March 25, 2004
Aww Dammit!
I might have to change my views on David Bernstein's posts if he keeps writing stuff like this. Prof. Bernstein lays out very nicely the libertarian critique of anti-trust policy.
The losses from antitrust law can be huge: the costs of rent-seeking and countering rent-seeking alone can dwarf any gains from good antitrust enforcement, and antitrust enforcement won't necessarily be good. The question, to this extent, is whether you would rather have market outcomes be governed by Wall Street or K Street. Meanwhile, the losses from monopoly are not likely to be huge. The monopolist sells at a monopoly price, and gains monopoly prices, but the product is still, after all, on the market. And the available monopoly rents should lead to competitors trying to break the monopoly.
Which is exactly right. However, I'd also add that the government is one of the sources of market power and that firms will also engage in rent seeking to gain market power. This too is a loss to society and points to one of the inherent contradictions in government. One part of the government grants market power while another part tries to take it away.
Juan Non-Volokh then follows up with this post, which makes the obvious point.
The failure of market processes to produce an optimal result does not ensure that the political process will do a better job.--emphasis in the original
This too is precisely right. Simply because there is an optimal outcome does not mean we can get there. This is topic I have addressed on this blog before. There is this post on the theory of the second best. There is also the problem with fact that many solutions are arrived at via the political process (posts on that can be found here, here, and here).
Henry Farrell at Crooked Timber tries to turn this idea on its head. The problem with Henry's little joke is that there is nothing that says the political process has to lead to a good outcome (theoretical or practical), while theoretical equilibrium models on the other hand do indicate that market outcomes are in some ways desirable.
The perfectly competitive equilibrium model results in a pareto optimal outcome. This is the same type of outcome proponents of government intervention often point too. However, there is nothing in the political process that assures us of getting to that point. The only exception that I am aware of is the median voter theorem and the requirements for this theorem are about as stringent (maybe even moreso) as those for a perfectly competitive outcome.
Posted by Steve at March 25, 2004 12:53 PMHenry Farrel at Crooked Timber tries to turn this idea on its head. The problem with Henry's little joke is that there is nothing that says the political process has to lead to a good outcome (theoretical or practical), while theoretical equilibrium models on the other hand do indicate that market outcomes are in some ways desirable.
The perfectly competitive equilibrium model results in a pareto optimal outcome.
Well, Ken Arrow, who won a Nobel for the "perfectly competive equilibrium model results in a pareto optimal outcome" result, would vigorously disagree with your contention that it proves that market outcomes are desirable. He's quite keen, as it happens on governments stepping in to fix market failures, and quite down on people taking his results as license to argue all markets all of the time.
Posted by: Henry Farrell on March 25, 2004 01:12 PMAnother Nobel Laureate that would argue that markets work well even when the assumptions of the perfectly competitive model are not met would be Vernon Smith, who has shown experimentally that even a small number of market participants can achieve a competitive equilibrium.
Posted by: Donald Lacombe on March 25, 2004 01:24 PMHenry,
I doubt you'll return, but if you actually read my site you'll see that you have erected a nice strawman argument here. I am not opposed to fixing market failures, nor to I argue for "market all the time". That is a blatant and gross distortion on your part. Try again.
Posted by: Steve on March 25, 2004 01:30 PMWell ... one good straw man deserves another ... If you don't believe in all markets all of the time, fair enough - apologies for having misrepresented your position. But I still think you're completely mistaken here. General equilibrium models such as Arrow-Debreu are so unrealistic as to be interesting only as theoretical results (as Arrow himself is happy to agree). Partial equilibrium models can say pretty well anything that you want them to say - markets good, markets bad, markets whatever. So where are the equilibrium models that suggest in some general sense "that markets are desirable?" And if you want theories to suggest that political processes can lead to good outcomes, there's umpteen of them, contrary to your claim.
Posted by: Henry on March 25, 2004 06:04 PMThere you go again Henry. I wrote that the theoretical models show that in some ways markets are desirable. Note the emphasis.
Second, the result that typically one goes for with regards to policy are those results obtained by the Arrow-Debreu model! The very result that you say is irrelevant is the standard.
As for political theories that produce generally good results. Name them.
Posted by: Steve on March 25, 2004 07:21 PM