Defending markets

I have often accused rightists of making a "small truths, big error" rhetorical trick - of using a small truth to disguise a big mistake. I fear, though, that this post by Richard Murphy shows that the left can do the same thing.

He points outthat the conditions required for markets to work optimally are extremely unlikely to exist in the real world.

This is true.

It is also irrelevant. Optimality is a massively demanding standard. if we were to scrap all institutions because they were sub-optimal, we'd have nothing left.  

Nobody would seriously defend a market economy because it is optimal. Instead, the intelligent defence of markets is that they are (often) the least bad ways of coping with the fundamental problems of complexity, limited knowledge, bounded rationality and the (occasional?) human propensities for venality and greed.

For example, Hayek's defence of a market economy wasn't that it fulfilled the requirements for optimality; he described the textbook theory of perfect competition as "of little use." Instead, he said, markets were a way of aggregating dispersed information (pdf); countless traders and customers, taken together, know more than a central agency ever could. This, for example, is why prediction markets can be (pdf) more successful than individual pundits. And it's why computational experiments show that agents with limited rationality can produce efficientish markets. Under some circumstances, there is wisdom in crowds.

Similarly, when Smith wrote that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" he was capturing the possibility that markets could channel greed for useful ends. By contrast, the argument against state control is that the state will be captured by the rich used used to serve their interests - a claim for which there is surely abundant evidence.

Now, of course, the notion that markets are always a less sub-optimal institution than the state is silly. How well markets work will vary from  place to place and time to time, and often depend upon quite subtle differences in incentives and structure; sometimes, for example, bubbles occur in usually efficient markets. Most of us, I reckon, would favour tougher regulation of banks than greengrocers.

Personally, I feel a little embarrassed to say all this, as I think it's bleeding obvious.

But it's not just anti-market types such as Richard who don't realize this. Hayek's point about the virtues of disaggregated information-gathering is also underweighted by fund managers who rip off their clients by falsely claiming to be able to beat (pdf) the market, and by corporate bosses who think they deserve mega-million salaries for controlling big organizations.

It's insufficiently realized that the 1% and leftist anti-marketeers have a lot in common.

Comments

[Luis Enrique]

is it fair on "the left" to use Richard Murphy as an exemplar?

[Stevenclarkesblog.wordpress.com]

@Luis Fair or not, it's a widely read blog with a lot of influence.

[Guano]

There are some, though, who treat markets as optimal when they should recognise their weaknesses and guard against them.

[Keith]

You may be being unfair... I am sure most people left or right know banks should be regulated far more strictly than purveyors of greens. They merely are confused or uncertain how to do this. The fact that markets are driven by greed is the virtue but also vice. How to remove the bad effects of greed while keeping the good?

Adam Smith is himself aware that any meeting of business men tends to lead to conspiracies against the public good. How to stop it eludes us.

[Nicholas]

I don't think smith would have used the word 'greed' which he associated with the predations of the powerful. But rather self-love or self regard. Which unlike greed was a virtue, as it helps prevent people becoming a burden on others.

[shah8]

I don't see the problem with his post. He's saying that all functional markets operate with state intervention. That the libertarian version of unregulated but functional free markets is impossible. These two things are conventionally true.

[Jose Romeu Robazzi]

I am not a specialist, but every bubble in history seems to have been preceded by some form of monetary expansion (usually engineered by government, and not endogenous to the markets), The South Sea bubble, Brazilian "Encilhamento" in early 20th century, the twenties in the US, early 21st century in the US. Some of these are disputable clains, but saying that bubbles are endogenous to markets, when markets are not completely free is at least intelectually dishonest ...

[gastro george]

"... he was capturing the possibility that markets could channel greed for useful ends. By contrast, the argument against state control is that the state will be captured by the rich used used to serve their interests ..."

I'd like to focus on the use of the words "could" and "will be" here. They're doing a lot of work and showing a point of view that is at least debatable.

"Markets" can equally well be captured by the rich. State control could be channelled for useful ends. What's important in both are the relationships of power and its regulation.

[Herbie Destroys the Environment]

There is a tendency among libertarians to talk of the market as if it is the sum total of the system, of human relations. They live on the perfect competition cloud, this is where abstract ideas get you.

Because they see the market as the dominant thing and not simply a derivative, anything that deviates from the market is seen as deviant or dastardly. So relations that are not conducted via the market are seen as vested interest. while this can be true it is hardly the starting point and is hardly the whole truth.

The libertarians mystify the market, turn it into something supernatural. But it's just real people making real decisions about our lives at the end of the day.

This article betrays some of that mentality.

[AlanDownunder]

Jose, what was the GFC if not a wave of endogenous bank-created private debt breaking on the shoal of a bursting asset-inflation bubble?