Re: Madness: Bailing Out Greed in Wonderland

[David Farber <dave () farber net>]

Begin forwarded message:

From: Vadim Antonov <avg () kotovnik com>
Date: September 18, 2008 10:34:02 PM EDT
To: David Farber <dave () farber net>
Cc: ip <ip () v2 listbox com>
Subject: Re: [IP] Re:    Madness: Bailing Out Greed in Wonderland


Dave - I wholeheartedly agree that there's a need to filter out PR and  
BS.

To that effect I would like to ask for an opportunity to offer answers  
to
some objections raised in follow-up posts.

> From: "David P. Reed" <dpreed () reed com>
>
> "Every case" "conclusively shown" ? I'd like a citation on that one.

The relevant works are: "Markets Don't Fail!" by Brian P. Simpson,
Lexington Books, 2005 (the author is Professor of economics in National
University, CA); "The Half-Life of Policy Rationales" by Fred Foldvary  
and
Dan Klein, NYU Press, 2003 (Foldvary is a lecturer in economic at Santa
Clara Univerity, and Klein is Associate Professor there); and, of  
course,
the seminal "Man, Economy and State" by Murray N. Rothbard (esp. chapter
10, "Monopoly and Competition"), and his "Power and Market" (esp.  
chapter
4, "Triangular Intervention") for theoretical exposition of concept of
market failure.

I probably should rephrase my statement (preserving its meaning): every
empirical case offered so far as an example of real-world market failure
was found to be deficient according to standard scientific criteria of
acceptance (such as lack of highly plausible alternative interpretations
and/or direct evidence contradicting the offered interpretation).

> From: "Dave Wilson" <dave () wilson net>
>
> "There are many examples cited by economists as examples of market
> failure."

"Cited by", note the hearsay rather than direct specific evidence.

> "For instance, traffic congestion is considered an example, since
> driving can impose hidden costs on other drivers and society,"

This example is funny because transportation infrastructure can hardly  
be
claimed to operate in anything resembling a free market. It is either
public or very heavily regulated.

"Can impose hidden costs" does not on its own mean that there's a market
failure (I'll come to the definition of the term later).

> "whereas use of public transportation or other ways of avoiding  
> driving
> would be more beneficial to society as a whole."

This, of course, also has "hidden" (or, to be more precise, conveniently
ignored) costs on other drivers and non-drivers - namely, taxes.

The problem with stating that something is "more beneficial to society  
as
a whole" is that this assumes existence of a metric of societal  
goodness,
as accepted by all members of said society. (Obviously my idea of what  
is
good "for the society" is quite different from authors' - and why  
should I
accept their implied claim that their metric is better than mine?)

> "Other common examples of market failure include environmental  
> problems
> such as pollution or overexploitation of natural resources."

Pollution is, basically, poisoning of some people by others. The problem
with pollution is not in the failure of market to deal with commons, but
rather in failure of government monopoly on justice and law  
enforcement to
provide protection to the rights of the people.

Overexploitation of natural resources is a case of tragedy of commons -
which requires creation of commons in the first place (for example, by
restriction on privatization of land and said resources).

> From: James Grimmelmann <james () grimmelmann net>
>
> I should like to purchase a passenger pigeon.  Can you please direct
> me to where one can be found for sale?  Since, as you say, there have
> been no documented cases of market failure in the history of
> humankind, the market for passenger pigeons is presumably functioning
> well and they can be obtained at a competitive price.

Market is a mechanism for efficient allocation of resources, it is not a
magic wish fulfillment machine. It definitely does not prevent species
from becoming extinct (neither does government regulation - the  
hunting of
pigeons was prohibited in 1897, with no effect).  By the way, the modern
accounts tend to blame loss of habitat (a.k.a. "economic development
needed to sustain growing human population") and Newcastle disease virus
as main culprits in the pigeon disappearance rather than hunting.

A less romantic interpretation of this extinction is simply that it is
evolution in action - the species which couldn't adapt to the changing
environment gave way to more successful cousins. The last time I checked
there was no shortage of other species of Columbidae all over the world.

Finally, the definition of "market failure" is "persistent failure to
allocate resources efficiently". The fact that some specific kind of
resource became unavailable does not constitute market failure.

To summarise: I made a specific claim, which can be easily refuted by
providing a single piece of specific empirical data (which would be
specific date(s), place(s), and circumstances of a clear-cut market
failure). Non-existence of phenomena cannot be proven, it is the  
existence
which has to be proven, at least according to usual criteria of  
scientific
inquiry.

--vadim





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