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Just had a heated debate with my professor over market failure.

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C Posted: Tue, Sep 7 2010 8:49 PM

Wow.  OK so class just ended and I had a pretty heated debate tonight.  This was the first class of the new semester and I'm taking a graduate course in Risk & Insurance Management with some Russian professor.  

So he's talking about financial models and how they make assumptions that don't always match reality.  Ok, I'm with him so far.  Then he starts talking about these assumptions and says they ignore the presence of market failure. So he puts up a slide on the screen and says the market chronically under-invests in areas like farming, small business, education, environment etc.  So the government has to create agencies to increase the credit flowing into these industries.  

So I said "Hold on, I'm not sure I'm following you.  The market is under-investing in farming by what standards?"

He says "The market has historically under-invested in this area that's why the government has to step in and make up the difference."

I say, "By having the government step in, isn't it just diverting resources from other areas in the economy where they are more pressingly needed?  And I still don't see how your making the claim that the market is under-investing in farming, by who's standards? It seems to me that you are substituting your preferences for those of market participants?"

He says, "If the government didn't extend credit to our farms, the we would be importing all of our food from Africa or Mexico."

And that's when I gave a big Rothbardian "So what?"  (Which btw turned alot of heads)  "If Mexico can produce food more efficiently I fail to see the problem."

He says, "Then all of our farmland in this country would barren." 

Me, "No it wouldn't.  It would be put to more productive uses."

Him, "All you are talking about is theory.  In real life things don't work like that.  There is no invisible hand."

Then he goes on, "Take the housing market, if a lender has a choice between lending to a poor person with a risk of X and and return of Y, and another business with the same risk and return, the lender will always choose to ignore lending to the poor person."

Me "So then the government subsidizes the poor person and we see how that turns out."

Him "That had nothing to do with the crisis."

Me "And so what if a poor person can't get a loan, they can rent can't they?  By subsidizing them you are preventing capital from making to the areas of the economy where it is needed more."

Him "How do you determine where it is more needed?"

Me "Profit and loss."

Him "You are talking about the invisible hand.  Every serious economist has long recognized the existence of market failure."

Then he proceeds to draw a supply and demand graph on the board and shade in the consumer surplus and says "See even here people are willing to pay more for products but they don't because of the market"

Me "What????"

Him "Even right now there are businesses not lending to people who are looking for loans, this is not an efficient outcome."

Me "Well there are reasons for that"

Him "No this is market failure."

And then I let him say a few more sentences and get in the last word. 

Anyway, How did I do?

Think the other students learned anything?

  At least he wasn't a Keynesian!

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Sieben replied on Tue, Sep 7 2010 8:52 PM

Him "Even right now there are businesses not lending to people who are looking for loans, this is not an efficient outcome."
Zomg people can't have everything they want its market failureztime!

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DD5 replied on Tue, Sep 7 2010 8:58 PM

If you really said all of that, then you deserve a gold medal, no.. a silver Mises medal for your heroic and intelligent performance.  Those are great responses.  You owned him!

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Yeah, if you articulated all that in such a brief, pressure-filled situation, I'm impressed. As a rule of thumb: whenever you can get someone to proclaim "well, in real life, things don't work like that", you've probably made the better argument.

Nice job! 

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Jackson replied on Tue, Sep 7 2010 9:48 PM

yeah, you batted that out of the park. the only thing you didn't do was tell him that market failures don't exist while wearing shutter shades and a 'markets clear' t-shirt.

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Dabba replied on Tue, Sep 7 2010 9:48 PM

Good stuff, sounds like you didn't go overboard (which is a good thing). I personally wouldn't want to get into an extremely heated exchange on my first day with the professor, but it looks like you kept your cool, and did very well. I also recently challenged my professor on market failure. He was talking about pollution and how the government needs to regulate it, but he left out the little detail of property rights, so I called him on it after class.

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Jackson replied on Tue, Sep 7 2010 9:49 PM

you nailed it.

the only thing you neglected to do was tell him that market failures don't exist while wearing shutter shades and a markets clear tshirt.

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Chris Pacia:

Him "You are talking about the invisible hand.  Every serious economist has long recognized the existence of market failure."

Here you should have accused him of appealing to authority.

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
Rabbi Lapin: "Let's make bricks!"
Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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Gero replied on Tue, Sep 7 2010 10:05 PM

I applaud your articulacy and bravery in defending liberty.

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Sieben replied on Tue, Sep 7 2010 10:06 PM

Every serious economist is payed by the government to apologise for their failed programs.

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DD5 replied on Tue, Sep 7 2010 10:18 PM

The comment about "every serious economist" is not even true.  Most mainstream economists are simply suffering from some sort of an identity crisis.  

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Bravo. The fact that your argument - if properly written out - was so clear, concise, and articulate during your first class... that's incredible. I would have been extremely nervous doing that in front of an entire class against a professor. Very impressive.

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Andy replied on Tue, Sep 7 2010 10:39 PM

Good job man, keep it up. I need to keep learning more so I can do the same, confidently.

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chloe732 replied on Tue, Sep 7 2010 10:57 PM

Chris,

If that was day #1, it will be interesting to know how day #2 goes.  Please keep this fine forum informed! 

At some point, though, your grade ought to occupy a higher place on your value scale than proving your professor wrong in a debate, but you must know that already.

I am surprised by the level of economic ignorance in a graduate level class.  Did he receive formal schooling in economics in Russia (you said he is a Russian professor)?  His arguments are so bad I can't imagine a mainstream economist would make the arguments he is making.

"The market is a process." - Ludwig von Mises, as related by Israel Kirzner.   "Capital formation is a beautiful thing" - Chloe732.

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Conza88 replied on Tue, Sep 7 2010 11:16 PM

"And that's when I gave a big Rothbardian "So what?"  (Which btw turned alot of heads)  "If Mexico can produce food more efficiently I fail to see the problem.""

laugh. It's always good to follow up the "so what?", with an added reason / justification. Well done!

Also seems like the discussion wouldn't have been very long, that's good - you'll avoid the "that guy" label. And I think you'll find, other like minded folks will have noticied from the exchange, appreciated it thoroughly and the remnant will probably seek you out.

Ron Paul is for self-government when compared to the Constitution. He's an anarcho-capitalist. Proof.
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C replied on Tue, Sep 7 2010 11:21 PM

While that level of economic ignorance inexcusable, in his defense he is a finance professor not an economist.  Although, you do have to take economics classes to get a degree in finance, so ya, he must have been educated in the soviet union.  

And I'm not to worried about my grade, I'm almost done with the degree and have yet to have any professors undercut my grade because of my views.  It takes someone who is real low class to do that and I would hope a PhD with a large salary would be professional enough to assign a fair grade.  

I do like the idea of showing up next class with a markets clear t-shirt tho. LOL. 

  At least he wasn't a Keynesian!

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Conza88 replied on Wed, Sep 8 2010 12:21 AM

Receiving repercussions becomes less likely when he doesn't know your name.

If he asks, say Murray Rothbard.. >.<

Ludwig von Mises may not be so believable.. (unless you can do a mad Austrian accent)wink

Ron Paul is for self-government when compared to the Constitution. He's an anarcho-capitalist. Proof.
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Gotta say, I'm not a fan of Rothbard's use of the "so what?" in works that were meant to be lasting contributions to scholarship.  But in the rough-and-tumble of debate, it works.  Good job.

"the obligation to justice is founded entirely on the interests of society, which require mutual abstinence from property" -David Hume
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Bert replied on Wed, Sep 8 2010 1:15 AM

Great debate.  Not sure if I could be so precise and on point within only a few statements under pressure and time (but I was also able to change a teachers entire teaching strategy with a 5 minute rant about how she has no clue what she's doing in high school).

I think the use of the "so what?" has it's place, and was a perfect place to whip it out (I do find it amusing in some situations, it's like having someone walk into getting slapped in the face).  Maybe it could be titled as "pulling a Rothbard".

I had always been impressed by the fact that there are a surprising number of individuals who never use their minds if they can avoid it, and an equal number who do use their minds, but in an amazingly stupid way. - Carl Jung, Man and His Symbols
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Naevius replied on Wed, Sep 8 2010 1:26 AM

Bravo, good sir. You're a better man than I to be able to articulate yourself so clearly under pressure like that. I'm so socially awkward that I tend to really screw up in verbal debates.

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Think the other students learned anything?

I think they learnt that the whole issue is not easily as simplified as the market failure asserted in the classroom.

Always let the man have his last word, though. He worked years of his life, greyed his hair, stayed away from home, and temporarily gave up on family to do what he does now. It's very hard to become a PhD, moreso in an area like risk management.

Since he is a Russian, I am not surprised he used "You are talking about the invisible hand"*, and he'd probably have done a Pravda style "This is neoliberalism!" on you. They are still very angry about the forced market reforms in Russia and cheer every time a crisis happens in the US.

*another sign of Das Adam Smith Problem, the man who plagiarised and set back economics tremendously by copying ideas he didn't understand, giving anti-marketers all the leverage with his idiotic "invisible hand" rhetoric.

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Prateek Sanjay:
*another sign of Das Adam Smith Problem, the man who plagiarised and set back economics tremendously by copying ideas he didn't understand, giving anti-marketers all the leverage with his idiotic "invisible hand" rhetoric.

Ha, Rothbard came back from the dead, I see!

I knew of Rothbard's critique of Adam Smith, but I don't remember any accusations of Adam Smith copying ideas 'he didn't understand'. I must look that part up again. (I remember the plagiarism accusation, but not that Adam Smith didn't understand the ideas he was copying.) 

I don't get the problem with the invisible hand rhetoric by the way. It's relatively clear what Adam Smith means by it: self-interest, in the correct institutional environment, creates stuff for other people. 

You are, by the way, aware that traditionally 'das Adam Smith Problem' is used for a different problem? (Just checkin'; I'm sure you do.) 

The state is not the enemy. The idea of the state is. 

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From what I remember in the endnotes of that wonderful article, Das Adam Smith Problem refers to not just one kind of Adam Smith problem. There are some other contradictions in Smith's work, but post-1970s, Smith's idolization has come down.

It's just that invisible hand is a very very bad analogy. No free marketer ever believed millions of humans interacting create some perfect natural harmony. It's all about rapid reception and response to information, and learning from loss, failure, and mistakes.

I prefer Joseph Schumpeter's Creative Destruction, which reflects the rapid chaos from which we humans learn, act, and build. The word Marginalism also captures that sense of real life capitalism, where we know that there is no perfect solution, but only giving up a little to gain a little.

Marginalism and Creative Destruction are what builds human civilization.

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It's not as much of an analogy as it is an empirical generalization.

'Hey, this process actually works pretty well. It is as if someone is guiding it. But the awesome thing is: it is not!' It doesn't imply 'perfect natural harmony', nor does Adam Smith portrait it like that. 

Well; the original Das Adam Smith Problem refers to the so called gap between his moral and economic writings. I don't know of any other generally acknowledged use of the term. 

The state is not the enemy. The idea of the state is. 

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I. Ryan replied on Wed, Sep 8 2010 12:46 PM

Chris:

Then he goes on, "Take the housing market, if a lender has a choice between lending to a poor person with a risk of X and and return of Y, and another business with the same risk and return, the lender will always choose to ignore lending to the poor person."

Not sufficiently subjectivist!

He is substituting his idea of what the risk and return would be for the idea of what the risk and return would be of the entrepreneur. If the risk and return from the point of view of the lender was the same for the poor and rich person, they would be indifferent as to who to lend to. So what he is saying is that the damn entrepreneurs have the bizarre notion that poor people are less able to pay back their loans than rich business people, and that the government has to step in and fix their arbitrary discrimination! So what makes him think that he knows who will pay their loans back better than the lender would?

The fact that he just said straight up that they have the same risk and return and didn't even reveal that he was switching up the points of view from the entrepreneurs to himself just shows where his ideas came from. If he had noticed that he had changed the points of view, he might have realized how unsubstantiated his views were. He would have noticed that he just asserted the basis of his whole argument, and didn't give anything resembling an explanation for it!

If I wrote it more than a few weeks ago, I probably hate it by now.

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Azure replied on Wed, Sep 8 2010 9:47 PM

I don't get the problem with the invisible hand rhetoric by the way. It's relatively clear what Adam Smith means by it: self-interest, in the correct institutional environment, creates stuff for other people.

It's because the rhetoric is used to accuse economists os being nutcase puritans by likening the "invisible hand" to God, as many pro-market writers actually did (and do). The market is God's Plan, and the economist's only argument against socialism is that God's Plan is Right, no matter what that plan may be. If the "invisible hand" wills children to starve to death then that is the way things should be, and all those who try to save them are blasphemers.

Of course this isn't even what Adam Smith meant, but that doesn't stop people who use this from being annoying. Though I can't really say I blame Smith for it, if he hadn't used the "invisible hand" idea then they would have just come up with another cowardly rhetorical tactic to use in its place.

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Azure:

I don't get the problem with the invisible hand rhetoric by the way. It's relatively clear what Adam Smith means by it: self-interest, in the correct institutional environment, creates stuff for other people.

It's because the rhetoric is used to accuse economists os being nutcase puritans by likening the "invisible hand" to God, as many pro-market writers actually did (and do). The market is God's Plan, and the economist's only argument against socialism is that God's Plan is Right, no matter what that plan may be. If the "invisible hand" wills children to starve to death then that is the way things should be, and all those who try to save them are blasphemers.

Of course this isn't even what Adam Smith meant, but that doesn't stop people who use this from being annoying. Though I can't really say I blame Smith for it, if he hadn't used the "invisible hand" idea then they would have just come up with another cowardly rhetorical tactic to use in its place.

Relevant, from Theory and History, Chapter 8...

Believing in the existence of God, Smith could not help tracing back all earthly things to him and his providential care, just as later the Catholic Bastiat spoke of God's finger.[2] But in referring in this way to God neither of them intended to make any assertion about the ends God may want to realize in historical evolution. The ends they dealt with in their writings were those aimed at by acting men, not by Providence. The pre-established harmony to which they alluded did not affect their epistemological principles and the methods of their reasoning. It was merely a means devised to reconcile the purely secular and mundane procedures they applied in their scientific efforts with their religious beliefs. They borrowed this expedient from pious astronomers, physicists, and biologists who had resorted to it without deviating in their research from the empirical methods of the natural sciences.

Oddly, you don't generally find the mildly indulgent religious references of Galileo, Newton and Wallace being pounced upon by these same leftist critics.

"the obligation to justice is founded entirely on the interests of society, which require mutual abstinence from property" -David Hume
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Jackson replied on Wed, Sep 8 2010 10:21 PM

yo.

we getting anymore human action comics?

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