I contrast Hayek and Stiglitz on the importance of imperfect information.
Hayek would have the government tolerate messy competition. His point is that with the optimal outcome unknown, government resolution of issues shuts off the learning process that market competition provides.
Stiglitz sees the messiness in real-world economies, and he claims to have the right solution in every case. ..Stiglitz’s outlook is that markets are imperfect, but he is not. Where Marx offered dictatorship of the proletariat, Stiglitz would give us dictatorship of the Nobel Laureate. Between the two, we might be safer with Marx.
I argue that FCC Chairman Michael Powell is Hayekian, while most regulators are Stiglitzian.
A new book from the Cato Institute, The half-life of policy rationales, leads with a quote from Hayek.
New methods may be found for making a service saleable…and thus make the market method applicable to areas where before it could not be applied. Wireless broadcasting is an instance. [T]echnical advance might well open the possibility of confining reception to those using particular equipment…
For Discussion. How can the FCC effect a transition away from “command and control” regulation of spectrum?
READER COMMENTS
Eric Krieg
Oct 27 2003 at 11:05pm
The FCC has examples IT HAS CREATED of an alternative to the command and control model.
If you have a Wi-Fi router/ notebook combination, you are participating in this new model.
The FCC opened the 2.4 GHz spectrum to everyone. They left it up to industry as to how to use it and, more importantly, how to make products that are robust enough to deal with interference in that spectrum.
Industry responded to the open spectrum by devising an open industry standard (802.11b) for internet devices to use that spectrum to communicate wirelessly.
There is no reason that more frequencies couldn’t be opened in this way. Cisco even has a wireless Wi-Fi phone that uses internet standards and could make an awesome replacement for the standard cellphone, if more spectrum were opened.
Jim Glass
Oct 27 2003 at 11:33pm
Brings to mind the famous Coase/Samuelson battles.
Coase:
“My approach is to compare the alternatives.
“People like Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something.
“They stop their analysis at that point.”
http://reason.com/9701/int.coase.shtml
Mats
Oct 28 2003 at 3:57am
“Stiglitz’s outlook is that markets are imperfect, but he is not” – but the central planner’s outlook doesn’t have to be perfect, it suffices if it is superior. Don’t forget that capitalism, or at least its predecessor merchantilism, was created through the most heavy handed regulation – a total ban on trade outside privileged cities (and market places on certain market days):
http://blogofpandora.blogspot.com/2003_10_01_blogofpandora_archive.html#106720759002769333
Patrick R. Sullivan
Oct 28 2003 at 11:28am
” the central planner’s outlook doesn’t have to be perfect, it suffices if it is superior”
This is Arnold’s point. Central planning has not shown itself to be superior. Far from it. The twentieth century was almost a laboratory experiment on the question, and the answer was unequivocal; markets are almost always superior to central planning. Soviet Union, RIP.
Lawrance George Lux
Oct 28 2003 at 11:48am
The controversey between Hayek and Stiglitz will never be resolved, because both views are imperfect. Market forces will evolve Monopolies, through the process of Competitors over-capitalizing, in hopes of capturing a large segment of the market. The eventual Monopoly survivor often is the more conservative investor, who buys out bankrupt Competitors for their capitalization. Stiglitz believes he can outguess the market.
Economists cannot freeze the Economy, by eliminating the effects of market forces; else the Economy begins to resemble the Soviet planned economy. They, at the same time, must limit over-capitalization of Competition to maintain this competition. The best way to do this to tax Profits, or to limit charges to Consumers of the Product. Neither is attractive. Such practice, though, must often be entertained; especially in a volatile industry such as Telecommunications.
The answer to the Broadband issue is to open all licenses to competitive bidding at periodic intervals. This allows already capitalized Competitors an advantage, but not an overwhelming advantage. lgl
Boonton
Oct 28 2003 at 11:54am
I think this discussion would be more productive if we actually compared some of Stiglitz’s actual policies instead of what we imagine he feels about his mental powers vs. the market.
Eric Krieg
Oct 28 2003 at 12:22pm
>>I think this discussion would be more productive if we actually compared some of Stiglitz’s actual policies
…with regards to the FCC’s regulatory power.
Has the FCC done a good job regulating television broadcasters and cellphone companies? If not, is there a better way?
I say that the open model used to regulate the 900 Mhz, 2.5 Ghz, and 5.8 Ghz bands is superior.
Boonton
Oct 28 2003 at 3:28pm
Maybe I’ve missed something here but where are Stiglitz’s views on the FCC’s method of regulation discussed? I feel like I missed some required reading here…
Bernard Yomtov
Oct 29 2003 at 4:22pm
I agree with Boonton. Before criticizing Stiglitz’ views on FCC regulations we should find out what they are, and what his basis for those views is. The only quote from Stiglitz I saw in the article was,
“But information economics does not agree with Hayek’s assertion that markets act efficiently. The fact that markets with imperfect information do not work perfectly provides a rationale for potential government actions.”
The first sentence is indisputably true. The second is a very reasonable proposition. You might disagree with it, but it’s a far cry from being a call for Soviet-style planning.
Eric Krieg
Oct 29 2003 at 5:40pm
>>The fact that markets with imperfect information do not work perfectly provides a rationale for potential government actions
How can this be true? Does the government have BETTER information?
Boonton
Oct 30 2003 at 11:18am
“>>The fact that markets with imperfect information do not work perfectly provides a rationale for potential government actions
How can this be true? Does the government have BETTER information?”
Key word here is ‘a rationale’. That doesn’t mean the rational will always be valid in all cases. I’m a little disappointed by this thread because it seems we are not really comparing Hayek to Stiglitz…we are comparing the real Hayek to a sterotypical characterization of Stiglitz (lines like “Stiglitz’s outlook is that markets are imperfect, but he is not” raise warning flags for me that the person has not actually read what Stiglitz has to say on the subject).
Anyway, it is sometimes possible to impose an efficient policy even if the policy maker knows his information is imperfect. Here’s a favorite example for Eric, the market!
Economists can tell you that a market is usually the best way to allocate resources even though the economists themselves will happily admit they know very little about whatever resource they are talking about. Economists may even know a lot less about a particular field than the people who work there (for example, farming) but may suggest a policy that is superior (farmers, for example, are often prone to suggesting subsidies and import quotas).
Eric Krieg
Oct 30 2003 at 1:58pm
>>Anyway, it is sometimes possible to impose an efficient policy even if the policy maker knows his information is imperfect. Here’s a favorite example for Eric, the market!
Your characterization is a little simplistic.
First of all, just because the “market” doesn’t have the information doesn’t mean that SOMEONE doesn’t have the information. By taking positions in the marketplace, those with information can make a profit. It is that profit motive that makes the market a good mechanism for information to be disseminated. Information is literarally power.
I don’t see any similar regulatory mechanism. How is information disseminated in a regulatory environment? The electoral process, maybe? Not exactly a robust or timely way to make changes!
Boonton
Oct 30 2003 at 3:07pm
My example was simply intended to show that one could understand the concept of the market & even advocate it as a desirable policy even if they had an inferior understanding of the subject of the market.
Since we are not discussing a specific type of regulation it is hard to discuss how a regulatory policy could be crafted without perfect information being available to the policy maker. One promising example is the ‘pollution credit market’ which regulate pollution by creating a virtual market. The policy maker in that example is not required to have perfect information about the industry or even the relative desire to reduce pollution.
Eric Krieg
Oct 30 2003 at 3:30pm
I agree, it is difficult to articulate the ramifications of a regulatory policy when you don’t have any specifics.
Perhaps Arnold was talking about the FCC implementing “broadcast flags” in digital media?
If so, this is an example of the market beating the regulators to the punch.
Every digital television being made today has a DVI port in the back. The DVI port comes with copy protection based on broadcast flags. All set top boxes (to decode digital cable, satellite, or OTA HDTV) also comes with a copy protected DVI port.
So it seems to me that the industries involved (Hollywood and consumer electronics) have come to a solution regarding copy protection. Why does the FCC need to even be involved?
Boonton
Oct 30 2003 at 4:16pm
“So it seems to me that the industries involved (Hollywood and consumer electronics) have come to a solution regarding copy protection. Why does the FCC need to even be involved?”
I’m speculating here but what if the agreement effectively prohibits ‘fair use’? Remember the ‘fair use’ doctrine gives consumers the right to publish parts of normally copyrighted material for certain purposes (such as public discussion, academic work etc.). If Hollywood and the electronics manufacture’s agreement effectively prevents fair use then Hollywood has been able to expand its gov’t granted monopoly beyond the scope of the law.
There is an interest (those legitimately seeking to exercise ‘fair use’) that I don’t think should be ignored simply because they have minimial market power in the consumer electronics market.
Boonton
Oct 30 2003 at 4:25pm
Just to use a real life example of how this might work:
Suppose in the near future someone wants to publish a TV Media Bias site. The site will take clips from the news networks (FOX, CNN, etc.) & analyze them for bias. Even though this is reproducing copyrighted material, it would probably fall under ‘fair use’. In effect this is no different than sites that do this with newspaper/magazine articles.
Suppose that in this near future world, media producers and consumer electronics manufactures had arrived at an agreement that Eric was talking about. But this agreement makes it impossible to capture the video on your VCR, TiVO, DVD Burner or whatever and republish parts of it without the broadcasters permission! Fair use, which is permitted by law, has been destroyed!
Eric Krieg
Oct 30 2003 at 5:48pm
B, there are a number of different broadcast flags.
Right now, there are high def cable boxes out there with DVI ports with copy protection. The broadcast flags are turned off, so there is effectively no copy protection. (I know this because Time Warner in NYC mistakenly turned the flags on one day, and a few people with HD boxes found that they couldn’t take anything).
The next step up is a “write once” flag. If you are so lucky to have a high def VCR, this broadcast flag allows you to tape the program, but not make further copies of that tape.
Finally, there is a flag for things like PPV boxing and such. No taping is allowed at all. Your HD VCR won’t do a thing with this type of program.
Like I said, the industries involved have come up with a copy protection system. There are industry standards and industry agreements in place. Why does the FCC need to be involved?
The answer is that the FCC regulates the broadcasters, and the OTA HD stations don’t yet have broadcast flags embedded in their signals. But the only reason this is so is because the FCC sets the HD standard for broadcasting. Cable companies, who are not subject to FCC regulation, have already changed their HD standard to implement the flags.
Eric Krieg
Oct 30 2003 at 5:50pm
>>Fair use, which is permitted by law, has been destroyed!
You can always make an analog copy. The flags are there to make sure that HD content is not copied digitally.
Bernard Yomtov
Oct 30 2003 at 6:56pm
Just to understand the Hayek/Stiglitz issue better, I looked up the article ARnold quotes.
http://www.econlib.org/library/Enc/Information.html
Just before the quoted segment, Stiglitz writes,
“The new information economics substantiates Hayek’s contention that central planning faces problems because it requires an impossible agglomeration of information. It agrees with Hayek that the virtue of markets is that they make use of the dispersed information held by different participants in the market.”
A little later he writes,
“The modern theory says that government might improve upon matters, but to ascertain whether or not this is the case requires a closer examination of how governments actually behave, or might behave under various rules.
The modern study of political economy has uncovered many inefficiencies associated with government behavior, just as the modern study of firms has uncovered many inefficiencies associated with market behavior. An important line of research has focused on identifying how government differs intrinsically from other organizations in the economy (their powers and constraints, including the limitations on information that they face and their powers and incentives to acquire information) and, based on these distinctive features, on determining the appropriate economic roles of governments and markets. ”
So it’s clear that he is not advocating massive governmnet involvement, or even claiming that govt can always or usually do better. Just that sometimes it might and it’s worth studying how this might happen.
Hardly dogmatic. In fact, considerably less so than those who claim, ex cathedra, that government involvement is always bad.
Eric Krieg
Oct 31 2003 at 10:28am
Bernard, I don’t think that government involvement is ALWAYS bad. But EXPERIENCE (rather than THEORY) tells us that it is USUALLY bad.
And, unfortunately, we have a class of people in this country who believe that the answer to any problemn is either a new law or a new government program to address the problem.
Eric Krieg
Oct 31 2003 at 10:29am
More on broadcast flags
http://www.forbes.com/home/2003/10/31/cx_ah_1031tentech.html
Bernard Yomtov
Nov 1 2003 at 12:05pm
Eric,
You say,
” I don’t think that government involvement is ALWAYS bad. But EXPERIENCE (rather than THEORY) tells us that it is USUALLY bad.”
No need to get into a lengthy and futile discussion here. Let me just say I disagree with you, and think that history does not offer the degree of support for your opinion that you claim.
I’m sure that comes as no surprise.
Eric Krieg
Nov 1 2003 at 2:06pm
>>No need to get into a lengthy and futile discussion here. Let me just say I disagree with you, and think that history does not offer the degree of support for your opinion that you claim.
Bernard, I hope that you pick up “FDR’s Folly” when it hits your local library. I’ve already got my name on the reserve list and can’t wait to read it.
Sharon B. Kayser
Nov 6 2003 at 8:59am
Hi — I find all this Hayek-Stiglitz polemic kinda useless because those dismissing Austrian economics obviously unaware that the suppression of the gold price has been going on for many decades.
As I speak there is a lawsuit against Barrick Gold and JP Morgan accused of gold price fixing. http://www.moneyfiles.org/specialgata.html, and we may rest assured that it only is the tip of the iceberg. Isnt JP Morgan close to The Federal Reserve after all? FYI last March 2003, The State of Nevada declared the Fed. Reserve as unconstitutional: http://www.leg.state.nv.us/72nd/bills/ab/ab532.html
Moreover, the Keynesian economic model is responsible for a $400TN global credit bubble (crime against humanity) which now is on its way to pop considering that the global productivity/consumption is down by 50%, not to mention the alarming decreasing world demography. This is going to be ugly. This is what happens when currencies are debased, no longer obey reality. The world has been savagely enronized by the *powers that be*: http://www.moneyfiles.org/wtcrime.html
And the Anti-Gold standard crowd also seems to ignore that the panics in the late 1800’s and early 1900’s were rather caused by the people behind central banking who could not tolerate a fair competition and therefore conspired to give Gold a bad reputation.
Conclusion: our economy will not go better, until world gov’ts officially acknowledge that Gold is a political metal. What we need is not a monetary system for the Elite but for the people. Wealth does not come from the top but the bottom up… Please also note that depressions and wars go well along together.
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