Accurate summary of what went wrong?

[Francesca R]

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.

This denial that free individuals can make correlated mistakes on a large scale is a joke. To prop it up you need to declare that "regulation" caused all manias and bubbles and panics and crashes in history. And then (as above) when you are presented with evidence that greater (smarter) regulation elsewhere prevented crises that showed up at home, you flail around looking for unrelated reasons why those regulations exacted a greater cost. It's pretence. You are not interested in understanding "what went wrong".

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

Cool climb-down on the fractional lending. About a year ago you denounced the practice as criminal fraud. Now, apparently, you were "never entirely convinced". And yet it's other people whom you have the audacity to call "hysterical"

I am for laissez-faire capitalism, and one of the things government SHOULD do in a free market is act to prevent fraud. I believe that fractional reserve banking is a kind of fraud, which is actually promoted by government instead of criminalized.

Your argument against my claim that fractional reserve banking is fraudulent is very weak. [ . . . ] Since it IS fraud, and in a free market, government would make it illegal.

 

[Captain.Sassy]

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.

My point was that consumers aren't rational. Offered the choice nobody would say 'yeah I'm wanna be a big fat diabetic' but many people in effect make this choice in their every day consumption.

 

[SaulOhio]

My point was that consumers aren't rational. Offered the choice nobody would say 'yeah I'm wanna be a big fat diabetic' but many people in effect make this choice in their every day consumption.

But my point is, you can't blame that on the free market. The market is only a tool, an environment for freedom of choice. It doesn't guarantee that people will make the best choices. It lets people live with the consequences of those choices, however. I don't find the alternative very attractive, if it involves forcing people to eat right and exercise.

Francesca: All the evidence that there was government sponsored expansion of the supply of money and credit during booms, and that the expansion was cut off to precipitate the busts doesn't affect your position on the subject? Murray Rothbard's quantitative examination of the boom before the Great Depression? The Fed's recent policies that precipitated this recession, the graph of which is right HERE?

Blowing Bubbles

Law sought to "lighten the burden of the King and the State in lowering the rate of interest" on France's war debts and to increase the supply of money to stimulate the French economy, with the opening of General Bank, owned 25 percent by Law and 75 percent by the King, and the formation of a series of companies that when ultimately merged together were known as the Mississippi Company. Two years into his system, the regent granted Law's request that the General Bank be made part of the state, becoming the Royal Bank, patterned after the Bank of England.

With the Royal Bank creating vast amounts of paper currency, Mississippi Company share prices took off which led Law to issue more shares, using the capital to refinance more of the government's debt. Ultimately, the scheme unraveled, despite Law demonetizing gold and silver so that only royal banknotes and Mississippi Company shares would circulate as money. An outraged French public ultimately forced the regent to place the once-revered Law under house arrest.

While John Law was struggling to keep his Mississippi bubble inflated, across the English Channel, a nearly bankrupt British government looked on with envy, believing that Law was working a financial miracle. It was anything but, however Sir John Blunt followed Law's example with his South Sea Company, which in exchange for being granted monopoly rights to trade with South America, agreed to refinance the government's debt.

As the price of South Sea Company shares rose, as in the case of Law's system, more shares were sold and more government debt refinanced. The company had no real assets, but that didn't matter as speculators bid the share price higher and higher, spawning the creation of dozens of other "bubble companies."

The South Sea Company lobbied the British government to pass a Bubble Act that would shut down these new companies that were competing for investor capital. Ironically, it was the enforcement of that act that burst the bubble with South Sea Company shares falling nearly 90 percent in price. Beloved British statesman Sir Robert Walpole reorganized the technically bankrupt South Sea Company, and it remained in business for years.

Although these episodes occurred centuries ago, readers will find the events eerily similar to today's bubbles and busts: low interest rates, easy credit terms, widespread public participation, bankrupt governments, price inflation, frantic attempts by government to keep the booms going, and government bailouts of companies after the crash.

 

[Captain.Sassy]

But my point is, you can't blame that on the free market. The market is only a tool, an environment for freedom of choice. It doesn't guarantee that people will make the best choices. It lets people live with the consequences of those choices, however. I don't find the alternative very attractive, if it involves forcing people to eat right and exercise.

Yes but as soon as you allow for individuals being irrational then the market solution becomes less optimal.

You don't have to force people to eat healthy food, but you can do stuff like tax food to represent the true costs of an unhealthy diet.

In any case this is wildly off topic.

 

[kevinquinnyo]

..

You don't have to force people to eat healthy food, but you can do stuff like tax food to represent the true costs of an unhealthy diet.

In any case this is wildly off topic.

(bolding mine)

Wildly off-topic yes, but I'd like to chime in.

Essentially what you are saying is that an unhealthy diet, and the consumption by an individual is an inefficient transaction, because there is an external cost to the, say, cheeseburger that isn't in the initial transaction cost at McDonald's.

If we assume that say for instance, the external cost associated with the cheeseburger that is not a part of the initial transaction ($1), is about 50 cents in the form of say, higher health insurance premiums, then the "true cost" of the cheeseburger is $1.50, right?

Your solution would be to impose a tax of 50 cent to every cheeseburger, and subsidize the public to balance the transaction, thus making it more efficient.

The problem with this type of "solution," is that it ignores the real problem. It's not external cost that is the problem, but the transaction cost. (Not between Mcdonald's and the customer, but between the customer and the insurance buyer)

Consider a simpler example to illustrate this point.

If a factory pollutes into a neighborhood down-wind, the intuitive response is that the factory is imposing a cost onto the neighborhood, and should thus be taxed for the exact cost the pollution causes, and the neighborhood should be subsidized that amount.

The inherent assumption is that the cost is only being imposed by the factory. This is where the tax/subsidy solution breaks down.

The factory is imposing a cost on the landowners, but the landowners are imposing a cost on the factory by living near the factory.

This can be seen very clearly if you consider the cost involved of the factory installing anti-pollution measures.

The point is that the actual cost is of transactional nature between the two parties, not a one way cost imposed by one onto the other.

 

[Francesca R]

Francesca: All the evidence that there was government sponsored expansion of the supply of money and credit during booms, and that the expansion was cut off to precipitate the busts doesn't affect your position on the subject?

Yes it does. But this is more about the position you (not just you) espouse being unipolar. As you did above, if market systems with no non-market interference screw up, you blame the participants (not the market) and if systems with non-market interference screw up, you blame the interference. This is not logical; it is just a fallacious way of pushing a corner position. Under your illusory taxonomy one can always blame "regulation" and never blame "absence of regulation". That exposes your position as rather useless.

 

[Just thinking]

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

No ... I'm speaking of self-driving emotionally based buying/selling. Once one of those panic sessions gets started it's pretty much hard to stop it before it goes too far.

 

[Captain.Sassy]

(bolding mine)

Wildly off-topic yes, but I'd like to chime in.

Essentially what you are saying is that an unhealthy diet, and the consumption by an individual is an inefficient transaction, because there is an external cost to the, say, cheeseburger that isn't in the initial transaction cost at McDonald's.

If we assume that say for instance, the external cost associated with the cheeseburger that is not a part of the initial transaction ($1), is about 50 cents in the form of say, higher health insurance premiums, then the "true cost" of the cheeseburger is $1.50, right?

Your solution would be to impose a tax of 50 cent to every cheeseburger, and subsidize the public to balance the transaction, thus making it more efficient.

The problem with this type of "solution," is that it ignores the real problem. It's not external cost that is the problem, but the transaction cost. (Not between Mcdonald's and the customer, but between the customer and the insurance buyer)

Consider a simpler example to illustrate this point.

If a factory pollutes into a neighborhood down-wind, the intuitive response is that the factory is imposing a cost onto the neighborhood, and should thus be taxed for the exact cost the pollution causes, and the neighborhood should be subsidized that amount.

The inherent assumption is that the cost is only being imposed by the factory. This is where the tax/subsidy solution breaks down.

The factory is imposing a cost on the landowners, but the landowners are imposing a cost on the factory by living near the factory.

This can be seen very clearly if you consider the cost involved of the factory installing anti-pollution measures.

The point is that the actual cost is of transactional nature between the two parties, not a one way cost imposed by one onto the other.

Well, the added healthcare costs are definitely a consideration when looking at food taxes, but really what I was talking about was the irrationality of the consumer's decision to eat big macs when lifetime utility is considered. If you ask the average fatso "Do you wish you didn't scarf big macs all the time?" they would probably say "yup!"

I don't think you could realistically use taxes to approximate the actual cost to the consumer of eating big macs. But using taxes to internalize the costs to society (in any economy with some degree of socialized healthcare) is legitimate.

As for your factory example, I don't see how you can call it a transaction for the factory to pollute the neighbourhood, unless the factory is paying the people in the neighbourhood. Until you force (through some means) the factory to bear the costs of its polluting activities, it is a one-way imposition of costs onto others.

 

[lomiller]

My point was that consumers aren't rational. Offered the choice nobody would say 'yeah I'm wanna be a big fat diabetic' but many people in effect make this choice in their every day consumption.

I guess that depends on what you mean by rational. A lot of seemingly irrational behavior can actually be demonstrated as rational. For example paying more for a name brand product that is otherwise similar to a cheaper product. This is actually a rational choice when you factor in the time cost of evaluating the no-name product’s quality.

Even when the cost of the item is high enough to justify the time cost of further research there is often a glut of confusing information that the person isn’t really qualified to analyze. This is one of the ways business “short circuit” free markets, they deliberately pollute the knowledge pool people use for decision making which makes it almost impossible for a new company to compete even if their product represents superior price/value.

 

[lomiller]

But my point is, you can't blame that on the free market. The market is only a tool, an environment for freedom of choice. It doesn't guarantee that people will make the best choices. It lets people live with the consequences of those choices, however.

This is fine if consumers have reasonable incentive/opportunity to make informed decisions, but TBH this isn’t the norm.

I don't find the alternative very attractive, if it involves forcing people to eat right and exercise.

False dilemma. Regulation isn’t about forcing people to do anything it’s about blocking people from taking actions that short circuit the effective function of a free market.

 

[Captain.Sassy]

I guess that depends on what you mean by rational. A lot of seemingly irrational behavior can actually be demonstrated as rational. For example paying more for a name brand product that is otherwise similar to a cheaper product. This is actually a rational choice when you factor in the time cost of evaluating the no-name product’s quality.

Even when the cost of the item is high enough to justify the time cost of further research there is often a glut of confusing information that the person isn’t really qualified to analyze. This is one of the ways business “short circuit” free markets, they deliberately pollute the knowledge pool people use for decision making which makes it almost impossible for a new company to compete even if their product represents superior price/value.

I'm not talking about information asymmetries here. I'm talking about a consumer who knows the impact on their utility of being obese, knows that eating mcdonalds burgers will make them obese, and yet eats mcdonald's burgers every day. They know that their actions will lower their overall lifetime utility and yet they nonetheless undertake these actions- they knowingly act against their own interests.

Buying designer jeans is 'rational' if the consumer maximizes their utility in this way. For the consumer in question, the designer jeans are not the same commodity as the no-name jeans. Now, if the consumer buys designer jeans knowing full well that they will regret this decision the next day when it comes time to pay the heating bill and will end up with lower overall utility than if they had bought the no-name dungarees, then the decision to buy the designer jeans was irrational.

That being said, I think spending hundreds of dollars on jeans is retarded and fashion is also retarded.

I also agree with you that advertising should be very strictly regulated. Speaking of which **** ROGERS. Those lying filthy crooks are propogating bald-face lies in their recent 'say no to the TV tax' campaign.

 

[Tsukasa Buddha]

Yes it does. But this is more about the position you (not just you) espouse being unipolar. As you did above, if market systems with no non-market interference screw up, you blame the participants (not the market) and if systems with non-market interference screw up, you blame the interference. This is not logical; it is just a fallacious way of pushing a corner position. Under your illusory taxonomy one can always blame "regulation" and never blame "absence of regulation". That exposes your position as rather useless.

Seconded.

 

[kevinquinnyo]

Well, the added healthcare costs are definitely a consideration when looking at food taxes, but really what I was talking about was the irrationality of the consumer's decision to eat big macs when lifetime utility is considered. If you ask the average fatso "Do you wish you didn't scarf big macs all the time?" they would probably say "yup!"

I don't think you could realistically use taxes to approximate the actual cost to the consumer of eating big macs. But using taxes to internalize the costs to society (in any economy with some degree of socialized healthcare) is legitimate.

As for your factory example, I don't see how you can call it a transaction for the factory to pollute the neighbourhood, unless the factory is paying the people in the neighbourhood. Until you force (through some means) the factory to bear the costs of its polluting activities, it is a one-way imposition of costs onto others.

Exactly. The point, though, is that the assignment of blame is arbitrary, until you KNOW who is the least cost avoider.

For example, if the factory does 1 million dollars of damage to the neighborhood, then the pigouvian tax should be 1 million dollars exactly, but what if it costs only 500,000 dollars for the homeowners to move away?

That means that pigouvian tax is inefficient.

The conclusion to be drawn from this, (as admittedly ridiculous as the numbers in this example have become) is that the external cost is not created by one party and imposed onto a victim. It is the result of two parties' economic decisions that produce the cost.

 

[SezMe]

Consider a simpler example to illustrate this point.

If a factory pollutes into a neighborhood down-wind, the intuitive response is that the factory is imposing a cost onto the neighborhood, and should thus be taxed for the exact cost the pollution causes, and the neighborhood should be subsidized that amount.

The inherent assumption is that the cost is only being imposed by the factory. This is where the tax/subsidy solution breaks down.

The factory is imposing a cost on the landowners, but the landowners are imposing a cost on the factory by living near the factory.

This can be seen very clearly if you consider the cost involved of the factory installing anti-pollution measures.

The point is that the actual cost is of transactional nature between the two parties, not a one way cost imposed by one onto the other.

I think the problem with this analysis is that it ignores time dependency.

If the factory was built and started operations before neighboring residences were established then complaints by homeowners are indeed imposing a cost on a factory. Conversely, if the factory came after the homeowners were already established, then the factory is, indeed, imposing costs on them.

Extrapolating this scenario both in time and geographically complicates it to the point that your scenario is not illustrative of the problem being discussed.

 

[kevinquinnyo]

I think the problem with this analysis is that it ignores time dependency.

If the factory was built and started operations before neighboring residences were established then complaints by homeowners are indeed imposing a cost on a factory. Conversely, if the factory came after the homeowners were already established, then the factory is, indeed, imposing costs on them.

Extrapolating this scenario both in time and geographically complicates it to the point that your scenario is not illustrative of the problem being discussed.

It's not so much who came first, but who has the RIGHT to do whatever it is they are doing that matters.

Rather than summarize the work of Ronald Coase, I will just provide a link that is surprisingly relevant. (I guess the factory is the obvious example.)

http://www.daviddfriedman.com/Libertarian/The_Swedes.html

Read this link, you will definitely enjoy it.

 

[Francesca R]

It's not so much who came first, but who has the RIGHT to do whatever it is they are doing that matters.

And one needs a non-market authority to assign rights, and they must necessarily go beyond the supposedly (actually arbitrary) "self evident" or constitutional ones. So you're back to extending the reach of legislatures and judiciaries. Might be simpler (more efficient, if you like) to just regulate or tax.

Plus if you read Coase you'll be aware that exhaustive property rights assignment (even if you could do that, if anyone wanted to do that) doesn't do away with social costs unless you eliminate transaction costs and magic away public choice problems.

And if you could do that, then you still need to deal with relative bargaining power (presence of available alternatives), which is where moral philosophy and justice starts muddying up market solutions some more.

 

[Captain.Sassy]

For example, if the factory does 1 million dollars of damage to the neighborhood, then the pigouvian tax should be 1 million dollars exactly, but what if it costs only 500,000 dollars for the homeowners to move away?

I think this is covered by CV/EV

Under Compensating Variation, you'd give the people the 1,000,000 to compensate them for their loss in utility from the factory.

Under Equivalence Variation, the people would be willing to pay up to 500,000 to keep the factory away from the neighbourhood. A higher cost than this and they'd up and move.

So depending on which framework you use to compensate, you end up with either 1mill or 500K as the cost of the factory's pollution.

(NB: I might have CV/EV inverted).

 

[Captain.Sassy]

From the Coase link:

"Consider the question of airport noise. One solution is to reduce the noise. Another is to soundproof the houses. A third is to use the land near airports for noisy factories instead of housing. There is no particular reason to think that one of those solutions is always best. Nor is it entirely clear whether the "victim" is the landowner who finds it difficult to sleep in his new house with jets going by overhead or the airline forced by a court or a regulatory agency to adopt expensive sound control measures in order to protect the sleep of people who chose to build their new houses in what used to be wheat fields--directly under the airport's flight path. "

It is clear from this that the airport imposes a cost on the people in the houses, and so the loud noise is the externality. This is because the airport only incurs a cost because of regulation. There is no cost imposed by the homeowners on the airport just by dint of their houses being there- the costs have to be internalized to the airport by a non-market authority.

It is a market failure if the airport is built in an existing residential neighbourhood, and pays nothing to the homeowners who are offended by the noise. If the airport comes first, and a neighbourhood is built around the airport, then the homeowners buy cheap new houses that are built around the airport, and there is no market failure because the cost of the noisy airport is factored into the lower property prices. The comrade who mentioned time dependence was right in this regard.

(Just my first thoughts as reading this link.)

 

[SaulOhio]

Yes but as soon as you allow for individuals being irrational then the market solution becomes less optimal.

You don't have to force people to eat healthy food, but you can do stuff like tax food to represent the true costs of an unhealthy diet.

In any case this is wildly off topic.

How about if we stop PROMOTING such unhealthy lifestyles. The present subsidies and import quotas on refined sugar is making America more dependant on high fructose corn syrup, which is much less healthy. Next time you are at the supermarket, have a look at how many different products list high fructose corn syrup as an ingredient.

 

[Captain.Sassy]

Sure, I'd be in favour of repealing such subsidies if they encourage obesity. In Canada many agricultural subsidies are really hard to touch in part because of how we have elections (IMO). I imagine it would be similar in the US.

Have the HFCS health claims been vetted by the science forum on here?