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.

Comments

[Warren]

Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.

I want to live in that world.

[Dan T.]

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...

[dhex]

is there anyone left who doesn't want to be jesus on the cross these days?

[Timothy]

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.

[Edward]

So why do you marshal meaningless anecdotal evidence?

[joe]

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]

Becoming a new orthodoxy is a terrifying prospect for the bold readicals of capitalism, isn't it?

[D.A. Ridgely]

I remain confident that the market will sort this all out.

[joe]

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]

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.

[Mr. Nice Guy]

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."

[An Ottawa Reader]

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.

[JLM]

Marxist "economist" = intelligent design "scientist".

I'm comfortable with that.

[An Ottawa Reader]

The snark I referred to being my own usual snark, not anybody else's.

[:-]

Dow is up 184 points.
Damned capitalists enriching my portfolio!

[LarryA]

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.

[Ludwig von Mises]

Sociology is a subset of economics.

[D.A. Ridgely]

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]

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.

[Reinmoose]

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.

[Reinmoose]

Oh yeah, and I'm a little tainted

[Finkelstein]

"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]

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]

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]

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.

[An Ottawa Reader]

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]

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.

[Reinmoose]

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?

[Reinmoose]

Economists come up with all sorts of formulas and charts because the demand for bullshit is so high.

Bingo!

[joshua corning]

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?

[Marcvs]

A big reason why Friedman has had such a strong influence on economics is because the policies that he advocated... wait for it... WORKED!

[Jonathan Hohensee]

feminist economics
Huhwhatthefuckwhatsthisnow?
*punches wall out of fustration*

[An Ottawa Reader]

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]

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]

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]

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.

[brian]

sorry I dropped a > somewhere

[Warren]

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.

[Reinmoose]

...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]

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]

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]

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.

[Reinmoose]

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]

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.

[jerry]

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?

[jerry]

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?

[Reinmoose]

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!

[joe]

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]

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]

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]

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.

[Akira MacKenzie]

edit: ...to some hard core leftists...

[dhex]

feminist economics is a bad name but yeah what joe said.

[brian]

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]

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]

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.

[jerry]

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.

[MikeP]

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.

[MikeP]

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]

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".

[Grand Chalupa]

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]

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.

[MikeP]

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]

Grand Chalupa
I'm certain you meant 'where the lunatics were not in charge'.

[Grand Chalupa]

Uncle sam,

Yessir, thank you

[uncle sam]

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]

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.

[MikeP]

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.

[Stevo Darkly]

I was assuming that "feminist economics" was like regular economics, but without a sense of humor.

[uncle sam]

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.

[MikeP]

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]

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.

[MikeP]

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]

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]

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?

[MikeP]

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]

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.

[MikeP]

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]

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.

[uncle sam]

The market is cause and effect in our economic behaviors.

[uncle sam]

...and consequences.

[MikeP]

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]

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]

...even though X

[brian]

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.

[Neu Mejican]

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.

[Neu Mejican]

A non-academic example of my above assertion

http://en.wikipedia.org/wiki/Environment_of_China

[Cesar]

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.

[han]

Interesting article.

[han]

This should make it obvious