Economics

Philosopher Kings vs. Milton Friedman

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The always-interesting Arnold Kling writes at TCSDaily:

Milton Friedman got it right, and Plato got it wrong.

That is the message that I take away from Clifford Winston's exhaustive survey of the actual results of well-intentioned government policies aimed at correcting market failures. He looks at policies designed to address all of the ills that economists and others have identified with markets—monopoly power, imperfect information, externalities, and so on. Government tends to make things worse, not better.

More here.

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  1. The whole piece could have been stronger if Kling could have refrained from blaming “progressives” and just focus on how markets are better.

  2. Wow. I am hard pressed to remember ever reading a weaker argument for the market than the one outlined in the article.

    Basically, the author’s friend had a bad experience at a health insurance company and took his business elsewhere. This situation is compared favorably to some imaginary law that some imaginary legislature might pass, that would have banned poor customer service. The imaginary law (proposed by nobody, so far as I can tell) probably wouldn’t have worked, according to the author. Therefore, because this imaginary ridiculous law might have failed, government will always do worse than the market in all matters concerning monopolies, imperfect information, etc. Ipso facto!

  3. So the lesson here is what…that if you don’t need health insurance, the market will provide it to you?

    Change “minor skin rash” to “chronic heart condition” and see how it goes.

  4. Correction: the imagined law would have forbid denying insurance based upon medical history, and according to the author, such a law does exist in other states.

    Still, the author makes no argument that this law is ineffective or wrong– only that his one friend didn’t need it to get insurance elsewhere, and therefore the market is better than government solutions.

  5. Change “minor skin rash” to “chronic heart condition” and see how it goes.

    If you have a chronic heart condition, you don’t need insurance. Insurance provides protection against something that might happen. You already freakin’ have a heart condition; you need medical care, not insurance.

  6. The point was that if you have such a condition as to make future medical care very likely, the market is less likely to sell you insurance that you can afford.

  7. If your house is on fire the market isn’t likely to sell you homwowners insurance that you can afford either.

    If you want a program to pay for healthcare that people can’t afford, set one up. Just don’t call it insurance.

  8. And Obama and Lieberman are in New Orleans doing what, again? It doesn’t look much like a victory lap, to me.

    The government is much better at creating problems than solving them.


  9. The government is much better at creating problems than solving them.

    This explains why so many people are leaving the United States to move to places with no legitmate functioning government.

  10. I think this

    http://www.nybooks.com/articles/19857

    is a nice look at the strengths and weaknesses of MF’s ideas and how they work out in the real world.

  11. http://www.santafe.edu/research/publications/workingpapers/07-01-003.pdf

    For an empirical review of public policy and the limits of implementing market-based solutions to social problems.

    (sometimes it works, sometimes it is counter-productive… imagine).

  12. http://www.santafe.edu/research/publications/workingpapers/06-05-015.pdf

    The Visible Hand in a Production-Chain Market: A Market Equilibrium from Network Analytical Perspective

    We analyze general price equilibrium mechanisms of production-chain markets, comparing the producer market model proposed by Harrison White with hypothesized network effects on pricing that emerge from empirical analysis of trade relationships among over 8,000 firms in a large-scale industrial district in Tokyo. Consistent with White’s model, the supplier-prime buyer relationships are strictly hierarchical and constitute a directed acyclic graph (DAG). There are no exchange cycles that would promote price equilibrium. We argue, partly from a Simmelian approach to triad configurations, that three linked network configurations are likely to affect pricing. First, a particular form of structural cohesion as defined by multi-connectivity (bicomplete connectedness within a large bicomponent) is a critical “seeding” mechanism where quasi-optimal exchange can be achieved as the “visible hand” in production-chain markets. Second, a powerful core of elite firms was detected that organizes status differences among firms and serves to institutionalize role structures in the production markets. Third, structural advantages in pricing accrue to elite core firms because suppliers upstream in the hierarchy operate through a 4:1 preponderance of multiple-supplier to multiple-buyer triads, which enforces competition among themselves rather than among the buyers. These pricing benefits to buyers are passed along to the downstream elite firms. The elites can exert power over the complex network through the serial divisions of labor embedded in the tiers of subcontracting hierarchies, dominating price-setting from the top.

  13. http://www.santafe.edu/research/publications/workingpapers/05-04-009.pdf

    Fiat Money and the Natural Scale of Government

    The competitive market structure of a decentralized economy is converted into a self-policing system treating the bureaucracy and enforcement of the legal system endogenously. In particular, we consider money systems as constructs to make agents’ economic strategies predictable from knowledge of their preferences and endowments, and thus to support coordinated resource production and distribution from independent decisionmaking. Diverse rule systems can accomplish this, and we construct minimal strategic market games representing government-issued fiat money and ideal commodity money as two cases. We endogenize the provision of money and rules for its use as productive activities within the society, and consider the problem of transition from generalist to specialist production of subsistence goods as one requiring economic coordination under the support of a money system to be solved. The scarce resource in a society is labor limited by its ability to coordinate (specifically, calling for the expenditure of time and effort on communication, computation, and control), which must be diverted from primary production either to maintain coordinated group activity, or to provide the institutional services supporting decentralized trade. Social optima are solutions in which the reduced costs of individual decisionmaking against rules (relative to maintenance of coalitions) are larger than the costs of the institutions providing the rules, and in which the costs of the institutions are less than the gains from the trade they enable to take place.

  14. Neu Mejican- impenetrable, soporific jargon of that species is why I decided to forego an economics degree.

  15. Confirmation bias is the true believer’s friend.

  16. “This explains why so many people are leaving the United States to move to places with no legitmate functioning government.”

    I hope no one else here thinks that just because the U.S. is the best of a bad bunch means that it is good.

  17. If you want a program to pay for healthcare that people can’t afford, set one up. Just don’t call it insurance.

    If antitrust law ever makes a comeback (and it might), you will find out why they opted to characterize it and (somewhat) structure it as “insurance.”

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