me: >>> I don't know much about "Masonomics" (having thought that it was just >>> a more extreme and puerile version of the Chicago school). But the >>> slogan saying that "Markets fail. Use markets" is like Stalin saying >>> "Central planning fails. Use central planning." It's crazy. If a GMU >>> insider thinks that represents their point of view, it's quite >>> telling.
David B. Shemano wrote: > I am not sure why you jump to such a harsh conclusion based upon a > bumpersticker, especially when you show no inclination to understand what the > bumpersticker is supposed to reflect, If you had clicked on the link and > read the short article, you would have read:< I did click on that link, but didn't dwell there since I've been discouraged by the somewhat tedious nonsense I've seen coming from GMU. starting the quote: >"Somewhere along the way, mainstream economics became hung up on the concept of a perfect market and an optimal allocation of resources. The conditions necessary for a perfect market are absurdly demanding. Everything in the economy must be transparent. Managers must have perfect information about worker productivity and consumers must have perfect information about product quality. There can be nothing that gives an advantage to a firm with a large market share. There cannot be any benefits or costs of any market activity that spill over beyond that market.< that familiar assertion is what's what's called an Austrian critique of the mainstream/neoclassical approach. The mainstream is into imperfect info these days, by the way. But it (unlike the Austrians) has not dropped the fatal marriage to equilibrium. (The Austrian and Schumpeterian conceptions of market competition seems very similar to that of Marx. Some say they learned it from him, via Böhm-Bawerk.) > The argument between Chicago and MIT seems to be over whether perfect markets > are a "good approximation" or a "bad approximation" to reality. Masonomics > goes along with the MIT view that perfect markets are a bad approximation to > reality. But we do not look to government as a "solution" to imperfect > markets.< So the GMU types side with Chicago in practice even if they differ in theory. It's practice that counts. > Masonomics sees market failure as a motivation for entrepreneurship. As an > example of market failure, let us use a classic case described by a Nobel > Laureate [George Akerlof], which is that the seller of a used car knows more > about the condition of the car than the buyer. Masonomics predicts that > entrepreneurs will try to address this problem. In fact, there are a number > of entrepreneurial solutions. Buyers can obtain vehicle history reports. > Sellers can offer warranties. Firms such as Carmax undertake professional > inspections and stake their reputation on the quality of the cars that they > sell.< Gee, this author never read Akerlof's original article, which explicitly mentions warranties and similar solutions. Of course, warranties and vehicle history reports are often as bogus as the ostensible information the used-car seller provides. Warranties are usually written in obscure language so that if the business doesn't feel it's profitable to follow them, they don't have to. It's often very expensive to sue businesses that violate warranties. In California, people decided that the standard "free market" solutions to the lemon problem were not enough, so they passed the Lemon Law. I don't know enough about it to say anything intelligent, however. The Carmax idea isn't very new, but it doesn't really change anything. You have to pay for the (hopefully more correct) information and then trust Carmax. For all we know, they could follow the old-fashioned "take the money and run" strategy: build up a good rep, exploit it by doing inadequate but cheap inspections, and then liquidate all assets and shut down the company before people catch on. Imperfect information can allow them to "get away with murder." Even if this normal kind of fraud is avoided, there's no guarantee (as it were) that the Carmax solution's benefits exceed the costs. Anyway, the whole "market for lemons" story isn't really about the used-car market at all. It's about the common problem of "adverse selection" that insurance people and bankers have been familiar with for generations. Even Adam Smith knew that raising interest rates does not drive out the unsafe (excessively risk-loving) borrowers. Instead, it tends to discourage the reliable ones from borrowing, so that the Darwin-like selection process in the market produces adverse results (for bankers, in this case). The wildcat borrower types don't care if interest rates are really high since they're betting they can pay off the loan -- and if they can't do it, they go bankrupt or simply walk away from the loan. (If the bet doesn't pay off, they won't be able to pay off the loan anyway.) The response by bankers is to eschew pure market solutions (varying interest rates and other prices). They don't raise interest rates as a response to the plague of unsafe borrowers. Instead, they ration credit (refusing to lend as much as people want to borrow at the prevailing interest rate), nosily collect a lot of information about prospective borrowers, and then pick and choose among the queue of borrowers in deciding who to lend to. In this situation, bankers gain "short-side" power because they are on the short side of the market. (The prospective borrowers need the funds and so will give into the prying demands for personal information by the bankers to get the loan.) This gives them the power to do stuff like redlining, discriminating against racial minorities, etc. Another non-price solution for the bankers (often used in tandem) is to be bossy, authoritarian, supervising the borrower as much as possible. The simple market transaction between lender and borrower becomes more of a boss/employee relationship. > Masonomics worries much more about government failure than market failure. > Governments do not face competitive pressure.< On the other hand, governments are subject to the wrath of the voters to the extent that the system is democratic. If I remember correctly, the "libertarians" at GMU advocate minimizing the role of democratic controls over government (e.g., making the Fed independent of voters but not of Wall Street). They also want the state to be nothing but a police/army force that enforces the "rules of the game." So, if their plans work out, you've got an unrepresentative iron fist with no hope of having a representative helping hand. >They are immune from the "creative destruction" of entrepreneurial innovation. In the market, ineffective firms go out of business. < GMU types love the value judgment implicit in the phrase "creative destruction," the _a priori_ presumption that the benefits of creation exceed the costs of destruction. Why don't they call it "destructive creation"? Because that sounds bad, not fitting with their hidden value judgments. What is an "ineffective firm"? "ineffective" at doing what? well, businesses are defined -- in their own terms -- as "ineffective" if they're not garnering as many profits as the stockholders would like. There are lots of ways to garner profits (think Enron). Not all of them are good for the public. Not all of them are moral. Even those that are moral are more likely to serve those with the most purchasing power, i.e., the rich. > In government, ineffective programs develop powerful constituent groups with > a stake in their perpetuation."< What are privately-owned corporations and a rich community like Bel Air but a powerful constituent groups that fight tooth and nail to preserve their privileges, whether or not they actually serve the general population in any way. They insist on continuing such ineffective programs as tax cuts for the rich... By the way, we should define an "ineffective" government program. To me, it would be one that doesn't serve the democratic will of the people. My understanding is that the GMU folks see an "ineffective" government program as being one that goes against the sacred market, soiling the holy Invisible Hand. David stops quoting and says: > Personally, I would put it this way. No matter how many flaws in markets > you can identify, the existence of such flaws do not logically lead to the > conclusion that the absence of markets (i.e. government intervention) would > lead to a preferable result.< The issue is not about markets _versus_ government (collectivism, etc.) Instead, it's about the extent to which either serves the democratic will of the people. Usually, we find that the market forces (corporations, dollar votes, etc.) and the government are in league with each other, colluding against the public. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
