Economics Questions

Re: Do you believe in market failure?

Caley McKibbin — Sun, 15 Aug 2010 04:46:07 GMT

Maybe it should be called "failure to create a market" instead of "market failure."

Good one.

Re: Do you believe in market failure?

liberty student — Sat, 14 Aug 2010 17:08:07 GMT

DD5:
That has to be some sort of a fallacy. Any brilliant intellectual can be "accused" of not taking his theory a few inches further. And if he did, then there are always a few more tiny steps that he could be "blamed" for not making. And so on and so on, until it is concluded that the first brilliant intellectual should have solved everything.

Yes. Mises was human. Humans are imperfect. He laid a foundation that has helped lead to positions he didn't hold. This is true of nearly every thinker. Ideas are part of the process of thought development, not the final authority on any issue.

To be fair, Mises was for conscription though. He didn't just retreat from anarchism, he saw defense as a non-market good. And I think it is ok to embrace him despite this position, but not in the best interest of Mises or Austrian thought to white wash it (not saying you are, but it does go on in these discussions).

Re: Do you believe in market failure?

Modus Tollens — Sat, 14 Aug 2010 16:16:34 GMT

Maybe it should be called "failure to create a market" instead of "market failure."

Re: Do you believe in market failure?

z1235 — Sat, 14 Aug 2010 14:42:16 GMT

Clayton:
The actual world we live in is characterized by rational actors who choose the "locally optimal" action irrespective of the larger consequences.

What "failure"?

http://www.youtube.com/watch?v=UIthEM6pDqw

http://www.youtube.com/watch?v=RjrEQaG5jPM

Re: Do you believe in market failure?

filc — Sat, 14 Aug 2010 05:15:47 GMT

I agree DD5. We naively expect too much.

Re: Do you believe in market failure?

DD5 — Sat, 14 Aug 2010 02:51:42 GMT

"I'm sure Mises, if he were alive, would disagree with you, since praxeologically speaking the concept of "market failure" is fictitious. Markets don't fail, but people do.

At any rate you do raise a good point that his defense on coercively provided security is inconsistent with the rest of his arguments. Is it too hard to believe that he simply didn't get that far? Perhaps for political reasons or who knows why?"

That has to be some sort of a fallacy. Any brilliant intellectual can be "accused" of not taking his theory a few inches further. And if he did, then there are always a few more tiny steps that he could be "blamed" for not making. And so on and so on, until it is concluded that the first brilliant intellectual should have solved everything.

Mises was already way out there for his time. He was practically an anarchist for that time, which is why I'm sure he went out of his way in quite a few places to say that he's not. Anyway, it's easy for us to take all that we know for granted when decades of great works by others is available at our disposal in such an efficient manner.

All truths are easy to understand once they are discovered; the point is to discover them.

--Galileo

Re: Do you believe in market failure?

Laotzu del Zinn — Sat, 14 Aug 2010 02:13:45 GMT

Maybe it would be easier if they used "The Market" for market transactions in general and "the market" to discuss specific markets?

Re: Do you believe in market failure?

yessir — Sat, 14 Aug 2010 01:35:03 GMT

http://blog.mises.org/13561/fix-traffic-problems-get-rid-of-lights-and-signs/

How come they are not listening to their rational self-interest according to friedman?

Re: Do you believe in market failure?

Clayton — Sun, 08 Aug 2010 21:14:06 GMT

Clayton, actually it looks like I predicted your response pretty well. You assert that transaction costs are circumstances we can't fix and then skip along to how you dislike the political solutions that are typically offered for solving market failure because they involve coercion.

Of course, none of what you said justifies your original assertion that market failures can only be defined with reference to sort of collective ideal outside of individual valuation. *shrug*

You must appeal to some sort of collective in order to define market failure. Taking the intersection, for example, we can say that "if everybody waited their turn", they would all get home sooner. That is, if people acted "collectively", there would be a more desirable outcome. But this outcome (everybody getting home earlier) can only be desired by a "collective" valuation, since rational individuals are indifferent to whether others get home earlier or not. Yes, the valuations of an individual happen to coincide with the "collective" valuation in this instance, but I posit that that is a coincidence of the chosen examples.

Slippery fish arguments are never very fun for me, so this will likely be my last post in this thread. But I will take a second to address 3 of your specific points.

Think what you like. I'm more interested in debating substance and learning something in the process than exchanging pre-canned "my experts versus your experts" posts.

#1. I guess I have a philosophical problem with the idea of market failure because it conceives of the market as something that is designed. Transaction costs, like any other cost, are simply a circumstance. We cannot fix, alter or even redistribute costs without resort to coercion.

Not true. The definition of market failure doesn't require anything about markets being designed or how they are created at all. In fact, it takes the existence of a market as given and says that this market is not able to do its job

"[the] market [does] not do its job" - this is exactly what I mean... "its job" is a collective valuation. You are applying a criterion for success and asserting that the market fails to meet this criterion. You are reasoning about the market as if it has an end, such as being more efficient or maximizing prosperity or whatever. The market - like biological evolution - has no end or purpose, it is atelic.

when transactions costs are high (for example, I never described the creation of the air quality market in my example because it is irrelevant for the *definition* of market failure). Now, that doesn't mean that how markets are created isn't an important question--especially when it comes to considering how to *solve* market failures. But I should stress that defining market failures and solving them isn't the same thing. Based on your post I wonder if you are drawing any distinction between the two concepts.

I doubt the ROI of pondering the concept of "market failure". Yes, mainstream economists spend a lot of time talking about it and think that it's an important problem. I dissent. Entrepreneurial endeavor is the "solution" to the "problem" of market failure. What's the big deal?

#2. I understand what economists mean when they talk about market failure. I do think the term is loaded but so what? That's what economists call it. The trouble I have is not with the idea of market failure itself but with the idea that market failure can be corrected via coercion. If you look at each example of market failure on a case-by-case basis, you will find that coercion is not needed to solve whatever problem is at hand.

I actually have no problem with this statement. I would just note that this isn't what you said in your previous post. If you scroll up, you will see that the first sentence of your post stated that market failure itself cannot even be defined without appealing to some collective ideal. Bad choice of words, right? :D

OK, so then we are in agreement anyway. It appears that the disagreement is either a "bad choice of words" or some other form of verbal crossed wires.

#3. However, I do have a technical quibble with market failure. Rational action sometimes leads to results that are suboptimal based on the individual valuation of each individual, such as Friedman's example of the "busiest intersection in the world" and if everyone just simultaneously cooperated by doing what seems to be irrational on individual valuation, the end result would be more optimal based on individual valuation. But this idea presupposes that the actions of others are not as much a part of the circumstances of "the world as it is" as anything else. <snip>

Rationality is not measured with respect to some counterfactual world where, for example, everyone cooperates at the intersection to reduce total time to get home.

But the state of affairs where everybody just magically* cooperated to get home sooner is, indeed, a counterfactual world. The actual world we live in is characterized by rational actors who choose the "locally optimal" action irrespective of the larger consequences.

It is measured with respect to this, actual world and the choices that people actually do make, even when those choices frustrate the ends of most or all participants in the market.

I am not sure what you are getting at. Rationality is not being measured with respect to a counterfactual world. Its the desirability of the OUTCOMES that are being measured and compared.

Yes, but the outcome is the outcome of collective action, not the outcome of individual action. If I choose route A over route B and get home faster, the outcome is the result of my own action. This, in turn, influences my future actions. But the outcome of the choices of many individuals cannot influence my future actions since I cannot control the actions of others. If I choose A and achieve a reward, then I may alter my decision-making strategy to incorporate A more of the time. But if I get rewarded or punished regardless of my own choices (as a consequence of the choices of many other individuals), my decision-making cannot be improved since my decision was not the controlling factor in the outcome.

Let me see if I can clarify. Our choices are not made in a vacuum. They are made in the context of institutions. Going back to Friedman's intersection example, how does each individual decide when to cross the intersection? In the real world, the institution in place is a combination of ques and traffic signals. Cars line up, single file (first come first serve) and wait for "their turn" to cross the road. However, as Friedman describes, each individual is only interested in getting home earlier (regardless of whether that means other people get home later). So you effectively wind up with some individuals trying to "cheat" by clogging the intersection after their light turns red so they can effectively steal a turn from individuals going in the other direction. Knowing this will happen, other individuals do the same to avoid getting cheater out of their turn later, and everyone winds up getting home later than if everyone simply waited their turn.

Are people acting irrational in Friedman's intersection example? No. But the institution in place for deciding who gets to cross the intersection is channeling everyone's rational self-interest in a way that creates an ***outcome*** that is undesirable from the perspective of each driver (each of whom is making decisions with the goal of getting home earlier). Maybe you could call it a "coordination problem" if that suits your anarcho-capitalist fancy.

I don't really like the term "anarcho-capitalist", I just prefer anti-state or anti-statist. And I'm no fundamentalist. I grew up in fundamental right-wing churches and I've gotten more than a lifetime's worth of pulpit-pounding. I understand the issue of market failure and I assent to your above description of Friedman's example as accurate. Nevertheless, I think that it's either an unimportant problem or a poor way to think about the important problems it touches on. I understand that most economists disagree.

This coordination problem arises because there are externalities (the cost of my decision to cheat are felt by others and not myself), transaction costs (it is very costly to bargain with other drivers over who will cross the intersection next), and ill defined property rights (i may think it is "my turn" to cross the intersection next, but you seem to think it is your turn because you're blocking my way by sitting in the intersection and no one is around to settle the disagreement).

Yes, transaction costs are important. There are problems with Coaseanism, however. This is one area where I disagree with David Friedman... he thinks that Coase is, generally speaking, the "solution" to transaction cost problems and property rights disputes. I think the solution is a lot more complex.

Clayton -

*In other words, irrationally

Re: Do you believe in market failure?

filc — Sun, 08 Aug 2010 20:22:11 GMT

Neoclassical:
Wouldn't Mises' defense of minarchism imply his belief in market failure?

I'm sure Mises, if he were alive, would disagree with you, since praxeologically speaking the concept of "market failure" is fictitious. Markets don't fail, but people do.

Re: Do you believe in market failure?

Lagrange multiplier — Sun, 08 Aug 2010 19:55:48 GMT

I agree with everything Student has said.

Wouldn't Mises' defense of minarchism imply his belief in market failure?

Re: Do you believe in market failure?

The Late Andrew Ryan — Sun, 08 Aug 2010 19:18:15 GMT

"(discussing "market failures" isn't good PR for an anarcho-capitalist fan club)"

Sizzle.

Re: Do you believe in market failure?

Student — Sun, 08 Aug 2010 18:39:47 GMT

Clayton, actually it looks like I predicted your response pretty well. You assert that transaction costs are circumstances we can't fix and then skip along to how you dislike the political solutions that are typically offered for solving market failure because they involve coercion.

Of course, none of what you said justifies your original assertion that market failures can only be defined with reference to sort of collective ideal outside of individual valuation. *shrug* Slippery fish arguments are never very fun for me, so this will likely be my last post in this thread. But I will take a second to address 3 of your specific points.

#1. I guess I have a philosophical problem with the idea of market failure because it conceives of the market as something that is designed. Transaction costs, like any other cost, are simply a circumstance. We cannot fix, alter or even redistribute costs without resort to coercion.

Not true. The definition of market failure doesn't require anything about markets being designed or how they are created at all. In fact, it takes the existence of a market as given and says that this market is not able to do its job when transactions costs are high (for example, I never described the creation of the air quality market in my example because it is irrelevant for the *definition* of market failure). Now, that doesn't mean that how markets are created isn't an important question--especially when it comes to considering how to *solve* market failures. But I should stress that defining market failures and solving them isn't the same thing. Based on your post I wonder if you are drawing any distinction between the two concepts.

#2. I understand what economists mean when they talk about market failure. I do think the term is loaded but so what? That's what economists call it. The trouble I have is not with the idea of market failure itself but with the idea that market failure can be corrected via coercion. If you look at each example of market failure on a case-by-case basis, you will find that coercion is not needed to solve whatever problem is at hand.

I actually have no problem with this statement. I would just note that this isn't what you said in your previous post. If you scroll up, you will see that the first sentence of your post stated that market failure itself cannot even be defined without appealing to some collective ideal. Bad choice of words, right? :D

#3. However, I do have a technical quibble with market failure. Rational action sometimes leads to results that are suboptimal based on the individual valuation of each individual, such as Friedman's example of the "busiest intersection in the world" and if everyone just simultaneously cooperated by doing what seems to be irrational on individual valuation, the end result would be more optimal based on individual valuation. But this idea presupposes that the actions of others are not as much a part of the circumstances of "the world as it is" as anything else. <snip>
Rationality is not measured with respect to some counterfactual world where, for example, everyone cooperates at the intersection to reduce total time to get home. It is measured with respect to this, actual world and the choices that people actually do make, even when those choices frustrate the ends of most or all participants in the market.

I am not sure what you are getting at. Rationality is not being measured with respect to a counterfactual world. Its the desirability of the OUTCOMES that are being measured and compared. Let me see if I can clarify. Our choices are not made in a vacuum. They are made in the context of institutions. Going back to Friedman's intersection example, how does each individual decide when to cross the intersection? In the real world, the institution in place is a combination of ques and traffic signals. Cars line up, single file (first come first serve) and wait for "their turn" to cross the road. However, as Friedman describes, each individual is only interested in getting home earlier (regardless of whether that means other people get home later). So you effectively wind up with some individuals trying to "cheat" by clogging the intersection after their light turns red so they can effectively steal a turn from individuals going in the other direction. Knowing this will happen, other individuals do the same to avoid getting cheater out of their turn later, and everyone winds up getting home later than if everyone simply waited their turn.

Are people acting irrational in Friedman's intersection example? No. But the institution in place for deciding who gets to cross the intersection is channeling everyone's rational self-interest in a way that creates an ***outcome*** that is undesirable from the perspective of each driver (each of whom is making decisions with the goal of getting home earlier). Maybe you could call it a "coordination problem" if that suits your anarcho-capitalist fancy.

This coordination problem arises because there are externalities (the cost of my decision to cheat are felt by others and not myself), transaction costs (it is very costly to bargain with other drivers over who will cross the intersection next), and ill defined property rights (i may think it is "my turn" to cross the intersection next, but you seem to think it is your turn because you're blocking my way by sitting in the intersection and no one is around to settle the disagreement).

Now, there are a variety of ways you could try to solve each of these underlying problems. Because of the high transaction costs, an explicit "intersection market" (where "turns" are bought and sold like any other commodity) would probably "fail" to achieve a better outcome than the existing institution. But maybe there are other alternatives. For example, I think a crossing guard would be a pretty simple solution--someone who decides whose turn it was and punished people who tried to cheat. But I just want to be clear that solving the problem is totally seperate from defining what the problem is.

Alright. Thats it for now. This post is already way too long.

Re: Do you believe in market failure?

Caley McKibbin — Sun, 08 Aug 2010 08:05:36 GMT

So call it transaction costs and avoid the semantic bickering.

Ha! That makes too much sense, you gibbering fundamentalist. Quit worshipping at the altar and get with the program of fabricating taxonomically useless and misleading negative connotations, like every sensible person does.

Re: Do you believe in market failure?

Michael J Green — Sun, 08 Aug 2010 07:22:40 GMT

"Sure we could have a civilized discussion about the problems these transaction costs create, but I would prefer to act like I don't know what "market failure" means so we can argue definitions for 8 pages."

So call it transaction costs and avoid the semantic bickering.

And what is objectionable in caring about PR? Considering the struggle for liberty is based entirely on persuasion, I think it's pretty important. (though, as I've argued earlier in this thread and as Clayton did above, I think 'market failure' is a wholly misleading term, and not just something that sounds negative)