Do you believe in market failure?
I do.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
"I am about 10 minutes into it, thanks for posting it."
ViennaSausage: Would you mind posting a TL;DR/TL;DW (too long; didn't watch) version of this. I am curious what their definition of market failure appears to be.
Would you mind posting a TL;DR/TL;DW (too long; didn't watch) version of this. I am curious what their definition of market failure appears to be.
That usually would be necessary. But he defined it very well in the first 5 minutes. Watch it.
If I wrote it more than a few weeks ago, I probably hate it by now.
You might want to read the first page of Friedman's article, Do We Need a Government?
The typesetting looks a little bugged, but here is a lengthy quote:
It is sometime in the 12th century, somewhere in Europe, and I am one of a line of men with spears, on foot, facing another bunch of men--on horseback with spearsãmoving rapidly in our direction. I make a rapid cost benefit calculation. If we all stand, we might break their charge. If we run, we die. I should stand.
The mistake I have just made is the word ≥we≤. I only control me, and I am only one spearman out of several thousand. If everybody else stands and I run, my running has little effect on whether their charge is stopped--and I wonπt be one of the men who dies stopping it. If everybody else runs and I stand, I die. So whether the rest of the line is going to run or stand, I should run. Everybody else in the line makes the same calculation. We all run and most of us die.
Welcome to the dark side of rationality.
This is an example of market failureãa situation where each individual correctly chooses the action that best accomplishes his objectives, yet the result is worse, in terms of those same objectives, than if everyone had done something else. More familiar examples include the Prisonerπs Dilemma, a situation where each of two criminals is better off confessing even though both would be better off if neither confessed, and air pollution in circumstances where it is in each personπs interest to pollute but we would all be better off if none of us did so.
Central to these examples is the fact that my decision provides costs or benefits for other people. In deciding what to do, I take account of the effect on me.[1] I correctly conclude that I am better off running than standing, ignoring the cost my running imposes on my comrades. They correctly conclude that they are better off running, ignoring the cost imposed on me. I gain by my decision but lose more by theirs, and similarly, mutatis mutandis, for them. We each decide correctly and are all worse off as a result.
This is clearly a failure of some sortãbut the examples I have given have nothing to do with markets, so why is it called ≥market failure?≤ A likely answer is that the concept was developed in the context of neo-classical economics. Economists generally assume that individuals are rational, that they take the actions which best serve their objectives.[2] That suggests that if we simply let each person do what he wants, the outcome should be attractive for everyone, a suggestion that can be converted into a formal proof, an efficiency theorem showing that, under some set of simplifying assumptions, the outcome of individual choice in a market system cannot be improved even by a wise and benevolent central planner.[3]
In economic theory, market failure provides the exception to that conclusionãan exception that may arguably swallow the rule. Where one personπs acts impose costs or benefits on others that he has no reason to take account of, individual rationality cannot be expected to lead to group rationality, so there are opportunities for a wise and benevolent central plannerãperhaps also for a real world governmentãto intervene in ways that make everyone better off. So economists are used to viewing the various forms of market failure they have analyzedãthe public good problem, externalities, adverse selectionãas reasons why free markets, laissez-faire, sometimes fails, hence arguments for government intervention.
They are half right. Market failure is a reason why free markets sometimes fail. But it is also a reason why the alternatives to free markets, the political mechanisms proposed for correcting those failures, fail. In order for government intervention to improve on the market outcome, it is not enough that there is something government could do that would give a better outcome. There must also be a reason to expect government to do it. Putting the point in the language of economics, the incentives of the relevant political actors have to be such that it is in their interest to act in ways that result in the improved outcome.
@Neoclassical:
Friedman: "I make a rapid cost benefit calculation. If we all stand, we might break their charge. If we run, we die. I should stand. "
Or...if we all stand, we might break their charge. If we run, we die. If I run, I will be considered a coward and life will not be worth living. I should stand. Everyone believes they will be labeled cowards if they run. Everyone stands.
Friedman's example is flawed.
Friedman: "so there are opportunities for a wise and benevolent central plannerãperhaps also for a real world governmentãto intervene in ways that make everyone better off. "
This presupposes there is such a thing as a "wise and benevolent central planner". Does this creature exist in either theory or practice?
As for "government intervening in ways that makes everyone better off", well, that is the point of Austrian economics, isn't it. AE points out that intervention does NOT accomplish the stated goals of the planner or interventionist. The seen and unseen...but that is being ignored in the market failure analysis.
[EDIT: Friedman talks about government being exposed to the same types of "market failures" as the market itself, but that is not what I'm referring to]
The coal / smog example: Everyone uses coal in his fireplace, NOT BECAUSE HE THINKS IT CONTRIBUTES A SMALL AMOUNT TO THE SMOG AS FRIEDMAN SAYS, but to keep warm. Big difference. An entrepreneur sees that smog is produced, and comes up with electricity, or a less polluting alternative. Market success, not failure.
Camel example: He calls it an elegant example of market failure. It is not. It makes no sense, it is not an example of an exchange, it is a bet, a wager.
The concepts and terms being used to describe "market failure" do not describe what markets do, the market process.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
Sorry for not mentioning, but the reason I spoke about Prisonner Dilemma before was because David Friedman uses that indeed as market failure.
As said before, PD's get solved by coordination, this will be done in the market if there is demand for it (or, as in most cases, by repeating the PD game, which allows reputation to kick in).
You see, that's my issue with mainstream economics. It's all about cool ideas. I like game theory, I like some of the ideas for the sake of them, but they never go to the core of the philosophical issues as the Austrian School does.
So I ask again to neoclassical; What else besides the (false) examples of buyer's remorse and prisonner dilemma do you have of market failure?
chloe732: @Neoclassical: Friedman: "I make a rapid cost benefit calculation. If we all stand, we might break their charge. If we run, we die. I should stand. " Or...if we all stand, we might break their charge. If we run, we die. If I run, I will be considered a coward and life will not be worth living. I should stand. Everyone believes they will be labeled cowards if they run. Everyone stands.
This is a very insightful analysis Chloe. It sheds light on why there is a cultural bias against 'cowardice' and 'cowards' in human societies. Thanks for posting !
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
he prisoner's dilemma. Heard of it?
I really don't get why this is supposed to be the great example that proves that market failure exists. Not at all. Because the prisoner's dilemma is merely a reflection of poor preparation on part of the prisoners. It is not the fault of "the market", but of the individuals involved. A few possible solutions: They could hire a third party in advance to make sure to kill the traitor (which would make sure that not betraying the other prisoner would be against the interests of both) or if they were thieves they could hide their stash in a box that has two keys (each of the prisoner's having one of them so each of them would depend on the other for getting any of the loot), etc. Usually just befriending each other should do the trick as the affection for the other combined with belief that the other one also factors that affection and the knowledge one's one affection into account will if the friendship holds any water easily provide a solution to the prisoner's dilemma (and usually does; it's hard to imagine for example 2 family members getting trapped into the prisoner's dilemma) by aligning the personal and collective interests of the two in question to each other.
I think the main point that "human nature" has going against problems like that though is the concept of emotion. If every human being acted only on behalf of his own material well-being and disregarded the interests and well-being of all his comrades as well as their opinion of him (which is a necessary condition for Friedman's examples to be valid, as already pointed out), then yes, in general every form of interhuman corporation/contract that depended on even a little bit of trust would need the most careful planning on making sure that the interest of both participants are at all times to stick to the agreement, making most interhuman activities that we currently enjoy very hard to achieve. Even if we did not have emotion, the prisoner's dilemma could still be solved (as I explained above, by creating artificial interdependence), but emotion sure makes it much easier (by aligning the interests of individuals to each other to some degree to begin with, of course that is not in all cases enough).
In any case, however, the free market is required for finding solutions; once the prisoners are in the cell and haven't prepared themselves for the situation, they are obviously screwed, but we're then not dealing with a market situation anymore because coercion on the part of the prison guards, etc, keeps the market situation from arising (not saying that I oppose this, if the prisoners have committed horrible crimes, this is obviously precisely what we - that is I - want). The prisoner's dilemma can therefore only be conceived of in a coercive, a non-market, situation: It is the precise elimination of the operation of the market by the police through isolating the two prisoners that brings it about.
market failures = sub optimal distributions of property rights. Market failures can be corrected on the market by rearranging property rights. If done in a voluntary fashion through prices, efficient combinations can be sorted out from inefficient ones.
Neoclassical:See! This sort of intellectual charlatanry is what made me so distrustful of Austrian economics, in general. Your ideology trumps your economics qua science.
I just think you are being unfairly vague.
Brother, you are on a forum of novices. We aren't good representatives of Austrian School economics.
There are many people here who are very well versed in Austrian econ as well as neoclassical econ. I'd reiterate the question you posed, only in a different way? Why say the "market" "failed"?
See! This sort of intellectual charlatanry is what made me so distrustful of Austrian economics, in general. Your ideology trumps your economics qua science.
Oh, you mean when we call nebulous concepts into question, it irks you? Nebulous pseudo-concepts like "market failure"?
Freedom of markets is positively correlated with the degree of evolution in any society...
"Friedman's example is flawed."
Actually, I believe the assumption was that the chargers were a superior force and would surely crush them. (There are numerous occurences of this very thing happening in military history, where everyone knows that if they run they will die, and run anyway.)
"It is sometime in the 12th century, somewhere in Europe, and I am one of a line of men with spears, on foot, facing another bunch of men--on horseback"
In States a fresh law is looked upon as a remedy for evil. Instead of themselves altering what is bad, people begin by demanding a law to alter it. ... In short, a law everywhere and for everything!
~Peter Kropotkin
Wow this is just silly. We have seen 100s of years of armys (not all government forced) standing opposed to each other, with NOT all of them running. Why setup a strawman of rationality then cut it down?
(only first minutes, still listening)
Well his intersection example is silly too. Who is the owner of the intersection. Why define rationality and goals the way he does? What about customs, norms and values, all things that influence humans (maybe not rational agents...)
------
And if they stand? And why does that make it a market failure?
No idea, cuz someone might invent pikes. Just sayin it still holds true as an analogy.
I agree that 'market failure' is a troublesome label, particularly with the way Friedman defined it. Failure requires a goal; 'the market' does not have any goal in mind. The goods and services produced in an environment of private property and free contract may fail to satisfy the wants of one person or a wide group of people. The amount of security provided may be unsatisfactory to many consumers, possibly due to externalities and adverse selection; why, however, is this to be called 'market failure'? There can be said to be state failure, because the state is an organization with goals. If it chooses means that do not lead to the ends sought, then the state has failed. The market is not an organization with set goals. Why should we allow the confused and confusing label 'market failure' to stand? It is counterproductive to our goal of convincing people of the superiority of the free market, is it not?
Can there be individual failure? Of course. Business failure? Sure. Industry-wide failure? Perhaps, properly understood. I don't think Austrians will disagree with any of this; that some may quibble with the label market failure should not be seen as intellectual charlantry. It is a legitimate battle to be fought, especially since it involves understanding just what 'the market' is.