So... as far as I can tell, the concept of "market failure" is complete nonsense. From a philosophical point of view, the whole idea is total bull crap. It appears to be an attempt to pass utilitarianism off as economics. Am I right, or am I missing something?

[quote="Conrad"]

ReIgNoFrAdNeSs wrote:

In neoclassical economics the idea is that in some situations markets give suboptimal results and a government solution would be better, e.g. in the case of positive and negative externalities.

"Better" how (in respect to what goal)? Do they bother mentioning that, or do they just slip some agenda in under the radar, hoping we won't notice?

At the very least, the term "market failure" is totally misleading, because the goal one ascribes to the market is certainly arbitrary/personal.

I just made a video about it.

I don't know how people can cope with such ideas. My brain started to hurt trying to figure out what the hell it was all about. I was reading the relevant wikipedia articles, and everything was just so vague and meaningless, that it was a real strain trying to make heads or tales of it all.

What I find interesting (whether or not this is relevant) is how people will absorb and perpetuate things without actually understanding them. It's like when I ask UPB advocates what an "ethical proposition" is. I figure that if I sure as heck don't know, and stef doesn't seem to know (or at least isn't talking), then they probably don't know either. And yet, they go around claiming that UPB can validate such things.

I'm fairly astute (I'd say), so... if I can't figure out what the heck "market failure" is supposed to mean, I become skeptical of other people who act as if they know what it means.

This isn't true of all people or all things I don't understand mind you. It's just that some things strike me as being perpetually vague or nonsensical. If I noticed that a word is being used in a meaningless way (such as when people describe "the market" as being "inefficient", without specifying a goal by which efficiency can be gauged), I start to wonder.

RoR, if your criticism of "market failure" is that there's no objective way to measure "efficiency", then I think you're missing the big picture. It actually doesn't matter how you measure efficiency.

To give you an example, suppose that you are a factory owner and you are trying to produce industrial-grade fluxor widgets. Now suppose you have an employee who is not able to produce fluxor widgets for you as fast as you'd like, and so you're not able to recoup the cost of his salary with the goods he produces. This is an employee who is inefficient. Now, it's certainly possible that he could be efficient in some other capacity. Maybe he can produce wibble widgets faster than anybody on the line. That doesn't matter, though, because right now he's producing fluxor widgets.

If you fire this guy, he might protest, "You think I'm inefficient? That's just your opinion. It's incoherent." But that's not the point. The point is that X dollars are going into him as an employee, and he is producing less than X dollars worth of value. You can measure this objectively, even if the actual value of fluxor widgets vs wibble widgets is itself subjective. One of the functions of markets is to calculate a concrete cost for goods that are individually evaluated.

Now, I think it's question-begging to call the phenomenon market failure. And maybe most of the time the people who use that phrase don't know what they're talking about. It's also possible that I don't know what I'm talking about. But I thought about your post a bit this morning (does anybody here do more productive things in the shower? come on) and I have some thoughts about it that I think are worthwhile. They might not be original.

In genetic evolution (either organic or algorithmic) there is a phenomenon of local optimality. There's probably a specific piece of technical jargon to describe that phenomenon, but I'm not aware of it. I don't think it's quite the same as Pareto efficiency. The idea is simple, though: Suppose you're trying to get to the highest altitude possible, and you decide the best way is to start climbing a nearby mountain. When you get the top, will you have found the most optimal solution to your problem? Only locally, because there are probably taller mountains than the one you're currently on. The problem is that you can't get to any of them without first climbing back down the mountain you're currently on.

In genetic evolution this might show up as an herbivore which has developed dangerous spines in order to fend off predators. But suppose it would actually be more effective for the animal to burrow into an underground den in order to avoid being eaten. Suppose it would result in less capture, but the creature's current spines actually make it difficult to get into the dens quickly, preventing it from using this approach. If the creature had no spines, but more powerful hind legs, call that "Point B." Right now the creature has weak hind legs, though, and spines that get in the way. Call that "Point A". It's conceivable that there is no way to get from Point A to Point B without first going through an intermediary position which is worse (for this creature's survival) than either Point A or Point B. Since evolution has no designer, and is driven by fitness, it's implausible that the species will ever make this transition.

Could a similar situation arise in the emergent properties of a marketplace? I think so. I haven't worked out a perfect example, but I'll try to come up with one. Probably somebody else has done the work for me, but I haven't stumbled across it yet.

My view is that "market failure" is an incoherent statement, an impossibility.

I will start with the assumption that a market transaction is one in which each party voluntarily agrees to the transaction and that there is no fraud involved.

Each party has his own perspective on what he wants and how he values stuff. He will not make a transaction in which his goals are not more positive, in his perspective, than his current position. The only way he would make a transaction in which he comes out worse is if he is under duress, and so this would not be a "market transaction," but rather a criminal action.

Now it may well be that one or more actors in a transaction find that the trade ended up with a different result that what he had presumed when he agreed to that trade. If so, that is not a market failure but is rather a failure of that actor to properly understand his goals and his environment prior to engaging in the trade.

Anything else which is spouted as "market failure," it seems to me, must be dishonest obfuscation.

The only way there can be market failure is if there is not a market in the sense of free transactions between free actors, which is like saying air is solid or heat is cold.

- NonE

NonE, I agree that it's biased and misleading to call it a "failure", but what you're describing does not capture the meaning of market failure.

A market failure (I think) describes a situation where everyone gets what they want, everything in voluntary, everyone is better off, but there exists some better arrangement of transactions which is not reachable through the market's operation.

You mean, kinda like "Utopia" is a real possibility?

- NonE

I would not call that "market failure," but rather "intellectual failure."

- NonE

(You know, like "Marxet failure.")

I think what people are generally trying to say with the "market failure" concept is simply this:

On it's own, "the market" won't necessarily behave how we want it to, nor produce what we want it to. However, we can force "the market" to behave how we'd like.

Now personally, I'd say this is only a half truth due to unintended consequences.

At any rate, an advocate of "free markets" is simply someone who believes that the natural "short comings" or "limitations" of the market (as measured by one's personal value scale) are preferable to the market distortions, or "ethical consequences", generated by coercive market intervention.

Stewart is right, and NonE and RoR are being hippy activist 'I don't-wanna-think-I-wanna-feel' types.

btw, the idea of local optimums is standardly used in economics, especially in evolutionary economics. Game theory os often used to analyse these things: There often are several Nash equilibira in a situation, but people can get stuck in one such equilibirum while other such equilibria would actually benefit them more. the idea of path dependence (common (rather ridiculous) examples are QWERTY vs. DVORAK, VHS over Betamax) is also often used in this

[edit: there is a problem though in calculating optimal outcomes exactly because in the absence of markets and hence demonstrated preference you don't know what the costs and revenue of some actions are]

NonE, RoR, I think you're both misunderstanding me. I'm not at all suggesting that there are more or less correct ways of evaluating marketplace arrangements. Let me give you an example to illustrate what I am talking about when I refer to efficiency and optimality:

Suppose Conrad, Zebra, and Danny are each subsistence farmers who do not trade with each other. They each grow equal amounts of peas, corn, and pumpkins. They grow all their own food, and they're able to grow and harvest just enough to feed themselves individually. Call this situation A.

Now suppose that Conrad agrees to grow twice as much corn as before, but half as much peas. And Zebra, in turn, does the opposite. Now, by trading with each other, they are almost certainly better off, because the two of them will be more focused, and therefore more productive, in their individual efforts. Call this situation B.

Is B more or less efficient than A? You can certainly argue that it's a nonsensical question, because it presupposes the value of producing more peas and corn. That's not wrong. But it's also missing the point entirely, because the individuals in the example clearly do value the production of more peas and corn. Situation B is obviously more productive / efficient / optimal than situation A for the people who matter in the situation.

But Situation B is still not the most optimal situation. There is some other arrangement, call it Situation C, where everyone involved is even more productive, and more corn, peas, and pumpkins are produced. In my simplified example, we can easily see that adding Danny to the mix allows us to reach this more-optimal situation. If everyone specializes in just one crop, they will all produce more.

But how do we know that Situation C is the most optimal? If Danny is growing pumpkins, Conrad is growing corn, and Zebra is growing peas, the situation will be more productive than if they all grew the same crops individually. But what if Danny would actually be a better corn farmer than Conrad? If they swapped, of if the whole group rotated, they might be even more productive still. Call that Situation D.

More likely, though, they will already be skilled in their individual crop practices. It might be the case that Conrad would have been a better pumpkin farmer had he started out as a pumpkin farmer in the first place. But he didn't, because maybe his father hated pumpkins and steered him towards corn instead. So Situation D may be more optimal than C, but it might also not be reachable from C without first regressing to a less optimal situation (e.g. one where Conrad has to go back to school to learn pumpkin farming, and is therefore at least temporarily less productive).