Sen on the importance of Hayek

[Garth Zietsman]

Here is Amartya Sen's excellent take on Hayek's Road to Serfdom - a great book if you haven't already read it.

Hayek makes a slam dunk case against centralized planning of the economy or of society.  Popper's work The Open Society and it's Enemies also makes a good case against grand social engineering.  Of course the failures of such societies have vindicated their arguments.

The question I have is about what Popper called piecemeal social engineering i.e. very limited bits of planned economics or social change usually on a small local scale at first.  One could see these as experts engaging in tentative experiments.  This is in essence what progressivism is supposed to be about - the cummulation of small social science based changes that have been shown to work.  I am interested in whether this sort of thing does work, in the sense of leading to a better society, and am for the moment ignoring the moral issues of the financial transfers involved.  In terms of effectiveness can experts make a positive difference or does the market always do a better job?

Experts simply cannot know enough to pull off grand social engineering but what if they are confined to a scale and scope more in keeping with what they can know?  Can they then perhaps add to human thriving?

I'm asking this because although I very much believe in the virtues of bottom up spontaneous order - not only because I'm a libertarian but also because I'm into complexity theory - I also believe that what experts know isn't entirely useless.  I believes humans do have it in them to rise above their situation and can in fact manage and manipulate the situation so that it suits their purposes i.e. can deliberately plan their way to a better life.  I was reading the book Grand Pursuit (about the people who made modern economics) recently.  There the point was made that around 1850 economic growth picked up and incomes of everyone - including the poor - began increasing.  There was the realization than man didn't have to just accept his lot but had the means to determine his fate and that economics was in fact quite an effective tool i.e. the economists knew something useful that bettered the lives of all.  I think other social sciences may make similar contributions.

I have in mind such things as planning roads, or walking and social spaces. Isn't it true that an expert could probably do a better job (on a limited scale) i.e. produce roads that are easier to use, move traffic faster with fewer accidents and agro; or living spaces that are more interesting, attractive, usable and peaceful, than a completely unrestrained market?  

What about libertarian nudges to get people to save adequately for old age or look after their health?  

How about game theory and the prisoners dilemma?  Since it is in our individual interests to turn on our mate, when cooperating would lead to better outcomes for everyone, wouldn't a social design that increased cooperation be an improvement e.g. a convincing peacekeeper?

One could go on and on but you get the point.  Am I being naive or shortsighted?

Garth

PS I sorry for the rather unpolished form of this post.

[Paul AH Hjul]

I am a huge fan of Sen and firmly believe that treasury should be guided by welfare economists. The very simple problem that exists is that the majority of people taking control of fiscal powers are dye in the wool utilitarians who don't value freedom and so we end up with what I have previously called Krugmanism. On the other hand if the starting point of your economic theory is that every actor acts according to the rational pursuit of its preferences then a for profit company's directors must pursue courses of action to maximize the profit base whilst a not-for-financial-profit educational institutions directors must embark on the course that balances revenue and expenditure and promotes learning - - finally and most importantly the government with its free resources promotes the wellbeing of the people. The governments legitimacy to take property or erode the law is as much as the private individual - ie it doesn't have any.

[Colin Phillips]

Hi Garth,

I think you offer a false dichotomy in "can experts make a positive difference or does the market always do a better job".

There is a third alternative -> that the experts, rather than being separate from the market, become fully integrated in the process by which the market gropes towards solutions.

If it is true that the experts can provide real value, and let's presume that it is, then those experts have a skill which can be sold on the labour market, as consultancy services.  It seems to me that we can have a solution found by market means in which the experts are tasked with designing a system, including a set of mutually agreeable contracts for all users of the system to sign.

To use roads as an example, I have many times sat in traffic, looking at the traffic light synchronisation, searching in vain for any sign of intelligent design.  Speaking as a citizen, and thus as a (theoretical) part owner of all state assets, including the road, I would very much like a service which re-optimises the traffic light synchronisation.  This is a task requiring at least some level of expert skill, and is a task which an expert should be able to make some profit in performing.

My point is this - if experts have the skills to be able to improve a situation, say by redesigning some aspect of a road system, then they should form a business selling this skill.  If we find a case (in the freed market) where the experts are not being heeded, this means one of two things (or perhaps both):  either the solution proposed by the experts does not actually suit the purposes of those who are asked to pay, or the experts need to spend a little bit of money on advertising, to be able to convince the stakeholders that the solution is in their best interests.

In the examples you mentioned in your post, I didn't see any cases where my solution would not be that the people paying for a particular development would do well to invest in getting expert advice, so as to get value for their investment.

To be specific:

Planning roads, walking or social spaces:  This already happens, inside complexes and retirement villages, engineers (experts) are asked to consult on the design aspects of the complex as a whole, including the roads and parks.

Living spaces that are interesting, usable, attractive, and peaceful:  The experts that do this are called architects.  In many cases, the "usable" requirement may trump all other considerations, but, for the most part, this is the goal of architecture.

Getting people to save adequately for old age.  If this was really such a good idea, we would, within one generation, find people of the older generation telling people of the younger generation what a good idea this is.  I find that this is very much the case.  Also, I get an sms advert about once a week, offering a free financial planning session with the big banks, where they will do everything they reasonably can to nudge me into saving as much as possible for old age.

Getting people to look after their health: From here https://www.discovery.co.za/portal/individual/vitality :"Discovery Vitality is the wellness programme that rewards you for getting healthier. All you have to do is know more about your health and take a few easy steps to improve it.
Every step earns you Vitality points and improves your Vitality status. The more points you earn, the more travel, shopping and lifestyle rewards you get!"

It would seem that this problem has already been solved.

The prisoner's dilemma.

I've never really been convinced that this is a problem.  If I were the sort of person to use accomplices when committing my crimes, I would think that my first step would be to create a contract with my potential accomplice, which details exactly what the strategy would be if we were to be caught, and furthermore details what penalties should be incurred if someone deviates from this strategy.  I would hope all parties to the contract would be willing to put some valued asset into the hands of a trusted third party, so that the contract would be at least partially enforceable.  This is generally the solution to most game theory problems - rather than being limited to just the original players, if an outside observer of the game notices that the game is in a sub-optimal Nash equilibrium, then that outside observer has found a business opportunity to buy up the stakes of two opposing key players, and simultaneously adjust both of their strategies to yield the greater outcome.  In all likelihood, this outside observer will be some sort of expert.

To sum up, my feeling is that if a person says they are an expert, we should not take them at their word, and give them excess power over our lives, without some reasonable standard of evidence.  To my mind, the best standard of evidence they could provide is proving the value for money of their skills on an open, free market.

I hope I am making sense.

Colin Phillips.

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[Garth Zietsman]

Hi Colin

You make many sensible points - with which I substantially agree.

I must say I do sometimes doubt the 'expertise' of architects when I look at the average building.  Soulless, unimaginative and not very useful either.  Also I don't think town developers consult experts very much or when they do they tend to listen to those who want to preserve 'heritage' over those who may better serve the interests of those who actually live in or use the place.

On the savings issue - I just read a post about the incentives of the market are not always to give the customer the best advice but rather to make the most money from the client e.g. recommend investments with high fees rather than a low fee index fund.  Banks offering financial planning advice are not an effective nudge for people to save enough.  

On the 'prisoner's dilemma' as an argument (or not) for minarchism - lets just disagree at this point.  Yes I suppose in theory people can contract a solution.  Often they do try but in the absence of a believable outside enforcer these attempts are not successful.  I find it hard to believe that someone you contract to be an outside enforcer really has the authority to be believable.  However I remain open to persuasion. 

But all that aside I basically agree with you - expertise can be utilized within a market to a very large degree.  My view of markets are - they encompass freedom which is valuable for it's own sake and they work really well to serve needs.  However saying they work very well is not saying they must necessarily work perfectly.  I don't think free markets always reach optimum solutions and where they do it's not always a global rather than a local optimum.  Genetic algorithms are pretty awesome at optimisation problems where things are complex but even they sometimes miss the very best solutions.  So what I find in need of an explanation is why markets under-utilized experts?  That is just my subjective opinion - not a statement of fact.

I too like Sen a great deal - even though he is not a libertarian.  I had the pleasure of a half hour face to face conversation with him on economics once.  We didn't argue.  Funny thing is that of the four Nobel Laureates I have met I ended up having arguments with two of them.  Robert Aumann did however quickly see my point on the problem of dividing a cake into more than two fair pieces (and he took a shine to my wife) but I parted with Nadine Gordimer without an agreement.  She was however kind enough to sign next to Sen's signature in one of his books rather than her own.  The fourth was Tutu.  Unfortunately I merely shook hands and exchanged greetings with him.

Garth

[Trevor Watkins]

I have just started reading Freakonomics (finally) and cannot resist sharing their opinion of the problem with relying on experts. 

Experts are human and generally seek to promote their own good ahead of those they purport to advise, using their informational advantage. Freakonomics gives the example of estate agents who would rather sell a house at a low price quickly then at a higher price after more effort from themselves. Doctors who profit more from expensive procedures than cheap or no procedures. Life insurance salesmen, funeral home directors, used car salesmen - all supposed experts in their field - whose advice we have mostly learnt to distrust. The great leveller for many of these "experts" has been the internet, which provides competing information at almost no cost. (Its no wonder the "experts" are so quick to pooh-pooh sites like wikipedia).

I'll keep trusting the marketplace of ideas and a little personal investigation over the advice of experts.

(I guess one must distinguish between someone who offer a certain level of skill at a particular price from someone who claims to be an "expert")

Trevor Watkins - Base Software
bas...@gmail.com 083 44 11 721 - 042 293 1405 - (fax)0866 532 363
PO Box 3302, Jeffreys Bay, 6330

[Garth Zietsman]

Indeed Trevor the expert often isn't to be trusted - especially when the incentives make it not in his interest to serve your best interests.  It makes a difference if the doctor is paid according to the number of procedures and tests or whether they are paid if the patient isn't re-admitted to hospital or re-treated for the same ailment.

While it is relevant whether the expert will use his knowledge to help or screw us I am more interested in whether the expert actually knows anything useful.  Specifically do they know better than what a market of average people could produce on a limited local scale?  It is often assumed (by free market fans) that people know what they want and know local conditions better than outsiders.  It is often claimed that experts in principle cannot know better.  Couple this with the notion that the market is super efficient at balancing and maximising the total values, and you have an idea that a free market involving locals must produce the best outcome.  

Against this you have the notion that experts have intellectual tools (not available to the average person) that will enable them to do better than this provided the informational load and complexity of the task is limited.  Here the claim is that the average person is actually both pretty ignorant and unable to handle the complexities involved.  A further claim might be that the market is simply doing the best balancing and maximising it can with this ignorance and misunderstanding so mistakes are bound to be built into any market solution that doesn't have expert input.  Furthermore it is all very well to refer to the marketplace of ideas but how is the average person to judge which of a bunch of complex ideas is best?  The aid of the internet doesn't fully solve this problem.  Often it just exposes you to even more confusing ideas one is ill equipped to handle - not to mention plausible sounding crackpots.

Which of these stories is more likely?  I have an emotional foot in both camps - hence my confusion.  

I have quite a bit of knowledge about the ability and knowledge distributions of people and also how they solve problems and make decisions in emotion driven illogical short cut ways that bear no resemblance to the rational man hypothesized by economics.  Some behavioral economics results e.g. preferences reverse depending on arbitrary circumstances, imply that people don't even know what they really want.  I also have some (less) knowledge of the performance of experts in various fields, and the fields themselves.  This has left me with a great deal of doubt about whether the average person really can and does decide what is in his own best interests.

On the other hand who can argue with the performance of free markets relative to 'scientific socialism'?

I put some hope on Colin's observation that the market does buy expertise and uses it efficiently.  It is my subjective impression however that expertise is not included into the market with anything like 100% efficiency.  For example persistent long term economic growth is mostly driven by science and technology (80% in the case of the US) and yet the resources devoted to basic science, and the salaries paid to scientists, seem woefully inadequate, and the fact that so many top mathematical minds end up in zero sum stock market games rather than science seems perverse.

Garth

[Leon Louw (gmail)]

Below ...

On 9 May 2013 17:33, Colin Phillips <noid...@gmail.com> wrote:

Hi Garth,

I think you offer a false dichotomy in "can experts make a positive difference or does the market always do a better job".

There is a third alternative -> that the experts, rather than being separate from the market, become fully integrated in the process by which the market gropes towards solutions.

If it is true that the experts can provide real value, and let's presume that it is, then those experts have a skill which can be sold on the labour market, as consultancy services.  It seems to me that we can have a solution found by market means in which the experts are tasked with designing a system, including a set of mutually agreeable contracts for all users of the system to sign.

To use roads as an example, I have many times sat in traffic, looking at the traffic light synchronisation, searching in vain for any sign of intelligent design.  Speaking as a citizen, and thus as a (theoretical) part owner of all state assets, including the road, I would very much like a service which re-optimises the traffic light synchronisation.  This is a task requiring at least some level of expert skill, and is a task which an expert should be able to make some profit in performing.

My point is this - if experts have the skills to be able to improve a situation, say by redesigning some aspect of a road system, then they should form a business selling this skill.  If we find a case (in the freed market) where the experts are not being heeded, this means one of two things (or perhaps both):  either the solution proposed by the experts does not actually suit the purposes of those who are asked to pay, or the experts need to spend a little bit of money on advertising, to be able to convince the stakeholders that the solution is in their best interests.

In the examples you mentioned in your post, I didn't see any cases where my solution would not be that the people paying for a particular development would do well to invest in getting expert advice, so as to get value for their investment.

To be specific:

Planning roads, walking or social spaces:  This already happens, inside complexes and retirement villages, engineers (experts) are asked to consult on the design aspects of the complex as a whole, including the roads and parks.

Living spaces that are interesting, usable, attractive, and peaceful:  The experts that do this are called architects.  In many cases, the "usable" requirement may trump all other considerations, but, for the most part, this is the goal of architecture.

Getting people to save adequately for old age.  If this was really such a good idea, we would, within one generation, find people of the older generation telling people of the younger generation what a good idea this is.  I find that this is very much the case.  Also, I get an sms advert about once a week, offering a free financial planning session with the big banks, where they will do everything they reasonably can to nudge me into saving as much as possible for old age.

Getting people to look after their health: From here https://www.discovery.co.za/portal/individual/vitality :"Discovery Vitality is the wellness programme that rewards you for getting healthier. All you have to do is know more about your health and take a few easy steps to improve it.
Every step earns you Vitality points and improves your Vitality status. The more points you earn, the more travel, shopping and lifestyle rewards you get!"

It would seem that this problem has already been solved.

The prisoner's dilemma.

I've never really been convinced that this is a problem.  If I were the sort of person to use accomplices when committing my crimes, I would think that my first step would be to create a contract with my potential accomplice, which details exactly what the strategy would be if we were to be caught, and furthermore details what penalties should be incurred if someone deviates from this strategy.  I would hope all parties to the contract would be willing to put some valued asset into the hands of a trusted third party, so that the contract would be at least partially enforceable.  This is generally the solution to most game theory problems - rather than being limited to just the original players, if an outside observer of the game notices that the game is in a sub-optimal Nash equilibrium, then that outside observer has found a business opportunity to buy up the stakes of two opposing key players, and simultaneously adjust both of their strategies to yield the greater outcome.  In all likelihood, this outside observer will be some sort of expert.

To sum up, my feeling is that if a person says they are an expert, we should not take them at their word, and give them excess power over our lives, without some reasonable standard of evidence.  

It's the norm in free markets to enlist the services of experts. We do that with virtually every purchase.  The closest we get to giving "power" over us to experts is surgery.  This is, of course, a contract entailing no more surrender of power, than any other contract, at least not conceptually.  I'm for slavery contracts.  Okay, I know, that'll seem to libertarians like a contradiction, but think about it.  I'm reminded of a top SA entertainer, forget his name, great guy, whose child needed bone marrow transplants.  he could not raise enough money -- we contributed modestly -- and the child died.  He might have been able to raise enough if slavery contracts were allowed.  The point is not about slavery contracts, but that contracts entail the surrender of "power".  So yes, Colin, you do make sense.  Which is another way of saying I agree with you.  Though I don't expect you to agree with my heresies.

--
Leon Louw

work:  +27-11-884-0270

mobile:  +27-84-618-0348

www.freemarketfoundation.com

[Leon Louw (gmail)]

Below ...

On 9 May 2013 22:10, Garth Zietsman <garth.z...@gmail.com> wrote:

Hi Colin

You make many sensible points - with which I substantially agree.

I must say I do sometimes doubt the 'expertise' of architects when I look at the average building.  Soulless, unimaginative and not very useful either.  Also I don't think town developers consult experts very much or when they do they tend to listen to those who want to preserve 'heritage' over those who may better serve the interests of those who actually live in or use the place.

I know this is a peripheral point, but I agree about architecture, Garth.  I often stare at buildings and wonder what one could do to make them uglier, perhaps offer a prize for anyone who can come up with a way to do it.  And I wonder why houses have their own plans since they are typically monotonous and repetitive; why not a library of plans on the net from which people download one of their choosing.   If they are uncommonly creative they can make the toilet smaller and the closet bigger, or whatever.

On the savings issue - I just read a post about the incentives of the market are not always to give the customer the best advice but rather to make the most money from the client e.g. recommend investments with high fees rather than a low fee index fund.  Banks offering financial planning advice are not an effective nudge for people to save enough.  

Yes, just as it not always -- indeed rarely is -- in the interests of officials to perform their functions without goal-substitution. 

On the 'prisoner's dilemma' as an argument (or not) for minarchism - lets just disagree at this point.  Yes I suppose in theory people can contract a solution.  Often they do try but in the absence of a believable outside enforcer these attempts are not successful.  I find it hard to believe that someone you contract to be an outside enforcer really has the authority to be believable.  However I remain open to persuasion. 

O agree with you, Garth, at least on this important point, that the Prisoner's dilemma is a given set of facts one has to confront; you can't do so by changing the facts.  This is one of the few issues that distinguishes the legal way of thinking, namely accepting given facts and then deciding what to do with them.  Non-lawyers tend to say "Yes, but what if .... ".

 

But all that aside I basically agree with you - expertise can be utilized within a market to a very large degree.  My view of markets are - they encompass freedom which is valuable for it's own sake and they work really well to serve needs.  However saying they work very well is not saying they must necessarily work perfectly.  I don't think free markets always reach optimum solutions and where they do it's not always a global rather than a local optimum.  Genetic algorithms are pretty awesome at optimisation problems where things are complex but even they sometimes miss the very best solutions.  So what I find in need of an explanation is why markets under-utilized experts?  That is just my subjective opinion - not a statement of fact.

The question is not whether "the market" is perfect, but under which conditions expertise is likely to be most productive (or least counter-productive).

 

I too like Sen a great deal - even though he is not a libertarian.

Sen may not be libertarian, but is a classical economist -- should also be understood in the context in which he was working.  For what it's worth, very few of our gurus considered themselves libertarian.  Friedman and Williams are the only ones who come to mind who described themselves thus.  Some, like Rand, viciously denounced libertarianism.

--

[Leon Louw (gmail)]

Below ...

On 10 May 2013 11:37, Garth Zietsman <garth.z...@gmail.com> wrote:

Indeed Trevor the expert often isn't to be trusted - especially when the incentives make it not in his interest to serve your best interests.  It makes a difference if the doctor is paid according to the number of procedures and tests or whether they are paid if the patient isn't re-admitted to hospital or re-treated for the same ailment.

While it is relevant whether the expert will use his knowledge to help or screw us I am more interested in whether the expert actually knows anything useful.  Specifically do they know better than what a market of average people could produce on a limited local scale?  It is often assumed (by free market fans) that people know what they want and know local conditions better than outsiders.  It is often claimed that experts in principle cannot know better.  Couple this with the notion that the market is super efficient at balancing and maximising the total values, and you have an idea that a free market involving locals must produce the best outcome.  

Against this you have the notion that experts have intellectual tools (not available to the average person) that will enable them to do better than this provided the informational load and complexity of the task is limited.  Here the claim is that the average person is actually both pretty ignorant and unable to handle the complexities involved.  A further claim might be that the market is simply doing the best balancing and maximising it can with this ignorance and misunderstanding so mistakes are bound to be built into any market solution that doesn't have expert input.  Furthermore it is all very well to refer to the marketplace of ideas but how is the average person to judge which of a bunch of complex ideas is best?  The aid of the internet doesn't fully solve this problem.  Often it just exposes you to even more confusing ideas one is ill equipped to handle - not to mention plausible sounding crackpots.

Which of these stories is more likely?  I have an emotional foot in both camps - hence my confusion.  

I have quite a bit of knowledge about the ability and knowledge distributions of people and also how they solve problems and make decisions in emotion driven illogical short cut ways that bear no resemblance to the rational man hypothesized by economics.  Some behavioral economics results e.g. preferences reverse depending on arbitrary circumstances, imply that people don't even know what they really want.  I also have some (less) knowledge of the performance of experts in various fields, and the fields themselves.  This has left me with a great deal of doubt about whether the average person really can and does decide what is in his own best interests.

On the other hand who can argue with the performance of free markets relative to 'scientific socialism'?

I put some hope on Colin's observation that the market does buy expertise and uses it efficiently.  It is my subjective impression however that expertise is not included into the market with anything like 100% efficiency.  

I repeat that no one (I hope) suggests 100% "efficiency" (whatever "efficiency" means in this context).  The question is which conditions make best use of expertise and which have best damage control.  This discourse, interesting as it is, has presupposed that expertise is a good thing to be optimised.  Much expertise is serious dangerous and the system we need is one that provides damage control.  This is true of almost all expertise in government, and even more true expert consultants to government.  Then there is the expertise of criminals and con-artists, sharp operators and slick sales people.  The world is full of dangerous expertise around every corner.  Freer markets are a means of damage control.

As a matter of human nature, my jaundiced view is that almost everyone seeks to promote their interests and use their expertise to gain advantage at everyone else's expense.  Which rules of the game turn, as Mandeville put it, private vices into public virtues, to which the clear answer seems to be maximally free markets.  The idea is also captured brilliantly in Smith's invisible hand.  

Government, on the other hand, is characterised by a visible foot.

--

[Garth Zietsman]

Below 

I repeat that no one (I hope) suggests 100% "efficiency" (whatever "efficiency" means in this context).  The question is which conditions make best use of expertise and which have best damage control.  This discourse, interesting as it is, has presupposed that expertise is a good thing to be optimised.  Much expertise is serious dangerous and the system we need is one that provides damage control.  This is true of almost all expertise in government, and even more true expert consultants to government.  Then there is the expertise of criminals and con-artists, sharp operators and slick sales people.  The world is full of dangerous expertise around every corner.  Freer markets are a means of damage control.

As a matter of human nature, my jaundiced view is that almost everyone seeks to promote their interests and use their expertise to gain advantage at everyone else's expense.  Which rules of the game turn, as Mandeville put it, private vices into public virtues, to which the clear answer seems to be maximally free markets.  The idea is also captured brilliantly in Smith's invisible hand.  

Government, on the other hand, is characterised by a visible foot.

 

Agreed on all points Leon. 

I might add two more that you may agree with.  First market failures do not imply that one should underestimate government failures.  Although one must expect both markets and governments to make mistakes (well meaning or not) e.g. investment in something that proves unprofitable or a social program that flops, the market has a more robust correction mechanism and in my opinion probably makes fewer mistakes in the first place.

Secondly even if one could show that an expert could better make all one's life choices - how much to save, where to invest it, house plans and decoration schemes, choice of transport, choice of spouse, how many kids to have, how much to study and where, what job to do, where to live, which religion to join, etc - I think it would be a major reduction to one's life to give up so much autonomy.  Quite aside from the utility considerations, personal autonomy and liberty are valuable for their own sakes - a point Sen makes repeatedly.  There was a time when the Soviet Union had a growth rate a fair bit higher than the USA for a decade or two - hence Kruschev's claim "We will bury you".  This came to a predictable end in the 70s and 80s but while it happened one was seemingly presented with a choice - material well being versus liberty.  I think most people who were familiar with life under both systems would have preferred a free US life to a well off Soviet life i.e. liberty has some value for it's own sake.

On the issue of damage control I tried to suggest that the input of experts be confined to limited spheres or small scale experiments, which in a sense the market accomplishes.

Garth

[Trevor Watkins]

On 10 May 2013 14:52, Garth Zietsman <garth.z...@gmail.com> wrote:

Government, on the other hand, is characterised by a visible foot.

You are too kind Leon. I think a visible anus would be more appropriate.

[Trevor Watkins]

On 10 May 2013 14:52, Garth Zietsman <garth.z...@gmail.com> wrote:

if one could show that an expert could better make all one's life choices - how much to save, where to invest it, house plans and decoration schemes, choice of transport, choice of spouse, how many kids to have, how much to study and where, what job to do, where to live, which religion to join, etc

But we do have such an expert - governments in one form or another have controlled all these choices for citizens, and continue to do so in many cases. Their colossal record of failure bears grim testimony to the value of experts, particularly when the expert advice is obligatory.

I am certainly not opposed to experts offering advice - gee I've been known to offer advice myself. I merely caution that one understands the motivations an expert has for offering advice, and one researches the history of success of the expert. I am totally opposed to expert advice ever being obligatory.  And that is my expert advice.

Trevor Watkins

[Leon Louw (gmail)]

Below ....

On 10 May 2013 14:52, Garth Zietsman <garth.z...@gmail.com> wrote:

Below 

I repeat that no one (I hope) suggests 100% "efficiency" (whatever "efficiency" means in this context).  The question is which conditions make best use of expertise and which have best damage control.  This discourse, interesting as it is, has presupposed that expertise is a good thing to be optimised.  Much expertise is serious dangerous and the system we need is one that provides damage control.  This is true of almost all expertise in government, and even more true expert consultants to government.  Then there is the expertise of criminals and con-artists, sharp operators and slick sales people.  The world is full of dangerous expertise around every corner.  Freer markets are a means of damage control.

As a matter of human nature, my jaundiced view is that almost everyone seeks to promote their interests and use their expertise to gain advantage at everyone else's expense.  Which rules of the game turn, as Mandeville put it, private vices into public virtues, to which the clear answer seems to be maximally free markets.  The idea is also captured brilliantly in Smith's invisible hand.  

Government, on the other hand, is characterised by a visible foot.

 

Agreed on all points Leon. 

I might add two more that you may agree with.  First market failures do not imply that one should underestimate government failures.  Although one must expect both markets and governments to make mistakes (well meaning or not) e.g. investment in something that proves unprofitable or a social program that flops, the market has a more robust correction mechanism and in my opinion probably makes fewer mistakes in the first place.

Indeed i agree, in the conventional sense, but make the intellectual, perhaps excessively abstract, point which is always when "market failure" is discussed, that markets are processes and no ,ore have "failure" than physics or weather has failure.  

Failure presupposes unfulfilled objectives, which means governments, companies, organisations and individuals can fail, but not markets.  People have divergent views on what they wish other people would do in markets, and when others don't do what's wanted it's called "failure".  Free market environmentalists want markets to adopt "green" technology and generate lots of literature to the effect that they do.  Andrew Kenny, on the other hand, wants markets to increase CO2 so as avoid the risks of current historically (and in his view dangerously) low levels.  Christians conservatives want market to serve religious ends, and free market atheists want the opposite.   People in the arts call inadequate private support for the arts "market failure", as do academics who want government research grants.  Cheap imports that drive local businesses under are called "market failure" by protectionists.  And so on.  There is a very important sense in which they are all right and all wrong, depending on preferred outcomes.

I, like "true" libertarians, do not think there is such a thing as market failure, because I am pro whatever the outcome of voluntary might be.

 

Ideologies -- libertarianism (non-dirigisme) is not an ideology (which which I think you've said you disagree) -- on the other hand can "fail" in the sense that dirigisme seldom if ever has desired outcomes.  The most successful plan ever is likely to fall short of 100% success, and to that extent "fails".  If a specified objective is met, such the desired tonnage of mine, if can be called success, but is likely to have had all sorts of imperfect things happen along the way. 

Whether or not you accept that liberty is not an ideology (in that it entails no planned or imposed outcome), there is a very real sense in which there can be no such thing as "market failure".

Taking you example of growth rates (below), high growth rates might be an outcome of markets or dirigisme, but I think it is wrong to call low growth market failure.  Many people (eg many Buddhists and greens) , for instance, think high growth is market failure.  In other words, "failure" just means failure to achieve desired outcomes.  In that sense something without a prescribed outcome preference cannot be said to have failed. 

I wonder if there are libertarians who regard prosperity as the "objective" of free markets.  I hope not.  Hippies, beggars, drop-outs, village idiots, charities, insolvency and laggards are all perfectly legitimate aspects of free markets. 

I'm not going to debate this; only want to draw attention to the subtle misuse of the concept of failure by dirigistes who almost always want outcomes I regard as less desirable, in other words, what they call "failure" is almost always in my view, and that of many others, success.

Regardless of how much material prosperity or public health dirigisme causes, I would regard the absence of freedom as "failure", but people who do care for liberty (that's most people) would obviously, and legitimately disagree.  Liberty, after all was not the intention of their dirigisme, and therefore its absence cannot be called "failure".  If there is a free market objective -- which I deny -- it is liberty (that's a process, not objective).  By definition therefore, there can be no market failure in free markets.  To the extent that freedom is lacking, markets are unfree.

Minister Aaron Motsueledi neither knows what freedom means nor cares about it.  his health totalitarianism will in his view and that of his many fans be succeeded fully if we have a world free of freedom (conundrum intended) so long as it is free of tobacco, liquor, obesity, sedentary lifestyles etc.  Markets do not have such objectives.

Secondly even if one could show that an expert could better make all one's life choices - how much to save, where to invest it, house plans and decoration schemes, choice of transport, choice of spouse, how many kids to have, how much to study and where, what job to do, where to live, which religion to join, etc - I think it would be a major reduction to one's life to give up so much autonomy.  Quite aside from the utility considerations, personal autonomy and liberty are valuable for their own sakes - a point Sen makes repeatedly.  There was a time when the Soviet Union had a growth rate a fair bit higher than the USA for a decade or two - hence Kruschev's claim "We will bury you".  This came to a predictable end in the 70s and 80s but while it happened one was seemingly presented with a choice - material well being versus liberty.  I think most people who were familiar with life under both systems would have preferred a free US life to a well off Soviet life i.e. liberty has some value for it's own sake.

On the issue of damage control I tried to suggest that the input of experts be confined to limited spheres or small scale experiments, which in a sense the market accomplishes.

Garth

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[Leon Louw (gmail)]

Oh dear, I should have edited before hitting send --- sorry folks, hope it makes sense -- fixed a bit at the beginning in bold.

On 10 May 2013 18:58, Leon Louw (gmail) <leon...@gmail.com> wrote:

Below ....

On 10 May 2013 14:52, Garth Zietsman <garth.z...@gmail.com> wrote:

Below 

I repeat that no one (I hope) suggests 100% "efficiency" (whatever "efficiency" means in this context).  The question is which conditions make best use of expertise and which have best damage control.  This discourse, interesting as it is, has presupposed that expertise is a good thing to be optimised.  Much expertise is serious dangerous and the system we need is one that provides damage control.  This is true of almost all expertise in government, and even more true expert consultants to government.  Then there is the expertise of criminals and con-artists, sharp operators and slick sales people.  The world is full of dangerous expertise around every corner.  Freer markets are a means of damage control.

As a matter of human nature, my jaundiced view is that almost everyone seeks to promote their interests and use their expertise to gain advantage at everyone else's expense.  Which rules of the game turn, as Mandeville put it, private vices into public virtues, to which the clear answer seems to be maximally free markets.  The idea is also captured brilliantly in Smith's invisible hand.  

Government, on the other hand, is characterised by a visible foot.

 

Agreed on all points Leon. 

I might add two more that you may agree with.  First market failures do not imply that one should underestimate government failures.  Although one must expect both markets and governments to make mistakes (well meaning or not) e.g. investment in something that proves unprofitable or a social program that flops, the market has a more robust correction mechanism and in my opinion probably makes fewer mistakes in the first place.

Indeed I agree, in the conventional sense, but make the intellectual, perhaps excessively abstract, point which is always forgotten when "market failure" is discussed, that markets are processes and not outcomes, and do not therefore have "failure" any more than physics or weather has failure.  

[Garth Zietsman]

I agree wholeheartedly Leon.  

I made the mistake of using the words "market failure" when I wasn't trying to suggest the market itself fails, as if it had a goal.  Rather I meant that mistakes are made within markets.  For example people can be sure that investing in a, b or c is a certain way to make money, and be thoroughly mistaken.  This is of course not a market failure.  

Although most individual business ventures fail 'business' itself thrives.  To be more specific, although heavy competition ensures most restaurants fail the restaurant industry is pretty awesome.  Also there is a natural rate of malinvestment i.e. investment in things that prove to have a lower demand than expected but that's normal.  Some investment mistakes are positive in that they prove to have better than expected returns.  Free markets automatically weed out that sort of mistake.

Mistaken decisions taken by government on the other hand are often not corrected - instead governments frequently double down.

My point about the need for more basic science is no doubt my own prejudice.  If the market doesn't deliver more science it's because people want other things.  I happen to think that is silly of people but that isn't the market's failure.  I suppose I should call people disagreeing with me a 'people failure' rather than a market failure.  

Your point that the market has no goal is important.

You are right that I see placing a high value on liberty as an ideology but I'll leave that debate for another day.

Thanks for taking the trouble to make these thoughtful replies.

Garth

[Stephen vJ]

You mean to say that something exists which is worth more to society than it costs, yet is not worth more than it costs to any member of that society ? I think you need to read Hayek again. A specialist guru must compete against other would-be gurus in providing tranquil walkways, even on a small scale. Force is an indicator of costs exceeding value, regardless of scale.

S.

Sent from an electronic device.

--

[Stephen vJ]

Dawkins has an interesting piece on evolution, equilibrium strategy, game theory and the prisoners dilemma in chapter 5 of The Selfish Gene. I believe what he is describing there is the mechanism by which natural equilibrium is reached in a population, regardless of individual incentives... Which sounds somewhat like what you are pondering. But the answer is still no.

S.

Sent from an electronic device.

On 09 May 2013, at 14:44, Garth Zietsman <garth.z...@gmail.com> wrote:

--

[Stephen vJ]

There is no such thing as "not for profit". No organization can run without profit. Some give it other names, like surplus earnings or retained equity but it is still profit. If you dont take in more than you give out, your doors will close, no matter who or what you are.

S.

Sent from an electronic device.

--

[Stephen vJ]

Just seen on Twitter: "Israel wanted Einstein to be their president. He didn't fall for it.". I'm sure there's plenty wrong with that technically and factually, but I can't help agreeing anyway.

If really stupid and self-destructive people do not have the freedom to do even stupid and self-destructive things, then nobody can be free. In nature there are no rewards or punishments, only consequences.

S.

Sent from an electronic device.

[Trevor Watkins]

Leon said:

I wonder if there are libertarians who regard prosperity as the "objective" of free markets.  I hope not.  Hippies, beggars, drop-outs, village idiots, charities, insolvency and laggards are all perfectly legitimate aspects of free markets. 

Leon makes well the point I was trying to convey in earlier posts. Libertarians don't favour free markets because they almost always lead to prosperity, growth and wealth. They favour them because they imply freedom of choice for individuals. If the free market lead to poverty, crime and disease, libertarians would still favour it over coercively applied solutions. Hence the endless discussion of optimum coercive solutions to the problems of growth and prosperity are essentially pointless, at least to this libertarian.

Trevor Watkins 

[Trevor Watkins]

Stephen said:

 Force is an indicator of costs exceeding value, regardless of scale.

Congratulations Stephen, you have made it into my file of worthwhile quotes!

Trevor Watkins

[Stephen vJ]

The fact that it does lead to greater prosperity helps the argument though. I mean that I would still support liberty on moral grounds even if it lead to less prosperity, but it sure would have made the debate harder and the support less.

S.

Sent from an electronic device.

--

[Leon Louw (gmail)]

To which should be added that all purposeful human action (Mises) is to generate benefits exceeding costs, ie profit.

The flaw in the not-for-profit term is the assumption that the only kind of profit it pecuniary.

I suppose it's okay to use a term with such a narrow sense provided everyone knows that that's it's meaning in that context.

In that sense the FMF, LibSA, Solidarity and Catholicism are "not-for-profit", but they are, of course, decidedly for generating benefits exceeding costs (the latter promising by far the biggest benefits compared with costs).

[Paul AH Hjul]

Two things:

I disagree that there is no such thing as a market failure. There are market failures and they are a big problem; all unfree markets are doomed to fail and most markets have their freedom severely curtailed by government in some way or another. The tendency is for it to be suggested that market failure necessitates government intervention which is refuted by a claim that markets don't fail. A free market doesn't have objectives and does not fail but it only exists so long as there are market participants with objectives and purpose (their own), add some coercion into the market and the story is different.

You can use whatever reasonable and uncortorted definition of a market that you like but every market ultimately either dissolves (without issue as there simply are no longer participants in the market and as a free market participants leave - often forming other markets) or as a result of being unfree fails - often badly. Markets like planes can land without issue so long as there isn't a drunk pilot - for some reason people are able to resist putting a drunk person into the pilots seat of a plane in the face of turbulence but seem very happy to put a government in control of their lives.

The term profit is one open to continuous boundary shifting and definition games, I usually use the term profit in a narrow sense and as it appears on an income statement and see it differently to a surplus that a "non-profit organization" records funds with which to put towards future endeavors to realize its preferences. If hold profit as the realization of preferences then I am all for entities pursuing profit regardless of whether they are charitable, idiotic or whatever. I clearly used profit in the narrow sense and honestly see little value in ordinary use to discard a fairly useful distinction between entities whose preference is to return proceeds to investors from those whose preferences are to apply all revenue to some defined function. The American's have a distinction between for-profit and non-profit schools (mostly for tertiary education) and the impact which for-profit schools have had on ballooning student debt etc ... makes the distinction worth consideration; of course the real reason for statutes making distinctions between for-profit and non-profit is for tax purposes, which is probably why there is opposition in some quarters to the distinction at all.

One of the great problems of "neo-liberalism" is the fact that it does distinguish between profit and non-profit on at least a similar basis to the manner in which I am using it and thereupon moves towards profit as the primary objective. This isn't libertarian or grounded in economics - this is halfbaked utilitarianism propounding the rhetoric of freedom and economic sense. The non-profit doesn't need to assume that all profit is pecuniary it simply needs to assume that profit is redistributable among investors / members - this is very much the case in a for-profit and non-for-profit cooperative: a for-profit coop has redistributable proceeds whereas a non-profit coop is one where any proceeds are surplus to be reapplied to the joint use - - members derive their benefit in the process of operations not as a distribution of proceeds. The difference really is that in the non-profit setting the "bottom line" is "paid out" on a continuous basis rather than as a distribution of proceeds from operations. This is in my mind a very useful distinction in how firms operate.

[Stephen vJ]

Even in that case, how would you sustain pecuniary profits ? Assuming you mean profit above the market rate, so competition would naturally tend to eliminate such profit down to the level where nobody else could drive costs (of which profit is one component) down any further i.e. to zero. Except in the case of monopoly, which we know is possible over the medium to long term only under government protection or with the use of force. So that kind of profit is wrong for the same reasons as slavery is and cannot be the aim of any organization except through the lobbying of the dominant bully. So depending on your definition of profit, either everyone aside from bullies are non profit or nobody is.

S.

Sent from an electronic device.

[Leon Louw (gmail)]

I started reading enthusiastically expecting an example of "market failure", Paul, but you don't offer any; only the bald assertion that they are conceivable.

Give us your best example.  

And let's agree that if it fails, you'll concede there's no such thing.

I predict that you'll volunteer:

1. Nothing.
2. Government failure, such as the "financial crisis".
3. Corporate failure, such as Enron.
4. Market efficiency, such as the absence of free late-night coffee on demand at the South Pole.
5. Non-market phenomena, such as negative externalities.
6. Anti-market phenomena, such as fraud or breach of contract.

I also predict that whatever your best shot at an example of market failure might be, it's going to turn out to be a non-market phenomenon and/or the mere expression of personal preference.

I agree, Paul, that diverse definitions of terms (like "profit") are legitimate, so long as we try to be clear about what we have in mind when we use such terms.  One of the commonest confusions arises from the the way economics uses "cost".  Saying "benefits have costs" or "there's no free lunch" means pecuniary cost for lay people, whereas economist mean anything one would rather not forego. 

Popper was, for me, clearest on this, and Rand maximally muddled.  For Popper there is no unambiguous and comprehensive definition; the best we can do is  communicate the essence of what we have in mind ("essentialism").  Rand on the other hand insisted on precise definitions, yet was unable to produce one despite heroic but putative attempts.  The worst example was her definition of "objective" which was either ambiguous or manifestly wrong.  What "objectivism"  means, for instance, is subjective concepts of truth ("absolutes").

[Leon Louw (gmail)]

A little aside, Paul; I see your icon is bound volumes of Britannica.  I didn't know people under 50 know what that is.  I still own and love mine, even though I never look at it except to dip into casually/randomly on a nostalgia trip.

[Stephen vJ]

I am not yet convinced. There are a million ways to do business and a so called non profit might distribute its surpluses to members in years of plenty while for profits might retain earnings for future growth or give it to charities for public relations purposes. The label thus does not fit the distinction.

S.

Sent from an electronic device.

[Garth Zietsman]

That's right - profit is not just about more money and liberty would be valuable even if it didn't lead to prosperity.

A few points to ponder though.  

All values can be priced - even if they typically aren't.  For example a year or so ago I calculated that the average believer in the US puts the value of God on par with a Toyota Corolla; economists calculate the value of human life every now and then, etc.

Although liberty has a value apart from it's ability to contribute to prosperity I would venture to suggest that this value isn't infinite.  In essence I'm suggesting every libertarian has his price - high though it may be.

While liberty contributes to prosperity it is less appreciated that prosperity also contributes to liberty.  To the extent that it does a libertarian ought to be interested in economic growth.

While libertarians focus on liberty why shouldn't freedom - defined as the range of choices you are capable of actualizing - also be relevant?  Wealth is critical to the latter.

While a free market isn't about prosperity for a libertarian it is about prosperity for an economist.

Garth

[Leon Louw (gmail)]

You'll' enjoy Tullock's "Vote Motive", Garth, where he establishes how much (in money) people value their votes.

Regarding the value of freedom/liberty, all value is subjective.

I'm aware that I value liberty much higher than almost anyone I know.  That's not debatable, it's just so.

Minister Against Health and Liberty, Motsoaledi, on the other hand, attaches close to zero value -- maybe actually absolute zero -- to liberty.  

[Garth Zietsman]

I would have been inclined to see negative externalities, and crashes not attributable to government, as possible market failures.

I suspect that someone will try to tell me that all bubbles and crashes are government produced but simulations show that such phenomena can easily happen in completely free competitive markets, as they can and do in unmanaged ecosystems.

More importantly there is some work - built on stuff like Arrow's impossibility theorem - that shows that even if all transactions are fully voluntary, win-win or fair, the overall or end outcome need not reflect these principles. I hope to be able to unpack this work in the future.  If there is anything to this work some important libertarian assumptions may have to be modified.

[Garth Zietsman]

You'll' enjoy Tullock's "Vote Motive", Garth, where he establishes how much (in money) people value their votes.

I'm certain I would.  I like that kind of thing. 

Minister Against Health and Liberty, Motsoaledi, on the other hand, attaches close to zero value -- maybe actually absolute zero -- to liberty.  

It seems he doesn't really value effective and affordable health care all that much either. 

[Leon Louw (gmail)]

I think you'll agree on reflection that the problem is deeper, Garth.   

It is not a question of whether free markets have bubbles -- I assume that bubbles are characteristic of human action in all systems -- but by what criteria bubbles are called "failures" (as opposed, for instance, to healthy "market corrections").  

Just as all benefits have cost, all costs have benefits, and the question is whether the benefits of bubbles exceed their costs.  

Let's assume reductio ad absurdum that we have a bubble with conspicuously trivial benefits and monumental costs, and that there is some reasonably objective way reach this conclusion.  To call it market failure, you have to prove or assume (a) that it is a market phenomenon, (b) that its costs really exceed its benefits, (c) that "the market" had a contrary purpose and (d) that the purpose is bubblelessness.  That's a tough ask, even if you reject (c), that markets don't have purposes.

Perhaps the biggest challenge is one none of the "market failure" critics have to my knowledge mentioned, namely that the opportunity exercised by those who lost in the bubble was not a sufficiently countervailing benefit.  How would one value "market opportunity"?  Losers may, for instance, have benefited sufficiently from the same opportunity in other contexts to off-set even the most devastating bubble.  

But then I'm defining away my original proposition that we're assuming there really are no compensating benefits and that there's some way of knowing that. 

Once we've made all the most extreme (and improbable) pro-market failure assumptions we can think of we're left with my coup de grace, that the market has no purpose, and that bubblelessness is an arbitrarily imposed/subjective preference.  We all know of people who would think one of the great virtues of markets is to ruin  participants in bubbles; the worse the better.  It seems to me that there is inescapably arbitrarily subjectivity in the "market failure" idea., which subjectivity is absent from other normal dictionary definitions of "failure". 

I don't see how to escape my basic proposition that all "market failure" is code for outcomes someone doesn't happen to like, as opposed to failure in the sense that wanting to complete Medupi at R90 bn by 2011 is corporate and/or government failure -- the plan failed to achieve it's explicit purpose by massive margins according to incontestably objective criteria.  Nothing comparable happens to/in markets.  Only players in markets can fail, not markets per se.

Now here's my soft underbelly.  I'm quite unsure about all this despite pretenses to the contrary.  I've read a bit about it, and pondered it in a fog of ignorance, and hope this dialogue helps me clarify the matter.  The little voice inside says I must be wrong because much greater minds than mine (in the same philosophical paradigm) accept the notion of market failure -- which has me assuming I'm missing something.

I'm off now to see if I can find what my current guru, Sowell, has to say about it.  If he interrogates the matter I expect his view to be pretty definitive/conclusive.

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[Garth Zietsman]

Below

On Sat, May 11, 2013 at 5:46 PM, Leon Louw (gmail) <leon...@gmail.com> wrote:

I think you'll agree on reflection that the problem is deeper, Garth.

Oh yes.  I was being very brief and superficial. 

  

It is not a question of whether free markets have bubbles -- I assume that bubbles are characteristic of human action in all systems -- but by what criteria bubbles are called "failures" (as opposed, for instance, to healthy "market corrections").

I think this would depend on one's view of whether it was a bubble or not.  If you think it was a bubble then market correction is appropriate but if you think the economy was healthy before the crash then "healthy market correction" seems less appropriate. But since we are assuming a bubble then market correction it is.

 

Just as all benefits have cost, all costs have benefits, and the question is whether the benefits of bubbles exceed their costs.  

Let's assume reductio ad absurdum that we have a bubble with conspicuously trivial benefits and monumental costs, and that there is some reasonably objective way reach this conclusion.  To call it market failure, you have to prove or assume (a) that it is a market phenomenon, (b) that its costs really exceed its benefits, (c) that "the market" had a contrary purpose and (d) that the purpose is bubblelessness.  That's a tough ask, even if you reject (c), that markets don't have purposes.

Yes this is a tough ask but by the same token it is equally difficult to demonstrate that the benefits outweighed the costs and that therefore there is no failure i.e. it's hard to address the question at all hence the fallback on calling the results a failure if you don't like them.

Two phenomena come to mind here.  One is that the enormous destructiveness of bubble bursts and crashes are quite obvious but any possible benefits are harder to see after the fact and the second is the fact that free markets prosper better than the alternatives in spite of not being immune to instability - that speaks to the possibility that net benefits do exist.

I don't see how to escape my basic proposition that all "market failure" is code for outcomes someone doesn't happen to like, as opposed to failure in the sense that wanting to complete Medupi at R90 bn by 2011 is corporate and/or government failure -- the plan failed to achieve it's explicit purpose by massive margins according to incontestably objective criteria.  Nothing comparable happens to/in markets.  Only players in markets can fail, not markets per se.

Now here's my soft underbelly.  I'm quite unsure about all this despite pretenses to the contrary.  I've read a bit about it, and pondered it in a fog of ignorance, and hope this dialogue helps me clarify the matter.  The little voice inside says I must be wrong because much greater minds than mine (in the same philosophical paradigm) accept the notion of market failure -- which has me assuming I'm missing something.

I'm off now to see if I can find what my current guru, Sowell, has to say about it.  If he interrogates the matter I expect his view to be pretty definitive/conclusive.

I also see economists I respect talk of market failures as if there is no question about it but I am rather inclined to believe your take on it - that a market failure is a result someone doesn't like.  A real failure would be some demonstrated inefficiency where one can show some more optimum result given the participant's preferences.  Right now I can't think of any.

The biggy is whether stability per se is good or whether instability improves the long run result.  Keynes argued that in the long run we are all dead and no one cares about the long term being calm during a storm, so economics must address any short term instability.  Others - like Schumpeter and Taleb - disagreed and talked about the benefits of creative destruction or the perils of heightened risk.

You might be interested in Gerard Debreu's 2nd law of welfare economics (it's a mathematical theorem) which proves that one cannot improve on a free market's production of values (whatever these are) for a given input, or the input for a given output, under conditions of perfect competition.  Free markets are Pareto optimum for all values, assuming perfect competition and unhindered market entrance.  

The assumption of perfect competition raises some problems.  At the first Mont Perelin society meeting Hayek argued that one necessary state function was to protect liberty via ensuring perfect competition i.e. that an unhindered market would not ensure perfect competition.  I don't know how that squares with his later spontaneous order work.

[Leon Louw (gmail)]

Below ...

This does interest me.  It seems conceivable that intervention can increase welfare outcomes, but it's very hard to come up with plausible examples.  I'm going to check this out.

 

The assumption of perfect competition raises some problems.  At the first Mont Perelin society meeting Hayek argued that one necessary state function was to protect liberty via ensuring perfect competition i.e. that an unhindered market would not ensure perfect competition.  I don't know how that squares with his later spontaneous order work.

I don't like "perfect competition" models/theories.  Hayek actually had very little to say about this.  He never settled competition theory to his satisfaction -- told us personally that he found everything he'd read on it unsatisfying. 

My objection to competition theory is rather like my concern about "market failure".  It seems to me that prevailing assumptions/axioms are fundamentally flawed.  It's a long story -- a real can of worms -- so I mention this with trepidation, but it seems to me there's something like what Rand called a "stolen concept", Hayek the "counter-revolution of science" and Sowell "evidence without evidence".   None of those terms are quite right. The point is that the competition model is derived from sport and war where adversaries engage each other and one wins, the other loses. 

Calling what happens in economies "competition" is a misnomer in that competitors have nothing to do with each other.  What happens is what Mises calls "collaboration", co-operation in plain English.  People who engage each other are co-operating.  "Competitors" don't lose, so much as that they co-operate less satisfactorily.

How would "perfect competition" fit into this.  It doesn't.  It makes all sorts of assumptions that have nothing to do with what actually happens, which is that people go around co-operating.  Would I make sense to speak of "perfect co-operation"?   Only in a somewhat convoluted sense, just as hanging out with friends would be Perfect co-operation" only if there was nothing else more satisfying you could have been doing.  Since what else you could have been doing is close to infinity, it seems very unlikely that anything (competition, collaboration, sleeping, dying etc) ever amounts to "perfect".

The idea of perfect information is so silly I assume no comment needed.

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[Garth Zietsman]

This does interest me.  It seems conceivable that intervention can increase welfare outcomes, but it's very hard to come up with plausible examples.  I'm going to check this out.

 

The assumption of perfect competition raises some problems.  At the first Mont Perelin society meeting Hayek argued that one necessary state function was to protect liberty via ensuring perfect competition i.e. that an unhindered market would not ensure perfect competition.  I don't know how that squares with his later spontaneous order work.

I don't like "perfect competition" models/theories.  Hayek actually had very little to say about this.  He never settled competition theory to his satisfaction -- told us personally that he found everything he'd read on it unsatisfying. 

Calling what happens in economies "competition" is a misnomer in that competitors have nothing to do with each other.  What happens is what Mises calls "collaboration", co-operation in plain English.  People who engage each other are co-operating.  "Competitors" don't lose, so much as that they co-operate less satisfactorily.

I totally get the idea of cooperation but surely there is unambiguous competition for customers between different restaurants on a street and even with other industries for a greater share of everyone's spending.  It is supposedly the competition that corrects mistakes and prevents waste.  BTW game theory recognized cooperation as part of market reality is is trying to come up with models that handle it.

Debreu's theorem doesn't work without the simplifying assumptions.  That's not to say it is known that you can do better than a free market when there isn't perfect competition.  I know of no economic theorem that shows that.

I too could learn more.  When Hayek says he couldn't decide humility is probably in order.  Overall I don't think I disagree with you.  

[Leon Louw (gmail)]

Below ...

On 11 May 2013 20:24, Garth Zietsman <garth.z...@gmail.com> wrote:

This does interest me.  It seems conceivable that intervention can increase welfare outcomes, but it's very hard to come up with plausible examples.  I'm going to check this out.

 

The assumption of perfect competition raises some problems.  At the first Mont Perelin society meeting Hayek argued that one necessary state function was to protect liberty via ensuring perfect competition i.e. that an unhindered market would not ensure perfect competition.  I don't know how that squares with his later spontaneous order work.

I don't like "perfect competition" models/theories.  Hayek actually had very little to say about this.  He never settled competition theory to his satisfaction -- told us personally that he found everything he'd read on it unsatisfying. 

Calling what happens in economies "competition" is a misnomer in that competitors have nothing to do with each other.  What happens is what Mises calls "collaboration", co-operation in plain English.  People who engage each other are co-operating.  "Competitors" don't lose, so much as that they co-operate less satisfactorily.

I totally get the idea of cooperation but surely there is unambiguous competition for customers between different restaurants on a street and even with other industries for a greater share of everyone's spending.  It is supposedly the competition that corrects mistakes and prevents waste.  BTW game theory recognized cooperation as part of market reality is is trying to come up with models that handle it.

My concern is that the word "compete" has connotations that have nothing to do with so-called market competition.  As agreed in another thread we can assign whatever meaning we like to words -- Keynes and rand were masters of the art. "Competition" implies contest.  If the contest is to see who can co-operate best, language gets mangled as in Orwell's 1984 where words mean their opposites, in this case competition is co-operation.   Say that to someone and they'll look at you as if you've lost your marbles, yet that's what is being said in economic theory.  

Google, for instance, offers as its 1st definition:

"The activity or condition of competing: there is fierce competition between banks".

"Fierce"?  Really?  In what sense is there anything fierce in bending over backwards to be nicer to people than anyone else?  That's weird.

Google's 2nd definition is:

"An event or contest in which people compete."

That's appropriate, but comes only 2nd.  What happens in 2 is profoundly the opposite of what happens in 1, yet we have the same word, and these opposites appear in a single word defined.

https://www.google.com/webhp?hl=en&tab=iw#hl=en&gs_rn=12&gs_ri=psy-ab&tok=94ACNiu8O_EGib5-rlKa8g&suggest=p&cp=18&gs_id=20&xhr=t&q=definition+competition&es_nrs=true&pf=p&safe=off&output=search&sclient=psy-ab&oq=definition+competi&gs_l=&pbx=1&bav=on.2,or.r_cp.r_qf.&bvm=bv.46340616,d.ZWU&fp=18f32579d5f3fbe3&biw=1366&bih=638

It reminds me of the conundrum of "inflammable" in SA English meaning "flammable" in US English, and of sanction meaning to approve and to disapprove (depending on context).

Anyhow, what behaviour in markets do we call competition?  Provide a concrete example and let's see whether what's really being described is the opposite of competition in its normal sense.

 

Debreu's theorem doesn't work without the simplifying assumptions.  That's not to say it is known that you can do better than a free market when there isn't perfect competition.  I know of no economic theorem that shows that.

I too could learn more.  When Hayek says he couldn't decide humility is probably in order.  Overall I don't think I disagree with you.  

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[Paul AH Hjul]

Re-look at what I said market failure is and then check your list:

Government failure, such as the "financial crisis".

Corporate failure, such as Enron.

>> There are market failures and they are a big problem; all unfree markets are doomed to fail and most markets have their freedom severely curtailed by government in some way or another. The tendency is for it to be suggested that market failure necessitates government intervention which is refuted by a claim that markets don't fail.

I also distinguished between a free market - which doesn't fail but only exists where there are actors engaging:

Market efficiency, such as the absence of free late-night coffee on demand at the South Pole.

>>  A free market doesn't have objectives and does not fail but it only exists so long as there are market participants with objectives and purpose (their own)

I didn't consider the issues of externalities or fraud and in both cases remain on the view that the "success" (by which all that is meant is the existance or absence of the market is determined by their being voluntary participants) of failure depend on the issue of coercion. Hence I don't see any value in listing

Non-market phenomena, such as negative externalities

Anti-market phenomena, such as fraud or breach of contract.

The point I was making - and continue to make - is that the bald statement "markets don't fail" is mistaken, a market exists because of voluntary transactions between economic actors. So long as there are free economic agents and cause to enter into voluntary transactions to their mutual benefit there will be a market. There is no late night coffee shops in the South Pole because there aren't voluntary economic agents wanting to purchase coffee at a price which other voluntary economic agents are willing to sell it; market forces hypothesis that if there was a mass immigration of highly intelligent polar bears into the South Pole Starbucks might open up shop and the penguins would hire security companies - - the point is there is no market and there is no market failure. On the other hand there is acute market failure in the South African telecommunications industry, if it was a free - or for that matter fair, and whether the two can be separated is a different discussion - the market wouldn't fail

If the kids of a street start selling lemonade and dope and the picket fence soccer moms and office worker dads all hop along we could have a nice little Agrestic lemonade and marijuana market which is not going to fail - it may dissolve when it is no longer needed - until either the DEA or a street bully (again whether they can be considered as different things is another discussion) comes into the equation. If Sid the street bully starts pushing all the moms and pops to buy weed from his little sister but lets them continue to buy lemonade from the other kids and his little sister only buys lemonade from one of the kids who are selling she is going to majorly skewer the market - she will run out of weed and buy from the other kids who will price in the monosopy position they are in on weed and shift towards lemonade she in turn will will be able to sell the weed as a monopoly (a coerced monopoly) and the kid that she is buying lemonade from will be in a stronger position than most of the other kids ... In the end many market actors will leave the market (no profits for them) and the market will ultimately become so skewed that it will fail.

Now the fact that the kids and their parents should have removed Sid from the equation doesn't change the fact that the corrupt effect of coercion does irreparable harm to the market. We don't stop talking about something as a market simply because there is a lack of voluntary transactions - the market might no longer be called a free market but it is still a market. More importantly the reason that Sid might not be taken out of the equation is if Sid's dad is a DEA agent. As a special note there is no direct application of coercion on the lemonade side of things.

The problem with most regulators and their approach to the world is that the lemonade market is what they will move to regulate - meanwhile market failure occurred in the weed market because of coercion.

Note I have never said market forces failed or that market forces change or anything of that nature - rather than the operation of market forces on a coerced environment is that what existed as a market fails.

[Paul AH Hjul]

I was specifically barred by my host in Chicago  from picketing the head office in protest of the monstrous decision to discontinue any print edition. I grew up with a 15th edition and probably digested more from Britannica's macropaedia than from formal South African education. It is probably also the cause of my persistent desire to use "ize" spelling forms.

The selection of profile picture was a suggestion from my brother-in-law who is among the other half a dozen or so people under 50 who appreciate the Britannica but he is an old soul - having majored in English, Latin and later Greek.