Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.2 9/18/84; site gargoyle.UUCP Path: utzoo!watmath!clyde!cbosgd!ihnp4!gargoyle!carnes From: carnes@gargoyle.UUCP (Richard Carnes) Newsgroups: net.politics.theory Subject: The free market Message-ID: <206@gargoyle.UUCP> Date: Fri, 4-Oct-85 20:09:51 EDT Article-I.D.: gargoyle.206 Posted: Fri Oct 4 20:09:51 1985 Date-Received: Sat, 5-Oct-85 14:39:45 EDT References: <204@gargoyle.UUCP> <10516@ucbvax.ARPA> Reply-To: carnes@gargoyle.UUCP (Richard Carnes) Organization: U. of Chicago, Computer Science Dept. Lines: 74 In article <10516@ucbvax.ARPA> mcgeer@ucbvax.UUCP (Rick McGeer) writes: >>>Finally, whether you call them "needs" or "demands", you're still >>>talking about the allocation of scarce resources...which is done optimally >>>in a free market. > >It is not well-known to be false. See Alchian & Allen, or Hirschleifer. >Or read Smith, or Pareto, or Hume, or Mill, or Ricardo, or Friedman (either >one) or Stigler, or von Hayek. Of all of history's great economists from >Smith on down, only a very few would not argue this. I am more than a little >surprised that you would make this statement. Most statist economists that >I know would argue that, though the market was optimal, it did not >address concerns of equity. Correct me if I am mistaken, but to my knowledge none of the above-mentioned economists makes the blanket and unqualified statement that "the free market optimally allocates scarce resources," unless perhaps in a textbook which makes oversimplified statements for the consumption of students or as a rhetorical statement which is not intended to be theoretically precise. [BTW, would some libertarian kindly define "statist"? "Non-libertarian" is not a helpful definition. I would like to know the nature of the crime of which I am accused.] There are many situations that can be described in which the market does not "optimally" allocate resources (let's assume for the moment we all agree on what "optimal" means). Here is a very simple one: Let us say there is a town with owners of used cars and potential buyers of the cars. The cars vary in quality from great to lemons, but only the owners know the quality of the cars. A potential buyer must assume that a used car he is looking at is of average quality, and therefore he would only be willing to pay (say) $1000, the price of an average used car. But the only owners willing to sell at that price are those with cars of below average quality. The potential buyers realize this, and so are not willing to buy any car that an owner is willing to sell. Hence there are no transactions, even though such trades would be beneficial to both parties. It is the asymmetry of information that causes the market inefficiency. It is clear that such information asymmetries are common in markets. I'm not saying anything that isn't well known to economists. The article on which this argument is based appeared in the *Quarterly Journal of Economics* in 1970 (G. Akerlof, "The Market for Lemons"). Other well-known market inefficiencies are denoted by the terms prisoner's dilemmas, ethical hazard, externalities, corner solutions, and free riding. I'll elaborate on these later on if I have time. In addition, reasonable arguments can be made (I'll probably post them to the net at some point) that minimum wage laws, anti-discrimination laws such as affirmative action, and vouchers (similar to M. Friedman's educational vouchers) for subsidizing the purchase of basic necessities, can all, at least in some circumstances, increase the efficiency of the marketplace. Please note that I am not now talking about *equity*; I mean *efficiency*. I agree that markets are extremely useful. I am satisfied, unless someone convinces me otherwise, that Arrow, Debreu, and Hahn have shown that the market, assuming some stringent conditions such as perfect competition, achieves a Pareto-optimal state. But they are discussing an abstract model, not the actually existing marketplace, and in addition Pareto optimality is a very debatable standard for optimality, since it does not address some distributional questions that many people feel to be important in assessing social outcomes. My main point is that I object to Rick's dogmatic claim that the free market optimally allocates resources without qualification and without defining "optimality." Yes, a certain model produces a certain *kind* of optimality, and this is useful and important information. But the full story is far more complex than this, and does not lead to the conclusion that the absence of government intervention is the best policy in all circumstances. -- Richard Carnes, ihnp4!gargoyle!carnes