[Soixante-Retard]

I thought this (recent) lecture by David Friedman might interest the small cadre of libertarians on this forum. David has his father's great skill of delivering ideas in a digestible and persuasive manner.

Is Market Failure an argument against government?

[youtube]J5maguX5x8c[/youtube]

Enjoy and feel free to leisurely discuss the points he raises in his lecture.


Personally, I like Friedman's analogies and his explication of how he and Rothbard differ (during Q&A).

[lucky]

Thanks. This is quite a nice talk. He explains sources of market failures and sources of government inefficiencies, and the similarities between the two, very nicely.

I have two comments:

First, I think he misuses the term "market failure". Even though government activities are often inefficient for the same sort of reasons that markets are inefficient (externalities, lobbying as a public good, etc), it's incorrect to refer to them as "market failures", since the term refers to failures of free markets.

Second, he says a few times that government inefficiencies are "worse" than market failures, but does not substantiate such a broad claim (always worse?) at all. He would have done better to restrain himself from polluting the talk with this politically motivated opinion.

How big of a problem a particular inefficiency is depends on the actual issue at hand. Some market failures are very small, others are very big, so it seems more reasonable to think that for some issues the problems with government intervention may be larger than the market failure and hence should be avoided, and for other issues they may be smaller. That is in fact a common and reasonable view of the situation.

He's well entitled to his anarchist opinions, but he shouldn't go there in this otherwise good talk, unless he wanted to dedicate some time to that topic.

[Soixante-Retard]

You're welcome lucky. I like Friedman's story, using the two camel riders, on how regulations (i.e. the rules) can cause market failures - so simple it's brilliant.

First, I think he misuses the term "market failure". Even though government activities are often inefficient for the same sort of reasons that markets are inefficient (externalities, lobbying as a public good, etc), it's incorrect to refer to them as "market failures", since the term refers to failures of free markets.

I think this is very trivial. One could just call it government failure.

Second, he says a few times that government inefficiencies are "worse" than market failures, but he did not substantiate such a broad claim (always worse?) at all. He would have done better to restrain himself from polluting the talk with this politically motivated opinion.

Considering the length and type of the talk I am not too surprised. However, the Public Choice theorists and political scientists have substantiated this - so it isn't conjectural.

He's well entitled to his anarchist opinions, but he shouldn't go there unless he wanted to support them.

Not sure. The purpose of the talk, I think, was to serve as an advertisement. You know, "if I have sparked some interest I can provide you with more comprehensive literature, if not oh well no worries". Given that, I think unsubstantiated claims are permissible in the lecture so long as those are substantiated somewhere in the literature.

[lucky]

However, the Public Choice theorists and political scientists have substantiated this - so it isn't conjectural.

No, not really. It is an extremely fringe claim to say that government activities are always bad (worse than every market failure problem they are trying to solve). If there was a consensus in support of this claim, all economists would be an-caps. The consensus is almost universally the opposite.

I do admire him for saying outright that he's not an expert on macroeconomics in Q&A, by the way.

[Soixante-Retard]

I see what you mean - in that case I agree with you, though I wouldn't use your terminology. "Unorthodox", perhaps.

Regarding macroeconomics: Honesty is the best policy regarding things that you don't know, macroeconomics or not.

[Kman]

I think these examples of market failure are bullshit, if people individually decide to all reneg on paying for a radio station so it goes bankrupt then that is a punishment which will encourage donations. Same thing with his spearmen in a line argument, Friedman junior claims that leaving the line in a spearman formation is the rational choice since it greatly increases your chance of personal survival if everyone else stays, it is not however the rational choice if everyone leaves so how can you say it is a market failure? Clearly the rational choice is to stay in formation to increase your chances of survival since any reasonably intelligent person can figure out what happens if everyone runs, it is not as he claims to leave the formation.

[lucky]

Listen again, Kman. And again. It's hard to find a better, more detailed or patient exposition of what externalities are and why they cause market failures, suitable for people with no economic background. He addresses exactly what you're confused about. I don't think anybody in this forum can do a much better job explaining it to you, especially with your arrogant attitude.

[Eran]

I haven't yet watched the talk.

Calling a phenomenon "market failure" is like calling a car "mechanical failure" because, unlike an idealised model of a car, an actual car suffers from friction. In other words, the term's only meaning stems from comparison of actual markets with idealised, unachievable, internally-inconsistent model of markets invented by mathematical economists so that they can run their calculations. Mathematical economists are like the drunk looking for a coin under the light while knowing it was dropped elsewhere.

In the real world, there are no perfect markets. All markets are therefore subject to "failure".

The reasons markets are always better than government is because markets are the best mechanism for correcting their own inefficiencies.

Assuming only that property rights are well defined and protected, every so-called "market failure" is also an entrepreneurial opportunity. Entrepreneurs will be better informed, motivated and situated to improve on an imperfect state of affairs than government bureaucrats.

At the risk of misquoting, a relevant quip goes like this:

Chicago - Markets are perfect. Use markets.
Harvard - Markets fail. Use Government.
GMU - Markets fail. Use markets.

[Rich]

Obvious market failure: the Atlantic slave trade. Fixed by the mailed fist of the British Navy. Lets be honest the modern Liberal state fucking rocks. If you don't think slavery is a market failure or at least a serious one then the Soviet Union can be considered part of the free market economy, Stalin was a free citizen of the world, the population of the Soviet Union just happened to be his slaves.

Assuming only that property rights are well defined and protected,

Can we assume the Moon is made of cheese at the same time. The point is that without a state there's no chance of property rights being either well defined or protected. Even the Libertarians on this forum can't agree on property rights: abortion, the rights of the child, or to be more precise the rights of any group who fancies acting on behalf of children or foetuses, what punishments are legal, the death penalty, copy right, patents, taxation, government or private defence and police forces.

[Eran]

Can we assume the Moon is made of cheese at the same time. The point is that without a state there's no chance of property rights being either well defined or protected.

For the purpose of this discussion, your point is moot.

We can discuss a minarchist state which does nothing but define and protect property rights. Surely, if government is good for anything at all, it is for that, right?

So let's assume, for the purpose if this discussion of market failures, and so as not to be distracted, that government can actually do what it is supposed to do, and define and protect property rights. Given that assumption, are there any market failures which can better be resolved by further government activity (i.e. beyond its role in defining and protecting property rights)?

Clearly the slave trade is a bad example. If governments did their job protecting property rights (including the property rights of Africans in their own body), the slave trade wouldn't have taken place. The slave trade was an obvious example of government failure. Government failed its job of protecting property rights.

What else?

Even the Libertarians on this forum can't agree on property rights: abortion, the rights of the child, or to be more precise the rights of any group who fancies acting on behalf of children or foetuses, what punishments are legal, the death penalty, copy right, patents, taxation, government or private defence and police forces.

So what? Neither do statists. Most libertarians aren't anarchists, and so would probably advocate some kind of democratic mechanism for resolving such disputes. Those of us who are anarchists are in an even better place, since an anarchy doesn't require a uniform, monolithic legal environment.

The world today operates just fine despite being made of many different countries, each with its own legal codes, rules and principles. Anarchists may simply propose that the same diversity can be accommodated at more local levels.

[Soixante-Retard]

@Eran, I know what you mean when market failure isn't a very good term as it presupposes markets should be perfect and not fail. However, this is somewhat trivial, I think, when trying to persuade people that markets can fail not just because of current market mechanisms but also because of government imposed mechanisms which prohibit any evolution and preclude any dynamism to endogenous market regulations.

Have you watched the video yet?

[lucky]

I haven't yet watched the talk.

It's a mistake to write a commentary about something you haven't watched... All you can do then is to copy some generic talking points.

Calling a phenomenon "market failure" is like calling a car "mechanical failure" because, unlike an idealised model of a car, an actual car suffers from friction. In other words, the term's only meaning stems from comparison of actual markets with idealised, unachievable, internally-inconsistent model of markets invented by mathematical economists so that they can run their calculations.

You've disclosed a misunderstanding of the term "market failure". It does not mean a discrepancy between reality and idealized models. Market failures occur in idealized models just as well.

The talk goes into some length trying to show some examples in layman terms using stories. If you really want to understand, you should read up the actual maths: game theory, Nash equilibria, Pareto optima, etc.

Ironically, the speaker says it at the beginning of the talk: many people think they know what a technical term means based on just the name (he mentions "theory of relativity" and "market failure"), without studying the actual mathematics behind it, and they are wrong.

[Kman]

Ironically, the speaker says it at the beginning of the talk: many people think they know what a technical term means based on just the name (he mentions "theory of relativity" and "market failure"), without studying the actual mathematics behind it, and they are wrong.

Mathematics suck dick at describing human behavior, I dont see why you pretend that you need to be highly skilled at math in order to understand economics.

[lucky]

I dont see why you pretend that you need to be highly skilled at math in order to understand economics.

I never said that you have to "highly skilled" at math to understand economics. Game theory concepts used to describe market failures are rather simple, most high school students should be able to grasp them.

Of course if you're going to try to do something more sophisticated than just understanding the definitions, that might require more skills.

[SolarCross]

One important way that markets fail is when they are rigged by cheaters. These days certain important markets such as stock and commodity markets are heavily manipulated by algorithmic fake trading performed by non-state institutions such as morgan-stanley. This goes on because government doesn't interfere to put a stop to it. How could a libertarian or anarchist market avoid being rigged like this?

[Someone5]

For the purpose of this discussion, your point is moot.

We can discuss a minarchist state which does nothing but define and protect property rights. Surely, if government is good for anything at all, it is for that, right?

Well, if governments aren't even good for that, then you an-caps sure are in trouble with your theories, aren't you? Because if the government isn't even good for that, then the entire foundation of your preferred economic system is a sham and unworkable without force. So much for "non-aggression."

Though I do find it interesting that you an-caps are so entirely willing to admit that your only interest is the service of power; by stripping government only to the functions that benefit the few at the expense of the many.

Clearly the slave trade is a bad example. If governments did their job protecting property rights (including the property rights of Africans in their own body), the slave trade wouldn't have taken place. The slave trade was an obvious example of government failure. Government failed its job of protecting property rights.

Let's face it, the slave trade was only ended by governments protecting exactly that right--of Africans to their own body. The British Navy interdiction of slave vessels was an example of that, so was the British ban on slavery. You're basically saying that "because governments ended the slave trade, and the slave trade is a market failure, that must mean that governments failed to protect property rights and failed to correct a market failure." The only way you can even sort of defend that position is if you think that the slave trade was ended by the market rather than by government force. You're basically saying that government is a failure because it didn't immediately nip the problem in the bud when it started; that government is a failure because it can amend its policies and viewpoints to adapt to changing circumstances. Again, you libertarians fail to take account of informational economics--you fail to understand that economic actors do not have perfect knowledge, even with the price mechanism.

So what? Neither do statists. Most libertarians aren't anarchists, and so would probably advocate some kind of democratic mechanism for resolving such disputes. Those of us who are anarchists are in an even better place, since an anarchy doesn't require a uniform, monolithic legal environment.

It most assuredly does require a uniform social environment; you cannot be an anarchist with fascists at the doorstep. It does require a basic social agreement on the ground rules of debate and economic relationships. If you have anarchists and an-caps in a society, for example, the an-caps would be awfully busy shooting anarchists for "stealing" their "property."

The world today operates just fine despite being made of many different countries, each with its own legal codes, rules and principles. Anarchists may simply propose that the same diversity can be accommodated at more local levels.

[SolarCross]

Of course we shouldn't get too dreamy eyed about the British ban on slavery. The british were enthusiastic slavers until the slaves on their carribean plantations violently overthrew the british slavers. The british were forced by the slaves to start paying them a wage for work. The british then decided to smash slave trade to the US and Spanish colonies so they wouldn't be the only ones doing without fresh slaves.

[Joe Liberty]

Well, if governments aren't even good for that, then you an-caps sure are in trouble with your theories, aren't you? Because if the government isn't even good for that, then the entire foundation of your preferred economic system is a sham and unworkable without force. So much for "non-aggression."

If anything, the presumption that government can't even secure property rights properly would be an argument in favor of an-caps, not against, wouldn't it?

Though I do find it interesting that you an-caps are so entirely willing to admit that your only interest is the service of power; by stripping government only to the functions that benefit the few at the expense of the many.

That doesn't follow. Exactly how does securing the property rights of all individuals, and having no power left over to be influenced by and grant favors to the few, only benefit the few?

Let's face it, the slave trade was only ended by governments protecting exactly that right--of Africans to their own body.

Nevermind that governments started and maintained the slave trade by ignoring those property rights, right? You give government credit for ending an abhorrent practice that it started and perpetuated in the first place. Your paragraph reminded me of a Harry Browne quote: Government is good at one thing: it will break your legs, hand you crutches, and say, "see, without government you couldn't walk".

You're basically saying that government is a failure because it didn't immediately nip the problem in the bud when it started;

Yes, we're saying governmnet was a failure because it failed in the first place. It's like an auto mechanic who screws up your engine the first time you take it to him. Does he deserve praise and thanks when he finally fixes his own mistake? Shouldn't he be held responsible for making it in the first place?

[Someone5]

If anything, the presumption that government can't even secure property rights properly would be an argument in favor of an-caps, not against, wouldn't it?

You can't have property rights without a government to mediate the claims, recognize new ones, and defend property claims by force against seizure. An-caps do support governments that perform the property privilege protection function of government; they entertain delusions of calling their governments "rights management agencies", but that's just renaming the beast.

That doesn't follow. Exactly how does securing the property rights of all individuals, and having no power left over to be influenced by and grant favors to the few, only benefit the few?

It benefits the few people who have property at the expense of the many who don't. It would be like the government saying "we'll only be providing Medicare for the rich, but the rest of you still get to pay for it." When the government is stripped down to a set of functions that anyone can qualify for, but which most people do not actually qualify for, that is simply a service to power.

Nevermind that governments started and maintained the slave trade by ignoring those property rights, right?

We could have solved the problem more directly simply by eliminating property rights; slaves can't be slaves if there is no property. So what? The government ended it, even if it might also have started it--though really trying to claim that the government "started it" by granting people the property privilege over other people is pretty weak. The slavers who were interested in buying people were the start of it, the government just didn't get in their way. The government opted not to interfere with the slaveowner's "precious" negative liberties until it changed its policy.

You give government credit for ending an abhorrent practice that it started and perpetuated in the first place.

The slaveholders started it, the government simply did nothing to get in the way of their property claim for a time. That's rather like saying that a person who drives by a car crash without stopping to do something about the injured caused the car crash. It's stupid.

Yes, we're saying governmnet was a failure because it failed in the first place.

Sure, Henry Ford was a failure for not making electric cars to begin with. If he had just foreseen the problems with gasoline, we could have avoided this whole oil issue. Fuck Henry Ford, he was a total failure in life. Yeah, that makes total sense, right?

The fact that the government isn't omniscient does not mean it isn't a necessary and conflicted weapon against domination by the wealthy. The fact that the government can be of many minds about an issue does not mean it cannot serve the working class against the investor class.

It's like an auto mechanic who screws up your engine the first time you take it to him. Does he deserve praise and thanks when he finally fixes his own mistake? Shouldn't he be held responsible for making it in the first place?

Except that's not an adequate analogy; the government didn't start the business of hiring slaves, it just adapted its existing property framework to account for slavery--until they stopped doing that, and decided that slavery was morally abhorrent. Yes, they should have decided that earlier, but that doesn't mean they created slavery. Slavery was created by the individuals who bought other people, not the government that was afraid to infringe on the slaveowner's property privilege. That makes the government cowardly, not a slaver.

[Joe Liberty]

You can't have property rights without a government to mediate the claims, recognize new ones, and defend property claims by force against seizure. An-caps do support governments that perform the property privilege protection function of government; they entertain delusions of calling their governments "rights management agencies", but that's just renaming the beast.

That depends on how broadly you define the word "government".

It benefits the few people who have property at the expense of the many who don't.

That's like saying traffic laws are unfair becuase they benefit people who drive at the expense of people who don't. There is no "at the expense of". Property rights would be enforced equally for all; nothing dictates that those without property are being taken advantage of or being forced to pay for anything. So where does the "expense" come in?

Secondly, in this context property rights refer to more than physical land.

When the government is stripped down to a set of functions that anyone can qualify for, but which most people do not actually qualify for, that is simply a service to power.

I still fail to see how a government stripped of the power to favor the chosen few is a boon for the chosen few.

We could have solved the problem more directly simply by eliminating property rights; slaves can't be slaves if there is no property.

That's just nonsense. No one could be anything but a slave if there were no property rights.

The government ended it, even if it might also have started it--though really trying to claim that the government "started it" by granting people the property privilege over other people is pretty weak.

Blaming government for ignoring property rights is weak, but excusing that because it eventually cleaned up its own mess (not due to any altruisim, but from economic and social pressures) makes sense?

Your car crash metaphor is a horrible one. It's not like blaming someone for driving by a crash and doing nothing, it's like causing the crash and then being awarded a medal for not utterly killing the other driver.

Except that's not an adequate analogy; the government didn't start the business of hiring slaves, it just adapted its existing property framework to account for slavery

Right, it ignored property rights. You don't want to hold it responsible for betraying its most basic function, but you give it all the credit for finally getting around to enforcing property rights when it was left with very little choice in the matter. I just don't get it.