Saturday, September 11, 2010

Thinking deeper about the market process

Two good posts that I would broadly call "thinking deeper about the market process":

First is Steve Horwitz on agent failure ("irrationality", behavioral economics type shortcomings of market agents) and its implications, and how that is related to what has come to be called "market failure". It's a very good post - his point is that the market process is equipped to deal with agent failure, something which I certainly agree with. The only people who worry about imperfections in market agents (i.e. - rationality not holding, etc.) are the people who only get their economics from modern textbooks. Those rationality assumptions and utility functions are very important and very useful, but I think relying on them exclusively gets people worried about more problems than need worrying about. That sort of formal microeconomics (that assumes the rational agents, etc.) is useful for formally conceptualizing welfare criteria so we can think about the implications of certain departures from model assumptions. But when we see these departures from model assumptions, just because the math in the model breaks down doesn't mean the market itself breaks down!!! Anyway - please read Steve for more detail on this. I find him less convincing when he argues that agent failures and market failures are in the same class of problems. I go into some detail in the comment section in the beginning and several comments down on that point, if you're interested.

The second post is at Crooked Timber, where Henry is responding to James Scott at Cato Unbound on standardization in the government and the market. Henry brings in Hayek and the uses of knowledge and asks how Hayek has to be caveated given the fact that a lot of the tacit knowledge he talks about is homogenized and standardized by the market. I don't know what to think of all this. When I think of tacit knowledge a la Hayek I think of all the myriad things that go into costs and benefits that enter into the price at which goods are demanded or supplied. In other words, the whole point of the price mechanism is to standardize all this knowledge into a price. I think Henry is thinking of something completely different when he talks about the use of tacit knowledge, so I'm not really sure what I think of this. Worth a read, I guess.

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