The sleight of definition
In an earlier post I had wondered whether something like "market can address market failures" made any sense. Ritwik replied here. The gist of his argument (or rather his summary of the libertarian argument), if I understand correctly is, the situations that are deemed to be market failures (owing to not being,I believe the term is, pareto optimal ) are not due to insufficiency of theoretical framework, but either incorrect application of fundamental market concepts (such as the property right*) or the instrument to enforce market don't function as expected. Further, this situation will be resolved once suitable instruments/technologies evolve.
I have two objections to this.
1. The premise that technologies which resolve market failure emerge from market is not historically accurate. Technologies have developed due to war, or where state (or someone other who is not a market agent acting on market impulse) has intervened. Now one can argue that market is the most efficient way for emergence of technology, a line which I am more favorably disposed towards. Nevertheless this argument must be backed by data.
2. The market failure is a concern for policy makers when it effects the public welfare, and therefore the situation must be rectified not at a later date **. To give one example, the pollution is case of externalities, which greatly affects public welfare. Now it is possible that in future new technologies may help resolve this problem, but until that happens it is sensible if state intervenes by creating policies to counter pollution.
* I don't recall specifics, but someone (probably from cartel) argued that water pollution (or something related) can be resolved without state intervention. I am not knowledgeable enough on economics, but I felt that daal mein kuch kaala hai.
** There is a problem that I have observed in libertarian (esp. in cartel) circle among India. This morbid obsession with theory. Now don't get me wrong. Far be from me to dismiss importance of theory, but ultimately market has utility only as long as it addresses the issue. Surely, making a fetish of market is going too far. In fact if it were not for the fact that Jagadguru has copyrighted the term, I would have used free market fundamentalists.
5 comments:
dictator,
What i meant was "can market address market failure?" is a futile question because the way you define the term, your answer is inbuilt into the question, and the answer is no. You are defining a market failure to be that which the market cannot possibly auto correct, which is a truism.
However, there are situations that are commonly thought of as 'market failures' even by neoclassical liberal economists - 'market failures' here is a well defined term referring to specific situations rather than the fluid evolutionary definition that you ascribe to it. Once defined this way, the argument is worth considering because now one can discuss if these so called market failures are better corrected by government intervention or by markets themselves.
Ronald Coase's main research was into evaluating the impact of regulations on these boundary cases - the conclusion he semed to be driving towards was that regulation was almost always lesser effective. It is worth remembering though that he went for empirical evidence first before framing his beliefs rather than framing his beliefs first and then looking for some empirical evidence that validated his beliefs.
The cartel member you are looking for is Gautam Bastian. He had two posts on the water problem in India, one about how property rights on Ganga will de-pollute the river, and one about how the inefficiencies of the Delhi Jal Board have been so wonderfully solved by the market which came up with the solution of Rs 1 water sachets. The first one showed that he had no historical perspective on Ganga, the second one was so abysmally lacking in any cost analysis that it was not even funny. The gentleman believed that a lower middle class family could solve its water problem by buying water at Rs 4 / litre. The birlliance of this argument nearly blinded me.
Cartel members, while usually sensible, have certain infuriating traits. Ravikiran, the most sensible of them all, showed this in his strict liability post. I figured that ultimately his argument boiled down to a gut feel about a probability in one situation vis a vis another. He also asserted that one solution is more cost effective because it has only one cost head while the other solution has multiple cost heads. For an argument that said that costs are driven primarily by the numerosity of the cost heads, he would have been slaughtered in a management accounting class in B-school.
Don't be afarid of using the fmf term though. If you let the Jagadguru decide your actions (even in the negative), you let him win.
Technology is of course, only one of the ways that the market may 'correct' itself. The main discussion is slightly more fundamental.
Ritwik,
Thanks, your comment cleared the issue. In my defense the term is misleading for a layman like me.
I think you are right, it was Gautam ,I went to his blog through desi john galt, I think he was advocating something like treating private property. Now I don't know enough about economics to offer an economical critique, but I think when we talk about property rights we must also consider how the property rights has evolved historically, merely relying on economic concept doesn't seem such a good idea (I guess this is somehow related to your post on property). Rivers have been common property, and I think it is better to continue that way.
Reg. Cartel I don't know. Except for Ravikiran who is mostly sensible (or has been mostly sensible during last two years) and Amit, who despite all his disingenuous and Aym- Gramd pretensions, knows stuff, the cartel makes one suspect that Ayn Rand never really died but turned into a vampire and has been turning impressionable boys into crazies by biting them (probably after a night of passionate lovemaking, so it is not that bad, I guess). Possibly I should write something starting with "Where is India's Van Helsing" ;-)
But I must take issues with your statement about Jagadguru, how can you even suggest that I compete against him, his profundity and incisive prose has turned me into his parambhaktha.
You are reading a lot of jagadguru.
Is this a praise or is this a praise ;-)
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