I'm glad to see that this book review is by Cass R. Sunstein, who has devoted much of his research to related issues. Human psychology works in ways not completely anticipated by classical liberal economists like Adam Smith (although Smith deserves more credit than he gets for a deep understanding of human psychology). One interesting paragraph in the review tells the tale: "To support this claim, Akerlof and Shiller point to an uncanny prediction by John Maynard Keynes in 1930. Keynes expected that by 2030, the standard of living would be eight times higher. We are on track to get in that vicinity. At the same time, Keynes made a profound mistake. He predicted that the workweek would plummet to fifteen hours and that people would struggle not with financial problems, but with a surfeit of leisure. That isn’t going to happen. What Keynes missed is that free markets generate new desires. In Akerlof and Shiller’s words, markets 'do not just produce what we really want; they also produce what we want according to our monkey-on-the-shoulder tastes.'" In other words, producers can act jointly more effectively than consumers can in exploiting weaknesses of human psychology. This seems to be a fair statement with a lot of empirical support.
I think the reviewer does a good job at the end of his review of critiquing the book's view of behavioral economics by asking for more specificity about which mechanisms most lead to "phishing" (dishonest marketplace behavior to fool consumers). To say that free markets take advantage of consumers does not guarantee that making markets less free is any better for consumers, unless some new form of regulation is based on careful research and an affirmation of commonly held human values.
> What Keynes missed is that free markets generate new desires
I've been curious if, as a result of the attitude toward aggregate demand that grew as a response to the Great Depression and Keynes work, we have deliberately designed our society to try to generate more and more desires.
Most of the driving of new desires is done by individual companies in the private sector though. Apple aren't trying to stimulate aggregate demand each time they release a new phone, they're trying to increase their future profits, just like every other company before them.
Keynesianism ensures these companies can borrow more cheaply in an economic downturn, as can the less-likely-to-lose-their-job consumers. But it's lubricating the process of creating new markets rather than powering it.
> "What Keynes missed is that free markets generate new desires. In Akerlof and Shiller’s words, markets 'do not just produce what we really want; they also produce what we want according to our monkey-on-the-shoulder tastes." In other words, producers can act jointly more effectively than consumers can in exploiting weaknesses of human psychology. This seems to be a fair statement with a lot of empirical support.
An alternative theory for explaining Keynes' mistake is just that people's consumption is driven by desire for relative status, a zero-sum game, and therefore people will continue to work to consume more no matter how productive they become. But what is the evidence that free markets generate these desires rather than merely fulfill them? Yes of course marketing will have a hand in determining which goods are high-status, but I don't know much reason to believe that people would stop consuming for status in the absence of marketing. (To wit, there was plenty of conspicuous consumption historically by the rich before there was any sort of marketing industry.) They would just consume a different arbitrary basket of good.
You are spot on. It is all about relative status and that was Keynes' big mistake (Russell makes same mistake). Relative status is also the hidden driver behind most of income inequality debate.
> An alternative theory for explaining Keynes' mistake is just that people's consumption is driven by desire for relative status, a zero-sum game, and therefore people will continue to work to consume more no matter how productive they become.
I have a different explanation: that progress is uneven.
(1) There has been amazing progress with electronics, where computers have increased our productivity practically unmeasurably, and in manufacturing, where new technologies and materials have made products better and cheaper.
(2) On the other hand, in areas like human services (e.g. medicine, law), housing (the price of land isn't falling with technological progress), and transport (e.g. bus drivers, garbage collectors, everyone who needs to drive around) there has been very little progress from free markets, rising GDP, or technological advancement.
Since people need things in (2), they need to work. And since (1) affects most of us (rising productivity => falling wages), we need to work more and more to afford (2).
Even if there are certain products we need that can't be produced more efficiently with better tech, Keynes' would still expect overall hours worked by most people to go down as tech made other products cheaper. But in fact, hours worked continues to rise for the most productive people whose wages have increased.
Good point. Status seeking will always be with us. I think the relevant question is whether or not that status seeking takes place in the market or in some other social space.
For example, by putting a cap on wages perhaps status-seeking could be redirected to non-market pursuits. I'm not saying that's a good idea, just an example of how policy can be used to redirect behavior away from markets into other areas of production.
And one thing this article leaves out is the problem of non-market policies creating unintended consequences.
It's easy to talk about regulating the market - it's hard to come up with effective policies that don't create results worse than the problems they're attempting to address.
Some of it's status. Some of it's genuine new desires. Sure, I wished it wasn't so hot. But before air conditioning, you wished it was October, when it wouldn't be so hot. Now you really want to have air conditioning.
If you were trying to write a book, you were irritated at how clumsy using a typewriter was, but you didn't know that you really wanted a word processor - until there were word processors.
You didn't want to see the new Star Wars movie until there was a new Star Wars movie. Then you wanted to see it. Why? Maybe partly status ("all my friends will be talking about it, and I don't want to look clueless"), but probably more because you thought the first set (Episodes IV - VI) were really cool.
I could go on and on. But if you think in terms of Maslow's Heirarchy, new desires make perfect sense. As you get to a new level of the heirarchy, you start wanting what's on the level above that.
I think it's certainly true that human desire for more will never be sated, but I think this overlooks the fact that there are also finite resources (like land) that won't grow to match productivity, and thus a substantial part of our productivity is captured as rent. And this isn't something that we can grow our way out of...
People are very definitely working to increase the available land by getting us to other planets. That means we can grow our way out of it, although it remains to be seen if we actually will.
Yes, productivity of land can grow (in all sorts of ways), but if the ownership of the land is unequal, all this does is increase the rent on the land for those lucky enough to have it...
Not so fast. If I double the productivity of my farmland, I increase the rent on my land (but typically I have to invest in it to get that, so it's not just rent in the economic sense of the word). But if everybody doubles the productivity of their farmland, the price of wheat falls through the floor, and the landowner may be even worse off than before, while consumers get a windfall.
Exploitation of irrationality is how rationality evolves in biological systems. In other words, if we get the government to play the role of a protective nanny, we the citizen will remain intellectual equivalent of infants.
Allowing rationality to evolve by allowing irrational actors to be exploited is going to take thousands of years at the least. I'd rather figure out some way to improve things sooner than that.
It doesn't have to be biological evolution or take thousands of years. Most exploitation of irrationality works by playing off subconscious desires; once that leads to a very public and consequential failure, it is very quickly brought into consciousness, where future instances can be dealt with rationally.
Someone who invested their life savings in dot-coms in 1999 is probably never again going to invest in "the next big thing". That brings its own form of irrationality - once everyone believes that it's foolish to invest in the next big thing, the next big thing becomes very underpriced - but they are at least not going to make the same mistake twice.
There is a vast body of ways we can act irrationally. It doesn't make sense to let people make mistakes and slowly, individually learn each flaw through their own mistakes. It's much more efficient to teach them from an accumulated body of scientific knowledge and create a mechanism to "automatically" preventing the gravest mistakes.
What gobsmacking arrogance. Who do you suggest does the assessing of 'mistakes' and 'teaching' thereof? http://www.amazon.com/Intellectuals-Society-Revised-Expanded...: as one review puts it - Thomas Sowell - gets right to the warped mindset of the elite intellectual. It should be a must read for every high school senior in the country.
You seem to be reading much more than I actually stated.
I was contending with the overly broad criticism of the government (and other institutions) as protective figure through laws, rules and regulations. Letting the system evolve without rules by exploiting irrationality, letting individuals learn exclusively by mistake is a bad mechanism. His "evolutionary" argument could apply to most rule systems -- do you believe rules are inherently bad? That's nonsense imo.
The assessing of mistakes and teaching is done by domain experts (rule makers or law makers), who know much better than new entrants the perils of a given system, in the case of a well functioning system. There is also evolution in those systems, but it's a more effective form: usually when a single actor finds an exception or flaw in the rules, the rule makers are warned and may rewrite, propagating this knowledge to everyone.
If we had infinite capacity to learn, reason and absorb minutiae of the world around us, we wouldn't need rules. But if you go, for example, work in a dangerous factory environment, you don't want to study about all the systems and every way you could die, or even worse (per the 'naive evolutionary' suggestion), try yourself going everywhere. You want someone to tell you "You can't step outside those lines; when working at this machine, you can't put your hand in those places", because you trust the rule maker has gone through everything and you won't walk out missing a limb. Is this "babysitting"? Probably, it's still the best way to go about it.
That's not to say every activity should have strict rules. Rules are good fit in general where the environmental conditions don't change very rapidly (in time or across the actors) and where the perils they protect against are sufficient to warrant learning and enforcing the rules in the first place. They remove flexibility for each actor to make it's own optimum choice (only relevant when this varies in time or across individuals) and take resources to formulate, teach and enforce.
Relying on evolution, a slow mechanism for humans, especially in a social context where a lot of selection pressure has been removed, sounds like really bad way to design policies.
Beyond the fact that you would need a direct link between genes and rationality for selection pressure to apply, you're positing that rational people have more reproductive success. Is that really true you think?
If you're being intellectually honest here, you need to go the full distance and acknowledge that your logic (if actually scientific) requires the "irrational" genes to NOT be passed on (at least not as much as the "rational" ones).
Does the appropriation of the term "phish" disturb anyone else? To me, it confuses the distinction between auspiciously legal capitalistic behavior and the work of con artists. The appropriation equates tempting irrational actors to act against their own interests with defrauding rational actors into acting against their own interests. I also shutter at the thought of reading a 272 page book littered with various "phish", "phool", "ph"-etc'd terms.
I would also like to note that anyone criticizing neoclassical economics (and it's full of dubious assumptions, don't get me wrong) based on straw men about "rationality" is fighting windmills. But don't take it from me, take it from a heterodox post-Keynesian: https://unlearningeconomics.wordpress.com/2012/06/29/how-not...
And, unsurprisingly, Akerlof and Shiller stop at yelling "market failure" without proposing a theory of government and ignoring the very fruitful area of government failures.
Anyone who argues for intervention on basis of asymmetrical information without having read up on public choice is in no position to speak of anything, since their model is stuck in assuming government is a mystical exogenous equilibrator and that all of its constituents have virtually no expectations whatsoever (which is an even worse assumption than full rationality).
Akerlof and Shiller are obviously well aware, but their book is little more than a political polemic.
I can't see where Boudreaux's comments - themselves more polemic than analysis - expose any "dishonesty". I mean, one of his posts pulls out the old libertarian canard of "every potentially harmful product will be effectively countered by competitors taking the equal and opposite opportunity to sell good honest consumer-friendly protection" by speculating that a market solution to smells designed to induce customers to over-eat could be rival entrepreneurs selling a nose-attachment[1]! And as far as I can tell, he's actually not trying to parody his own argument.
If that's one of the best objections he can raise to an example in Akerlof and Shiller's book it must be remarkably good by the standards of popular economics texts.
[1]Perhaps the only reason America doesn't have a penchant for nose attachments and no obesity problem is because the market isn't free enough!
The reason his proposed solution of a "nose attachment" sounds ridiculous is because the original complaint by Akerlof and Shiller of "pastries that just smell so good consumers can't resist them" is a complete non-issue that is straight out of Poe's law.
To quote Alex Tabarrok: "Cinnabon pastries are hard to resist. Advertising can be deceptive. Humans sometimes act in foolish ways. If these statements strike you as anodyne then there is no need to read George Akerlof and Robert Shiller’s new book Phishing for Phools, a disappointing foray into behavioral economics from two recent Nobel Prize winners."
>Very few economists foresaw the great recession of 2008–2009
I just can't get past the very first sentence. First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history. Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.
The next thing will be people talking about how very few economists foresaw the issues with reverse home mortgages, or how no regulators foresaw the dangers of equity crowdfunding for non-accredited investors.
> > Very few economists foresaw the great recession of 2008–2009
> First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history.
Yeah, whether it was tied specifically to those particular schemes or not, lots of economists were predicting an imminent severe recession -- including both notable Austrian-school economists and notable neo-Keynesians -- driven by a collapse in the housing market bubble.
> The next thing will be people talking about how very few economists foresaw the issues with reverse home mortgages, or how no regulators foresaw the dangers of equity crowdfunding for non-accredited investors.
And some of the people writing those articles will inevitably be business journalists who spent the previous five years complaining about the regulations that remained and shilling for the crowdfunding companies...
The simple fact is that few economists predicted a recession of that magnitude. Predicting a crash is very different than predicting a recession. And predicting a recession is very different than predicting the magnitude of that recession.
Nuance matters.
I'm glad you were able to foresee it, but there's always outsiders who foresee a collapse, so that data point just isn't terribly relevant.
Of course, the economy nearly collapsed a year after that speech.
That's the great conceit of central banking, that a small committee of "learned professionals" can predict the future and claim to divine the actions of billions of market transactions.
> I just can't get past the very first sentence. First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history.
The fact they were effectively silenced and ignored is largely because they were few in number.
The vast majority didn't foresee the scale of the disaster.
> Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.
If you can demonstrate this for a significant number of recessions [e.g. 5+], its relevant.
I pulled my money out in May of 2007 because I was pretty sure something was going to happen and threw it back in to basically double it...doesn't mean I believe it was abundantly obvious to everyone. The mere fact I could do that demonstrates it wasn't obvious.
The simple fact is, whenever there is a crisis, there is going to be a minority of Doomsayers who predicted correctly. However, the fact the majority was oblivious implies it was non-obvious and possibly chance that a specific Doomsayer was, ultimately, correct in his/her prediction for reasons beyond random chance.
> The fact they were effectively silenced and ignored is largely because they were few in number.
No, they weren't particularly few in number -- it was lots of economists (they were few in number compared to the whole population, but the universe at issue was economists, not the whole population.)
They were ignored because there was substantial financial interests among the powerful interests resting on the perception that things were going to continue going well, and because the top-line economic indicators (which aren't particularly good leading indicators, in any case) that the mainstream media likes to look to were strong, so there was a PR effort that was in line with what the media was naturally inclined to follow; the warnings from various different directions were an inconvenience for the interests of the powerful and the comfortable narrative of the media.
> I pulled my money out in May of 2007 because I was pretty sure something was going to happen and threw it back in to basically double it...doesn't mean I believe it was abundantly obvious to everyone. The mere fact I could do that demonstrates it wasn't obvious.
Sure, it proves that it the particular impacts and timing of the impending collapse weren't widely expected by market participants. That's not inconsistent with a significant number -- not very few -- predicting an imminent and significant downturn to be driven by the collapse of the housing bubble.
> No, they weren't particularly few in number -- it was lots of economists (they were few in number compared to the whole population, but the universe at issue was economists, not the whole population.)
> Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right.
So, I mean, you can argue a Nobel Laureate is so ignorant of his field that you are correct if you want. However, you need to provide a great deal of evidence to convince me of that which so far none of you have.
For instance the quality of evidence I generally see is on par with this comment:
Yes, one group of folks went out and found something they believed to be true but that doesn't represent the majority view simply by its existence. Signal to noise is a very real problem that requires a very large level of agreement to move the levers of policy for a reason.
> They were ignored because there was substantial financial interests among the powerful interests resting on the perception that things were going to continue going well, and because the top-line economic indicators (which aren't particularly good leading indicators, in any case) that the mainstream media likes to look to were strong, so there was a PR effort that was in line with what the media was naturally inclined to follow; the warnings from various different directions were an inconvenience for the interests of the powerful and the comfortable narrative of the media.
This is a comforting conspiracy theory but the fact economists, as a class of people, failed to capitalize on this for their own financial gain based on knowing that the public perception was in error ... well, that would imply they failed to predict it in sufficient numbers.
> Sure, it proves that it the particular impacts and timing of the impending collapse weren't widely expected by market participants. That's not inconsistent with a significant number -- not very few -- predicting an imminent and significant downturn to be driven by the collapse of the housing bubble.
If many economists predicted a recession on that scale, we would have many rich economists. Specifically, a minimum of doubling the value of their investments due to timing the market. Do we?
I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it. I've never seen such evidence myself.
> So, I mean, you can argue a Nobel Laureate is so ignorant of his field that you are correct if you want.
I rather see Krugman's piece here as leveraging the media narrative on the issue to his own ends; his real issue in the piece is that policymakers are listening to the wrong voices. Accepting the dominant media narrative that "few economists" foresaw the collapse is a lot better for getting people to listen to his explanation of what was wrong with the approaches that were influencing policy than challenging that narrative.
> Yes, one group of folks went out and found something they believed to be true but that doesn't represent the majority view simply by its existence.
There's a big excluded middle between "few" and "majority". I would characterize the group that predicted a significant, housing-bubble-collapse triggered recession as a significant near term probability before it occurred as a significant (both in number and notability) minority, neither "few" nor a "majority".
> This is a comforting conspiracy theory but the fact economists, as a class of people, failed to capitalize on this for their own financial gain based on knowing that the public perception was in error ... well, that would imply they failed to predict it in sufficient numbers.
Or that successful economists tend to be fairly likely to be at the income level where increased income has (as studies have shown) minimal contribution to experienced utility -- and unusually likely to be aware of that fact. Or, well, a lot of other things.
> If many economists predicted a recession on that scale, we would have many rich economists.
If lots of economists actively invested based on such a prediction, sure; but that an economist makes a prediction does not mean that they actively invest based on it (or that they are actively investing at all).
>If many economists predicted a recession on that scale, we would have many rich economists.
Its kind of inflammatory. Using your logic: If many economists predicted a healthy economy and housing market, we would have many poor economists. I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it.
Here is just one example:
US Federal Reserve Chairman, Alan Greenspan, has gone on record and said he knew of the impending housing bubble in 2005. I think even the most blind economists could have predicted a devaluation in average housing price at $x0,000/house (I really wish I knew that actual average price homes fell by), at 100M homes that is an evaporation of $x,000,000,000,000 of wealth, now from an economists point of view whether that suggest a imminent recession, I don't know, but to me that is unprecedented.
Essentially, you had Goldman taking direct payments from a fund to sell the fund's toxic loans to Goldman clients.
Home loans are traditionally solid investments (very low default rate), so the fact they were being chopped up and sold the way they were is clue number 1 the sellers knew to get rid of the asset whereas historically these were coveted investments. Its a tiny fine but there was a fraud charge and $1B fine.
The catch is you can't simply flood the market, or the market will react. So the toxic loans were sold slowly and steadily for as long as possible. There was just so much bad debt that when the market did catch on the institutions were still holding a massive amount of bad debt...hence the bailouts. Its not like they didn't want to get rid of them sooner, but trying to get rid of it all at once would have been counterproductive.
> Its kind of inflammatory. Using your logic: If many economists predicted a healthy economy and housing market, we would have many poor economists. I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it.
1) The reverse doesn't hold true because the average income is $95,000 a year.
2) If one continued to hold assets, as a rational economist likely would, they would have recovered with the rest of the market by this point in time.
3) Extraordinary claims require extraordinary evidence. The claim it was widely predicted yet Nobel Laureates claim otherwise falls under that standard.
3b) Similarly, silencing such people required a certain degree of conspiracy yet there is no evidence of such a conspiracy. The reverse is not true.
4) It is a good effort to try to require me to meet the reverse logic except I'm not the one who made the initial claim that was extraordinary, unusual, and not backed by the opinion of a Nobel Laureate economist among others. Similarly, the reverse case simply isn't valid since you can't be "poor" on $95,000/year unless you are completely incompetent in managing your finances which is a different problem.
> US Federal Reserve Chairman, Alan Greenspan, has gone on record and said he knew of the impending housing bubble in 2005. I think even the most blind economists could have predicted a devaluation in average housing price at $x0,000/house (I really wish I knew that actual average price homes fell by), at 100M homes that is an evaporation of $x,000,000,000,000 of wealth, now from an economists point of view whether that suggest a imminent recession, I don't know, but to me that is unprecedented.
> Mr. Greenspan said that he had publicly warned about the “underpricing of risk” in 2005 but that he had never expected the crisis that began to sweep the entire financial system in 2007.
He specifically stated he hadn't expected the crisis but rather an underpricing of risk which was one of the causal factors.
> Mr. Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford.
Btw, he actively resisted and successfully fought to allow suprime mortgages.
> By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.
Your best defense wasn't Greespan btw, but his opposition in 2004 who were warning his actions would lead to a speculative bubble. However, they were relatively few in number and there is no evidence they were silenced as the original post I was replying to implied.
>However, they were relatively few in number and there is no evidence they were silenced as the original post I was replying to implied.
Yeah I think there is a little miscommunication, you are limiting the silence to economists and not extending it to people in finance which is what I did in OP. It was more the finance people with evidence were silenced, in the whistle-blower sense of the word, and economists who did acknowledge what was occurring were ignored.
As OP, I never qualified my statement as "large scale", I simply stated the article ignored the reality that economists and financial insiders did make attempts blow the whistle. Now since neither of us knows the exact numbers, I'm not going to bicker over qualifications I never invoked such as "large scale", what ever "large scale" means to you subjectively.
Scale aside, silencing happened all the same, just look at the whistle blower lawsuits against the big banks: BOA; JP Morgan Chase; Countrywide; etc...
All of them had employees/investigators who discovered fraud and they were subsequently fired for blowing the whistle. Perhaps these examples fall more under the financial insiders I noted rather than economists, though I assume more economists would have got it right had the whistle blowers not been silenced.
>the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.
>A few months into her tenure, Fleischmann would later testify in a DOJ deposition, the bank hired a new manager for diligence, the group in charge of reviewing and clearing loans. Fleischmann quickly ran into a problem with this manager, technically one of her superiors. She says he told her and other employees to stop sending him e-mails. The department, it seemed, was wary of putting anything in writing when it came to its mortgage deals.
I completely agree. Here is an article from the economist in 2005 and it states: "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops"
The term "free market" is thrown around rather easily in this article, oftentimes with the assumption that consumers have absolutely no recourse in said "free market." A few places, you could replace "free market" with "freedom of speech" and it would read the same. Of course the "progressive" thing to do is to limit speech as well, for our own good.
When an economy has a strong central bank meddling with the interest rates, firms and individuals receive an incorrect signal in the time-preference for money, since the interest rates are not determined by the market. Coupled with an inflationary monetary regime and Keynesian ideology throughout, the "free market" has no chance to produce optimal outcomes.
Come back with a book that examines actual free markets and we'll talk.
>A few places, you could replace "free market" with "freedom of speech"
Interestingly, from a legal perspective free speech does go hand in hand with what the Court's call the market place of ideas[1] which generally should act like the free market.
"The marketplace of ideas is a rationale for freedom of expression based on an analogy to the economic concept of a free market. The "marketplace of ideas" holds that the truth will emerge from the competition of ideas in free, transparent public discourse."
Right? Any time something in the economy goes wrong, people are quick to blame it on the free market. Greed is the problem, they say. If, in fact, that problem is caused by the government, then it is the fault of "corporations meddling with government." If it is clear that a handful of politicians caused the problem, then people call for "getting money out of politics." It's almost as if the government can do no wrong.
We live in such a highly regulated world that I can't help but chuckle when someone blames the "free market" for many of the problems of today.
Right? Any time something in the public sector goes wrong, people are quick to blame it on the government. Greed is the problem, they say. If, in fact, that problem is caused by the market, then it is the fault of "government meddling with economy." If it is clear that a handful of businessmen caused the problem, then people call for "getting government out of our personal lives." It's almost as if the free market can do no wrong.
We live in such a bought-and-paid-for world that I can't help but chuckle when someone blames the "government" for many of the problems of today.
Nope. The 2 countries (microstates?) that are often touted as free-markets are Hong Kong SAR and Singapore.
Hong Kong, which is widely applauded by neo-Liberal economist Milton Friedman for it's low taxation and hands off regulation, has a hidden secret, they raise most of their revenue from land leases. To clarify, in Hong Kong the only piece of freehold land belongs to Saint John's Cathedral.
> Article 7 of the Basic Law of the Hong Kong Special Administrative Region (HKSAR) stipulates that the land and natural resources within HKSAR shall be state property.
Same goes for Singapore, they meddle continuously in the real estate economy through the HDB. Ethnic quotas in state owned buildings ensure Singapore's racial harmony.
It's questionable whether either country could survive without their neighbors (China and Malaysia) whom they import most of their goods from.
Part of that would be no protectionism. I seriously doubt that most in the HN community are big fans of e.g. the H-1B visa program. And yet a free market would not have an H-1B program because in such a market anyone anywhere would be hireable strictly upon the discretion of the employer. The H-1B program itself is an intervention.
The reality is that you cannot have completely free markets in a democracy. As soon as a signifcant minority (let alone majority) do not like the market's outcome, they will petition a legislative alternative to that outcome. So of course there's going to be a hybrid system. Is there any 1st world country with a less interventionist government in economics than the U.S.? There are plenty of 3rd world countries where there's no regulation at all, I don't see entrepreneurship flourishing there, rather it's exploitation, and might makes right.
>As soon as a signifcant minority (let alone majority) do not like the market's outcome, they will petition a legislative alternative to that outcome.
But that presupposes that the populous would dislike the free market's outcome, which if anything points to the idea that free markets are unworkable in a practical sense.
Interestingly, Denmark and Canada surpass the United States, according to the IEF. I was aware the former has the least regulated banking sector, but not much beyond that.
A free market implies that supply and demand are reached naturally without intervention by government: either in fixing prices, setting quotas, or giving special consideration to some firms over others.
The term "free market" does not imply that there are not courts of law or private property rights. Perhaps too many think "anarchy" when they read "free market."
The argument in the book under discussion is that the natural balance of supply and demand is favoring the seller, who is exploiting the buyer in ways the buy isn't aware of, and is complex and fast enough that a regulatory paradigm can't mitigate.
A "free market" is an attempt to simulate a perfect market, which is a theoretical construct that doesn't exist. One of the things it requires is perfect information among all parties in the buy and sell process. Courts and property rights are one way of trying to simulate that perfect market, and thereby create a free market. But this isn't actually working well enough, is the book's argument, there's still an imbalance that favors exploiters, i.e. the free market isn't providing enough information for buyers to make properly informed decisions rather than manipulated ones.
Free markets don't require perfect information, I'm not sure where you came up with that. Perfect information is an assumption used in general equilibrium models, that's really it.
I think you might have meant perfect competition. Free markets don't need perfect competition, either. That's just a neoclassical assumption, again for modeling convenience.
> Courts can recognize violations of private property rights without regulating trade...
Which certainly addresses things like conversion (the civil parallel to theft), but doesn't address consumer recourse, which is what was asked about and is expressly about trade.
Q: What does the completely free market say about the practice of adding melamine to food to increase protein contents?
A: A completely free market would not require food labelling, meaning that protein contents would be unrecorded. Therefore, there would be no point in adding melamine.
Q: What does the free market say about the addition of fillers such as sawdust to food?
A: If such fillers are in such quantity as to affect the quality of the food, the food product will command a lower price in relation to other, higher quality products. If not, well, no harm, no foul.
Q: What if there are no higher quality products? What if the manufacturers collude, implicitly or explicitly, or if the costs required to enter the market prevent competition?
A: The market will adapt to use other products. Too much sawdust in your bread? Eat cake.
Along with inestimable human livelihood and wealth, the free market creates various possibilities to foolishly harm oneself. Some questions Sunstein does not raise are:
1. Does the option of self-harm have value? If such options are forcibly removed, is the human condition degraded? For example, if one is stripped of having the sense of self-ownership, is that person limited in their level of human development and functioning?
2. Can harmful products be forbidden without the threat and use of violence against their would-be producers and consumers?
3. How successful could we expect such efforts to be, based on similar past and current efforts? And how costly, monetarily, socially, and in human lives?
4. How likely are such efforts, and the institutions that exert them, to be corrupted and bent to the service of powerful interests?
I think the US prohibitions, first the alcohol in the past, and the current drug prohibition, pretty resoundingly answer that restricting freedom (in this way) results in very damaging outcomes.
> Along with inestimable human livelihood and wealth, the free market creates various possibilities to foolishly harm oneself.
As opposed to the ability for the state to foolishly harm us? Sure, a free market allows humans to be human and make mistakes, but allowing others to take your freedom in the interest of self-preservation is a fool's compromise.
Certainly, you raise great philosophical questions though. One of my favorite thought experiments is to imagine how many things done by the government today could be accomplished without the government. I don't mean obvious things like the postal service, I mean fundamental services like road building and a court system. I plan to read David Friedman's book soon on this topic, called "Legal Systems Very Different From Ours":
The central problem of a free market is also its greatest strength: it relies on the people making the purchases to decide what constitutes a good product or service. It asks us to vote with our wallets.
This works best when the individual educates him/herself about each purchase.
However, when individuals make purchases based on popularity rather than merit, or based on what they're used to, their ability to vote with their wallet suffers.
And when producers begin to settle into a position of comfortable mediocrity, when they refuse to compete and improve, they also hurt the consumer's ability to vote with their wallet.
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[ 3.9 ms ] story [ 168 ms ] threadI think the reviewer does a good job at the end of his review of critiquing the book's view of behavioral economics by asking for more specificity about which mechanisms most lead to "phishing" (dishonest marketplace behavior to fool consumers). To say that free markets take advantage of consumers does not guarantee that making markets less free is any better for consumers, unless some new form of regulation is based on careful research and an affirmation of commonly held human values.
I've been curious if, as a result of the attitude toward aggregate demand that grew as a response to the Great Depression and Keynes work, we have deliberately designed our society to try to generate more and more desires.
Keynesianism ensures these companies can borrow more cheaply in an economic downturn, as can the less-likely-to-lose-their-job consumers. But it's lubricating the process of creating new markets rather than powering it.
An alternative theory for explaining Keynes' mistake is just that people's consumption is driven by desire for relative status, a zero-sum game, and therefore people will continue to work to consume more no matter how productive they become. But what is the evidence that free markets generate these desires rather than merely fulfill them? Yes of course marketing will have a hand in determining which goods are high-status, but I don't know much reason to believe that people would stop consuming for status in the absence of marketing. (To wit, there was plenty of conspicuous consumption historically by the rich before there was any sort of marketing industry.) They would just consume a different arbitrary basket of good.
I have a different explanation: that progress is uneven.
(1) There has been amazing progress with electronics, where computers have increased our productivity practically unmeasurably, and in manufacturing, where new technologies and materials have made products better and cheaper.
(2) On the other hand, in areas like human services (e.g. medicine, law), housing (the price of land isn't falling with technological progress), and transport (e.g. bus drivers, garbage collectors, everyone who needs to drive around) there has been very little progress from free markets, rising GDP, or technological advancement.
Since people need things in (2), they need to work. And since (1) affects most of us (rising productivity => falling wages), we need to work more and more to afford (2).
For example, by putting a cap on wages perhaps status-seeking could be redirected to non-market pursuits. I'm not saying that's a good idea, just an example of how policy can be used to redirect behavior away from markets into other areas of production.
And one thing this article leaves out is the problem of non-market policies creating unintended consequences.
It's easy to talk about regulating the market - it's hard to come up with effective policies that don't create results worse than the problems they're attempting to address.
If you were trying to write a book, you were irritated at how clumsy using a typewriter was, but you didn't know that you really wanted a word processor - until there were word processors.
You didn't want to see the new Star Wars movie until there was a new Star Wars movie. Then you wanted to see it. Why? Maybe partly status ("all my friends will be talking about it, and I don't want to look clueless"), but probably more because you thought the first set (Episodes IV - VI) were really cool.
I could go on and on. But if you think in terms of Maslow's Heirarchy, new desires make perfect sense. As you get to a new level of the heirarchy, you start wanting what's on the level above that.
Someone who invested their life savings in dot-coms in 1999 is probably never again going to invest in "the next big thing". That brings its own form of irrationality - once everyone believes that it's foolish to invest in the next big thing, the next big thing becomes very underpriced - but they are at least not going to make the same mistake twice.
Considering they can sneak in CISA into a US budget bill after it was shot down by the public, apparently, neither does the government.
I was contending with the overly broad criticism of the government (and other institutions) as protective figure through laws, rules and regulations. Letting the system evolve without rules by exploiting irrationality, letting individuals learn exclusively by mistake is a bad mechanism. His "evolutionary" argument could apply to most rule systems -- do you believe rules are inherently bad? That's nonsense imo.
The assessing of mistakes and teaching is done by domain experts (rule makers or law makers), who know much better than new entrants the perils of a given system, in the case of a well functioning system. There is also evolution in those systems, but it's a more effective form: usually when a single actor finds an exception or flaw in the rules, the rule makers are warned and may rewrite, propagating this knowledge to everyone.
If we had infinite capacity to learn, reason and absorb minutiae of the world around us, we wouldn't need rules. But if you go, for example, work in a dangerous factory environment, you don't want to study about all the systems and every way you could die, or even worse (per the 'naive evolutionary' suggestion), try yourself going everywhere. You want someone to tell you "You can't step outside those lines; when working at this machine, you can't put your hand in those places", because you trust the rule maker has gone through everything and you won't walk out missing a limb. Is this "babysitting"? Probably, it's still the best way to go about it.
That's not to say every activity should have strict rules. Rules are good fit in general where the environmental conditions don't change very rapidly (in time or across the actors) and where the perils they protect against are sufficient to warrant learning and enforcing the rules in the first place. They remove flexibility for each actor to make it's own optimum choice (only relevant when this varies in time or across individuals) and take resources to formulate, teach and enforce.
Beyond the fact that you would need a direct link between genes and rationality for selection pressure to apply, you're positing that rational people have more reproductive success. Is that really true you think?
If you're being intellectually honest here, you need to go the full distance and acknowledge that your logic (if actually scientific) requires the "irrational" genes to NOT be passed on (at least not as much as the "rational" ones).
So... eugenics or death.
[Edit: grammar]
http://cafehayek.com/2015/12/phoolishly-against-phreedom-of-...
http://cafehayek.com/2015/12/a-baseless-charge.html
http://cafehayek.com/2015/12/daffy-elitists.html
http://cafehayek.com/2015/12/mostly-exaggerated.html
http://cafehayek.com/2015/12/more-on-phishing-for-phools.htm...
http://cafehayek.com/2015/12/the-role-of-market-forces-in-pr...
I would also like to note that anyone criticizing neoclassical economics (and it's full of dubious assumptions, don't get me wrong) based on straw men about "rationality" is fighting windmills. But don't take it from me, take it from a heterodox post-Keynesian: https://unlearningeconomics.wordpress.com/2012/06/29/how-not...
And, unsurprisingly, Akerlof and Shiller stop at yelling "market failure" without proposing a theory of government and ignoring the very fruitful area of government failures.
Anyone who argues for intervention on basis of asymmetrical information without having read up on public choice is in no position to speak of anything, since their model is stuck in assuming government is a mystical exogenous equilibrator and that all of its constituents have virtually no expectations whatsoever (which is an even worse assumption than full rationality).
Akerlof and Shiller are obviously well aware, but their book is little more than a political polemic.
[1]Perhaps the only reason America doesn't have a penchant for nose attachments and no obesity problem is because the market isn't free enough!
To quote Alex Tabarrok: "Cinnabon pastries are hard to resist. Advertising can be deceptive. Humans sometimes act in foolish ways. If these statements strike you as anodyne then there is no need to read George Akerlof and Robert Shiller’s new book Phishing for Phools, a disappointing foray into behavioral economics from two recent Nobel Prize winners."
I just can't get past the very first sentence. First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history. Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.
The next thing will be people talking about how very few economists foresaw the issues with reverse home mortgages, or how no regulators foresaw the dangers of equity crowdfunding for non-accredited investors.
> First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history.
Yeah, whether it was tied specifically to those particular schemes or not, lots of economists were predicting an imminent severe recession -- including both notable Austrian-school economists and notable neo-Keynesians -- driven by a collapse in the housing market bubble.
And some of the people writing those articles will inevitably be business journalists who spent the previous five years complaining about the regulations that remained and shilling for the crowdfunding companies...
The simple fact is that few economists predicted a recession of that magnitude. Predicting a crash is very different than predicting a recession. And predicting a recession is very different than predicting the magnitude of that recession.
Nuance matters.
I'm glad you were able to foresee it, but there's always outsiders who foresee a collapse, so that data point just isn't terribly relevant.
http://www.forbes.com/2007/05/17/bernanke-subprime-speech-ma...
Of course, the economy nearly collapsed a year after that speech.
That's the great conceit of central banking, that a small committee of "learned professionals" can predict the future and claim to divine the actions of billions of market transactions.
The fact they were effectively silenced and ignored is largely because they were few in number.
The vast majority didn't foresee the scale of the disaster.
> Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.
If you can demonstrate this for a significant number of recessions [e.g. 5+], its relevant.
I pulled my money out in May of 2007 because I was pretty sure something was going to happen and threw it back in to basically double it...doesn't mean I believe it was abundantly obvious to everyone. The mere fact I could do that demonstrates it wasn't obvious.
The simple fact is, whenever there is a crisis, there is going to be a minority of Doomsayers who predicted correctly. However, the fact the majority was oblivious implies it was non-obvious and possibly chance that a specific Doomsayer was, ultimately, correct in his/her prediction for reasons beyond random chance.
No, they weren't particularly few in number -- it was lots of economists (they were few in number compared to the whole population, but the universe at issue was economists, not the whole population.)
They were ignored because there was substantial financial interests among the powerful interests resting on the perception that things were going to continue going well, and because the top-line economic indicators (which aren't particularly good leading indicators, in any case) that the mainstream media likes to look to were strong, so there was a PR effort that was in line with what the media was naturally inclined to follow; the warnings from various different directions were an inconvenience for the interests of the powerful and the comfortable narrative of the media.
> I pulled my money out in May of 2007 because I was pretty sure something was going to happen and threw it back in to basically double it...doesn't mean I believe it was abundantly obvious to everyone. The mere fact I could do that demonstrates it wasn't obvious.
Sure, it proves that it the particular impacts and timing of the impending collapse weren't widely expected by market participants. That's not inconsistent with a significant number -- not very few -- predicting an imminent and significant downturn to be driven by the collapse of the housing bubble.
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html...
> Paul Krugman
> Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right.
So, I mean, you can argue a Nobel Laureate is so ignorant of his field that you are correct if you want. However, you need to provide a great deal of evidence to convince me of that which so far none of you have.
For instance the quality of evidence I generally see is on par with this comment:
https://news.ycombinator.com/item?id=10760402
Yes, one group of folks went out and found something they believed to be true but that doesn't represent the majority view simply by its existence. Signal to noise is a very real problem that requires a very large level of agreement to move the levers of policy for a reason.
> They were ignored because there was substantial financial interests among the powerful interests resting on the perception that things were going to continue going well, and because the top-line economic indicators (which aren't particularly good leading indicators, in any case) that the mainstream media likes to look to were strong, so there was a PR effort that was in line with what the media was naturally inclined to follow; the warnings from various different directions were an inconvenience for the interests of the powerful and the comfortable narrative of the media.
This is a comforting conspiracy theory but the fact economists, as a class of people, failed to capitalize on this for their own financial gain based on knowing that the public perception was in error ... well, that would imply they failed to predict it in sufficient numbers.
> Sure, it proves that it the particular impacts and timing of the impending collapse weren't widely expected by market participants. That's not inconsistent with a significant number -- not very few -- predicting an imminent and significant downturn to be driven by the collapse of the housing bubble.
If many economists predicted a recession on that scale, we would have many rich economists. Specifically, a minimum of doubling the value of their investments due to timing the market. Do we?
I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it. I've never seen such evidence myself.
I rather see Krugman's piece here as leveraging the media narrative on the issue to his own ends; his real issue in the piece is that policymakers are listening to the wrong voices. Accepting the dominant media narrative that "few economists" foresaw the collapse is a lot better for getting people to listen to his explanation of what was wrong with the approaches that were influencing policy than challenging that narrative.
> Yes, one group of folks went out and found something they believed to be true but that doesn't represent the majority view simply by its existence.
There's a big excluded middle between "few" and "majority". I would characterize the group that predicted a significant, housing-bubble-collapse triggered recession as a significant near term probability before it occurred as a significant (both in number and notability) minority, neither "few" nor a "majority".
> This is a comforting conspiracy theory but the fact economists, as a class of people, failed to capitalize on this for their own financial gain based on knowing that the public perception was in error ... well, that would imply they failed to predict it in sufficient numbers.
Or that successful economists tend to be fairly likely to be at the income level where increased income has (as studies have shown) minimal contribution to experienced utility -- and unusually likely to be aware of that fact. Or, well, a lot of other things.
> If many economists predicted a recession on that scale, we would have many rich economists.
If lots of economists actively invested based on such a prediction, sure; but that an economist makes a prediction does not mean that they actively invest based on it (or that they are actively investing at all).
Its kind of inflammatory. Using your logic: If many economists predicted a healthy economy and housing market, we would have many poor economists. I mean, if you have a vast body of evidence you can present that proves this is the case by all means present it.
Here is just one example:
US Federal Reserve Chairman, Alan Greenspan, has gone on record and said he knew of the impending housing bubble in 2005. I think even the most blind economists could have predicted a devaluation in average housing price at $x0,000/house (I really wish I knew that actual average price homes fell by), at 100M homes that is an evaporation of $x,000,000,000,000 of wealth, now from an economists point of view whether that suggest a imminent recession, I don't know, but to me that is unprecedented.
Another:
http://www.theguardian.com/business/2010/apr/16/goldman-sach...
Essentially, you had Goldman taking direct payments from a fund to sell the fund's toxic loans to Goldman clients.
Home loans are traditionally solid investments (very low default rate), so the fact they were being chopped up and sold the way they were is clue number 1 the sellers knew to get rid of the asset whereas historically these were coveted investments. Its a tiny fine but there was a fraud charge and $1B fine.
The catch is you can't simply flood the market, or the market will react. So the toxic loans were sold slowly and steadily for as long as possible. There was just so much bad debt that when the market did catch on the institutions were still holding a massive amount of bad debt...hence the bailouts. Its not like they didn't want to get rid of them sooner, but trying to get rid of it all at once would have been counterproductive.
http://www.bls.gov/ooh/life-physical-and-social-science/econ...
1) The reverse doesn't hold true because the average income is $95,000 a year.
2) If one continued to hold assets, as a rational economist likely would, they would have recovered with the rest of the market by this point in time.
3) Extraordinary claims require extraordinary evidence. The claim it was widely predicted yet Nobel Laureates claim otherwise falls under that standard.
3b) Similarly, silencing such people required a certain degree of conspiracy yet there is no evidence of such a conspiracy. The reverse is not true.
4) It is a good effort to try to require me to meet the reverse logic except I'm not the one who made the initial claim that was extraordinary, unusual, and not backed by the opinion of a Nobel Laureate economist among others. Similarly, the reverse case simply isn't valid since you can't be "poor" on $95,000/year unless you are completely incompetent in managing your finances which is a different problem.
> US Federal Reserve Chairman, Alan Greenspan, has gone on record and said he knew of the impending housing bubble in 2005. I think even the most blind economists could have predicted a devaluation in average housing price at $x0,000/house (I really wish I knew that actual average price homes fell by), at 100M homes that is an evaporation of $x,000,000,000,000 of wealth, now from an economists point of view whether that suggest a imminent recession, I don't know, but to me that is unprecedented.
http://www.nytimes.com/2008/10/24/business/economy/24panel.h...
> Mr. Greenspan said that he had publicly warned about the “underpricing of risk” in 2005 but that he had never expected the crisis that began to sweep the entire financial system in 2007.
He specifically stated he hadn't expected the crisis but rather an underpricing of risk which was one of the causal factors.
> Mr. Greenspan, along with most other banking regulators in Washington, also resisted calls for tighter regulation of subprime mortgages and other high-risk exotic mortgages that allowed people to borrow far more than they could afford.
Btw, he actively resisted and successfully fought to allow suprime mortgages.
> By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.
Your best defense wasn't Greespan btw, but his opposition in 2004 who were warning his actions would lead to a speculative bubble. However, they were relatively few in number and there is no evidence they were silenced as the original post I was replying to implied.
http://www.theguardian.com/business/2010/apr/16/goldman-sach...
Yeah, that isn't evidence of a large scale market prediction by economists so isn't in the domain of the argument I was making.
Yeah I think there is a little miscommunication, you are limiting the silence to economists and not extending it to people in finance which is what I did in OP. It was more the finance people with evidence were silenced, in the whistle-blower sense of the word, and economists who did acknowledge what was occurring were ignored.
As OP, I never qualified my statement as "large scale", I simply stated the article ignored the reality that economists and financial insiders did make attempts blow the whistle. Now since neither of us knows the exact numbers, I'm not going to bicker over qualifications I never invoked such as "large scale", what ever "large scale" means to you subjectively.
Scale aside, silencing happened all the same, just look at the whistle blower lawsuits against the big banks: BOA; JP Morgan Chase; Countrywide; etc...
All of them had employees/investigators who discovered fraud and they were subsequently fired for blowing the whistle. Perhaps these examples fall more under the financial insiders I noted rather than economists, though I assume more economists would have got it right had the whistle blowers not been silenced.
http://www.publicintegrity.org/2011/09/22/6687/countrywide-p...
>the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.
>http://www.rollingstone.com/politics/news/the-9-billion-witn...
>A few months into her tenure, Fleischmann would later testify in a DOJ deposition, the bank hired a new manager for diligence, the group in charge of reviewing and clearing loans. Fleischmann quickly ran into a problem with this manager, technically one of her superiors. She says he told her and other employees to stop sending him e-mails. The department, it seemed, was wary of putting anything in writing when it came to its mortgage deals.
http://www.economist.com/node/4079027
Many didn't know we had over leveraged the value of the entire world economy several times over.
When an economy has a strong central bank meddling with the interest rates, firms and individuals receive an incorrect signal in the time-preference for money, since the interest rates are not determined by the market. Coupled with an inflationary monetary regime and Keynesian ideology throughout, the "free market" has no chance to produce optimal outcomes.
Come back with a book that examines actual free markets and we'll talk.
Interestingly, from a legal perspective free speech does go hand in hand with what the Court's call the market place of ideas[1] which generally should act like the free market.
"The marketplace of ideas is a rationale for freedom of expression based on an analogy to the economic concept of a free market. The "marketplace of ideas" holds that the truth will emerge from the competition of ideas in free, transparent public discourse."
[1] https://en.wikipedia.org/wiki/Marketplace_of_ideas
We live in such a highly regulated world that I can't help but chuckle when someone blames the "free market" for many of the problems of today.
We live in such a bought-and-paid-for world that I can't help but chuckle when someone blames the "government" for many of the problems of today.
This is a tautology.
Do you have any examples of "actual" free markets?
Hong Kong, which is widely applauded by neo-Liberal economist Milton Friedman for it's low taxation and hands off regulation, has a hidden secret, they raise most of their revenue from land leases. To clarify, in Hong Kong the only piece of freehold land belongs to Saint John's Cathedral.
> Article 7 of the Basic Law of the Hong Kong Special Administrative Region (HKSAR) stipulates that the land and natural resources within HKSAR shall be state property.
Same goes for Singapore, they meddle continuously in the real estate economy through the HDB. Ethnic quotas in state owned buildings ensure Singapore's racial harmony.
It's questionable whether either country could survive without their neighbors (China and Malaysia) whom they import most of their goods from.
The reality is that you cannot have completely free markets in a democracy. As soon as a signifcant minority (let alone majority) do not like the market's outcome, they will petition a legislative alternative to that outcome. So of course there's going to be a hybrid system. Is there any 1st world country with a less interventionist government in economics than the U.S.? There are plenty of 3rd world countries where there's no regulation at all, I don't see entrepreneurship flourishing there, rather it's exploitation, and might makes right.
But that presupposes that the populous would dislike the free market's outcome, which if anything points to the idea that free markets are unworkable in a practical sense.
Interestingly, Denmark and Canada surpass the United States, according to the IEF. I was aware the former has the least regulated banking sector, but not much beyond that.
The term "free market" does not imply that there are not courts of law or private property rights. Perhaps too many think "anarchy" when they read "free market."
A "free market" is an attempt to simulate a perfect market, which is a theoretical construct that doesn't exist. One of the things it requires is perfect information among all parties in the buy and sell process. Courts and property rights are one way of trying to simulate that perfect market, and thereby create a free market. But this isn't actually working well enough, is the book's argument, there's still an imbalance that favors exploiters, i.e. the free market isn't providing enough information for buyers to make properly informed decisions rather than manipulated ones.
I think you might have meant perfect competition. Free markets don't need perfect competition, either. That's just a neoclassical assumption, again for modeling convenience.
Courts of law don't provide any recourse for abuses in trade unless there are laws regulating trade.
Which certainly addresses things like conversion (the civil parallel to theft), but doesn't address consumer recourse, which is what was asked about and is expressly about trade.
A: A completely free market would not require food labelling, meaning that protein contents would be unrecorded. Therefore, there would be no point in adding melamine.
Q: What does the free market say about the addition of fillers such as sawdust to food?
A: If such fillers are in such quantity as to affect the quality of the food, the food product will command a lower price in relation to other, higher quality products. If not, well, no harm, no foul.
Q: What if there are no higher quality products? What if the manufacturers collude, implicitly or explicitly, or if the costs required to enter the market prevent competition?
A: The market will adapt to use other products. Too much sawdust in your bread? Eat cake.
1. Does the option of self-harm have value? If such options are forcibly removed, is the human condition degraded? For example, if one is stripped of having the sense of self-ownership, is that person limited in their level of human development and functioning?
2. Can harmful products be forbidden without the threat and use of violence against their would-be producers and consumers?
3. How successful could we expect such efforts to be, based on similar past and current efforts? And how costly, monetarily, socially, and in human lives?
4. How likely are such efforts, and the institutions that exert them, to be corrupted and bent to the service of powerful interests?
As opposed to the ability for the state to foolishly harm us? Sure, a free market allows humans to be human and make mistakes, but allowing others to take your freedom in the interest of self-preservation is a fool's compromise.
Certainly, you raise great philosophical questions though. One of my favorite thought experiments is to imagine how many things done by the government today could be accomplished without the government. I don't mean obvious things like the postal service, I mean fundamental services like road building and a court system. I plan to read David Friedman's book soon on this topic, called "Legal Systems Very Different From Ours":
http://www.daviddfriedman.com/Academic/Course_Pages/legal_sy...
This works best when the individual educates him/herself about each purchase.
However, when individuals make purchases based on popularity rather than merit, or based on what they're used to, their ability to vote with their wallet suffers. And when producers begin to settle into a position of comfortable mediocrity, when they refuse to compete and improve, they also hurt the consumer's ability to vote with their wallet.