Sunday, May 29, 2011

Incredible sentence of the day

"In most graduate programs, there will usually be a few faculty members who have very strong sentiments about the market as the main allocation mechanism and pessimism about the government in that role. They certainly would not dominate, but they will not be absent either."

- Peter Boettke, writing about top schools to study Austrian economics

My jaw dropped when I read these sentences. Using "free market economist" as a euphemism for "libertarian economist" - a euphemism that they will clarify if pressed - is one thing. I talked about some of that sort of usage of "free market economist" in this post. But this is a very explicit set of sentences from Boettke. I cannot think of a single economics professor teaching in the department at William and Mary or in the department at George Washington University who doesn't think that the market is "the main allocation mechanism", and who isn't pessimistic about government as an allocation mechanism. I would say unequivocally that this position "dominates" both departments, and almost all departments for that matter. To the extent that they do see a role for government, they certainly don't tout it's allocative advantages. I suppose he sincerely thinks this and I'm pretty troubled by the statement.

To undergraduates or even high schoolers looking to college I can assure you - the market is considered "the main allocation mechanism" in any department you are likely to be considering. You may not find a particularly libertarian department or a particularly Austrian department - that may take a little more searching. But the entire economics profession is in strong agreement about the market as an allocation mechanism. This is our "evolution by natural selection" - our underlying common thread that we all agree on and that informs essentially everything that we say. The allocative efficiencies of the market are the bedrock of the discipline.

The flip side of that is that if you have some kind of grudge against the market, you are not going to feel very comfortable anywhere.


  1. In the college economics textbook I use, MIT's Pyndick and Rubinfield, I find suggestions that

    - all utilities and related outlets undergo price regulation, or else they will limit production and raise prices

    - incomes policy be devised, because businesses will hire people based on marginal expenditure and marginal revenue product, when they should be hiring based on wages and price of marginal product

    - dramatic lowering of prices and creation of excess production capacity be considered a means of creating barriers to entry and thus be covered under anti-trust legislation

    - any business enjoying unusually high margins and raising prices continually without fall in sales be considered a monopoly to be broken up

    Now, I will give the intelligent authors of this book their due, and say that they have written it real lawyer-like, with a both-sides approach, but you clearly see they have a tendency to view "problems" where none existed. It's bizzare - businesses will only hire as many people as they actually need, but college economics has already determined how many people they SHOULD hire, how long they SHOULD be made to work, and exactly how much they SHOULD pay them,

    In the world of college-level welfare economics, low prices and surplus production is a wrong to be corrected and high prices and limited production is also a wrong to be corrected. Reality is only capable of wrongs to be corrected, and theoretical academic economics will somehow come to the rescue.

  2. Forty percent of US GDP is spent by government and we can see the trend. If government decides who gets paid what, regulates interactions to a fare-thee-well, and gaffles a giant portion of GDP without using markets, then the idea that the main allocation method is markets starts to look daffy:

    I wonder whether Kuehn would like to see this government spending trend toward Sweden reverse course. Doubt it.

    As Obama's treatment of Chrysler debt holders, ARRA exceptions, allocation of jobs based on arbitrary rules shows: the main allocation mechanism is becoming government. Get your slice of the pie!

  3. mobsrule -
    See, and this is what it's clear people really mean when they write like this. They don't mean that all economists see the market as the primary allocation mechanism. They aren't talking about allocative efficiency at all. They're talking about their politics, and if you don't buy into their politics instead of just saying that they make up things like accusing the majority of departments of not seeing the market as the main allocative mechanism or not having doubts about government as an allocative mechanism.

    If this is all that is meant - that most departments don't have a pronounced libertarian politics - that should be said. Students shouldn't be mislead into thinking that the economics profession is in disagreement about the allocative efficiency of the market.

  4. dkuehn-
    Here's what I've found. In every grad micro class I've had, I get the same thing. The first theorem of welfare economics shows that under the basic assumption of local non-satiation, a competitive equilibrium is pareto optimal, BUT, they all say, this is only the case for "no externalities", "symmetric information", and "complete markets". Of course, none of these things hold, so the theorem is meaningless. We then proceed to derive optimal subsidies/taxes and lump-sum transfers, and NEVER along the way discuss the associated informational problems that the planner faces in actually finding these things. Only every once in a while do you get a very thoughtful and inquisitive prof. who discusses such issues. For example, I have RARELY encountered a professor who was even aware of the Socialism debate in the early 20th century. I think this signals a certain lack of true curiosity among a huge percentage of econ academicians.

    Moreover, what I think Boettke has in mind is that in most all popular policy debates - health care, social security, alternative energy, education, monetary matters etc. - the overwhelming majority believe in a very strong presence of government, where as a minority believe that government's role should be practically non-existent.

    As a side note, I think the 2 theorems of welfare economics have actually become devices for ridiculing the idea of completely free markets - at least that's how I've seen them used. They're first set it up as the great insight of Adam Smith, or the darling of free-market economists, and then smashed with the simple question, "do any of these assumptions actually hold?"

    Of course, no one worth anything who thinks that an unfettered or "less" fettered market is preferable, thinks that information is symmetric, markets are complete, or that there are no externalities. The lack of these things is one of the primary reasons for preferring the market.

  5. Here's my question. Isn't this a fundamentally wrong way to choose a college? I mean what kind of high school junior is so committed to free-market ideology that they need to study economics in a free market department?

  6. Anonymous, graduate school, not undergraduate studies.

  7. edarniw - you and Prateek have me pulling my hair out here.

    What are you saying - that we can't actually talk about how real life markets work - with market power, externalities, information problems, etc. - without somehow doing violence to the idea of efficient market allocation? I genuinely don't understand what you two are saying. Teaching those things doesn't seem to deny any of the advantages to me. Teaching those things doesn't make someone a non-free market economist. Teaching those things makes you an objective and diligent instructor.

    Who ridicules free markets edarniw, really? I've never had a professor ridicule free markets and I've had some fairly liberal professors. All of them recognize the allocative efficiencies of markets.

    I'm kind of glad I posted this now - I had no idea how many people would sympathize with Boettke. I thought it was absurd on its face when I read it and he must have just been trying to make a statement about libetarians in economics departments.

    If you can't handle real world markets you probably shouldn't be doing economics. Somehow I managed to learn all the caveats, details, and the reality of how markets work and I can still say quite clearly that the free market is by far the best allocative institution humans have ever erected, and that we should be deeply skeptical and pessimistic about government's allocative abilities.

  8. "...with market power, externalities, information problems, etc..."

    None of which are ever solved or ameliorated by the state. The state only serves to exacerbate such issues not solve them. Not to mention all the nightmares that the state creates on its own terms.

  9. Hmm this post got me to soften my heart, Daniel. Well done. (I'm not being sarcastic.) I confess I thought you were being ridiculous in your earlier post, asking if being "pro-market" means I have to auction off breakfast to my son every morning, etc., but now in light of the Boettke quote, I see you aren't attacking a straw man.

    Of all the comments above, edarniw came closest to my take on this. So to be clear, Daniel, you are 100% right that at face value (and I haven't checked the context), Boettke's quote is simply wrong. Someone who didn't know any better might read that and conclude that the majority of economists in the US today are central planners, and of course that's not true.

    However, in fairness to Boettke, I think what he means is this: In most departments, most of the professors are extremely critical of laissez-faire. They could spend 45 minutes using the welfare theorems to explain a dozen different "market failures" lurking about. They would support a dozen different government interventions to remedy those failures, and in doing so nothing within the same ZIP code as Public Choice considerations would come out of their mouths.

    So that's what I think Boettke is talking about, even though I agree with you that his literal words convey something far more than that.

  10. Daniel, I don't understand why my rather modest and moderate post has you pulling out your hair.

    Perhaps because you lump it in with edarn's?

    All I said was that ONE specific textbook I use (without generalising to every known economics department) seems to have the impression that every determined income, price, and output has been wrongfully determined and that they all cry out for correction.

    Thankfully, we don't live in a world in which such is the case, but the views of that ONE particular textbook I mentioned, taken to their logical end, would involve a maddening mess of output rationing, incomes for every job set in advance, and prices for every product set in advance. This was not one of those "exceptional cases" only prescriptions.

    All I say is that I know of ONE textbook which has deemed major market allocation mechanisms to be inefficient.

    PS: The textbook has also been edited for Indian markets for the Delhi University system, and hence it might not even reflect the author's original intentions.

  11. Bob Murphy -
    Well, and again to reference my earlier post I would not concede that laissez faire is necessarily "pro-market" any more than a good banging in screws with a hammer is "pro-hammer". Certainly mentioning the reality of markets - the problems and the preconditions - isn't denying the allocative advantages of markets. Usually these problems and preconditions only concern the optimal price and quantity - but even at monopoly prices and quantities, for example, the market still performs the allocative task that we appreciate it for - just not quite at the optimal level.

    Prateek -
    For one thing I would imagine Pyndick and Rubinfeld would be fairly representative - but again it's this idea that if you teach markets how they really are you're denying the allocative advantages of markets. That seems silly to me. I probably shouldn't have lumped you in - but I just wondered after reading yours exactly what they should have said regarding natural monopolies, etc.

  12. dkuehn:
    You seem to be missing the essential point. It's not that a prof. who acknowledges and teaches about things like information asymmetry, incomplete information, externalities, etc. should be coined "anti-market". I would teach these things myself. The point is that these things are primarily taught asymmetrically. In all my experience they've been taught as failures of the market - but for some strange reason NOT as things from which the state may suffer. There is a tremendous lack of consideration of the more appropriate question: if the market cannot do X, is there any reason to think the government can do it any better?

    Perhaps your experience has been different, but I've had a good number of professors at the grad level, and I can only say that 2/24 have framed the question in that way. The others never considered it.

  13. "Forty percent of US GDP is spent by government and we can see the trend. If government decides who gets paid what, regulates interactions to a fare-thee-well, and gaffles a giant portion of GDP without using markets, then the idea that the main allocation method is markets starts to look daffy"

    Mobsrule, you ought to read this guy Mises. He was quite clear that, despite the amount of intervention, all Western economies are market economies.

  14. For instance, mobsrule, you realize that Mises said whatever a government may try to do, the actual incidence of any tax is decided by the market?

  15. Gene Callahan,

    Merely because Mises believed X doesn't make X true. And as for the LvMI:

  16. My personal experience at the University of Houston has been that the economists there are (unsurprisingly) very supportive of markets and against a whole host of government regulations. I have also found that they tend to be fairly critical thinkers when it comes to government regulations--they understand public choice, calculation problems, etc. They do, however, tend to rather frustratingly treat certain things--public education, Medicare--as inevitable and a necessary starting point for analysis. However, I have made a lot of headway on the education point, so they're hardly unreasonable about it.

  17. "Who ridicules free markets edarniw, really? I've never had a professor ridicule free markets and I've had some fairly liberal professors. All of them recognize the allocative efficiencies of markets."

    If the layman leftist were to read a micro econ textbook, his conclusion would be as follows:

    Micro econ textbooks are fringe right-wing propaganda written by sycophants of corporations.

  18. Gary Gunnels,
    You honestly didn't see what Gene was doing there? ;D


All anonymous comments will be deleted. Consistent pseudonyms are fine.