People sometimes wonder why I get so frustrated with some of the commentators on this blog who usually start off appearing reasonable, gradually disclose a free market, and often Hayekian bias, and end up effectively taunting on the basis that I will not accept their free market view of the world, which by their definition means that I am necessarily wrong. At this point I get bored and break off engagement as a complete waste of time and the rest is, I am sure, familiar to those who sacrifice their time to read such comments.
In that case then I think it worth explaining just why I find free market economics so frustrating. Fundamentally this is because of the absurd assumptions that underpin the logic of those who adhere to these beliefs. Saying that, many of those who do so will, I am sure, say that what follows represents beliefs they do not personally recognise. I hate to disillusion them, because the reality is that all this will reveal is that they are the unwitting slaves of some far from defunct economists because what I will describe are the assumptions that underpin the vast majority of economics journal papers in the UK, including those that result in the policy prescriptions of almost all free marketeers (including, depressingly, on tax).
So what are these assumptions? You can give and take a little on these, because once you get above about eight there is some overlap or substituitability between them, but each is common and worth noting. I should, in fairness, add I started with a list from here, but expanded a little as I thought appropriate. Free markets to work require that there be:
- Many sellers each of whom produce a low percentage of market output and cannot influence the prevailing market price.
- Many individual buyers, none has any control over the market price
- Perfect freedom of entry and exit from the industry. Firms face no sunk costs and entry and exit from the market is feasible in the long run. This assumption means that all firms in a perfectly competitive market make normal profits in the long run.
- Homogeneous products are supplied to the markets that are perfect substitutes. This leads to each firms being “price takers” with a perfectly elastic demand curve for their product.
- Perfect knowledge — consumers have all readily available information about prices and products from competing suppliers and can access this at zero cost — in other words, there are few transactions costs involved in searching for the required information about prices. Likewise sellers have perfect knowledge about their competitors.
- Perfectly mobile factors of production — land, labour and capital can be switched in response to changing market conditions, prices and incentives.
- No externalities arising from production and/or consumption.
- Markets that clear, which requires that for all sellers there is a buyer.
- Markets that reach a state of equilibrium i.e. there is an optimal outcome to economic activity.
- Rational expectations, which means that people accurately forecast statistical expectations and all errors are random.
As I have said, you can argue that one or two extra conditions can be added to this list and that a couple may overlap. It does not make a lot of difference to the outcome because the fact is that all these conditions need to exist simultaneously if markets are to provide optimal outcomes for the economic organisation of society. If any one of them fails then because of the simple application of chaos theory and the power of small numbers the outcome from leaving markets to themselves are wholly unpredictable.
So what is the chance that these conditions exist? This is a question Prof Richard Werner asked last week at the meeting I was at in Glasgow. Let's be generous and suggest that each of these conditions has a more than evens chance of existing — call it 55%. But remember, they all must. In that case them all existing is 0.55 to the power 10. That is about 0.25%. But that's incredibly generous: ludicrously so when the assumptions made are looked at by any sane person. Apply a more likely probability of these things existing of 5% (which I still think absurdly high) and the chance that free markets exists falls to 0.00000000001%. Let's call that a cat's chance in hell.
This is why I find free marketeers so absurd. They demand that markets be given freedom to deliver when there is quite simply no chance at all that they can deliver because the requirements that must exist for them to do so not only do not exist, but cannot do so.
There is no chance of there being multiple sellers in many markets. Monopolies are a reality. And so too are monopsonists (sole buyers).
Perfect freedom of entry to markets will never happen: it depends a socialists utopia of everyone having equal capital for a start.
Third, no one has perfect knowledge, or rational expectations come to that.
And the idea that markets are in equilibrium is absurd: we only ever progress towards a goal. We have never yet reached it.
I could go on, but the fact is that all these assumptions can only be held by someone wholly out of touch with reality or an economist (and there's a Venn diagram in there, with a massive overlap, of course).
So the reason why I can't be bothered to engage with those who persist in arguing that free market outcomes are possible is that it's absurd to do so. The premise of their arguments is false. Why move engage in debate on that basis?
The fact is that we cannot have markets without regulation.
And we cannot have markets without the state playing a significant role in determining what they can and cannot do.
And free markets cannot ever be free then, as a matter of fact. We can only talk about constrained markets where foreseeable outcomes must be within a limited range of potential outcomes to protect all those who might otherwise be harmed. Nothing less than that is ever going to be acceptable in a modern economy. But don't get me wrong: the outcome of those constrained markets is invaluable. I believe, very strongly, in a mixed economy. But free market thinking is a ong way removed from that an is absurd, wholly unrealistic and, bluntly, a rather sorry fantasy.
People can argue otherwise, but they can do it elsewhere. I deal with reality, possibility and what is desirable and free markets fit into none of those categories.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
richard ,
so many thoughts this early in the morning on everything from politics , to tax , to some interesting economic thinking ! Where do we nominate you for that nobel prize ?
I will let you into a secret
One was written last night
Free markets – the theory is great but then reality and pragmatism take over.
Perhaps they could exist, but rather like the Higgs Boson, they would disappear in less than the twinkling of an eye! 😉
The Austrian economists make the case for free markets – ie. for non governmental interference with market participants. And Austrian economics would agree with Richard on every single one of his bullet points assumptions being false in the real world. I think the way they do this is to recognise the real life limitations of markets, but to show that the state doesn’t improve the situation, but makes it worse. So, I think if one is to argue against free markets, whilst taking the approach Richard has taken may defeat some of the arguments some people use for free markets, that still leaves the Austrian school with its arguments untouched by these points (because it doesn’t rely on them for its line of reasoning and actually agrees with them). Certainly characterising the false assumptions as Hayekian is incorrect and attributing straw men to Hayek’s views. Because, again, Hayek would agree that all those bullet points are false assumptions in the real world. He spent much of his time considering the problem of knowledge in society, for example.
See my reply to Anthony Evans
Austrian economics is another exercise in fantasy
If you would like to understand the case for free markets, without falling into the trap of believing the conditions mentioned above are necessary, may I recommend my new textbook:
http://www.amazon.co.uk/Markets-Managers-Managerial-Economics-Finance/dp/1118867963/ref=sr_1_1?ie=UTF8&qid=1399735930&sr=8-1&keywords=Markets+for+Managers%3A+A+Managerial+Economics+Primer
Ah, Austria rears it’s ugly head
Free markets work without government
Please pull the other one
It’s just another crass assumption that ignores externalities, including the abuse by wealth of most in the community
Let’s call it the Road to Neo-Feudalism, shall we?
The book I’ve mentioned does not rest on the claim that markets work without government and also discusses externalities. Are these strawmen a result of ignorance or a deliberate attempt to mislead your readers? Either way, for those who want to understand more about Austrian economics there are resources available.
They’re based on my reading if Austrian economics
You know: the abuse that flowed from Mont Pelerin
And given we’re a long way down the road to neo-feudalism already, Richard, the last thing we want is the boost advocates of the Austrian school would provide.
Anyway, leaving aside comment on the historical and contextual background to Hayek’s work, the way in which it clearly shaped his thinking, and thus its contemporary relevance, one of the features of this school that has always struck me as almost completely reality free is their assumptions about the commercial organisations and entities that would dominate and control this government-free economic environment. Thus, without any form of regulation (apart from the “natural” regulation of markets) it is assumed these would be largely socially benign, ethically responsible and their success (or failure) of intrinsic value and benefit to society as a whole.
Now unless we assume that the vast array of examples of negative/destructive and/or corrupt/illegal behaviour of a significant percentage of the commercial organisations and enterprises that currently populate our planet is rooted in or caused by government (interaction or regulation, etc) then I really cannot see how or why this situation would change under the Austrian free-market model. Indeed, quite the reverse. We would live in a world dominated and controlled by corporate organisations and interests, with no accountability to anything other than themselves. In short, we would simply substitute or transfer the oppression and control that is frequently ascribed to government to large corporate entities, but with even fewer (ie. none) checks and balances than we currently enjoy (albeit these are increasingly ineffective under the existing neoliberal project). The road to serfdom – and by definition, neofeudalism – of that there’s no doubt.
Agreed
Basic physics assumes that friction doesn’t exist, that strings have zero mass, and that things are both non-deformable and completely elastic in collision – and often that G = 10 m/s2.
As none of those are true, does that mean that physics is all wrong? Can we get no useful insight into the world from such mechanical models?
They work because they are good approximations to reality
Not one if the assumptions is a good approximation to anything close to reality
That might explain the difference to a reasonable person
So you consider that the following are never the case in the real world, then?
– Many sellers each of whom produces a low percentage of market output and has little influence over the prevailing market price
– Many individual buyers, where few have any influence or control over the market price
– Ability to enter and exit from the industry. Sunk costs are manageable and entry and exit from the market is feasible in the long run.
– Products are supplied to the markets that are adequate substitutes for one another. This leads to demand curves for product being broadly elastic
– Consumers and sellers have readily available information about prices and products from competing suppliers and can access this at reasonable cost.
– Mobile factors of production — land, labour and capital can (at a cost in time and treasure) be switched in response to changing market conditions, prices and incentives.
– Externalities arising from production and/or consumption are discouraged.
– Markets that clear, which requires that for all sellers there is a buyer (although this may require prices to be reduced substantially).
– Markets that tend towards a state of equilibrium i.e. there is a trend to economic activity.
– Rational expectations, which means that people generally pay attention to statistical and empirical expectations and errors tend to be random.
To me, those sound rather more credible than perfectly smooth, weightless, non-deformable string 🙂
I hope you’re not asking me to answer that
Because if you really think those assumptions apply universally (and that is the requirement – one flaw and it all fails) I think I would have to say I seriously doubt your judgement
That, or presume you’re an economist
“…one flaw and it all fails”
That seems a pretty strict way to judge a model, and one which would completely stifle any sort of thought or innovation.
I’ve not said that the things I listed are universally true, just that they are the case quite often.
I understand that the point of the free market model is to say:
– If we assume X, Y, Z, then this is what happens.
– Do we have X,Y,Z in practice?
– As we do not, how does this affect the outcome?
That is, the items you list are not assumptions, but are more in the way of platonic ideals: you don’t ever expect to find them in the real world, but they’re a useful indicator of what things could be more or less like.
But what you clearly demonstrate is the fact you do not understand this
The model of free markets that economists promote as the panacea on which all policy can be built does require that all the se conditions hold simultaneously. Not some. Not partially. But all, completely. Of their maths does not work
So all those with blind faith that markets work – as you clearly have – are doimg so on the basis of the fact you’ve been sold a pup by a profession not owerthy of the name
If one of these assumptions does not work a free market solution will be sub-optimal and potentially wildly so
That’s why we cannot risk free markets, only deeply regulated ones
And yet despite the fact that the economics profession knows this you won’t believe it
Why is that?
I’m not an economist, but even I know that the model you present is not the model held up by economists – any more than the “smooth inextensible string” model they teach at GCSE physics is relied on by professional engineers.
You’re simply presenting a straw man.
You’re not an economist
OK, I accept that
But just last week I sat with a lot of people who are. Indeed who are professors of economics and they would certainly agree with what I am saying
Now, who to believe?
I suggest you stop talking nonsense Andrew
A group of academics say that a group of other academics have a simplistic and erroneous view of the situation, and so their theories should be discounted?
I’m shocked – shocked, I tell you 😉
Except that in this case the ones who say they believe in competition have done their very best to eliminate it
“They work because they are good approximations to reality”
Actually, the physics assumptions Andrew lists are pretty poor approximations to reality.
That doesn’t mean their useless though.
Here we go again
Economics is a natural science
No it isn’t
It’s politics
And it’s subjective
Call it moral philosophy
“But just last week I sat with a lot of people who are. Indeed who are professors of economics and they would certainly agree with what I am saying”
Isn’t Anthoney Evans a professor of economics? Looks like he’s disagreeing with you.
No
An assistant professor is not a professor
We call them lecturers
@AndrewJackson Science is not complete, and why is an incomplete theory an issue? Science is a process, an epistemology. Economics is more politics than physics.
more astrology than physics in some ways.
A good analogy
Blind faith is another description, with the object of faith being akin to fairies at the bottom of the garden, and so disprovable
This argument is absolute nonsense, and I post it as someone who is a scientist.
Approximations of all sorts are made within the scientific field, but what you do not do is use an approximation for examining a system, where that approximation if it does not hold, would make a large difference in the end result.
Thus you don’t use equations relating to a frictionless system on, for example, moving car engine parts. To do so would be absolutely absurd, not to mention in all likelihood bankrupt the car manufacturer.
Thus if you would apply useful models as you put it, to the economy, then as a scientist I would throw neo-liberal economics out the window on day 1. Because looking at the list of assumptions made it is obvious they do not hold, and that it is a neceesary prequisite for them to be true for neo-liberal economics to be a viable model for the economy.
Thanks
The only reason they are used, of course, is the outcomes they suggest possible suit some
alexw
Because looking at the list of assumptions made it is obvious they do not hold, and that it is a neceesary prequisite for them to be true for neo-liberal economics to be a viable model for the economy
I guess there’s only so many times one can point out that the list of assumptions Richard has created are *not* necessary conditions required for markets to work. If you choose to simply ignore that, fine.
However it does imply that Hayek was *not* a “neo-liberal” economist. Do you actually believe that?
Markets worl or not dependent upon the effectiveness of regulation because free markets cannot
How many times do I need to make that point?
“They’re based on my reading if Austrian economics
You know: the abuse that flowed from Mont Pelerin”
Even a cursory awareness of Austrian economics would recognise that it provides a *critique* of the assumptions you made in your original post, as opposed to a defense. If you are treating the MPS as being synonymous with Austrian econ then you are simply repeating your original error of being unable to distinguish between various schools of thought.
Seriously – if you want to criticise Hayek and other Austrians you really should spend time becoming aware of what they actually say. I humbly posit that my book would be a good starting point. Or, better still, actually read some Hayek.
I have read Hayek
It’s risible in its paranoia and contempt for humankind
Oh, and remind me: was Hayek at MP, or not?
How is Hayek paranoid? Bear in mind the time in which he wrote, when nationalism in various guises was killing millions of people. Also his target for criticism is on the hubris and over confidence of people with political power. Whilst he sees the good in society as emerging from the freedom and choices of the masses.
His freedom is that of unfettered wealth
We now know that results in abuse just as nationalism can
Why not believe in democracy?
If you’ve read Hayek then you’d realise that he criticises the same assumptions that you are critiquing in your original post.
e.g. http://mises.org/daily/4181
Hence in terms of *economic methodology* you are not providing a case against free markets. Indeed you’re siding with the most extreme free market economists.
If you feel that there’s other reasons to reject their views – such as their “paranoia” and “contempt” – that’s fine, but recognise it’s a non economic argument that you’re making.
Hayek founded MPS. Anyone with access to the internet would know that. But to assume that this automatically means MPS is driven by Austrian – as opposed to Chicago school – ideas is a big error.
I remember the 70s when the leninists argued with the trots who argued with the Stalinists
You remind me of them
Well that would make sense if you didn’t understand the difference between what Lenin, Trotsky and Stalin believed. But if you wrote an article in the 1970s criticising Lenin, and in fact your arguments were based on the *main* point of difference between Lenin and those others, it’d be valid to point that out!
Let me put this another way – if you started your article by mentioning Becker, or Friedman, or even Paul Samuelson or Krugman (i.e. *neoclassical* economists) then I wouldn’t have left a comment. But you mentioned Hayek. Why? Because he’s synonymous with “neoliberal” or free market economics. But although Hayek shared many beliefs with the likes of Becker or Friedman his economic methodology was very different. Indeed one of the reasons why free market policy conclusions are compelling is that they can be derived from neoclassical type assumptions (such as the ones you’ve listed) but also heterodox ones.
To write a methodological critique of free market economics and start off by mentioning Hayek reveals that you are ignorant of free market economics. If “it all looks the same” to you then it means you don’t understand it well enough. Your instincts about economic methodology – i.e. uncertainty – are valid ones. They are a valid critique of mainstream economics. But you are echoing Hayekian arguments when you attempt to critique Hayek. That should leave you thirsty to understand your position better. Start off with Hayek’s “Individualism and Economic Order”. You will find the following quote:
“The argument in favor of competition does not rest on the conditions that would exist if it were perfect”.
And the point is not one of the conclusions has any relationship to the world we live in – or one almost any person would want to live in
It’s the conflict between reality, people’s real wishes, and neoliberal dogma, however derived, that is rearing us apart
Literally tonight
And the fact is your sect – fairly described – us as outrageous in its disconnection as the mainstream of economics theory that I accurately described
The calculations in your post rest upon the implicit assumption that the events are independent. Since this is not true, as you say they “overlap”, your calculations are incorrect.
Go on ten
Let’s have the definitive answer
Because the chance that even if associated those conditions hold is in reality a tiny fraction of 1%
As you have conceded in the comment section, the question is not whether the simplifying assumptions of an economic model are true or not, but whether they approximate reality.
My point was that the probability of multiple events occurring simultaneously equalling the product of the probabilities of separate events uniquely applies to independent events.
I am now thinking angels and pinheads
Or deck chairs and the Titanic
The central argument of your post was that these assumptions holding (or even approximating reality) simultaneously is really unlikely, ergo the people who makes these assumptions should be distrusted.
This calculation was based around an error, assuming independence, where this is found at GCSE-level statistcs and probability: http://www.bbc.co.uk/schools/gcsebitesize/maths/statistics/probabilityhirev2.shtml
Given we should not trust people who make flawed assumptions, why should this post be trusted?
It’s entirely reasonable to think those assumptions are in the vast majority cases independent. That is glaringly obvious, I think
In a couple of cases I indicated there may be overlaps
So it may be to the power 8 not 10. It makes little odds
But if you really want to get into erroneous maths note the assumption that the arrival of another buyer or seller makes no difference to outcomes. Economics has yet to notice the significance of very small numbers and that they do not behave like zero. Alternatively if assumes static populations
The absurd assumptions can be kept on rolling out
And most economics on which we’re governed us based on this nonsense
It would be interesting to determine the proportion of the world’s markets that approximate each of the above assumptions, and look for instances that actually approximate all of them. The issue of independence could also be examined by looking for imbalances in these proportions for the individual markets, although near-independence seems a fair assumption in several cases.
But even allowing for substantial dependence I would be surprised if as many as 0.25 % of world market’s could be said to approximate the free market ideal. Externalities are present to some extent in practically all markets, oligopolies are common, and huge budgets are devoted to “marketing” precisely because it creates uninformed and irrational buyers.
But you still aren’t getting it
They must all hold
Approximation is no good
The maths on which the predictions are based that free markets work can’t handle those approximations
An approximation says free markets don’t work, inevitably
As we know to be true
i think a day will come when governments and regulators are no longer needed; as soon as technology – in particular the internet – allows for the creation of organisations so transparent and benevolent in their working that employees and consumers learn to trust them completely. this will obviously rely on employees/consumers becoming savvy enough to distinguish which organisations are trustworthy/well meaning but i think tech will get us to that point pretty quickly too.
in the meantime the right-wing’s dismembering of the state is more akin to a leopards’ attempts to scatter it’s prey from the herd. it’s pure divide and conquer.
That vision does,min am afraid to say, sound rather like Douglas Carswell’s
And the fact is your sect — fairly described — us as outrageous in its disconnection as the mainstream of economics theory that I accurately described
Maybe so, but name calling isn’t sufficient to make that case. This article purports to be a critique of Hayekian free market ideas. As I’ve pointed out (and which you now seem to accept) you’ve totally misrepresented Hayek’s ideas by conflating them with neoclassical ones. You then suggested that Austrian ideas suffer from other errors – such as the belief that free markets work without government, and the denial of externalities. I pointed out that you are wrong about that as well. As is obvious to anyone that’s read his books, Hayek wasn’t an anarchist.
Perhaps Austrian economics is a “sect” – you’ve not made any attempt to explain what you mean by that, so I can’t tell if I agree with you. But a more honest article would have been to ignore economic methodology and just say “I don’t like free market economics because it’s a sect”. At least then you wouldn’t be stating that there’s methodological flaws without being equipped to actually discuss those reasonably.
Arguing that it’s just as “disconnected” is hand waving – why is it disconnected? What are the methodological errors? If you’re not willing to support that claim, why make it?
BTW in terms of “sects” I don’t think it works as an insult. Economic theology is a serious subject and you may find this of interest:
http://www.amazon.co.uk/Economics-Religion-Samuelson-Chicago-beyond/dp/0271022841
I think we all know what sects are
The odd thing is that in all this I am interested in what actually happens and might what be done about it
The democratic disconnect is that about politics is, because of the unreality if it’s guiding economic principle, detached from that reality
It is sects that have created this problem and persist in perpetuating it
The result is democracy denied
Hayek would have bought into that, in my opinion
I’ve read your comment several times but honestly do not understand it.
That’s fine by me
Richard, you state: “The maths on which the predictions are based that free markets work can’t handle those approximations”.
You are right, the outcome of markets is pretty much impossible to predict. But, the markets came first – not the maths. And markets do work. There were no economists telling farmers to take their crops to a market place in the 16th century, nor were blacksmiths told by economists that it made sense for them to specialise in a single trade and rely on selling their labour to buy food (which requires a market).
Yet these things happened. Without any maths.
Models attempt to unpick, investigate and understand what happens in the real world. By necessity (due to the overwhelming complexity of the real word), models simplify things. Simplifications do not make a model useless (if that were the case, there would never be a model in any walk of life that worked. Climate & weather models, for example, make assumptions).
The point of a model is to attempt to increase our knowledge & understanding of something. The fact that a model of something is imperfect seems an odd reason to criticise the thing itself.
Markets did not work in neo-feudal society
Markets as we know them (and let’s deal in real issues, shall we?) are modern creations as far removed from the myth on which you base your proposition on as the limited liability corner shop is from BP, despite which economists model the latter as ilf it were the former
Stop, in other words, peddling falsehoods
As to the use of model, this is interesting. Approximations are used in sciences like physics to help explain systems, but not change them. In that case the approximations may be tolerated
But on the basis of false assumptions used to create fake mathematical models with no scientific credibility we are told we must adapt our behaviour to be more akin to this model
That is something very different indeed
“But on the basis of false assumptions used to create fake mathematical models with no scientific credibility we are told we must adapt our behaviour to be more akin to this model”
Climate change models are huge approximations involving massive assumptions, but we are being told we have to adapt our behaviour too them. You seem to be a firm believer in AGW, to the point where you think we need a green new deal.
What you are saying is that we need to believe in one assumption filled model, but reject another. Isn’t this total hypocrisy and a massive failure of your own internal logic?
AGW is a fact that no longer needs proving
Unless of course you are in the flat earth society
The models are about physical behaviour
Economics is not
Physics is rational
We are not
How long do I need to say that?
That the climate is changing is fact. But what is driving it and how much by is not. People are relying on models to predict those changes – and we’ve seen over the last few years that those models can be very wrong.
Physics definitely uses models and assumptions – and massive simplifications.
You are happy with use of assumptions, simplifications and models in these fields, so why do you think its not correct to use the same scientific techniques in economics?
Also, if you think that free market economics assumptions are wrong, what does that say about the assumptions you make in your economic pieces?
So the world is flat in your view then?
I can’t be bothered to debate on the basis of your absurd premise
Terry- can’t understand why people keep trying to compare economics with physical sciences -they are not homologous.
Economics is fundamentally about human relationships and, as Richard has often pointed out, more similar to religion than anything scientific. Economics is, therefore, about perceptions of the world and our place in it: change the perception of how we relate to each other and the economics changes.
people are fond of making a comparison with ‘hard’ sciences. But there is often a subconscious agenda behind this: to encourage us to think economics is like the weather or a natural physical system that is impervious to change.
@ Terry
unless the laws of physics are different where you live then we know exactly what drives the increase of GMST and hence, climate change. If you have information to the contrary, publish your paper, await the claim of your peers and sit by the phone awaiting a call from Sweden and a cheque in the post for £1 million.
@ Richard
Is this another one of your “can’t answer, won’t answer” lines? Answer the question.
Climate change models are approximations with major assumptions. You say we should listen to them. Economic models are approximations with major assumptions. You say they are all wrong and we shouldn’t listen to them.
Why is one model correct and one not? I don’t see comparing the legitimacy of two model based views as absurd.
@ Simon
See above. You can still model the human interactions within an economy. That doesn’t make it faith based – it’s a model. Richard claims to do plenty of economic modelling. It seems to me that he simply doesn’t like economic models which don’t fit into his political view.
@ Jeff
No, we really don’t know what drives climate change. We *think* it’s C02. But it could also be sunspots, or various other things. Scientists use models to try and predict what is going to happen, but as we’ve seen repeatedly those models are often wrong. The atmosphere is a complex system and modelling it is full of assumptions and approximations. Economics also models complex systems. So what is the difference?
I have answered this question endlessly but you are refusing to notice
Physics involves observation on a fairly objective basis of what is in effect a system in which we have only limited engagement and where as a result the number of variables where we may exercise control is limited so that physics can provide discrete answers based upon reasonable models
Economics is an issue where we are intimately involved on a wide range of issues where our presispositionsalways matters and simply asking a question always changes the outcome. To assume a technique applicable in physics is therefore suitable in economics is just folly
That is a complete answer, as I always supply
I will not give it again
The model that Austrian economists use is one of a ‘non-coercive’ relationship to buyer and seller based on need. The idea that capitalism can create non-coercive relationships seems to me a denial of the reality of history where capitalism has created alienation, fear, bad-faith, expropriation, gross inequality and grotesque rent-seeking.
How could the Austrian position create a remedy to this? Would it rely on people (to use Huxley’s phrase) becoming saints and geniuses at the same time? WE desperately need out of the box thinking on our economic issues – I’m sympathetic to the Austrian concern about banking and money creation by banks and how a return to full reserve might slow down irresponsible money creation – but I don’t like the model as the entrepreneur as ‘God’ benevolently bestowing employment on a grateful populace -we need something more co-operative than that with pay differentials that don’t create a sense of bilious disgust.
“The fact is that we cannot have markets without regulation.
And we cannot have markets without the state playing a significant role in determining what they can and cannot do.”
You have said you want to deal with reality.
Could you point towards some real world examples of where heavily state controlled economies have been a rip-roaring success?
Also, you list a series of conditions necessary for a perfect free market economy and then ‘prove’ a free market can’t exist by dint of arbitrarily assigning a percentage chance of each condition exisiting.
Could you do a similar exercise for your perfect state run economy? Give us an idea of how likely it is?
I am not arguing for state run economies
I am arguing for well regulated mixed economies
Only fools think otherwise
What are those economies? The UK for a long period pre 1973
And many others until neoliberalism undermined the regulation
“I am arguing for well regulated mixed economies
Only fools think otherwise
What are those economies? The UK for a long period pre 1973
And many others until neoliberalism undermined the regulation”
You’re joking I assume.
Pre the 1970s the UK was so unregulated that Michale Moran (The British Regulatory State – 2003) described the UK being run by a ‘club government’ of an old boy’s network.
We’re far more regulated now than then, even with recent deregulation – which is for the most part looking to remove regulations imposed after, not before 1973.
I’m afraid you’re looking back at the UK pre 1973 with glasses both rose tinted and misted up.
We’re more regulated now because Thatcher sold off business we owned in 1973 and regulated it instead
Next?
But are you seriously saying that we’d have been better off without the post war consensus and the regulation which has built modern prosperity
If so, where did that happen?
And don’t say Singapore and Hong Kong because one has massive state involvement and the other is a branch of China
Richard, you are contradicting yourself. You say markets do not work, but then state you believe in a mixed economy. Perhaps you mean a purely free market cannot work. In which case, why are you so worried about neoliberalism, if it can’t exist anyway? But that is also contradicted by the real world – the black market is by definition outside of state interference and quite clearly ‘works’ in terms of the demand and supply of illicit goods. In fact, it clearly works better than the straight prohibition of the state.
I think what you mean is that completely optimal market outcomes, of the sort described within neoclassical models, don’t exist because the assumptions in the model don’t exist. I think every economist in the world would agree with that.
The attempt to create free markets is undermining the viability if the mixed economy
Isn’t it obvious?
And if it is why do economists promote it?
Are they stupid?
Free markets do not exist, and probably never have existed. The idea that if markets are given free reign and the economy will be guided as if by an “invisible hand” is based on the idea of perfect information. A situation that is pure fantasy.
So called fee-marketeers tend to conveniently forget about the tax breaks and the protection through the law of intellectual property rights as well as subsidies.
In one way or another, the state has held the hand of capitalism ever since its inception.
¨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¨
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2014/09/defending-markets.html
I note his conclusion:
It’s insufficiently realized that the 1% and leftist anti-marketeers have a lot in common.
He’s the Marxist
Not me
And I have long suspected he does not understand issues like the one I explored – or provides a convenient supposedly left wing cover for them
If he does not realise that policy prescriptions are built on the basis of the falsehoods implicit in this modelling then I suggest that what he has to say is discredited
I have long suspected he does not understand issues like the one I explored
That’s a pretty sweeping statement given that his article made several serious points supported by clearly linked research.
Why not actually engage with the substantive points he’s raised? Does he have a point?
He totally missed the point
He says markets work
And to some degree they do, of course
But certainly not fur the reason the vast majority of reasons economists give and he knows that
In which case their policy prescriptions are wrong, which is what I argued
Based on what he says he should draw the only possible conclusion, which is that my argument is right
But certainly not for the reason the vast majority of reasons economists give and he knows that
But he’s not claiming that they work because of the “the reason the vast majority of reasons economists give”, is he? After all, he’s a Marxist. Your critique of the neoclassical case for markets has been criticised above, I’ve pointed out that you’ve not engaged with the Austrian case for markets, and now you’re refusing to engage with the Marxist case for markets.
Based on what he says he should draw the only possible conclusion, which is that my argument is right
Come on, don’t be so evasive! Chris is a well read, intelligent person. He wrote an entire post explaining where he disagreed with you. If you can’t understand how anyone can disagree with you, it just reaffirms that the main problem here is your lack of understanding as to what your intellectual opponents actually believe. And that probably results from an unwillingness to read them carefully.
I have not said markets do not work
I have said markets do not work with the outcomes most (and you can hardly argue with the hegemony if the vast majority of ecomocs, surely) economists suggest likely because their logic is based on false assumptions
In that case so a there policy prescriptions
Oddly it’s a point I would have thought you and Chris Dillus would agree with
We have all oaid the price for the insanity of these assumptions – from the efficient market hypothesis onwards
What I said was self evidently true except to those who are wedded, it seems, to free market theory, apparently whatever the reason
As I’ve already pointed out your confusion is based on an ignorance of free market theory. If the case for free markets rested on the assumptions you’ve listed, and if the desirability of policy prescriptions rested on how closely the theoretical assumptions matched reality, then you would have a point. But even a trivial understanding of economic theory reveals that you are wrong on both. EMH is a case in point. The text book I’ve just written has a whole chapter devoted to explaining why the case for markets does *not* rest on assumption that EMH holds. If this is news to you, do some reading.
Forget the hegemony of economics. This post started with a reference to Hayek. If you can’t critique Hayek without lapsing into a critique of a characatured view of mainstream, neoclassical economics, then you need to go back to the library.
As I have told you, joining a sect dedicated to removing the influence of government is not the way I intend to go to solve the problems of markets and nor, I suspect, will many others
In the meantime I note you agree that the use of these assumptions is dangerous, something Lord Turner did some time ago
So now we reach the point where you clearly agree with my argument but you disagree with the idea that the state has a role in addressing it
The fact that you equate “reading a book” with “joining a sect” is telling. Educating yourself on a topic you intend to critique is a normal, sensible thing to do. You must be very insecure in your own beliefs if you feel otherwise!!
I agree that faulty assumptions can be dangerous. That is why I became interested in the Austrian school. As I’ve said multiple times the case for markets is *strengthened* by the fact that the assumptions you’ve listed don’t match reality. Your post is right to point out that neoclassical assumptions are faulty. Where you’re wrong is your implication that this invalidates the case for markets, and causes policy prescriptions that follow from those theoretical models to be undesirable.
How many times do I have to say I am not arguing that properly regulated markets have a role?
What is there not to understand about that?
As for the belief that correct policy prescriptions follow from faulty assumptions let me take you back to 2008….
I thought it went without saying that I was referring to the case for *free* markets. Perhaps not. So to be clear – I acknowledge that you are not advocating total central planning. And I’ve previously corrected your erroneous claim that Austrian economics implies zero role for government. Hopefully now you can respond to the point that Chris and myself have raised – i.e. that the inapplicability of the assumptions you’ve listed can actually strengthen the case for *freer* markets.
I do find this exchange somewhat entertaining. It started with your claim that free market economists implicitly rely on faulty assumptions, and that free market economists may not even realise it. I pointed out that for the group of free market economists you’ve specifically identified – i.e. those with a Hayekian bias – you are wrong. Not only are they aware of the assumptions on which their models rest, they are explicitly different to the ones you attribute to them. Indeed the strongest case against those assumptions are Hayekian ones.
You’ve responded to this by trying to shift your critique to the economics profession more generally. Which raises some interesting inconsistencies – are you claiming that all economists are free market economists? What about Keynesian economists? Marxists? Yourself?
If you have really never heard of the difference between mainstream (hegemonic) and heterodox economics or even between the significance given to the difference between freshwater and saltwater economics within the hegemonic mainstream where have you been?
And why are you arguing?
Isn’t it you who has some reading to do?
Because don’t you realise how far outside the mainstream you are?
And, I admit, I am
But at least my work relates tp the world as it is
Now we’re getting somewhere – if you accept that Austrian economics is “far outside the mainstream”, surely you can now see why criticising the assumptions utilised by *mainstream* models does not achieve what you claim??
No
It says you agree with me
Albeit we disagree on the solutions
I am wondering what you have been arguing about all along
You wrote a post saying that free market economics rests on a set of assumptions that you deem to be false. I pointed out that the only free market economist you actually specified – Hayek – also argued that those assumptions didn’t hold.
For your argument to be valid one of two things must be true:
1. Hayek’s arguments rested on the assumptions you specified
2. Hayek is not a neoliberal or free market economist
Please correct me if I’m wrong, but think you accept that both points are false?
I acknowledge you know more about Hayek than I do
And I reiterate: he had the most enormous influence on the propagation of the ideas to which I refer
Ok, good. I suggest in future being more careful about making sweeping accusations about the implicit assumptions free market economists hold.
Since you seem to agree I got them right and it is beyond dispute Hayek assisted promotion of the fallacies then I admit I will take the liberty if ignoring your advice
Firstly, stop trying to attempt to claim that I’m agreeing with you. As I’ve made very clear your error was conflating neoclassical with neoliberal economic methodology. Your articulation of the assumptions of neoclassical economics are fine. But that isn’t the issue. The issue is whether they are implicitly adopted by free market economists. And they’re not.
Secondly, if your problem with Hayek is that he “assisted promotion of the fallacies” then you should have a far bigger problem with Paul Samuelson and Paul Krugman than you do with Hayek.
I’ve had similar debates with other people and their response tends to be that Hayek and other Austrians were neglected by the economics profession and haven’t had much impact on policy. The problem you have is that you are simultaneously trying to argue that:
1. There is a neoliberal hegemony
2. The main assumptions of mainstream economics are faulty
To the extent that you’re right about 2, it’s because you are wrong about 1.
Now your game is clear
You agree with me (you have to: these assumptions are not the basis for policy prescription was my argument and you gave agreed) but you are back to what I think was my first response to you, which was that you sound like the Old Left splitting hairs on intellectual purity
You see a difference between neoliberalism and neoclassicism
We don’t because you all get to the same place. How you get there does not trouble us as much as it does you
Your argument was that those assumptions are the basis for *free market* policy prescription. And yes, if you fail to see a difference between Austrian economists and neoclassical economists then it would appear as if my point is splitting hairs. But given that Austrian economists explicitly reject the assumptions you attributed to them, we are not in agreement at all.
I’ve written a book on neoliberalism, and feel qualified to talk a bit about it. Your reluctance to articulate what you mean makes it difficult to debate it with you. But if you insist that neoliberalism and neoclassicism are indistinguishable this implies that you believe that Hayek is either both or neither, and that Krugman is either both or neither. I would be intrigued by your clarification.
Is Hayek a neoliberal neoclassicist?
Is Krugman?
You simply fail to recognise that the term neoliberal is not generally used in the way you would like to define it
I agree neo-classicists hardly use it
And you like it as a badge of apparent honour
But generally those who use it – who are premonantly on the left – use it to describe those who offer a free market, low tax, lie regukation, low government solution to all ills however they deceive themselves into thinking it will work
Is by this definition Hayek neoliberal? Yes
Is Kugman a saltwater neo-classicist as you would have it? Yes. And yes, he does miss the point on many things. But at least he does not assume markets clear automatically and instantly