David Shemano wrote: > I think you have to try and distinguish a concept of "market failure," which > may have a technical meaning for certain types of transactions, from a > dislike of a market result.
>... market failure presumes the notion of market success, which in turn >presumes the ability to judge success by some standard other than the market, >which creates the problem of how do diverse persons agree on a success >standard that is something more than the subjective judgment of whoever is >doing the judging....< The official economists' standard is _Pareto optimality_ or efficiency, which refers to a situation where no individual can be made better off without making someone worse off. In this view, the Walrasian ideal produces Pareto optimal results (which is why I summarized the idea of market success in those terms). It's a standard that exists independent of market institutions, even though it's most often used to justify markets. > In the example below, Eugene assumes that the drug should be developed and > made available. I am sure he could embellish the facts so that we all could > agree, in the abstract, we would like to see the drug developed and made > available. But our agreement that it would be nice does not mean the drug > ought to be developed. The market is providing information saying the drug > should only be developed if a pill is $5.00, but such a price is impossible > to obtain under the existing market rules. That is not market failure -- it > is simply information that you may not like. The fact that a change in the > market rules (i.e. patent protection) may make the pill worth developing is > not a reflection on the market one way or the other.< The orthodoxy would say that it is a market failure if a change in the operation of markets could make someone better off (say, providing them with an AIDS vaccine) without hurting someone else (the owners of a monopolistic drug company). Usually, they apply "Hicks/Kaldor" hypothetical compensation: if changing the way markets work could help those who need the vaccine so much that they could (in theory) compensate the losers for their loss (and leave someone gaining), then it's an improvement in efficiency, i.e., it produces net benefits overall. The case I mentioned earlier in this thread started with competitive markets as the base-line (the _status quo_) rather than with a monopoly. In a purely competitive market, there is no way for the Pharma phirm to capture all of the benefits of the research and testing it does (not to mention the benefits of government subsidies it receives) so that they won't produce the drug, even though (by assumption) the over-all benefit of the drug exceeds the costs. Thus, deviations from perfect markets -- in the real world, patent-based monopolies -- are necessary to allow the phirm to capture the external benefits, which creates the incentive for the company to produce the drug. This results in over-all benefits that exceed costs, making many better without hurting anyone (or rather, helping the winners enough to compensate the losers for their loss). Of course, the Pharma company gets the lion's share of the efficiency gain. Other economists argue that patent monopolies are inefficient, so that the net benefit of moving to an alternative system would be positive. I'll leave the details to another time. Of course, the Pareto criterion is straight out of an imaginary static world. In the real world, it is used to defend the _status quo_ distribution of wealth and power: we can't help the unwashed masses, because "redistribution" would hurt those poor put-upon rich folks who have suffered so much in recent decades. Then, Hicks/Kaldor is used by the powerful to justify ripping off the rest: we neoliberals at the IMF, the ECB, or the US Treasury are helping the rich get richer, but it's making the world more efficient, so that _in theory_ we could compensate the poor for destroying their communities, etc. Then, in the real world, the lonely hour of compensation never comes. The employers of any standard of market success -- including Pareto efficiency -- must recognize that markets are a human-created institutional framework that exists due to the operations of the other artificial institutions (mostly the state and its monopolization of the means of coercion). Because people are involved, other criteria must be heeded in order to preserve the _legitimacy_ of the system: these include fairness (equity), democratic participation, and individual freedom. -- Jim Devine / It's time to Occupy the New Year! _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
