Accurate summary of what went wrong?

[SaulOhio]

Not really.

I think his point is basically that markets succeed on their own as the rule, and fail as the exception.

Government policy fails as a rule, and succeeds as an exception to the rule.

Not quite. People fail in markets. Markets correct them. Without failure, there wouldn't be any need for the corrections, now would there? Private businesses fail, and if they do, they should be allowed to, without government interference. None of this "too big to fail" nonsense.

In fact, if it weren't for human fallibility, there wouldn't be any need for markets at all, and you wouldn't have anybody arguing for free markets and against government intervention.

The problem with government is not only that it prevents the process of creative destruction in the private sector, the process works in reverse in government. If a government program fails, it isn't shut down. Politicians just throw more money at it. Look at the war on drugs.

nobody is saying that all private decisions would have been fine in the absence of government decisions.

Looks like that's exactly what you're doing:

The argument is that in the absence of government regulation, privately made errors would be corrected more quickly, and would not accumulate in the economy. Its the government regulations, like FDIC insurance and low interest rates that allow errors to go uncorrected for a long time. It is the accumulation of uncorrected mistakes, malinvestments, that eventually cause the collapse of the economy.

Um, now exactly how does admitting the fact that businessmen would make mistakes in a free market mean that everything would be "fine"? When a businessman makes mistakes, his employees sometimes lose their jobs, he fails to serve his customers well, and he ends up wasting resources. How is that "fine"? The argument is simply that the damage is limited, that he has to either change his policies and correct his mistakes himself, or they will be corrected for him, when he goes bankrupt and the resources he has been wasting go to someone else who might manage them better. You don't get, as Rothbard described it, a cluster of errors, with almost everyone making such mistakes.

Why do you insist on some kind of utopian strawman argument like this, even when I easily prove it completely wrong with a couple simple quotes of the free market economists you are criticizing?

 

[kevinquinnyo]

Not quite. People fail in markets. Markets correct them. Without failure, there wouldn't be any need for the corrections, now would there? Private businesses fail, and if they do, they should be allowed to, without government interference. None of this "too big to fail" nonsense.

Yeah, I agree, the market in aggregate tends toward correction, that's not even debatable, but I think Francesca's opinion is that markets have inherent failures. (aggregate failures, not individual market players) The extent to which they are actually problems, and how severe those are is certainly debatable.

In fact, if it weren't for human fallibility, there wouldn't be any need for markets at all, and you wouldn't have anybody arguing for free markets and against government intervention.

Well, I would say that if there were unlimited resources with multiple uses, and we could all travel at the speed of light, there were no cost of transfer or information, and lived in an infinite in all physical directions space, we wouldn't need markets.

The problem with government is not only that it prevents the process of creative destruction in the private sector, the process works in reverse in government. If a government program fails, it isn't shut down. Politicians just throw more money at it. Look at the war on drugs.

I agree 100%.

 

[Tumblehome]

Ok, so this paper has another proposal about how to regulate the capitalist system in order to make it stable. One question:

Are they going to get it right this time?

It seems to me they had it right, or as right as they can get it, for quite a while. We've been living a relatively comfortable life for the last 60 years or so, don't you think? It was when they loosened those regulations that it threatened to fall apart.

An economy is too complex a thing to regulate. Not only does it involve a vast number of parts, those parts are PEOPLE, each a vastly complex entity in itself, having free will and capable of all sorts of ingenuity to evade, ignore, or even use the regulations imposed to their advantage. The result is unintended consequences, perverse incentives, the throttling of the creative powers of the best among us, often rewarding the most corrupt businessmen, causing the stagnation or instability the regulations were intended to solve.

Are you really suggesting that economies shouldn't, even can't, be regulated? You might as well say that a society of 300 million people is too complex to regulate, so let's do away with the American justice system.

The fact that people act in their own self-interests is exactly why we need regulations, as the economic collapse demonstrated rather clearly, I thought. We were given a little more rope and we hanged ourselves with our own greed.

We need some controls on our selfish instincts to protect the greater good, otherwise there'd be no need for legal codes, unions, the SEC, or governments or any heirarchical system of management. It's always a balancing act between regulations that are too restrictive and too loose, but again, I think it's plain that the recent collapse was an example of too little control.

 

[Tumblehome]

Part of the problem was that the U.S. system had regulations pushing banks to make bad loans.

Good regulation helps. Bad regulation, no so much.

Did those regulations push the banks to make bad loans, or was the option opened to them and they ran with it irresponsibly?

 

[Tumblehome]

You left one out ... behave irrationally. When someone can truly model irrational behavior, only then will one be able to regulate and control an economy.

Aren't regulations, such as setting limits on lending practices, a way of controlling irrational behaviour?

 

[jimtron]

Part of the problem was that the U.S. system had regulations pushing banks to make bad loans.

.

Could you please provide evidence for this?

 

[Emperor_Gestahl]

Saul is right, just like the ex-IMF guy in the PBS video I linked (and the congresswoman, also from Ohio coincidentally). We had a chance to preserve capitalism and we chose bailouts instead. Both Bush and Obama, the decision was made over our heads.

 

[Francesca R]

Um, now exactly how does admitting the fact that businessmen would make mistakes in a free market mean that everything would be "fine"?

Here:

People fail in markets. Markets correct them. [ . . . ] You don't get, as Rothbard described it, a cluster of errors, with almost everyone making such mistakes

Dunno why you deny what you're saying only to say it all over again. You think markets fix everything. There is enough information out there (out here) for you to learn how blinkered that is. Ergo, your continuing to bang on about it betrays closed-mindedness.

 

[Francesca R]

Aren't regulations, such as setting limits on lending practices, a way of controlling irrational behaviour?

Leverage limits are a way of mitigating/preventing the potential socially bad effects of behaviour, not controlling it per-se. (Not that greed or correlated mistakes should be seen as "irrational" IMO). Going into the credit market crisis, there were few limits on leverage, and leverage was historically very high, everywhere.

 

[Francesca R]

We had a chance to preserve capitalism and we chose bailouts instead. [ . . . ] the decision was made over our heads.

Hardly. Rather, those who are against bailouts got out voted, or were not in power and those who were in power already had sufficient authority to implement chosen policies.

 

[Francesca R]

Yeah, I agree, the market in aggregate tends toward correction, that's not even debatable

Of course it's debatable. Not least, you only get to opine about this evaluation if the market exists in the first place. Markets aren't a given in any economy, they only arise if the private gain of setting them up exceeds the private cost. Without non-market intervention (government, social institution, whatever), this would likely not be the case for very much at all beyond bartered spot transactions. Even with non-market intervention, many markets are still missing.

To suggest that every market that provides a net gain to all participants must automatically exist is incorrect. To suggest that if markets do not succeed then they are not worth having, is an argument from ignorance and denial. I don't know if you are trying to argue either of these statements.

I think Francesca's opinion is that markets have inherent failures. (aggregate failures, not individual market players) The extent to which they are actually problems, and how severe those are is certainly debatable..

This is not particularly my opinion. Research of the failures of free-markets has been available in the public domain for over 40 years. Perhaps you have missed it. You might like to start with Arrow (1969)

 

[SaulOhio]

Here:

Dunno why you deny what you're saying only to say it all over again. You think markets fix everything. There is enough information out there (out here) for you to learn how blinkered that is. Ergo, your continuing to bang on about it betrays closed-mindedness.

Its the externalities issue all over again. You take one thing I say and interpret it as some kind of utopian dream that it isn't in order to try to dismiss it out of hand.

I never said markets fix everything. There is no way to HONESTLY interpret what I said in that way. All I am arguing is that the MASSIVE amount of error we see in a bubble would not happen in a free market.

Please quote where I said markets would fix EVERYTHING! Error would continue to happen, since people are human.

If I say that I didn't mean something the way you interpret it, why can't you simply accept that? Thats what betrays closed-mindedness. You just HAVE to interpret everything I say in the worst, stupidist way possible, even when corrected, in order to protect your own preconceptions.

 

[Captain.Sassy]

You left one out ... behave irrationally. When someone can truly model irrational behavior, only then will one be able to regulate and control an economy.

The whole idea that markets will fix everything is built on the notion that people behave rationally.

Also, everything needs to have a price. And everyone needs to know everything.

 

[JihadJane]

Delusions about ever-increasing abundance.

 

[Captain.Sassy]

Here's my pithy statement du jour:
If markets worked diabetes wouldn't be skyrocketing in the US.

Sorry for aiding and abetting teh derail.

 

[Francesca R]

I never said markets fix everything. There is no way to HONESTLY interpret what I said in that way.

I don't recall you ever noting where markets sometimes don't correct people's failures. Or that markets sometimes do result in a cluster of errors, with almost everyone making such mistakes.

Of course IIRC you do want some government regulation, such as outlawing fractional reserve lending. But with this you advance the ass-backwards notion that governments allowing fractions less than one are doing the "regulating", (and sponsoring fraud).

 

[Francesca R]

The whole idea that markets will fix everything is built on the notion that people behave rationally.

No it isn't. People can trade rationally and the market can still **** up. Zillions of prisoners' dilemma variants can show that.

 

[Captain.Sassy]

My bad I thought the rational utility-maximizing consumer with access to perfect information was a mainstay of micro economic theory and the idea of the perfect market.


Wait... on re reading I think maybe we don't disagree here... you are saying a market composed of rational actors can still give a bad result in the aggregate, and I'm saying you need the theorized rational actors for market forces to work their magic. I don't think one necessarily precludes the other.

 

[Tumblehome]

Leverage limits are a way of mitigating/preventing the potential socially bad effects of behaviour, not controlling it per-se. (Not that greed or correlated mistakes should be seen as "irrational" IMO). Going into the credit market crisis, there were few limits on leverage, and leverage was historically very high, everywhere.

Yes, you worded it better.

Although I could argue that financial institutions making bad loans and then selling off the risk to others is irrational. It goes against economic common sense that regulations were built on in the first place. Lenders must have known this, but somehow "forgot" about it in the orgy of fast, easy money.

In the end, I guess it doesn't matter what it's called. It doesn't change the end result.

 

[SaulOhio]

I don't recall you ever noting where markets sometimes don't correct people's failures.

Wait a minute. If I don't explicitly say that markets DON'T do something, that is the same as saying that they DO IT?

Edited by Tricky: 

Edited for civility.

Or that markets sometimes do result in a cluster of errors, with almost everyone making such mistakes.

Why would everyone make mistakes? What all-powerful force can make everyone make such huge overestimates of the profitability of their investments, other than some government interference? Sure, a lot of people will make mistakes, but all of them making the SAME MISTAKE, at the same time, based on wildly different specific data? Something has to be skewing all that data in the same way.

If you have a stable money supply, some investments will always look unprofitable, and others will look profitable. Some people will be making mistakes about it, but that will be a minority. The problem with a boom is that EVERYTHING looks profitable because the whole economy is being flooded with money. A rising tide lifting all boats is not really such a great thing. The problem is that it LOOKS like your strawman version of what I say a free market would be.

As for the fractional reserve thing, I have to admit I was never entirely convinced that it should be outlawed. Maybe it should be, maybe not. Its a difficult issue. I still wonder about it, but your hysterical, out of proportion reaction makes it hard for me to avoid taking sides. You attack as if winning the argument is more important than getting at the truth. A real skeptic's attitude should be the exact opposite.

Captain Sassy: Markets aren't about providing everyone with the best possible of everything, but with what they choose. If some people choose a lifestyle that promotes diabetes, I wouldn't blame the markets. I blame them.

And I have heard about the prisoner's dillemma applied to economics. I know what it is, but I have never heard anyone explain how it actually applies to economics, what specific situations. We don't live in an interrogation room, forced into one decision that affects nothing but you and one other person you will never see again. We live in a society with a vast number of ongoing interrelationships. People build up reputations. They learn to trust one another. Or to not trust one another.

All I hear is "The prisoner's dillemma proves markets can't work!". I look up the prisoner's dillemma, and am nowhere closer to understanding why markets don't work. Especially when I see them working pretty well, except when the government sticks its thumb fingers in the works.

Thought experiments don't teach you anything you didn't already know. But they can make you think you have confirmed something you already believe.