Juan non-Volokh (with minor editorial changes)

by Henry on March 25, 2004

Markets versus Politics – The Real Choice: … Too often policy arguments proceed as follows: A) politics “fails” because it does not produce the theoretically optimal result, therefore B) market processes are necessary. But B does not follow from A. The failure of government to produce an optimal result does not ensure that market processes will do a better job. From a social democratic perspective – or any perspective that is inherently suspicious of privatization – the burden should be on those advocating market processes to explain why the marketplace can be expected to produce a better result than the political process. In such an inquiry, the theoretical virtues of a basic equilibrium model of perfect competition are no more relevant than Pigouvian theories of government intervention. Both are blackboard abstractions that often have little bearing on what occurs in the real world. What matters is how privatization—and make no mistake, the subordination of political decisions to the marketplace is always political—is likely to affect the status quo ante, and whether the consequences of such intervention (and the attendant rent-seeking, transaction costs, etc.) constitute an improvement in the real world.

The introduction of market mechanisms into politics may be well intentioned, but that does not make it any more likely to generate positive results. Indeed, insofar as noble intentions leave the likely consequences of such interventions unexamined, such policies may make us all worse off.

(see here for original).

{ 31 comments }

1

BigMacAttack 03.25.04 at 5:42 pm

I agree with both.

I agree with this post and with the original.

Both are right.

And I am being consistent.

2

Kieran Healy 03.25.04 at 5:48 pm

Hehe. It’s a neat trick, that “I’ve been known to try myself”:http://www.kieranhealy.org/blog/archives/000097.html.

3

asg 03.25.04 at 6:11 pm

Too often policy arguments proceed as follows: A) politics “fails” because it does not produce the theoretically optimal result, therefore B) market processes are necessary. But B does not follow from A.

When do libertarians routinely argue anything like premise (A)? They don’t criticize the failure of political processes for failing to produce theoretically optimal results. They criticize the tendency of political processes to produce catastrophically inadequate results. This is in distinct contrast to the original argument Juan was laying out; in my experience it is very common for those “suspicious of privatization” to hold up any deviation from classical market equilibrium as “market failure” and thereby justify substantial government intervention, without bothering to show that the inefficiency losses from such intervention are exceeded by the costs of the market failure. This is why Henry’s juxtaposition fails.

4

dan 03.25.04 at 7:04 pm

Henry’s bit of satire failed finally for me because the “status quo” that the two posts argue in favor of conserving are so utterly different.

Juan’s status quo, after all, reflects, for better or worse, the real world of capitalistic societies. While the status quo Henry is (I hope) playfully arguing to protect from impulsive privatization (a status quo of absolute state control over the means of production, apparently), now exists…nowhere.

Did get me grinning, though, so kudos.

5

Justin Hart 03.25.04 at 7:15 pm

There are two problems with your argument.

One is an assumption: the unspoken premise of your argument is that something has to be done. You fail to recognize that leaving something to its own devices (in effect “doing nothing” from a political point) is the equivilent of the market approach.

The other problem is evidence. Please cite me some type of evidence to support your argument. Theory is king of the empty thoughts otherwise.

Here are some actual evidentiary examples as noted by Thomas Sowell in his book “Vision of the Anointed”. In all three examples, “market forces” were at play until a government program was initiated.

1) Sex Education – it was presumed that incorporating sex education in public schools would reduce out-of-wedlock births and impede the spread of veneral diseases. Sowell cites statistics indicating that both “crises” were non-existent. Both sets of numbers (births and disease) were on the decline. 30 years after the initiation of the programs, these statistics rose dramatically. The ends certainly did not justify the means.

2) War on poverty – geared particularly to minorities, this program became the focal point of the Kennedy and Johnson administrations to alleviate government dependency. Again, statistics indicate that dependency was on the decline. Where did we end up 20 years after? Program failed.

3) Crime – perceived problem in murder and crime led to government programs of rehabilitation. Despite the fact that the murder rate in 1960 was half of what it was in 1934. Result: Murder rate doubled by 1974

Returning to the main premise of my argument: why must we assume that “something must be done”. For example: NEWSFLASH: median incomes in the city of Stanford, CA are below the poverty rate! Accurate. Something must be done right?! No… and you know the reason why. A snapshot in time does not necessarily convey a crisis.

To further the discussion, perhaps you can cite some examples where govt. programs or political intervention is needed and we can take the discussion from there.

The point here is:

6

Henry 03.25.04 at 7:16 pm

ASG – where do I mention the word ‘libertarian’ in my post? If you want to know the truth, I think that the claim you seem to be making – that markets are wonderful and that political processes tend necessarily to produce catastrophically inadequate results – is so obviously batty that it defies parody. The target of my post is the less self-evidently preposterous argument that the fix for government ‘waste,’ ‘inefficiency’ etc is to turn things over to the private sector. This may sometimes be true, but it will very often not be true – and one needs a better and more specific justification of it than the (unsupported) contention that markets are always more ‘efficient’ than political systems.

7

nnyhav 03.25.04 at 7:28 pm

henry – excellent demonstration of Intelligent Design tactics!

8

dsquared 03.25.04 at 7:28 pm

Please cite me some type of evidence to support your argument

ridden on a British train lately?

9

alkali 03.25.04 at 7:32 pm

Too often policy arguments proceed as follows: A) the market “fails” because it does not produce the theoretically optimal result, therefore B) government intervention is necessary. But B does not follow from A.

When do social democrats routinely argue anything like premise (A)? They don’t criticize the failure of market processes for failing to produce theoretically optimal results. They criticize the tendency of some market processes to produce catastrophically inadequate results. This is in distinct contrast to the original argument Henry was laying out; in my experience it is very common for those “suspicious of democracy” to hold up any deviation from a theoretically optimal state as “government failure” and thereby justify substantial privatization, without bothering to show that the confiscatory losses from such privatization are exceeded by the costs of the purported state failure. This is why Juan’s juxtaposition fails.

10

JFD 03.25.04 at 7:49 pm

it is very common for those “suspicious of privatization” to hold up any deviation from classical market equilibrium as “market failure”

When do “those suspicious of privatization” argue that?

If government intervention is ruled out, then the possible responses to market failure are A) leave it alone or B) self-regulation by firms. Libertarians who choose A at least openly and honestly acknowledge their willingness to accept market failure (even when the results are catastrophic) because of their principled opposition to even the slightest impediment to market forces.

I question the intellectual honesty, however, of libertarians who choose B. Why do libertarians, who rightly emphasize the primacy of incentives in influencing behavior, promote the idea that those who have no incentive to limit their own behavior be allowed to regulate themselves? Because of this failure to coordinate incentives to goals, self-regulation usually degenerates into a fig leaf that serves no purpose other than to fend off the spectre of government regulation.

When faced with market failures, liberatarians at most suggest that firms cooperate to prevent them. Now I’m not opposed to this as long as it’s done right, but too often industry self-regulation is a fig leaf that serves to hold off the spectre of government regulation. Regulation, whether by industry or the state, requires enforcement and monitoring. In order for those to be effective, regulation shoul not be carried out by those who have the greatest incentive to undermine it.

11

John Quiggin 03.25.04 at 8:07 pm

“Juan’s status quo, after all, reflects, for better or worse, the real world of capitalistic societies.”

On the contrary, governments account for 30 to 40 per cent of economic activity in most developed countries. The status quo is closer to social democracy than it is to pure capitalism, a point made with great vigour by Ayn Rand, among others

12

Keith M Ellis 03.25.04 at 8:18 pm

Can we just not pay attention to Juan non-Volokh, please? Unlike the other academic bloggers at VC (and here), non-Volokh both hides behind anonymity and is partisan and inflammatory. In my book, that’s a recipe for “troll”.

13

bill carone 03.25.04 at 8:57 pm

“that markets are wonderful and that political processes tend necessarily to produce catastrophically inadequate results – is so obviously batty that it defies parody”

Eliminate “necessarily” (which ASG didn’t say) and “catastrophic” (which ASG did say) and it seems quite close to mainstream economic opinion, no?

“I agree with both. I agree with this post and with the original. Both are right. And I am being consistent.”

I agree. If what you care about is consequences, it isn’t enough to say how bad the consequences of your opponent’s policy are; you have to show yours would do better. (Which, I believe, was the point of both posts).

“one needs a better and more specific justification of it than the (unsupported) contention that markets are always more ‘efficient’ than political systems.”

Only the “always” is unsupported; “more often than not” I think is supported, no? After all, we use markets for almost everything, right?

Most of the time when people make the “markets fail, so we need government” argument, they do not then proceed to argue that government would do better.

For example, in the “Deadweight losses” post, Henry showed awful consequences of a monopoly, then concluded that government regulation is necessary, without arguing that government would make it any better.

Whereas most people I’ve read who argue “government fails, so we need markets” then proceed (_ad nauseam_ at times) to show all the reasons why a market would do better. They are often wrong, but they recognize that arguments need to be made.

“When do social democrats routinely argue anything like premise (A) [the market “fails” because it does not produce the theoretically optimal result]? They don’t criticize the failure of market processes for failing to produce theoretically optimal results.”

The definition of “market failure” in economics is A above, no? Any time the market doesn’t produce perfect efficiency, it fails, and an _ideal_ government would be able to do better.

As an example of someone making this claim, in the “Deadweight losses” post, Henry claims that monopolies “abuse” consumers (which I made fun of him for); the claim that is actually true is that monopolies don’t do as well as they could to enrich everyone as much as possible. Note Henry’s equivalence of “abuse” and “not perfectly helping everyone as much as possible.”

On which is more “natural”, market or government…

Ethically, killing, threatening, and stealing property require more justification than defending oneself against those things, no? I’m sure social democrats know this; most of what I’ve read start out by admitting the need for justification, and then proceed to admirably justify their positions. But they do recognize the need to justify what would be criminal activity if anyone else did it.

14

Steve 03.25.04 at 9:34 pm

Nice strawman comment you left on my site Henry. When you decide to take on my acutal position and not your fantasy version of it, let me know.

Thanks.

15

Brad DeLong 03.25.04 at 10:09 pm

You had me going. “How broadminded of Juan,” I thought. “He’s a more subtle thinker than I thought.”

16

Steve Carr 03.25.04 at 10:16 pm

Henry, I realize I’m asking for trouble here, but do you really think that markets are not wonderful? You can throw together a whole bunch of boundedly rational people with mostly short time horizons, who don’t know each other, may never see each other again, are mainly interested in looking out for their own self-interests, and from their freely-entered-into exchanges a remarkably efficient and economically productive outcome will, more often than not, emerge. This isn’t theory. This is reality.I’m amazed that that doesn’t fill you with wonder.

17

JFD 03.25.04 at 10:54 pm

do you really think that markets are not wonderful?

Markets are like an automobile engine: absolutely necessary to operation in a way that, say, a sweet Blaupunkt sound system is not. Accoutrements like air conditioning and power locks weigh a car down, impeding fuel efficiency. But then, so do airbags, anti-lock brakes and seat belts, and I wouldn’t want to get in a car without those. (Of course, passengers weigh a car down too and are also absolutely necessary for operation. To stretch the analogy, libertarians emphasize the efficiency of the engine at the expense of everything else, including the welfare of the passengers.

18

Micha Ghertner 03.26.04 at 12:12 am

Jfd,

Who the hell are these strawmen libertarians you speak of? Nice lumping job.

19

JFD 03.26.04 at 2:24 am

OK Micha,

Under what circumstances do you support state interference with market forces?

20

Parallel OGram 03.26.04 at 4:47 am

Libertarian: The default is liberty. Freedom is worth defending, so the argument must be made and won before power is temporarily granted to the government to restrict individual freedom. Some individuals may look at a market, where trades are freely made, and claim that the market produces negative effects or doesn’t produce a specific set of positive effects. The burden is on the folks who don’t like the status quo, to win a debate before temporarily granting power to the government to restrict the freedom of individuals to choose whether to trade or not. The individual who chooses to trade or not trade is innocent until the government creates a law that prohibits the individual’s choice. The individual is always considered innocent until the government successfully proves the individual’s chosen activity occurred after the law was created and broke the law.

Social Democrat: The default is government power. Government power is worth defending, so the argument must be made and won before freedom is temporarily granted to the individual. Some individuals may look at a government activity, where individuals are not allowed to participate, and claim that the government activity produces negative effects or doesn’t produce a specific set of positive effects. The burden is on the folks who don’t like the status quo, to win a debate before temporarily granting freedom to individuals to choose whether to trade in a market as an alternative to the government activity. The individual who chooses to trade or not trade is guilty until the government creates a law that permits the individual’s choice. The individual may be considered guilty at any time until the individual successfully proves the individual’s chosen activity occurred after the law was created and did not break the law.

Some of you are free to choose one of these positions as better than the other. Others of you are required to see them as equal.

21

john c. halasz 03.26.04 at 4:57 am

Actually, Steve Carr, the intricacy of biological life is my preferred candidate for thaumezein, though from a distinctly non-ID perspective.

22

JFD 03.26.04 at 6:04 am

And *I* get accused of setting up straw men?

Hey Micha, how about showing some evenhandedness and setting your dogs on parallel ogram over here?

How about there is no default, misleadingly posed, false choice between “liberty” and “the state.” How about the extent to which liberty exists because of the state’s enforcement of the rule of law rather than despite it?

23

Chirag Kasbekar 03.26.04 at 7:50 am

Must say, even though I think markets are wonderful and I would rather we use market-based solutions than bureaucratic ones, I cannot disgree with Henry.

Libertarians tend to make the same sort of unfair attacks on democratic politics that they accuse non-libertarians of making on markets. It’s when I started realising this that, some years ago, I had renewed appreciation for democratic politics.

On the other hand, I still think that many on the left do give democratic politics a lot more leeway than they do market economics.

24

humeidayer 03.26.04 at 1:56 pm

After reading so many words from economists, Kohlberg’s stages of moral development are starting to look to me like “The Road to Market Failure.” Those poor souls whose disease has progressed to the point that their behaviors follow the dictates of principled consciences are the walking dead, most contemptably and suboptimally misallocated resources in a market where there’s money to be made. If we are going to seek optimal market efficiency, I think we need to figure out how we can keep people from progressing past Stage 2.

25

Micha Ghertner 03.26.04 at 2:56 pm

Jfd,

Under what circumstances do you support state interference with market forces?

Don’t change the subject. You said, “libertarians emphasize the efficiency of the engine at the expense of everything else, including the welfare of the passengers.”

I don’t support state interference with market forces, but not because I emphasize efficiency at the expense of everything else, including people’s welfare. I don’t support state interference with market forces because I emphasize the welfare reducing effects of state intervention.

How about there is no default, misleadingly posed, false choice between “liberty” and “the state.”

Oh, but there is. Every instance of the state comes at the expense of an individual liberty. Every tax-dollar comes from a taxpayer. The State itself is a legal monopoly, and thus prohibits private entities from competing with its “services.”

How about the extent to which liberty exists because of the state’s enforcement of the rule of law rather than despite it?

You are falsely equating the State with the rule of law. The two are not identical, nor is one a necessary prerequisite for the other.

Regardless, none of this has much to do with your false claim that “libertarians emphasize the efficiency of the engine at the expense of everything else, including the welfare of the passengers.”

26

a different chris 03.26.04 at 4:18 pm

>they do not then proceed to argue that government would do better.

They don’t? News to me.

Anybody wanna bet that as soon as he hears “market intervention” it is not so much that the asserter stops arguing but that Mr. Carone stops listening?

PS: however, I do join Bill in the “both” camps. But as far as the “more natural” thing: WTF was that?? I have no idea what he means – chimpanzees have a social structure but no discernable market interactions, and the social structure is what keeps them from killing each other.

I don’t see, especially when you look at the market value of good organs and white babies – and I’ve eyed the little ones more than once in that context when they were on particulary poor behavior- , how the market alone could somehow be safe for the participants? Ethics are one thing almost completely the province of the social, AKA the (cover you eyes, guys, here that nasty word again) governmental, sphere.

27

bill carone 03.26.04 at 5:06 pm

Different Chris, thanks for the response.

“Anybody wanna bet that as soon as he hears “market intervention” it is not so much that the asserter stops arguing but that Mr. Carone stops listening?”

Most people stop listening to me far before I stop listening to them; read my comments on CT :-) Don’t know if this is such a good thing …

I admit, I should have said “In my current biased state of experience and ignorance.” Perhaps I only read stupid social democrats (I’ve certainly read a lot of stupid libertarians, though I’ve tried to cut down); but I do read CT, and none of these people strike me as stupid.

I also gave an example, so maybe you can correct my misimpressions. Did I misread Henry’s post on “Deadweight losses”? Did it not fit my description? Is it not representative of the anti-market posts on this blog?

Perhaps CT is writing to people who already know the standard arguments for government superiority in some areas. That’s fine, but there are standard arguments for market superiority in some areas as well.

“But as far as the “more natural” thing: WTF was that?? “

Sorry; I didn’t like the word either, but there was an argument brewing that I couldn’t illustrate with a quote.

Argument: Government is just as good of a default position as anarchy. In other words, it is just as valid to say “Any move away from anarchy needs to be justified,” as to say “Any move away from government control needs to be justified.”

This doesn’t seem to be the case in ethics; killing someone needs more justification than defending oneself from being killed.

I wasn’t arguing that such justifications don’t exist, but I think them necessary. So I don’t think the two positions parallel each other as much as Henry and Alkali (I believe) were claiming.

“I don’t see, … how the market alone could somehow be safe for the participants?”

Standard libertarian conclusion 1: Have a minimal state that taxes in order to provide police, courts, and national defense, but nothing else.

Standard libertarian conclusion 2: Private police and courts won’t lead to constant warfare, won’t leave poor people without basic legal protection, and won’t simply let rich people get away with anything they want. David Friedman and Randy Barnett both provide quite good arguments for these conclusions.

Or do you mean something else by “safe”? Abuse of consumers, perhaps? :-)

28

john c. halasz 03.26.04 at 11:44 pm

“You are falsely equating the State with the rule of Law. The two are not identical, nor is one a necessary prerequisite for the other.”

That’s a self-parody, right? Else it’s about as close to reality as ID is to evolutionary theory.

29

JFK 03.27.04 at 12:33 am

OK Micha,

JFD: Under what circumstances do you support state interference with market forces?

Micha: Don’t change the subject.

I ask the question because it cuts to the heart of the libertarian position.

Micha: You said, “libertarians emphasize the efficiency of the engine at the expense of everything else, including the welfare of the passengers.”

I don’t support state interference with market forces, but not because I emphasize efficiency at the expense of everything else, including people’s welfare. I don’t support state interference with market forces because I emphasize the welfare reducing effects of state intervention.

Buyers and sellers conduct transactions when it makes both parties better off. Let’s take the example of a mobile phone service, let’s call it CommuniCorp, and one of their customers, let’s call him Mr. Chatterbox. For argument’s sake, let’s say that Mr. Chatterbox pays for his service by the minute.

Now let’s say that Mr. Chatterbox goes to the theater and uses his phone while the movie is playing. Mr. Chatterbox is better off for the service that CommuniCorp provides and CommuniCorp is better off for the fees Mr. Chatterbox pays them. Everyone else in the theater, however, is worse off. The full costs of this transaction are not being borne by those party to it. The market forces that encourage Mr. Chatterbox and CommuniCorp to make their transaction make everyone else in the theater worse off.

JFD: How about there is no default, misleadingly posed, false choice between “liberty” and “the state.”

Micha: Oh, but there is. Every instance of the state comes at the expense of an individual liberty. Every tax-dollar comes from a taxpayer. The State itself is a legal monopoly, and thus prohibits private entities from competing with its “services.”

JFD: How about the extent to which liberty exists because of the state’s enforcement of the rule of law rather than despite it?

Micha: You are falsely equating the State with the rule of law. The two are not identical, nor is one a necessary prerequisite for the other.

The rest of the movie-going audience asks Mr. Chatterbox to show some consideration and stop talking on the phone. Mr. Chatterbox refuses, citing his right and that of CommuniCorp to conduct transactions without constraint from any third party. The movie-going audience therefore decides to lynch Mr. Chatterbox.

The cinema has in its employ a private security firm. The firm’s service makes the cinema better off and the cinema’s business makes the firm better off. However, if the firm protects Mr. Chatterbox, the cinema will lose the business of the dozens of paying customers busy throwing a noose over the nearest lamppost. By letting Mr. Chatterbox hang, they lose only one customer who was bad for business anyway. The cinema therefore tells the security guards to hold back. Besides, this episode might even create a disincentive for phone-talkin’ moviegoers and send the signal to others that the moviegoing experience at this cinema will not be marred by the use of mobile phones, increasing business.

Regardless, none of this has much to do with your false claim that “libertarians emphasize the efficiency of the engine at the expense of everything else, including the welfare of the passengers.”

By holding Mr. Chatterbox and CommuniCorp’s right to conduct transactions sacrosanct, libertarians condone the uncompensated costs they impose on the rest of the moviegoing audience. By leaving law enforcement to private entities whose behavior is sensitive to profit motives, market forces effectively undermine Mr. Chatterbox’s right to life and property. Both examples demonstrate that, by advocating absolute market non-interference, libertarians effectively condone those instances where market forces reduce people’s welfare.

30

JFD 03.27.04 at 12:35 am

Should have signed that “JFD.”

It’s not a Freudian slip, I swear.

31

Micha Ghertner 03.28.04 at 11:30 am

JFD,

Before the movie-audience tries to lynch Mr. Chatterbox, why doesn’t the movie theater simply kick Mr. Chatterbox off their property? How many people do you know who would act as you have described this movie-audience? How many people do you know who go through the effort of trying to lynch someone for a minor offense, and risk any future repurcussions from Mr. Chatterbox’s friends and relatives?

Incidentally, your thought experiment is somewhat related to the lynch-mob example often used against utilitarianism. Yet at the same time, you are aiming your criticisms at libertarian “rights.” I am not arguing against state interference with the market because of any notion of libertarian rights, but because of the welfare reducing effects of the state. If your argument against me is that the rights of an individual will be violated in order to increase the welfare of everyone else, then as a utilitarian I say: So what? I’m not interested in rights; I’m interested in welfare.

By holding Mr. Chatterbox and CommuniCorp’s right to conduct transactions sacrosanct, libertarians condone the uncompensated costs they impose on the rest of the moviegoing audience.

Again, you are lumping. I never said anything about holding rights sacrosanct. Not all libertarians base their arguments on moralist rights. And even those who do would not defend someone’s right to create negative externalities.

By leaving law enforcement to private entities whose behavior is sensitive to profit motives, market forces effectively undermine Mr. Chatterbox’s right to life and property.

True enough, but the important question is whether or not market forces do a better job of protecting people’s life and property compared to government forces. I believe market forces are superior to government in this respect, althought it would take more space than is available here to justify this claim.

Both examples demonstrate that, by advocating absolute market non-interference, libertarians effectively condone those instances where market forces reduce people’s welfare.

Market forces reduce people’s welfare compared to what? The entire question here is whether welfare is higher with government or without. If the entire basis for one’s support of market interactions over state interactions rests upon maximizing welfare, then it makes no sense to claim that “libertarians emphasize the efficiency of the engine at the expense of everything else, including the welfare of the passengers.” The claim doesn’t apply to utilitarian-based libertarians because the welfare of the passangers is the very criterion they use to argue against state intervention. And the claim also doesn’t apply to rights-based libertarians because they do not emphasize efficiency in the first place.

It would be fair to say that rights-based libertarians emphasize the morality (morality defined as the non-violation of rights) of the market at the expense of everything else, including welfare. If that is the claim you wish to make, you and I have no disagreement. But do recognize that not all libertarians are rights-based libertarians. So too, not all social democrats are ethical egalitarians. Some simply believe that social democracy will lead to better consequences compared to the alternatives, i.e. increase the general welfare.

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