then the factory wil be build, as the difference is the
profit for which the factory is built.
If X < Y, then the factory should not be built, as the costs
outweigh benefits.
See, the market isn't responsible for the values of X and Y, it
determines their values through the interactions of the
participants according to their priorities.
|7.12.07 @ 5:51PM|#
Presume that, for whatever reason, the factory cannot be
relocated and pollution cannot be decreased while still producing
product that is a net benefit for society.
Presume too that there is a set of prices per neighbor that will
successfully buy off all the neighbors' distastes for the
pollution, but that the prices are different for each different
neighbor, and it is not obvious what the price is for each
neighbor.
You can offer suggestions for how to figure the prices out and
compensate the neighbors. But if this factory does not get built,
the market in this instance has failed.
Note, too, that if the government steps in and says "Suck it up!"
to the neighbors, the result could still be of net benefit to
society. But that is a poor solution for the market failure.
|7.12.07 @ 6:00PM|#
I was assuming that "feminist economics" was like regular economics, but without a sense of humor.
uncle sam|7.12.07 @ 6:02PM|#
You can offer suggestions for how to figure the prices out
and compensate the neighbors. But if this factory does not get
built, the market in this instance has failed.
No, the market has produced this result. There is no net benefit to
society if the gain to many is negated by the cost to a few.
Pre-Civil war southern society benefitted from slavery (or so it
was thought), but they only were able to arrive at that position by
completely discounting the cost to the slaves.
What the market is saying in your example is no. Just because you
disagree with the answer, does not mean it is wrong.
IAC, I meant real-world examples, not hypotheticals. It's very
difficult to produce a completely realistic hypothetical. You say
the factory can't be built elsewhere, I ask: Why not? It's a big
world.
|7.12.07 @ 6:10PM|#
No, the market has produced this result. There is no net
benefit to society if the gain to many is negated by the cost to a
few.
I already posited your "X > Y", and that is the assumption the
rest of my argument is going under, so please don't redirect to
unaccounted costs.
The problem is that while Y is less than X, Y is merely the sum of
the elements of a nontrivial set P you do not
know. If you don't figure out an approximation of set
P where every element is greater than or equal to
every element in P while the sum of the elements
in the approximation is still less than X, you don't build the
factory. And every single person involved is worse off than had you
built the factory. Market failure.
uncle sam|7.12.07 @ 6:20PM|#
And every single person involved is worse off than had you
built the factory. Market failure.
Mere assertion is proof of nothing. Posited results have litle to
do with the real world. If the facdtory is not built, it would be
because the prospective builders have arrived at the determination
that X < Y. If they are mistaken, then that is their failure,
not a failure of the market.
We cannot get anywhere with an example where you posit a result
that proves your position and I might merely posit the
alternative.
Your conclusion negates your posit.
That's why I ask for real world where we can get information on
what actually happened.
|7.12.07 @ 6:21PM|#
I meant real-world examples, not hypotheticals.
As I said already, in the real world market failures are
rare.
But if you insist...
Traffic jams are market failures. The dearth of subscription radio
stations prior to the last decade was a market failure.
Yes, you can tautologically account the costs to discover a Coase
solution as costs of the market itself and say that there are
therefore no market failures because the costs always exceed the
benefits. But, in doing so, you are missing out on something very
important: You are missing the opportunities for changes in the
fabric of society that might make Coase solutions more evident and
bring success to more markets.
The best solution to the archclassic market failure of the common
sheep pasture is to privatize the pasture -- not to say, "Damn. My
sheep died. I guess the market said 'no' to grazing."
uncle sam|7.12.07 @ 7:29PM|#
Traffic jams are market failures. The dearth of subscription
radio stations prior to the last decade was a market
failure.
As I said earlier, we can discuss the failures of political
intervention (into the market). These two examples illustrate very
nicely what happens when the functioning of the market is distorted
by political intervention. The market responds rather predictably
to such interference.
I asked for an example of market failure.
Not a failure of political intervention. One of the, if not the,
main points of advocates of a free market (such as myself) is that
efforts to control the market, correct the market, stifle the
market, by government is a malfunctioning of the market process.
The market, as a manifestation of human behavior, responds. In the
case of traffic jams, the government give drivers the impression
that roads are free therefore causing an increase in demand beyond
the supply.
As to the dearth of subscription radio stations prior to the last
decade, that only illustrates that you think there should have been
more prior to the last decade, not whether the market 'should' have
provided such.
The fact of it illustrates either that it wasn't the appropiate
time, or something else that I don't know about (but I'm sure
somebody does), it's not a failure of the market, per se, but of
some factor if which your citing does not give any account.
IAC, given the huge amount of political presence, even in the U.S.,
I need have lots of details about the politcal environment in any
paricular example before we can discount the possibility of what
you suppose to be market failure to, in fact, be a manifestation of
some political intervention.
In case after case of popular suppositions of historical 'market
failure', closer examination reveals some kind of political
intervention is the root of the problem. A classic example, of
course, is the great depression.
|7.12.07 @ 7:49PM|#
As to the dearth of subscription radio stations prior to the
last decade, that only illustrates that you think there should have
been more prior to the last decade, not whether the market 'should'
have provided such.
It doesn't illustrate what I think. The fact that satellite radio
exists today is strong evidence that there were willing
broadcasters and there were willing subscribers. But there were not
broadcasters willing to broadcast or subscribers willing to
subscribe given the free riding that could and would occur.
What changed was digital radio and the encryption it admits, making
such broadcasting a pure private good.
The difference between then and now is nothing but the technology
to keep free riders from receiving the broadcast. Everyone involved
would have been better off if they could have figured out a way to
make subscription broadcasts work. They couldn't. Market
failure.
Interestingly, I would not call the Great Depression a market
failure. Why do you?
|7.12.07 @ 8:19PM|#
uncle sam,
I would agree with you that almost all instance of "market failure"
are indeed caused by the government, and that all instances of
"market failure" can be credited in some way to the praxeological
environment in which the economy operates.
But to therefore think market failure is a useless term is drawing
the wrong lesson. Rather, market failure as I am using it is an
indication of room for improvement in the rules governing
society.
Taking the sheep pasture example. You can reply, "The government of
the village made the pasture a commons. Therefore it is the
government's fault."
Well, yes. But the government -- and every single soul in the
village -- had no freaking clue that a commons is the wrong way to
organize a sheep pasture. That was simply the way their society was
organized.
An economist can look at the problem, find the market failure, and
inform the village that they should change their societal
organization to admit more private property. Real market failure.
Real solution. End of market failure. Everyone is better off.
It's the same with traffic jams. They are a market failure, as you
note, because government makes people think the roads are free. But
that's how people think of roads. Is that the government's
fault?
Again, the economist can observe, note the market failure, and
suggest a better way to organize roads to better privatize their
usage. Real market failure. Real solution. End of market failure.
Everyone is better off.
Dismissing market failure as meaningless means never discovering
solutions to those instances when rational individuals acting
rationally in the market conditions presented to them get a result
they didn't want.
uncle sam|7.12.07 @ 8:43PM|#
What changed was digital radio and the encryption it admits,
making such broadcasting a pure private good.
The difference between then and now is nothing but the technology
to keep free riders from receiving the broadcast. Everyone involved
would have been better off if they could have figured out a way to
make subscription broadcasts work. They couldn't. Market
failure.
I wouldn't call that market failure. And I don't know that
'everyone would have been better off...'. The market doesn't exist
to make everything work, otherwise we would be expecting it to
provide everyone with everything they desire at a price everone can
afford. If they couldn't find a way to make subscription work, then
the market for what they were atempting wasn't there, given the
available technology. But through the discovery process of the
market, the required technology did become available. I don't see
any "market" failure. It worked as we observe that it does. It's
something like saying that water fails because people drown, but
peopl drowning teaches us the nature of water and that the ability
to swim a valuable skill when one goes in the water.
Interestingly, I would not call the Great Depression a market
failure. Why do you?
I don't. Please read my comment carefully:
In case after case of popular suppositions of historical
'market failure', closer examination reveals some kind of political
intervention is the root of the problem. A classic example, of
course, is the great depression.
A classic example where it is commonly thought that the Great
Depression was an example of market failure.
|7.12.07 @ 8:48PM|#
A classic example where it is commonly thought that the
Great Depression was an example of market failure.
Ah. Okay. Yes, that is an abuse of the term.
uncle sam|7.12.07 @ 9:03PM|#
Dismissing market failure as meaningless means never
discovering solutions to those instances when rational individuals
acting rationally in the market conditions presented to them get a
result they didn't want.
I'm not trying to suggest that there are no problems within the
domain of 'the market'. Indeed there are, but calling those
problems 'market failure' does not encourage people to look for the
cause of the problem so much as to blame 'the market' and look to
government to fix it.
That seems to be why the Great Depression became so severe and
lasted so long. It was popularly held that markets didn't work and
the government had to do all kinds of things to make them
work.
My contention is that it is misleading to think of the market in
such a way that we might say that it fails or succeeds. It is not a
device or mechanism created to achieve a goal, therefore it is not
something that breaks or needs fixing.
What needs changing when there are problems in society/the market,
is our behaviors, which are a result of our beliefs riding atop our
nature as human animals. I don't think we can change our natures,
but we can modify erroneous beliefs.
I contend that when we will have to make a fundamental shift before
we will be able to escape the historical trajectory.
|7.13.07 @ 1:58AM|#
Let me try one more example of market failure...
rubbernecking.
Of all the drivers on the freeway, some fraction x prefer
slowing to gawk at an accident on the side of the road, some
fraction 1-x prefer passing by at speed. Absolutely zero
prefer being stuck in a backup.
Yet if one person who prefers gawking exercises that preference on
a full freeway, everyone who follows gets the exact outcome
absolutely no one wants.
Indeed, everyone in the backup would gladly pay a dollar to get out
of the backup. But there is no one they could give a dollar to that
would help. In fact, when they get to the scene of the accident, it
is an epsilon-cost behavior for them to gawk themselves and thus
slow their acceleration, compounding the backup.
Everyone acts rationally in their own self interest. Nobody gets
the outcome they want. Market failure.
You can say that if the people who don't want to gawk each pay a
dollar into a pool that is split among those who do want to gawk to
make them not gawk, the market will work. But that ain't going to
happen. The government's solution to the market failure is to make
slowing to gawk illegal. Yeah, that'll work.
Someday someone might devise a solution -- perhaps a
quick-deploying curtain that hides the accident. It will be like
solving the public goods problem of subscription broadcasting by
introducing encrypted digital radio.
But until that time, rational people all behave in their rational
self interests and get exactly what they don't want. That is market
failure. It is a real and useful notion in economics. It should not
be dismissed simply because others hijack the term for something
less useful and actively harmful.
brian|7.13.07 @ 10:00AM|#
There's another instance of market failure that Milton Friedman
talks about in Capitalism and Freedom: the lack of credit markets
for individuals. Businesses can take out loans on future profits
(also known as stocks and bonds), so if they are in a rut and the
market expects good things in the future from the business, they
can borrow to get back on their feet.
Individuals, however, cannot do that; there is no way for
individuals to borrow on their future earnings, making it difficult
for people to get the money to get back on their feet like
businesses can. This is probably because of the risk that would-be
lenders see, since they don't have full information about how
productive the individual (the borrow) will be in the future.
As a result, people can only borrow at extreme rates of interest
via credit cards to offset the risk that others pose to the
lenders. That is, a person who will be very productive in the
future and will pay off loans should be paying a low rate, with
those who are not like this should be paying a high rate, but the
lenders don't know which is which, so they charge an intermediate
rate to both, causing the productive person to subsidize the
unproductive person.
This market failure, like many others, are based on lack of
information. If the lender knows who will be productive and who
won't be, he can charge appropriate rates. Other market failures
occur when there are externalities, like pollution.
In the factory example above, the factory builders don't have to
pay for the costs of pollution, so even if the costs (including
pollution) outweigh the benefits, the benefits to the builders are
still positive. That is, even though X
brian|7.13.07 @ 10:02AM|#
Oh oops. I see what I did wrong. damn html. What I meant to say
at the end there is...
even though X is less than Y, meaning the factory should not be
built, it is still constructed, causing a net loss to the
market.
|7.13.07 @ 11:53AM|#
MIkeP/ Brian
Brian's version of the "built factory" market failure is both the
more likely and the more common in reality. Some would argue it is
currently the status quo.
|7.13.07 @ 12:01PM|#
A non-academic example of my above assertion
http://en.wikipedia.org/wiki/Environment_of_China
|7.14.07 @ 9:20PM|#
FWIW, heres my experience as an undergrad since I was a
university student fairly recently--
I went to a certain University in central Virginia, major in
History, minor in Poli Sci. I'd say about half my professors were
able to keep their politics out of the class room, a quarter of
them were liberal/socialist, and a quarter were what one could
consider libertarian. I had quite a few hardcore pro-free market
professors in some of the poli sci classes. There weren't any
social conservatives or Christian fundamentalists, but then again I
didn't go to Liberty for a reason.
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