Source Jim Devine
Date 09/03/11/09:04

David B. Shemano wrote:
> Markets don't make mistakes. People make mistakes. A lot of mistakes. People acting in the market make mistakes. People acting in charitable organizations make mistakes. People acting in governments make mistakes. People in family and romantic relationships make mistakes. People.<

OH, IF WE could just replace people by markets!

> > Since people are flawed mistake makers, the question becomes what institutional arrangements are best conducive to good decision-making by people and minimizing mistakes by people? What institutional arrangements best allow mistakes by people to be corrected by people? I think theory and history argue in favor of markets as opposed to the alternatives on the table.<

I can't argue about "history," since there's much too much information
in that category. Further, all of the lessons of history are in the
eyes of the beholders. That is, "history" is based on and informed by
theory. So turn to that.

The theory that argues in favor of markets as the best way to organize
us flawful individuals (coordinating us and encouraging us to
cooperate) typically makes extremely outrageous (anti-empirical)
assumptions such as that Say's Tautology actually says anything about
the behavior of the real world and the absence of both technical and
pecuniary externalities.

The received market theory says: "if you let a large number of people
seek to serve their own self-interests by buying and selling items in
a competitive market, it will result in the largest quantity of those
items being produced -- and their cost to buyers and others will be
the lowest sustainable."

The problem with that proposition can be seen in the many cases where
there are non-market interactions among the individuals: there's no
way that public goods such as a legal system or property rights will
be provided by a market, while market competition encourages each
individual to dump costs on others while grabbing all the benefits
they can from others. The market costs of an item (its price) may be
driven to its minimum by market competition, but the non-market costs
(externalities) may be maximized.

Even when property rights are well-defined, we can see adverse
selection (Akerlof's market for lemons): for example, in recent years,
we saw financiers competing with each other to sell assets with high
returns. This involved, naturally enough, selling assets with high
risks (various kinds of mortgage-backed securities, etc.) Those who
did not offer high returns were punished by being unable to sell, so
the Invisible Hand of the market inexorably meant that the market
became dominated by the risk-peddlers (the lemon-pushers).

This is why serious economists (i.e., those who have sat out the
neoliberal fad) do not believe in the "market über alles" perspective.
Instead, they see that

(1) it's wrong to see markets, centralized control, tradition, and
democracy as substitutes for each other in coordinating economic
activity (as with David's weighing of the virtues of "markets" against
those of "the alternatives on the table"); instead, they are

Markets require, for example, state control in the sense of forcing
people to obey the rules of the game (respecting property rights,
etc.) complemented by a generally-held sense of the legitimacy of both
the rules and the state. The freedom of the market (enjoyed by those
with money or other vendible assets) relies on the coercive state and
a tradition of acceptance. (If that system doesn't mesh well with
democracy, then we have problems. But that's another issue.)

(2) there are many situations where the market fails so drastically
that There Is No Alternative but to turn to non-market alternatives.
The financial mess and global warming (for example) both require
non-market solutions, pronto.

The centralized powers required to deal with these disasters would
likely make mistakes or succumb to the influence of vested interests
(cf. T. Geithner & H. Paulson), but (to my mind) they must be
subordinated to democracy, so we the citizens can make our own
mistakes and learn from them.

As suggested by this last sentence, "serious economists" need not be
socialists. A socialist would choose a qualitatively different kind of
complementarity among economic institutions than a liberal (of either
sort) would. A "classical liberal" would put property-owners in charge
(as with John Locke) while a socialist would put the
democratically-organized citizenry in charge. A Welfare-state or "New
Deal liberal" would seek a compromise.

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