Jim Devine writes: >> > 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.
Are you saying that if a theory leads to a practice you dislike, you should reject the theory? The appropriate approach is to define the practice you like, then figure out a theory to justify it? If practice precedes theory, how do you justify the practice? >> > 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. I really am unfamiliar with the whole importance of the debate regarding Akerlof. What is the point? That there are certain markets where information imbalance leads to less than optimal results? That the Austrians believe entrepeneurs will tend to reduce the problem, while you (or Akerlof) believe there is some structural problem that prevents entrepreneus from reducing the problem? >> 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. Of course, if the government passes laws that restrict the ability to ration credit, redline, discriminate, we get a housing bubble. Oh, the contradictions of capitalism. >> > 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. I think this really avoids the depth of the Austrian/public choice critique of government decision-making, even if (maybe I should say especially if) "democratic" in form. David Shemano _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
