Saturday, November 9, 2013

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.


  1. Are you talking about libertarianism or economics here? The libertarian position against state policy is based entirely upon property rights and the negation of aggression towards the same. That is all!

    Libertarians have many differing economic backgrounds, so to say that Boudreaux is making a libertarian argument is laughable-- one could easily be economically socialist and philosophically libertarian, though this would generally be inconsistent in practice. I haven't seen the exchange that you're referring to here, but by your words he is clearly making an economic argument (with some personal opinions attached), one in support of perfect competition (a model that is generally rejected in Austrian circles, btw). Where does libertarianism come into the picture?

    *Just to be clear, I've never personally seen a libertarian argument from Boudreaux, so I have no idea what his consistency is in that area.

    1. I am saying that you otten hear libertarians say X about things that mainstream economist say. After that I said nothing at all about libertarianism or libertarian economics.

      Sometimes libertarian economists say X, sometimes libertarian non-economists say X, hence the more general statement.

    2. A yes - Don offers an example. He is making a libertarian argument.


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