How economists think about market imperfections: an anecdote

You'll often hear from libertarians that "mainstream" economists are preoccupied with market imperfections because it's an excuse to push policy, criticize the market, or both. A good example was Don Boudreaux the other day thinking that Alan Manning was criticizing markets in general just because he has issues with models of perfect competition. Of course just about any non-libertarian is more willing to muse on certain types of policy options than libertarians, but generally speaking I think that understanding of mainstream economics of imperfect competition is silly.

I've got a good anecdote from yesterday's labor class where we were talking about asymmetric information and statistical discrimination. It was a great discussion, but we didn't say a single word about policy or government. We never mentioned it once. The more active parts of the discussion revolved around:

1. Making sense of some of the odd diagramming approaches in Cahuc and Zylberberg.

2. Me bitching (believe it or not, I do that in class too) about some assumptions in the textbook treatment that higher productivity workers would have higher reservation wages. I think outside options are much more sensible way of motivating how asymmetric information leads to adverse selection. It's a little different from the lemons model in that sense.

3. Real world examples.

We also got off topic (we do that) and talked about the IZA labor conference on Monday, our papers, classes next semester, and of course Caroline.

We didn't talk about public policies to address imperfections in the entire two and a half hour class.

I do not think this is unusual.

We deal with these models because they are good at explaining the way the world works, period. To the extent that we care about policy of course models that explain how the world works are the ones you should use to inform policy.