Categories:
Institutional Economics
In the latest econtalk, Russ Roberts interviews his co-blogger Don Boudreaux. This is a good opportunity for people to catch the distinctive flavor of GMU economics.
I like to put it his way: at Chicago, they say “Markets work well. Let’s use markets.” At MIT, they say “Markets fail. Let’s use government.” At GMU, they say “Markets fail. Let’s use markets.”
The idea that the best way to improve imperfect markets is through dynamic competition makes sense once you get it. But it is very hard for people, including many famous economists, to get it.
UPDATE: more on GMU economics at insidehighered.
READER COMMENTS
liberty
Oct 1 2007 at 11:56am
I’m confused. If the best way to improve imperfect markets is through dynamic competition, then wouldn’t that be “markets work well”? Unless, of course, the way to create dynamic competition is with government – but then that would be “let’s use government.”
I guess I need to spend more time at GMU.
General Specific
Oct 1 2007 at 11:57am
Arnold Kling wrote: “The idea that the best way to improve imperfect markets is through dynamic competition makes sense once you get it. But it is very hard for people, including many famous economists, to get it.”
Statements like this give me heartburn. It’s sort of like saying “if you were smart enough to understand how smart we are, you’d understand how smart we are.”
A bit circular if you ask me. It’s not an argument. It’s an appeal to a cult-like selective inner group, not based on argument, but instead based on the idea of “getting it.”
That said, markets are a good solution to imperfect markets. Except when they aren’t good solutions. Then it’s better to have a higher power regulate the imperfect markets–government. And the government itself is imperfect, so there is a higher power to deal with that–elections. That’s imperfect as well.
But the balance of power–between private markets and public democratic process–is often much superior than markets alone.
Unfortunately, many don’t “get it.” Even some economists. Famous or otherwise.
8
Oct 1 2007 at 12:20pm
Market failures are the worst form of failure, except for all the others we experience from time to time.
TGGP
Oct 1 2007 at 12:48pm
General Specific, it is called “checks and balances” when Congress can pass laws, but the President can veto them, but Congress can override vetos etc. The government can use force to control markets. What balance to markets have on the government? If you expect elections to take care of things, what acts as a check on elections to prevent a tyranny of the majority? Why should we prefer it to a tyranny of the market?
Mike
Oct 1 2007 at 1:48pm
Arnold
This post is a good illustration of what I like about your blog and I gather you were reaching out for input as to what we (your customers) like to see in the blog in your recent posting. I don’t have time to monitor the blogosphere and all the sources of information on economics so if I didn’t read your blog I would not have had the opportunity to listen to this excellent interview with Don Boudreaux. Of course, there are other reasons to follow your blog but this is a big reason I am a regular reader.
Keep up the good work.
Matt
Oct 1 2007 at 2:19pm
Maybe we should start talking about the material properties of markets.
Markets have something called capacity, I mentiond before, as he ability to hold a trade over a variable price; or the ability to hold a price over variable trades. We can call this dP*dT, or the price*trade rate product, similiar to the material dielectric properties in physics.
P the price would appear on the X spectral axis in an economic decomposition into market segments.
Now we can write the cyclic equations of the market:
T = c1 * dP/dt and P = c2 * dT/dt
Where P is price, T is transaction rate rate. The costants c1 and c1 combine to determine the characteristic function in time of the market, either damped exponentially and/or cyclic, a standard Lapalacian solution.
The material properties, c1 and c2, are generally measured and called utility in their various forms. However, I think this formulation will allow direct compution of the c1 and c2, hopefully creating a breakthrough in our ability to compute solutions in t from distributions in X.
Now it becomes obvious why markets go into cycles. The market capacity represents the error band about which future prices can be estimated, and this error band must stay in relative limits.
When the market is at its peak or valley, the first differential of trade rate is zero, and the first differential of price is at its max, just like a normal hamiltonian we find in physics. At the peaks, the error band expands, and the market seeks more average prices to reduce this estimation error to nominal.
The fundamental force behind this should be the quantum nature of wealth under conditions of small trade flow.
Who is doing this research?
dearieme
Oct 1 2007 at 4:29pm
I think you’ll find that famous economists will “get it” if you can identify some career-enhancing opportunities for them within your general approach.
broadly focused
Oct 1 2007 at 6:08pm
Why is it that markets are claimed to be good only with the oversight of government control?
Don’t we have compelling evidence that government without markets is a grand failure? Isn’t it likely, then, that it is not markets that need the help of government, but, instead, it is government that needs the help of markets?
General Specific
Oct 1 2007 at 7:04pm
broadly focused: “Why is it that markets are claimed to be good only with the oversight of government control?”
For starters, markets require penalties for participants who are violating the rules of the marketplace. In some cases, markets can handle this themselves. But any marketplace requires guardians of some sort–to a lesser or greater degree depending on the nature of the market. And who guards the guards? In the end, the government is the final arbiter of power, with the voters behind the government.
TGPP: “Why should we prefer it to a tyranny of the market?”
I think of this issue more in terms of balance. Unlike the people who complain about convoluted government regulations–yet haven’t looked at their own genetic code–I see the pressures between government regulations and markets as a good thing. Government can use markets to solve problems, allow markets to solve problems on their own, etc. And governments can protect property rights. Native Americans learned the hard way that without effective force behind one’s customs, property rights–communal or individual–are worth little.
There are no unregulated markets if you ask me. Even markets that appear to be unregulated exist in a sea of regulation–sources of power and stability. E.g. the Constitution and the common practices that go along with it.
broadly point
Oct 2 2007 at 6:32am
Oops. I did not intend the first sentence as the point. The first sentence was a set-up to the questions:
“Don’t we have compelling evidence that government without markets is a grand failure? Isn’t it likely, then, that it is not markets that need the help of government, but, instead, it is government that needs the help of markets?”
The anti-market crowd justifies government control — under almost any circumstance — by yelling, “Markets only work with the regulation of government.” But isn’t it more accurate to say that “Governments only work with the inclusion of free markets.”? Haven’t we seen enough examples to see that economic freedom is required for citizens to be happy, and that excessive government control *always* results in corruption and suspension of human rights in ways that are far worse than anything we see come from the market.
General Specific
Oct 2 2007 at 4:53pm
broadly: Yes, too much government a very very bad thing. Too much of anything can be bad. We do not need “people’s camera” nor “people’s car.” But battery disposal regulations/restrictions and mandatory safety requirements won’t kill us. In fact, they might do the opposite.
Max
Oct 4 2007 at 7:28am
Hmm, I have yet to meet a government measure that is actually better than a market solution, in the long run!
I have seen some measure to be on par (military, sometimes infrastructure f.e.), but mostly they turn out to be a waste of a lot of money with only a very reduced return to the citizens (just take railroads: per person transportation costs per year can be up to 20000 $).
Also, government seldom solves a problem, but rather moves it somewhere else and makes it bigger (retirement benefits in Germany).
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