On Jan 25, 12:12 pm,
retrogro...@comcast.net wrote:
> On Wed, 25 Jan 2012 09:48:46 -0800 (PST), Ddfr
...
> >I'm curious as to how you think "market failure" is defined, and what
> >your reason is to believe that it is the reason governments do things,
> >rather than an after the fact defense for their doing them.
>
> >Anyone curious as to my view of the subject can find it in several of
> >the recorded talks at:
>
> >
http://www.daviddfriedman.com/MyTalks/MyRecentTalks.html
>
> Market failure as traditionally defined is where the market does not
> deliver the most efficient result.
I don't think so, and your list further down isn't consistent with
that. Consider the case where the result is inefficient because
consumers are irrational--don't make the choice that is in their own
interest--or because firms make mistakes, or because the information
needed to make the correct decision isn't available. Those are all
case where the market fails to deliver the most efficient result, but
none of them is what normally counts as market failure.
I think you are making the (common) mistake of assuming that one can
deduce the meaning of a technical term from the words that make it up,
rather like believing that you can summarize the theory of relativity
as "everything is relative."
I also think that, contrary to the name, market failure isn't limited
to markets in the usual sense. Precisely the same problems, such as
the public good problem and externalities, show up in a political
system. A voter who spends time and effort figuring out which
candidate is better for the country in order to vote for him is
producing a public good, a benefit shared with many other people. Just
as with any public good, he can't control who gets the benefit and so
has an inadequate incentive to produce it, resulting in what public
choice economists refer to as rational ignorance. So that should also
count as market failure.
My definition is that market failure describes a situation where
individual rationality fails to lead to group rationality. The
prisoner's dilemma, which I expect you are familiar with, is a simple
two person example. Each prisoner is making the correct decision for
himself, and both are worse off than if both had made the alternative
choice.
> (My own belief is that economic
> efficiency is only one consideration in decision making and it has
> unfortunately been lifted to a God like status and should be the only
> outcome in the over simplified belief system of many. Economics was
> developed to be a tool for better information for decision making.
> Those who seek only economic efficiency have elevated a tool to the
> goal. We can talk about that in a different thread.)
There are certainly problems with economic efficiency as a criterion
of goodness--you can find a discussion in an early chapter of my
webbed _Price Theory_. I can't tell from your comments whether you
understand what economic efficiency is, or what your reasons are for
rejecting it.
> As to what why markets fail I rather like this description:
> Different economists have different views about what events are the
> sources of market failure. Mainstream economic analysis widely accepts
> a market failure (relative to Pareto efficiency) can occur for three
> main reasons: if the market is "monopolized" or a small group of
> businesses hold significant market power, if production of the good or
> service results in an externality, or if the good or service is a
> "public good".[2]
Or due to adverse selection.
In the conventional theory, monopoly only produces an inefficient
outcome in the absence of perfect discriminatory pricing, so you could
blame that for the inefficiency.
> So government gets involved frequently as a result of market failures.
> Government entered the environmental protection/regulation business
> after markets externalized pollution to unacceptable levels. People
> were literally dying in the streets. See e.g., the London Smog event
> 1952 - 4000 people died.
And why did government get involved, much earlier than that, in
putting on protective tariffs? In making it illegal for airlines, and
earlier railroads, to reduce their fares without government
permission? In forbidding anyone to cut hair who had not has several
hundred hours of classes on the subject? In making food more
expensive?
> Similarly government entered the fisheries regualtion and wildlife
> regulation because market failures actually lead to push these
> resources to extinction. Intervention was necessary as stocks
> collapsed.
Interesting case. In our society, government was already defining and
enforcing property rights--it was just doing so badly in that case. I
would argue that there are other mechanisms by which property (and
other) rights could be defined and enforced, but that would take us
fairly far afield.
In any case, my point is not that none of the things governments do
can be defended as dealing with market failure but that that is an
inadequate explanation, because a large part of government activity
exists to benefit some people, those with political influence in that
particular context, at the expense of others.
> Similarly government entered the food safety arena, market trading,
> pharmacy regulation, housing markets, banking, etc. when these markets
> did not curb wide spread abuses, fraud and public impacts.
Do you have any evidence that government involvement in fact resulted
in an improvement in those areas? Stigler published an article long
ago trying to see if securities regulation resulted in better
outcomes, and was unable to find them--do you know of later research
that succeeded in doing so? The most serious U.S. depression occurred
after the Federal Reserve was created as a governmental substitute for
the private arrangements that had earlier been used to prevent runs on
banks--and arguably it was the Federal Reserve that was responsible
for how bad the Great Depression was. Government intervention in
housing markets produced the two large government created firms that
dominated the mortgage market, and played a large role in its
collapse.
> Essentially the markets are left alone until they fail and raise
> unacceptable results,
International trade was producing unacceptable results, and that is
why we had tariffs? Can you explain prohibition on that basis? The War
on Drugs? The farm program?
> at which time government steps into provide
> regulation, either forcing consideration of externalities, making
> information more available and transparent, etc. Legislation and
> regulation in arena does not start ordinarily until there has been a
> significant market failure.
You are describing the c. 1960's economics textbook description of
what government ought to do, which is inconsistent with both
observations of what governments do do and the later public choice
analysis of what governments can be expected to do. Part of what was
wrong with those textbooks was that they attempted to provide a
realistic analysis of market outcomes, based on rational self-interest
of the actors, but failed to apply the same assumptions to analyse
what governments would do if given various powers.
...
> Let's look at credit default swaps now. A totally unregulated market
> place contributed massively to the recent economic collapse. Now
> legislation and regulation is looking into how to regulate this market
> - because of the failure.
Are you suggesting that banking was a totally unregulated industry? Or
only that the regulators made the wrong choices about how to regulate,
which is not evidence in favor of regulation.
> Now in best case scenario the risks are seen in advance and regulation
> can come in a preventative fashion, before the worst consequences. But
> of course that rarely happens as resources are limited, pressures
> resist such action and people tend not to address problems until they
> reach a significant level and are in their face.
Your whole view is based on an implicit philosopher king model of
government. You might want to think about whether you can construct a
plausible analysis that predicts governments will act that way, as
distinct from an analysis of how you would like them to act. Also
about whether that model is consistent with the actual behavior of
real governments.