I am engaged in a debate with someone over the issue of the Jim Crow South and how the free-market failed to self-regulate itself in those areas. Citing that " libertarians beleive in the invisible hand which doesnt exist at all. " and cites economists such as Joseph E Stiglitz to back this claim.
How would I approach this?
Jim Crow was government imposed. Is he serious?
Jim Crow forced black people to be inferior by law. It was essentially newly-legalized slavery.
Also, licensing added to the problem - local governments wouldn't grant licenses to buses who would desegregate.
Walter Block on the issue:
Consider in this regard that spate of infamous legislation known
as Jim Crow (Williams 1982b).
Here, rights were violated on a massive
scale, and great harm was perpetrated. Blacks had to sit at the back of
the bus because of legal requirements. If they tried to take a seat anywhere else, they would be jailed. Similarly, they were legally restricted in terms of the washroom and drinking fountain facilities (Wharton
1947; Welch 1967).
Contrast this with a very different scenario. Instead of this backof-the-bus practice being man dated by law, suppose that it were the
result of merely private discrimination. We assume, then, that in the
ex-Confederate states of Dixie that a view existed to the effect that the
appropriate place for blacks was in the back of the bus, and that this is
a widely upheld belief on the part of the majority white population,
although not—and this crucial—buttressed by supportive state intervention. In such a case, the typical entrepreneur would say to himself, “How
can I maximize profits, given this situation?” On the assumption that
blacks wanted to ride on the front of the bus, but were prevented from
doing so by the owners of the extant bus firms, this entre preneur would
start another bus line, one on which blacks can ride anywhere they
want—front or back—as long as they pay for this privilege.
The problem in the Jim Crow South was that this would have been
illegal. Entrepreneurs were re quired to obtain a permit or franchise in
order to start up a competing bus line. But the same statist powers that
forbade blacks the front of the bus also prohibited entrepreneurs from
coming to the rescue of the minority group in this commercially competitive way. Operation permits to alternative bus firms were simply not
granted (Wiprud 1945; Moore 1961; Eckert and Hilton 1972). In this
instance the underdog could not be helped by the market—not through
any fault of private discrimination, but because of the far more deleterious public variety.
Agree with them probably but I don't know about Jim Crow history
The 'invisible hand' is often misunderstood in the self regulation of markets in its effect on the relationship of supply & demand.
However Modern day behavioral economists sucha as Amos Tversky have disproved a direct link (humans are not mathematically rational agents)
I think its time libertarians moved on the well intended but fundamentally flawed theory of Adam Smith.
I'm afraid I don't think those are coherent sentences.
Accepting that humans are not mathatically rational is an important step in understanding why free markets are so volatile.
What does "mathematically rational" mean?
Can you give a hypothetical example of what would constitute as mathematical rationality, and then contrast that with one of mathematical irrationality?
I think he means that humans don't fit neoclassical models.
In that case, I think it's more appropriate to say not that humans are mathematically irrational, but that the models just suck.
True I am not stating that humans are not motivated by self interest.
I wouldn't want to over simplify the findings of indepth studies into complex pysche of human decision making into a one line example.
I'm talking about the many cognitive biases such as loss aversion, endowment & framing effects.
But really there are too many list :
Really recommend reading Thinking, Fast and Slow by Daniel Kahneman by Kahneman and Priceless by Poundstone.
Why is being biased irrational?
@Wheylous One's mathematics are only as good as their assumptions are valid, and I think you are correct in saying that the models are based on assumptions that, more or less, "suck". Amiright?
Yes, though I might regret my choice of words a little.
What I meant is that just because people don't use probabilities like math does, it doesn't mean they're irrational. It means that models based on expectations (sum over outcomes weighted by probabilities) are not very useful.
Lookup the Davis-Bacon Act, ask yourself whether it was government or the free-market that passed that law.
Actually that's obvious on its face :P
A great example is 'Anchoring"
Humans use a memory process called 'chunking' to save space and group items together, so often reference unlinked numbers as related supermarkets know this fact and look for any opportunity to put large numbers in your eye line.
1000 points here, 50% off there, 100g free
Then figure of £5.00 for a can of beans seems small and the buyer is happy they are getting a bargain.
Is that Rational?
And how do you know it's not?
Maybe they just hadn't seen the food in the same light.
You think that rational means logical. I don't think that's how economists use it.
Complience: all those effects are widely known, and while they do have an effect, it's not an overarching or long-term effect.
What buyer pricing-irrationality via market training, or w/e, ultimately produces is a chance for a competitor who knows the real facts to walk in and undercut the current market leader in some way.
There are some products that people want to be very high quality and will only spend a minimum amount on, like high-end car wax. Truth is, car wax is pretty cheap to make. If you price is very low then people will avoid it because they don't want to save a few dollars on something they're going to trust with a $5,000+ awesome paint-job.
So, for high-end car wax, quality is more important than price. And if one market competitor chooses to use regular quality wax and jack the price way up, people will buy it, thinking price corresponds to quality in this area, but in due time either people will realize that quality wax doesn't need to cost that much, or a high-quality competitor will enter which can actually justify that price and thus defeat the previous wax.
The market, and customer perceptions and biases, are like an ocean. Water seeks the low-point, but you never do actually end up with a smooth ocean, do you. It's always roiling and jostling, and the same is true of the market and market participants. But the overall trend is going to be pretty damn rational. What you surely won't have is waves suddenly breaking the laws of physics and floating upwards :P
The science of Behavioral economics is comparatively new and all the causality is not fully understood.
It would be also presumptuous to think that new biases are as yet not undiscovered.
You are right there is nothing to prevent another competitor from manipulating the same physiological phenomenon to their advantage - thats the whole point.
Your Wax example is more one of risk aversion (also illogical) rather than completely unconscious behavior such as anchoring
Although I have less of a problem with people choosing to pay more to avoid risk or gain increased status from a purchase than randomly linking numbers together to decide on a price.
I love a good metaphor and your are right in part comparing free markets to the sea with unpredictable waves and storms that eventually pan out.
But this is a sea of our own making, so its more like an unstable aquarium in which the fish keep on dying.
Logical doesn't equal rational, and I very much agree with what you had said Wheylous.
Complience seems to be using rational and logical interchangeably i.e. "Your Wax example is more one of risk aversion (also illogical)".
This is a common objection to AE, but often founded on a misconception of what Mises meant in regard to rationality:
"The assertion that there is irrational action is always rooted in an evaluation of a scale of values different from our own. Whoever says that irrationality plays a role in human action is merely saying that his fellow men behave in a way that he does not consider correct."
I really don't understand the unstable aquarium/fish dying analogy.
If only mustang and kylio were here. Oh, wait...
An aquarium is man made as are financial markets.
They work only if designed correctly in the first place.
Logical vs Rational - whats the difference?
When behavioral economists refer to an illogical/irrational behavior it is with reference to utility theory
So whenever a free agent pays for a good or service in full knowledge that the expected utility value will be less than the purchase price.
What I mean is, despite all the attempts at manipulation, in a free market all you need is one person with clarity in an area, and the manipulation attempts of others strike that person as a huge opportunity.
For instance, when Home Depot was started, it was done by two guys who worked for a hardware chain and had an idea for high-volume sales.
No one thought they could be making a profit theire first years--their prices were too low. But of course they were.
Because they had a new business model the others didn't understand.
Two guys with clarity via the numbers upended an entire products sector. Same with Walmart.
Manip all you want, if you're a small grocer in a medium-size town and Walmart moves into town, you're gonna have a bad time :P
"An aquarium is man made as are financial markets.
They work only if designed correctly in the first place."
Financial markets? What exactly are you referring to when you, for the first time in this thread, introduce 'financial' in front of 'market'. Anenome was referring to markets in general, i.e. 'free' markets. Anyhow, markets aren't designed, by definition there is no 'designer' hence it's 'free'. I do not accept the equivocation that because man 'makes' the market that it is thus designed as such. Man 'made' language, but there was no 'designer' of the English language.
Logical vs Rational - whats the difference?
Quite a scism between the two concerning AE. I don't recall Mises ever referring to action as logical except that is given that EVERY action is logical(for the framework of our minds are logical). So when would one use the term rational?
If I stated to you that my goal(end) was to murder my neighbor by way of tickling her for 30 seconds with a feather(means) you might say that that is not a rational method. A rational method would be to point my loaded 9mm at her temple and squeeze the trigger.
I'm just gonna go ahead and say that one always merely make judgements of value on another's action.
I could go to the 99 cent store and buy my trashbags, dishsoap, sponges, and other household items of that nature for 2 to 3 times cheaper than what I pay for at Ralph's. So why don't I go the 99 cent store? Because I value my free time more than the extra 45 minutes it would take once a month to grab those items and save $10. You can call me 'irrational' for that - but it doesn't mean squat.