But in the real world, the market cannot possibly make the sort of reliable calculations that economists expect from it. Market outcomes are highly contingent on strategies, beliefs, and past choices that are somewhat arbitrary. The market is not as well informed as we would like to believe, which in turn makes policymaking more problematic than we would like to think. Actual markets miscalculate an awful lot.
This is another in my heterodox essays. It is likely to go unnoticed by the back-scratching back-stabbingcabal, but I urge you to read the whole thing.
Excellent piece! You’re sounding more Austrian than ever. Have you embraced the monetary theory of business cycles yet?
>But in the real world, the market cannot possibly make the sort of reliable calculations that economists expect from it. Market outcomes are highly contingent on strategies, beliefs, and past choices that are somewhat arbitrary. The market is not as well informed as we would like to believe, which in turn makes policymaking more problematic than we would like to think. Actual markets miscalculate an awful lot.
A market cannot miscalculate; rather, a participant does. Enough of these and you get a distorted market.
Right here.
“Market” is a shorthand expression of “market actor”, and it is the miscalculations, and good calculations, of market actors which is what the “market calculation” nets out as a result.
No, “market” is a shorthand for what happens when the various “market actors” interact.
Markets “net out” what the various actors do but it’s not a simple addition as that expression would suggest. Given that markets take time, and that knowledge and expectations and preferences change through the market process, that “net out” can be very complicated (and not necessarily predictable).
An excellent essay with thoughtful solutions to some longstanding problems. Sadly, I must confess that I am more intrigued by the scandal of backstabbing and would love to hear that story. Oh well. Blame it on evolution.
Among other things, the essay points to two issues of interest. One is scale. Yes, limiting insured accounts to a fixed amount would limit the potential for catastrophe but shouldn’t that principle hold to government as well? The larger a political entity, the less democratic it is in the sense that the less any individual has a say, and consequently the greater the potential for mass unrest. Similarly, the immense size of Medicare and Social Security threatens the welfare of tens of millions as well as crowds out alternative, improved arrangements that smaller political entities might arrange. Finding the goldilocks point of not too big, not too small, is a topic that deserves more consideration. Related, is why the principle of subsidiarity appears to be run over with a truck all too frequently.
The second issue that I believe the essay brings to our attention is the question of the appropriateness of agnosticism in public policy. There are simply too many alternatives to consider in all too many situations to know what the “right” answer is and no amount of elite power wielding by ever more layers of governance will ever change that. This becomes more and more apparent to me the longer I live outside the US. Humans come up with a whole lot of different political and social arrangements and it is very difficult to justify moralizjing judgements about the tradeoffs involved. Having skin in the game should be a significant constraint on regulators and rent-seekers alike and the lack therof constitutes a major source of policy and market failure as well as provides an explanation for the continuing irrelevance of academics and academic approaches to public policy.
The story is that I mis-spoke. I meant back scratching because they are terrific at taking care of each other.
Oh, I was hoping for a more juicy back-stabbing gossip note.
I can agree or disagree, ex post, depending upon the X axis.
The Boomers did not kill off 50 million in a war, just a million or so since 1980. I figure the millennials can do half as better. At one point, we are down to 20,000 people about 70,000 years ago, we screwed up then, or suddenly got better? Pick a scale.
You might consider adding a fourth source of potential catastrophic failure: Government regulation. For example, government guarantees – both explicit and implicit – can create moral hazard leading people and companies to take greater risks than they otherwise would.
Regulations can require companies to weigh, and insure against, risk in the same ways (e.g., the Basel Accords, which specify the risk associated with various types of securities are and the capital reserves required to offset those risks).
Such controls can lead to what I call “regulatory herding” in which regulations drives whole industries in the same direction. In an economic downturn, regulatory herding may devolve into regulatory stampedes (e.g., security sales forced by mark-to-market accounting).
Good article. As we say in the South, “That’ll preach”.
In the first section, you came across to me as pretty harsh on “markets,” which I take to mean “what happens when people are allowed to trade when they want to.” I would suggest that is a valuable thing in itself. Markets may not optimize your favorite utility function, but your favorite utility function is likely far from optimal.
It is hard to understand what about a pollution tax causes or enables the customer segmentation; why did the airlines segment only after and not before? Also, I don’t see how it is actually a bad outcome for the State (rather than airlines) to capture pollution cost entirely from mythical price-insensitive travelers, even if it does not detectibly reduce the amount of flying.
You seem to neglect “cost of capital” considerations in business. R&D teams think about ROI very seriously. Much of what they and VCs do is speculative, but acting on very uncertain estimates is far from ignoring the capital cost.
It is, however, fair to say that market pricing is a sort of “local optimization” algorithm where the size of a change is limited by expected return on the largest possible investments. (It is not so locally contrained that Amazon.com didn’t seriously disrupt the retail and IT sectors, and Google, et al, the media sector, in the last 30 years. Ground transportation is currently under threat of disruption in various ways. Three cheers for big business; government did nothing of similar scale.) It would be great if something could bump us close to a better local optimum if we are stuck in a poor one. But (1) How do we reliably detect the “bad local optimum” condition? (2) How do we implement possible soultions? (3) How do we estimate value, cost, and risk of a proposal particular given your prior on market fragility? I don’t estimate any public system can do any of these things very well very often. You could persuade me that anti-trust laws have done this at certain points in the past; that doesn’t mean an expansion of them (Cf. Warren campaign’s recent proposals) would work better.
But, overall I really do think its a good essay, I am grateful to you for enabling me to read it.
Fine article, great conclusion:
Economists and policymakers tell themselves that they are dealing with a robust, predictable system with easily recognized points of failure and that they have reliable regulatory tools for steering it toward more optimal results. In reality, they are dealing with a fragile, complex system. It is less appropriate to seek to optimize this system, and more appropriate to worry about keeping it from failing catastrophically.
However, while we can’t anticipate all the effects of any tax, like a pollution tax, we can predict that firms will make decisions that have an equal or less amount of the taxed activity or product. Gas taxes DO make people want to travel by car or air, a little bit less, because it’s more expensive. They are hugely unpopular, sort of exactly for this reason — they push people to change their behavior or else pay more for the same behavior.
And everybody wants a (local) Free Lunch — to have somebody else pay for their lunch.
The fragility of the system could also be more elaborated upon, like in the case of Venezuela going from richest to poorest Latin country, in just a few decades of mismanagement.
Japan shows that fear of too much debt remains a bit overhyped. They’re well over 200% of annual GNP, yet are not “suffering”, tho they’re at 3 lost decades of growth & counting.
I was wondering, and hoping, if you would consider an increased tax on advertising — which would help reduce the (excess?) revenue of the tech giants.
Finally, I claim the best anti-fragility policy for all governments is a Full Employment policy, including a Job Guarantee and other policies to increase the private workforce.