June 21, 2004
What a Load of Economic Crap
I can't believe the head of the Economic Policy Institute wrote this,
Of course, economists contend that economics is a science. "Tell me what you want to do and I will tell you the best way to do it" is the economist's usual stance. (Actually, as one economist said, his role is to say, "Tell me what you want and I'll tell you why you can't have it.") Clearly, there's no room for values. The underlying assumption is that unfettered markets produce the best outcomes, except in a few very specified situations: externalities (such as pollution imposed on society but not reflected in producers' costs), monopolies, and other "market failure" cases everyone has had to study in Econ 101. Some economists (Martin Feldstein, for one) have contended that inequality is not a proper concern for economists. They should be concerned only with determining how to maximize the output of goods and services.--emphasis added
This thing pisses me off. This guy looks like he is an expert. He's the head of the Economic Policy Institute, but he write this kind of drivel. Here is my list of things that cause the market to fail:
- Monopoly,
- Externalities,
- Oligopoly,
- Public Goods,
- Information asymmetries,
- Taxes,
- Boundedly Rational agents.
This guy has managed to get only 2 out of the 7. Further, he is highly misleading with his comment "The underlying assumption is that unfettered markets produce the best outcomes, except in a few very specified situations:". This is completley false. Why does he have to present such a misleading case? I'm quite pro-market, and yet I'll tell you that in most cases the idea that the market is not going to fail is laughable.
I'd say the vast majority of economists would agree that the assumptions that allow for the outcome Mishel is talking about are extremely restrictive. That is, the unfettered markets = good outcome relies on the First Fundamental Welfare theorem in economics.
Mishel continues,
The U.S. economic-policy debate is in fact dominated by the assumption that unfettered markets work best, a view that's applied to our domestic economy and to that of other countries through international financial institutions that the United States controls. John Kerry's recent statement that he is "not a redistributionist" indicates how dominant this view has become.
This is almost delusional. If the dominant view is that unfettered markets is the way to go, why is there so much government inferference? I have to wonder if this crud is due to ignorance or a deliberate attempt to mislead the readers.
Posted by Steve at June 21, 2004 10:44 AMThere is a remarkable tendency for people to view their own pet policies as laws of nature and policies they oppose as unwarranted interference in the operation of the market.
Posted by: Dave Schuler on June 21, 2004 12:32 PMPeople like Robert Kuttner and the author of this gem are deliberately misleading their readers. They know full well that there are thousands of government regulations that alter market outcomes but what they really don't want you to know is that these regulations are demanded by businesses to create barriers to entry...not in every case, but in quite a few.
Posted by: EcoDude on June 21, 2004 12:41 PMThe author seems to conflate the term best outcome with most efficient allocation. The former is a value judgement while the latter is what aggregate market forces tend to do. If this was a venn diagram the intersection would be where you valued best outcomes as being efficient allocations. Most public policy advocates I've read don't seem to make that choice.
Posted by: TangoMan on June 21, 2004 02:27 PMWhy is there so much government interference ???
Two words for you: Stockholm syndrome.
Deep psychological disease :)
Posted by: Gene on June 21, 2004 11:42 PMGood catch on the EPI statement, but disappointing list of causes of "market failure."
First of all, the number of possible violations of the conditions for the Fundamental Theorem of Welfare Economics to apply is not a good measure of the proportion of an economy that roughly satisfies those conditions. It is the case, I'd say, that many if not most economists think that a general presumption of the efficiency of unregulated markets is valid.
Turning to your list of causes of market failure, I think it is erroneous to treat monopoly and oligopoly as exogenous distortions. For one thing, monopoly is created every single time that a new product is brought to market. Competition evolves as new firms enter; it does not arise instantaneously. However, monopoly or oligopoly persist in the long run only if entry is prevented either by cost conditions (increasing returns to scale over the relevant range of output) or state intervention. In the latter case, the "market failure" is caused by state action. In the former case, the benefits of laissez-faire vs. state action are a matter of cost-benefit analysis. To argue in favor of regulation of the power-transmission grid is not necessarily to believe that Microsoft should be regulated.
"Bounded rationality" is, IMHO, better treated as "costly information," and is no more a source of "market failure" than is gravity or bad taste.
And before you accept the proposition that information asymmetries prevent efficient allocations, ask yourself how it is that there are so many used cars bought and sold every day.
Posted by: Bill on June 24, 2004 09:41 AMBill,
Every entry on the list will result in the market not attaining a pareto efficient outcome. In that sense every item results in a type of market failure.
I agree that monopoly is likely to be the result of government actions. I am not as convinced with oligopoly.
"Bounded rationality" is, IMHO, better treated as "costly information," and is no more a source of "market failure" than is gravity or bad taste.
One of the assumptions in a general equilibrium model is that information is symmetric and complete. Remove this assumption and markets fail to reach a pareto efficient outcome. Just because bounded rationality is a "natural" part of the market does not mean it is not a source of market failure.
And before you accept the proposition that information asymmetries prevent efficient allocations, ask yourself how it is that there are so many used cars bought and sold every day.
I accept that information asymmetries can prevent efficient allocations, not that they will prevent efficient allocations. The fact that there are some ways around these problems in some markets does not mean that there is a solution in all markets.
It is the case, I'd say, that many if not most economists think that a general presumption of the efficiency of unregulated markets is valid.
I'd say it is probably more accurate to say that most economists see the unregulated market outcome as being less burdensome than the government oriented solutions. Or to put it differently: many if not most economists see the inefficient market outcomes as preferable to the inefficient government intervention solutions.
As I like to put it, market failure is a necessary condition for government action, but it is far from a sufficient condition.
Posted by: Steve on June 24, 2004 10:07 AM