Hayek's Academic Triumph?
Michael C. Moynihan | July 12, 2007, 12:51pm
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.
Grand Chalupa | July 12, 2007, 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 | July 12, 2007, 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.
MikeP | July 12, 2007, 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.
MikeP | July 13, 2007, 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 | July 13, 2007, 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
