Do you believe in market failure?
I do.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
You're right: he didn't account for a more plausible scenario, but that wasn't his point.
His point was that, given these tastes, individual decision-makers will not arrive at an optimal outcome.
Furthermore, like he said, we can definitely create institutional rules or norms that alleviate some market failures--(e.g., a consicence that weighs heavily if one runs away from "your duty to country" adds costs). New institutional economics is all about what helps generate economic prosperity.
And my point was that, given these tastes, individual decision makers would not engage in a set-piece battle in the first place. In such instances, capitulation, Fabian strategy, or guerrilla warfare would be selected as the optimal behavior.
"The prisoner's dilemma. Heard of it?"
The government doesn't solve anything because it would be subject to the same dilemma. It would be another prisoner.
Neoclassical is stealing my act.
Ambition is a dream with a V8 engine - Elvis Presley
I'd appreciate some backup, so it's alright.
And now we can be friends; you know, play kickball, trade lunches, the usual.
@OP:"Market failure" can only be defined by appeal to some collective ideal outside of individual valuation. People never choose against their true wishes. David Friedman's favorite illustration of the phenomenon of market failure is "the busiest intersection in the world" where, on every light, cars dart across the intersection during the yellow light and block the intersection and then the cars in the other direction do the same just as the light turns yet again. His second favorite illustration is that of the problem of getting soldiers during the era of swords and bows to stand in a line and not break and run. This is illustrative of the difficulty of designing rules for human interaction that accomplish the ends which the designers set out to accomplish. When you think about it, this is a limitation of central planned action, not distributed, uncoordinated action.
The reason is that there is no valuation by which to criticize distributed, uncoordinated action - like that which characterizes a market. The outcome is whatever the outcome is. Interactions which are planned by a designer may or may not meet the designer's ends, that is, they may fall short of satisfying the valuations of the designer. This is a design problem, not a problem with "the free market".
Clayton -
Clayton,
Market Failure can only be defined by an appeal to some collective ideal outside of individual valuation?
That is simply not right. Markets succeed when the individuals participating in them are able to make trades that make both the buyer and the seller better off. Likewise, markets "fail" when such trades cannot take place because the costs of operating in a market are too high (transaction costs). Its all about the individuals, guy. "Collective ideals" need not apply.
For example, suppose you have a world where a factory owns the right to spew gas into the atmosphere, but that the gas disrupts the breathing of nearby citizens. In a world without transaction costs, those citizens could get together and potentially purchase those rights away from the factory (assuming they were willing to pay enough of course). In that world, everyone would win. The citizens would get cleaner air and the owner of the factory would be paid what she thought was a fair price. Of course, in the real world, operating those types of markets simply don't exist because the price of operating in them is too high. Just think about it. How would you organize a negotiation that involved hundreds of people? Even if you did that, how would you find out how much those ownership rights were worth to the townspeople? Even if you asked them, how would you know they were telling the truth? These problems might not be impossible to solve. But who is willing to pay the price in solving them? From my observations, no one.
Now, of course, I've had this argument on this board before. And I can already predict what the response will be. "Oh well, that isn't really a "market failure"!!! You see, its not the market itself that is the problem, it is the cost of using the market!! So for me its a matter of symantics. 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. Sure, I *know* how economists define it. But why admit it? If I accepted their terminology that would be bad politics (discussing "market failures" isn't good PR for an anarcho-capitalist fan club)".
Don't think I'm up for that one again. Have fun!
PS* This is one reason why I say that 90% of the supposed "disagreements" Austrians have with the mainstream actually boil down to politics.
PPS*
Since this thread is about market failures, I just want to say that I am currently obsessed with Beck's song "The New Pollution."
Musically its mind blowing. Lyrically, its an enigma to me. I am pretty sure its about a deceitful woman. But I am not sure I know what "the New Pollution" is. In any case, the music video is balling. And I think it stars that chick from 24.
http://www.youtube.com/watch?v=uxugaMpt1vU&feature=av2e
Somehow, that video reminds me of David Lynch films... especially the creepy mock music video from Mulholland Drive. Anywho, everybody else feel free to carry on this debate, i've found it edifying so far.
"When the King is far the people are happy." Chinese proverb
For Alexander Zinoviev and the free market there is a shared delight:
"Where there are problems there is life."
No. They boil down to the mainstream being wrong.
Clayton, Market Failure can only be defined by an appeal to some collective ideal outside of individual valuation? That is simply not right. Markets succeed when the individuals participating in them are able to make trades that make both the buyer and the seller better off. Likewise, markets "fail" when such trades cannot take place because the costs of operating in a market are too high (transaction costs). Its all about the individuals, guy. "Collective ideals" need not apply.
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.
OK? So what?
Sorry, you got the wrong guy, I'm not a diehard Austrian fundamentalist. 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.
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.
Let's say I'm building a beach home and I move it closer to the water for a better view, only to have it wiped out by an unforeseeable tsunami. Had I built it further back (poorer view), the home would have survived. In retrospect, my life could have been improved if some benevolent force had stepped in and coerced me to act "irrationally", that is, forced me to build the home further back from the shoreline with a poorer view. But we understand that, in the case of unforeseeable tsunamis, there is no omniscient being or organization which could foresee such things, so there's no way that permitting coercion of this nature could actually improve people's lives (on their own valuation).
A tsunami or other natural event is simply an unalterable fact of circumstance. We do not refer to such events as a "nature failure" simply because nature failed to meet our planned expectations in attaining our own ends. But the actions of other individuals are, from the point of view of each individual, unalterable facts of circumstance. Each participant in the market can only plan his own actions by taking the actions of others as a matter of fact. In other words, if I'm at Friedman's "busiest intersection in the world", I can only plan my own actions (whether to dart across the intersection or stay back) in the context of the fact of the actions of others (they will, predictably, dart across). 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.
Friedman also discusses the solution of such problems via entrepreneurship and I think that highlights the crucial distinction between mainstream economics versus an anti-state stance. Even granting the idea of market failure, there is still no need to invoke the specter of a benevolent, omnimax, coercive authority to solve them. Friedman uses public choice theory to reject non-entrepreneurial solutions to market failure (basically, that democratic government is a larger public goods problem than the public goods problems that it is proposed to solve).
"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)
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.
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.
#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>
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.
"(discussing "market failures" isn't good PR for an anarcho-capitalist fan club)"
Sizzle.