It shouldn’t matter whether you introduced a “neologism”. It shouldn’t be relevant whether a term is new to whoever people you are talking about. It should matter only whether the people that you are talking to know what the term means to you. If you refuse to define your terms, you should just leave the discussion. What is the point of talking to people who don’t even know what you are talking about? Why would you continue a discussion with someone if you won’t let them know what you are discussing?
Why don’t you just respond to them how you responded to me? Why don’t you just point them to the video which you pointed me to? Why did you respond to my request that you define the term by pointing me to a video in which the speaker defines the term in the first few minutes but to their requests that you define the term by making an argument that you shouldn’t even have to define it? Why did you respond to my request by giving me a definition but to their request by refusing to give them a definition?
‘market failure’ is the most appalling type of defeatist semantics. There is no reason not to encapsulate what you mean when you say the phrase in other words that do not have all the connotations that ‘market failure’ has. its a PR nightmare… maybe it would not matter in a world without anti-capitalist, but we aren’t there yet.
why is ‘market failure’ superior phraseology than the less ambiguous ‘markets are not utopian’, or some other such thing?
Once again, I did not introduce any neologisms, so all of my terms are being used traditionally.
Then supply us with what you consider the traditional definition. No matter in what sense you are using a word, we still need to know what that sense is.
Market failure is when the operatation of the market creates an allocation of goods and services that is inefficient. Inefficient, in this sense, can refer to Pareto efficiency, Marshallian efficiency, or Kaldor-Hicks efficiency. Neoclassical, do you agree with my definition?
By this definition market failures likely occur all the time, but we would never know.
Let me pose a definition of market failure that I think even most members of this forum might agree with, although it may have little relevance to reality.
Market failure normally means that at any given moment markets fail to achieve optimal (however defined) results. The problem with this definition is that it misses the nature of markets. They are not static; they’re not supposed to at any given moment achieve optimal results. Markets are dynamic, evolving, and self-improving, and since inefficiencies are profit opportunities, markets will eventually resolve these inefficiencies. Market failure might better be considered a situation where an inefficiency cannot be resolved by market forces, no matter how adaptive and dynamic.
There might be no real world situations where this occurs (or at least they might be impossible to identify since one would have to wait until the end of the world to know for sure that markets could not solve the problem), but I wonder if the members of this forum would find the above an acceptable definition of market failure.
Market failure normally means that at any given moment markets fail to achieve optimal (however defined) results. The problem with this definition is that it misses the nature of markets.
The problem with this definition is that it relies on another undefined term. It’s like saying, “A Ziggle is two thirds a Quaggle.” Without a definition of a Quaggle, a Ziggle is still not defined.
You’re making my point for me! I did already address the question, so why not have some smug fun?
Here is a copy-and-paste from Wikipedia, for those who actually need an orthodox definition of market failure, Market failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. That is, there exists another outcome where market participants’ overall gains from the new outcome outweigh their losses (even if some participants lose under the new arrangement).
I do prefer Friedman’s presentation of it, though, which emphasizes that market failure can be found in situations that aren’t traditionally economy-related. If you have still skipped his video (shame on you), here is a copy-and-paste from his blog, For libertarians, especially libertarian economists, a similar problem is raised by the issues grouped under the label of market failure—situations where individual rationality fails to lead to group rationality. Standard examples include public goods, externalities, adverse selection and private monopoly.
For example, I do believe that the adverse selection present in healthcare insurance is a market failure. But, once again, for public choice reasons, I advocate noninterventionism.
“Here is a copy-and-paste from Wikipedia, for those who actually need an orthodox definition of market failure,”
The concept of Market Failure as provided by Wikipedia is clearly based on the erroneous concept of perfect knowledge or perfect markets. Under such assumptions of perfect knowledge, all real world market outcomes are market failures. But this concept is totally fallacious. Markets are themselves a process of discovery and knowledge quest.
To speak of “efficient” in this “orthodox” sense is to deny the existence of the market altogether. It is to completely misunderstand what a market is and what its social function is.
The concept of “market failure” is therefore incompatible with the Misesian and Hayekian understanding of the market as being a dynamic process.
“I do believe that the adverse selection present in healthcare insurance is a market failure. But, once again, for public choice reasons, I advocate noninterventionism.”
So, let me get this straight. Scarcity is now a market failure.
“If you wish to converse with me,” said Voltaire, “define your terms.” How many a debate would have been deflated into a paragraph if the disputants had dared to define their terms! This is the alpha and omega of logic, the heart and soul of it, that every important term in serious discourse shall be subjected to the strictest scrutiny and definition. It is difficult, and ruthlessly tests the mind; but once done it is half of any task. Will Durant, The Story of Philosophy (Chapter 2, Aristotle and Greek Science, Part 3, The Foundation of Logic).
Complete winner of a quote there! Thanks for posting this, Conza.
“I do not understand your response to my original statement. Please clarfiy.”
Maybe you should clarify how health insurance (If only we had such a thing) is somehow a market failure, as oppose to say car insurance, or fire insurance, etc…
Neoclassical: “I won’t definte “my” terms because I haven’t invented any neologisms.”
OK, then we’ll go with Wikipedia: “Market failures can be viewed as scenarios where individuals’ pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view.” Of course “societal point-of-view” seems to be code for the state. Or is it? If so, it rules out the idea of David Friedman’s private defense agencies and such. And what about “efficient [results]”?
It doesn’t appear to have occurred to you that words are not automatically well-defined for each debate one may engage in. Refusal to define terms, even common terms, in a debate that hinges on the exact meaning of said terms, is a huge red flag. Since you are AnCap, even if not Austrian, I wouldn’t want you continue with such a naïve view of language. This is for you, and anyone else that doesn’t see why we jumped on the above quote: http://lesswrong.com/lw/od/37_ways_that_words_can_be_wrong/
Not to be too harsh, but because it is counterproductive to the point of this forum, which is to learn and to share ideas.
How do you figure out whether the “overall gains” of the “market participants” outweigh “their losses”?
Wait, what? When did I skip his video?
Yeah, that definition seems to be a lot better. I think that I understand the connection between that definition and the “orthodox” one that you gave from Wikipedia. But can you explain the connection to make sure that I understand where you are coming from?
Nah, I’m loving these threads Neoclassical has started. Look at how much it’s stimulated the group discussion. He’s an AnCap with a different POV on econ. That’s just about perfect. Close enough to not be mutually unintelligible but with definite differences both sides can learn from (even if only about how to better defend one’s position). Definitely need to define terms carefully in this thread, though.
Isn’t this still based upon a static, arm-chair view of the economic process? Fails to lead to group rationality at what point in time? Sure, let’s say we all agree to Pareto or Marshallian efficiency or whatever - at what point do we yell “STOP!” and determine the success or failure of ‘the market’? So too little of a good or service is being provided according to your standards today, but what about tomorrow?
Adverse selection, externalities, etc., are all problems. I think everyone here agrees with that. But they are problems the entrepreneur addresses if he wants to be successful, just as he must address a whole host of other issues. I’m sure you’re well aware, Neoclassical, of the ways voluntary institutions have addressed externalities, public goods and similar problems in the past (for instance, mutual aid societies). Clearly these problems can be addressed through the market process. That they are problems and might, at times, not be solved, does not warrant the classification ‘failure.’ Earthquakes are a serious threat to any effort at construction, and earthquakes have destroyed many a building in the past; are earthquakes, then, a damning problem of construction? Hell, the sun is sure to destroy everything built on this planet in 4 billion years - construction failure!
In the thread criticizing ABCT, you argue that entrepreneurs, if rational, would incorporate ABCT and not be fooled by the central bank. Well, why wouldn’t entrepreneurs incorporate “market failure” theory and watch out for adverse selection and the like? I imagine you do agree that, in a freer market, they would; but why then should this be called market failure?
Why would you say that the deplorable state of private health insurance is a case of market failure (due to the problem of adverse selection), when market institutions have not been allowed to address adverse selection? If the government prohibits entrepreneurs from addressing the problem with market solutions, why in the world would you call it market failure? To return to the construction analogy, if you demand I build a house but prohibit me from using bricks, wood, concrete, steel, etc., would you nevertheless shout, “Construction failure!”?
And agreed on enjoying Neoclassical’s presence, warts and all.
The definition is nonsensical. It is a matter of opinion(Subjective valuation) how best resources can be spent more efficiently.
To argue that a system could better distribute resources more efficiently then a market is to argue omniscience. Otherwise how would you know? People who believe they have such foresight cannot really be taken seriously.
That’s been brewing in my mind on and off today. What really gets me is how David Freidman brings up the prisoner’s dilemma. When PD is played with all (“optimally”) rational players where each player wants what is good for themselves and for the other player(s), everyone co-operates on every round. They reach optimality. Some people don’t think rationaly, though. That’s when we get “market failures”.
I reject the idea that people act like this, or would come to act like this very quickly.
People who believe EMH could say “ABCT is wrong because no one believes it by now.” But even if people did know ABCT and did beleive it, they still wouldn’t be able to do anything about the boom-bust cycle when money/credit flows into the system. The information that the boom is coming or that we are in the boom is unavailable. This is why these actors cannot learn from this information and act on it. This is why boom/bust can’t be turned into an empirical science. The data with which we could make predictions is unavailable. Likewise, ABCT doesn’t predict boom/bust, and says nothing of details.
I don’t think ABCT itself discredits EMH. (EMH as in, “market participants act optimally when they have information”) But to believe in EMH and market failure at the same time is a bit strange to me. If everyone is rational with the information they are given (as in “optimal”) then we wouldn’t have market failures. And the only way to recognize a market failure is to have all the data anyways. And at that point, wouldn’t the market adjust to optimality? (and what kind of optimality?)
And then there is the issue brought up by flic:
Is one large gain worth ten small losses within a group of people?
After going through all this, I’m starting to think “market failure” means nothing at all without taking a situation and applying a certain evaluation function and finding optimality with that certain function. The problem is, as has been said, there are many ways to measure utility. And even then, what does optimizing utility have to do with realizing maximum value? I would say there is a correlation, at best.
What’s happened here and in Friedman’s view is a compartmentalization of the concept of a “market.” Why care about market failure at all - it’s not a matter of markets versus government; it’s a matter of natural order versus government. In a natural order, prisoner’s dilemmas get solved - yes partially by coercion - but the do get solved. For instance, common law is coercive. People’s harping on about the NAP prevents them from seeing this, I think, and this is precisely what opens up AnCap to such attacks.
Forget the NAP, forget free markets, forget even liberty…these are fundamentally only relevant concepts within a statist context: we don’t want to state to coerce, we don’t want to state to intervene in peaceful market interactions, we don’t want the state to deprive us of liberty, etc. Continuing to use such terms as if they are primary is to play right into the statist thought paradigm. If we accept such terminology as central we lose the debate before it even starts.
In a natural order, there is indeed much less aggression, markets are much freer, and everyone enjoys complete liberty from the state (because the state doesn’t exist!) but certainly not complete liberty in any other sense (that would be equivalent to becoming God). However, a natural order is not a perfect NAP world, nor a perfectly free market world, nor an order of omnipotent beings who are free to do absolutely anything with no interference from anyone else.
Hence if we accept the framing of the argument as being about perfectly free NAP-adhering markets vs. government, we open ourselves up to criticisms such as Friedman’s. However, if we make the argument about natural order vs. government we remain immune to such criticisms, because however long the natural order takes to develop into a workable system, the government will always take longer to develop into a less workable system.
If several of the individual soldiers say they will spear any fleers, that’s certainly aggression, but it’s not government aggression…and now we have a non-government, natural-order answer to Friedman. Not a wonderful solution, but still one that does better than government, and that is all that is needed here.
“Do you believe in market failure?” - Neoclassical
The market can’t fail because the market has no specific goals. It’s simply the manifestation of the various exchanges that people undertake in an effort to improve their personal well being. That process may result in ends some people don’t like, say coming out with a boner pill before a cure for cancer, but there’s a very big difference between saying, “I don’t like that outcome,” and saying, “The market has ‘failed’ because I don’t like that outcome.” Complain to the people making the choices.