Market failures

[lpetrich]

Economists who are not capitalist Panglossians recognize various pathologies of capitalism, most generally,  market failures. From the Wikipedia article,

In economics, market failure is a situation in which the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal.) 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. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.

Market failures are often associated with time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, externalities, or public goods.

This includes such resource-management troubles as the  tragedy of the commons (individual gains but shared losses) and the  tragedy of the anticommons (avoiding individual losses causing shared losses) and  economic bubbles (assets attracting buyers willing to bid up their prices far beyond any sensible economic justification).

I've seen some people try to argue that market failures never happen, but that often involves defining "rationality" or whatever so broadly as to become meaningless, or else trying to define market failures out of existence.

But there is a very interesting recent market failure. In recent years, various oligarchs and plutocrats have whined that they are being treated as badly as the Nazis' victims and lynching victims and the like. But also in recent years, a certain John Aglialoro has produced a three-part movie adaptation of Ayn Rand's novel Atlas Shrugged, a novel that pictures capitalists as Nietzschean heroes who do what many disgruntled workers have done. He is the head of a company that makes physical-fitness equipment, something that has given him the money necessary to make that adaptation. But what I find most curious is that those self-pitying oligarchs and plutocrats have not pumped large amounts of money into making those movies. One might expect them to love a movie that shows what misunderstood geniuses they are compared to everybody else, but they had no interest in financing those movies, and making them glossy, lavish productions with lots of advertising. They are cheap, low-budget productions, and it shows, especially in the third movie. The movies also had different casts and crews, resulting in three Dagny Taggarts.
 Atlas Shrugged: Part I -- budget: $20m, box-office earnings: $4,627,375
 Atlas Shrugged: Part II -- budget: $10m, box-office earnings: $3,336,053
 Atlas Shrugged: Part III -- budget: $5m, box-office earnings: $851,690
So by the standard of Atlas Shrugged, the movie is a failure. That book advocates the money theory of value, and in it, Francisco d'Anconia delivers his "money speech", arguing that the love of money is the root of all good.

 

[NobleSavage]

Wouldn't that be a product failure? The movie market seems fine.

 

[lpetrich]

Wouldn't that be a product failure? The movie market seems fine.

Atlas Shrugged celebrates capitalists as great heroes. The market failure is lack of support from the sorts of people that it celebrates as great heroes, despite their having the financial resources to do so.

It's hard to say what went on in their minds, but it seems like it could be the Tragedy of the Anti-Commons.

 

[boneyard bill]

Economists who are not capitalist Panglossians recognize various pathologies of capitalism, most generally,  market failures. From the Wikipedia article,

In economics, market failure is a situation in which the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal.) 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. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick.

Market failures are often associated with time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, externalities, or public goods.

This includes such resource-management troubles as the  tragedy of the commons (individual gains but shared losses) and the  tragedy of the anticommons (avoiding individual losses causing shared losses) and  economic bubbles (assets attracting buyers willing to bid up their prices far beyond any sensible economic justification).

I've seen some people try to argue that market failures never happen, but that often involves defining "rationality" or whatever so broadly as to become meaningless, or else trying to define market failures out of existence.

But there is a very interesting recent market failure. In recent years, various oligarchs and plutocrats have whined that they are being treated as badly as the Nazis' victims and lynching victims and the like. But also in recent years, a certain John Aglialoro has produced a three-part movie adaptation of Ayn Rand's novel Atlas Shrugged, a novel that pictures capitalists as Nietzschean heroes who do what many disgruntled workers have done. He is the head of a company that makes physical-fitness equipment, something that has given him the money necessary to make that adaptation. But what I find most curious is that those self-pitying oligarchs and plutocrats have not pumped large amounts of money into making those movies. One might expect them to love a movie that shows what misunderstood geniuses they are compared to everybody else, but they had no interest in financing those movies, and making them glossy, lavish productions with lots of advertising. They are cheap, low-budget productions, and it shows, especially in the third movie. The movies also had different casts and crews, resulting in three Dagny Taggarts.
 Atlas Shrugged: Part I -- budget: $20m, box-office earnings: $4,627,375
 Atlas Shrugged: Part II -- budget: $10m, box-office earnings: $3,336,053
 Atlas Shrugged: Part III -- budget: $5m, box-office earnings: $851,690
So by the standard of Atlas Shrugged, the movie is a failure. That book advocates the money theory of value, and in it, Francisco d'Anconia delivers his "money speech", arguing that the love of money is the root of all good.

Let me tackle the second part first. I have not seen any of these movies. From what I have heard they weren't very good. That's not surprising to me because I have read Atlas Shrugged and concluded that it's a pretty bad novel as well. You can't make a silk purse out of a sow's ear. But, at least based upon the novel, "capitalists" are not depicted as "Nietzschean heroes." Indeed, most capitalists, including Dagny Taggert's own brother, are depicted as crony capitalists who make their money by using the government to suppress their competitors. This is why the true entrepreneurs have to "drop out" and withhold their services just to get noticed.

Now, with respect to market failures, the argument is basically subjective.

" In economics, market failure is a situation in which the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. (The outcome is not Pareto optimal.) 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."

First of all, how does the market circumstance require that one person's gain must lead to another person's loss? X offers a product and Y voluntarily pays the price for that product. X and Y both gain. Who loses? Maybe Z loses because he can't produce the same product for the same price that X can, therefore Z goes out of business. Is that bad for society? Everyone can now purchase the product from X for less than they had to pay to Z. So, clearly, we aren't even looking for a situation where nobody loses. The efficiency of the market is maintained precisely because some people, indeed many people, lose.

Where does "society" lose? How is the "societal point of view" determined? Certainly, some things are not to be tolerated in a market society. Fraud ought not to be permitted. We have laws governing bankruptcy to avoid breaking up a company that might be perfectly viable once its debts are erased. But these laws are still based on the intent to secure rights for the individual. They are not primarily focused on the needs of society.

So Korea produces high-quality cell phones at a low price. This threatens the cell phone manufacturers in the US which would cost our economy x number of jobs. Should we impose tariffs to preserve those jobs? That's a subjective decision. Market analysis would tell us that the tariff would preserve jobs in the short-run but would produce a lower standard of living in the long run. Should we put restrictions on Walmart's marketing? They have driven out lots of small retailers like hardware stores, bicycle shops, etc. Should we restrict Walmart so that the mom and pops can thrive. Should we protect "Main Street America" from the predations of global corporations? Again, that's a subjective decision. How is "societal point of view" to be understood objectively? The very expression suggests that it is a subjective concept.

 

[laughing dog]

Now, with respect to market failures, the argument is basically subjective.

No, it is not. In economics, the conditions that may create a market failure are well understood, as the linked Wiki article outline. In economics, the notion of "economic efficiency" is well understood. A market cannot be considered efficient if the market price of the good does not equal its marginal cost of production.

 

[boneyard bill]

Now, with respect to market failures, the argument is basically subjective.

No, it is not. In economics, the conditions that may create a market failure are well understood, as the linked Wiki article outline. In economics, the notion of "economic efficiency" is well understood. A market cannot be considered efficient if the market price of the good does not equal its marginal cost of production.

That definition is nowhere included as a part of the OP and is, in fact, inconsistent with even the Wikipedia description. As the to Pareto shows:

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society

What then, does "market efficiency" have to do with "a societal point of view"?

 

[laughing dog]

No, it is not. In economics, the conditions that may create a market failure are well understood, as the linked Wiki article outline. In economics, the notion of "economic efficiency" is well understood. A market cannot be considered efficient if the market price of the good does not equal its marginal cost of production.

That definition is nowhere included as a part of the OP and is, in fact, inconsistent with even the Wikipedia description. As the to Pareto shows:

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society

An economically efficient outcome will be Pareto efficient. But a Pareto efficient outcome need not be an economically efficient outcome - something that is well understood by anyone who is familiar with modern economic theory. Technically, a market that is a monopoly is Pareto efficient but it is not economically efficient.

Economic efficiency in a market requires that the price of the product or service equals the marginal cost of its production. That is a necessary but not sufficient condition. Just like Pareto efficiency is a necessary but not sufficient condition for economic efficiency. Another way to describe a market failure is that the price of the product does not equal its marginal cost.

Now, you can certainly disagree with those arcane or technical conditions of economic theory. But neither your ignorance of their meaning nor your disagreement with them is sufficient to show that market failures (i.e) is a subjective notion.

What then, does "market efficiency" have to do with "a societal point of view"?

Nothing. Perhaps you could elaborate why you think that question is remotely relevant.

 

[boneyard bill]

That definition is nowhere included as a part of the OP and is, in fact, inconsistent with even the Wikipedia description. As the to Pareto shows:

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society

An economically efficient outcome will be Pareto efficient. But a Pareto efficient outcome need not be an economically efficient outcome - something that is well understood by anyone who is familiar with modern economic theory. Technically, a market that is a monopoly is Pareto efficient but it is not economically efficient.

Economic efficiency in a market requires that the price of the product or service equals the marginal cost of its production. That is a necessary but not sufficient condition. Just like Pareto efficiency is a necessary but not sufficient condition for economic efficiency. Another way to describe a market failure is that the price of the product does not equal its marginal cost.

Now, you can certainly disagree with those arcane or technical conditions of economic theory. But neither your ignorance of their meaning nor your disagreement with them is sufficient to show that market failures (i.e) is a subjective notion.

What then, does "market efficiency" have to do with "a societal point of view"?

Nothing. Perhaps you could elaborate why you think that question is remotely relevant.

The question is entirely relevant because that is the issue as it was presented in the OP. The Wikipedia article cited mentions the "societal point of view" as did the OP. You may wish to offer a different definition of market efficiency than the OP did. But I am referring to the claims of the OP, not to your claims.

 

[laughing dog]

That definition is nowhere included as a part of the OP and is, in fact, inconsistent with even the Wikipedia description. As the to Pareto shows:

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society

An economically efficient outcome will be Pareto efficient. But a Pareto efficient outcome need not be an economically efficient outcome - something that is well understood by anyone who is familiar with modern economic theory. Technically, a market that is a monopoly is Pareto efficient but it is not economically efficient.

Economic efficiency in a market requires that the price of the product or service equals the marginal cost of its production. That is a necessary but not sufficient condition. Just like Pareto efficiency is a necessary but not sufficient condition for economic efficiency. Another way to describe a market failure is that the price of the product does not equal its marginal cost.

Now, you can certainly disagree with those arcane or technical conditions of economic theory. But neither your ignorance of their meaning nor your disagreement with them is sufficient to show that market failures (i.e) is a subjective notion.

What then, does "market efficiency" have to do with "a societal point of view"?

Nothing. Perhaps you could elaborate why you think that question is remotely relevant.

The question is entirely relevant because that is the issue as it was presented in the OP. The Wikipedia article cited mentions the "societal point of view" as did the OP. You may wish to offer a different definition of market efficiency than the OP did. But I am referring to the claims of the OP, not to your claims.

This is simply a repetition of ignorance and evasion. You quoted this part of the Wiki article "Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society " which means market efficiency has nothing to do with "a societal point of view". I note you did not actually address anything about the fact that market efficiency is not a subjective standard.

Whether or not market efficiency is a socially desirable goal or outcome is debatable. But what market efficiency means is not.

 

[boneyard bill]

That definition is nowhere included as a part of the OP and is, in fact, inconsistent with even the Wikipedia description. As the to Pareto shows:

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society

An economically efficient outcome will be Pareto efficient. But a Pareto efficient outcome need not be an economically efficient outcome - something that is well understood by anyone who is familiar with modern economic theory. Technically, a market that is a monopoly is Pareto efficient but it is not economically efficient.

Economic efficiency in a market requires that the price of the product or service equals the marginal cost of its production. That is a necessary but not sufficient condition. Just like Pareto efficiency is a necessary but not sufficient condition for economic efficiency. Another way to describe a market failure is that the price of the product does not equal its marginal cost.

Now, you can certainly disagree with those arcane or technical conditions of economic theory. But neither your ignorance of their meaning nor your disagreement with them is sufficient to show that market failures (i.e) is a subjective notion.

What then, does "market efficiency" have to do with "a societal point of view"?

Nothing. Perhaps you could elaborate why you think that question is remotely relevant.

The question is entirely relevant because that is the issue as it was presented in the OP. The Wikipedia article cited mentions the "societal point of view" as did the OP. You may wish to offer a different definition of market efficiency than the OP did. But I am referring to the claims of the OP, not to your claims.

This is simply a repetition of ignorance and evasion. You quoted this part of the Wiki article "Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society " which means market efficiency has nothing to do with "a societal point of view". I note you did not actually address anything about the fact that market efficiency is not a subjective standard.

Whether or not market efficiency is a socially desirable goal or outcome is debatable. But what market efficiency means is not.

The statement I noted does not mean what you say it means. It does not define "minimal notion of efficiency" and therefore does not exclude subjective issues. The article clearly implies that there are subjective factors involved.

 

[laughing dog]

That definition is nowhere included as a part of the OP and is, in fact, inconsistent with even the Wikipedia description. As the to Pareto shows:

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society

An economically efficient outcome will be Pareto efficient. But a Pareto efficient outcome need not be an economically efficient outcome - something that is well understood by anyone who is familiar with modern economic theory. Technically, a market that is a monopoly is Pareto efficient but it is not economically efficient.

Economic efficiency in a market requires that the price of the product or service equals the marginal cost of its production. That is a necessary but not sufficient condition. Just like Pareto efficiency is a necessary but not sufficient condition for economic efficiency. Another way to describe a market failure is that the price of the product does not equal its marginal cost.

Now, you can certainly disagree with those arcane or technical conditions of economic theory. But neither your ignorance of their meaning nor your disagreement with them is sufficient to show that market failures (i.e) is a subjective notion.

What then, does "market efficiency" have to do with "a societal point of view"?

Nothing. Perhaps you could elaborate why you think that question is remotely relevant.

The question is entirely relevant because that is the issue as it was presented in the OP. The Wikipedia article cited mentions the "societal point of view" as did the OP. You may wish to offer a different definition of market efficiency than the OP did. But I am referring to the claims of the OP, not to your claims.

This is simply a repetition of ignorance and evasion. You quoted this part of the Wiki article "Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources: it makes no statement about equality, or the overall well-being of a society " which means market efficiency has nothing to do with "a societal point of view". I note you did not actually address anything about the fact that market efficiency is not a subjective standard.

Whether or not market efficiency is a socially desirable goal or outcome is debatable. But what market efficiency means is not.

The statement I noted does not mean what you say it means. It does not define "minimal notion of efficiency" and therefore does not exclude subjective issues. The article clearly implies that there are subjective factors involved.

If it clearly implies there are subjective factors involved, you ought to be able to clearly elucidate them. But you have not.

 

[Togo]

There are certainly inefficient markets. At a very basic level, some international markets are not sufficient liquid that they always settle. In other words, you can find someone who wants to buy, and someone who wants to sell, but neither can get hold of the actual item they want to trade.

Market failures are also quite common. There's a phenomenon whereby a small start-up goes IPO, and someone decides to crush it. They bet very, very, heavily against the shares, and devote a lot of money to spreading negative sentiment. This can make a fair bit of money, because the original shares were quite volatile, and you can drive them down to being almost worthless. All you need is a start-up that some people want to invest in, that's sufficiently small that you can mobilise more money than they could possibly promise as profits, and wide enough interest in it that you can spread your bets widely so that people don't see what you're doing until it's too late.

 

[dismal]

There are certainly inefficient markets.

The efficient market argument is not "markets are efficient" but "markets tend toward efficiency".

The fact that someone somewhere sometimes produces a product that loses money is not strong evidence one way or another.

Indeed it is to be expected since markets are expected to be risky.

I imagine a system that attempted to eliminate all possibility of money losing products would be spectacularly disastrous.

 

[ksen]

There are certainly inefficient markets.

The efficient market argument is not "markets are efficient" but "markets tend toward efficiency".

No, the efficient market argument says "markets are efficient."

http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp

DEFINITION of 'Efficient Market Hypothesis - EMH'

An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Or are we talking about some other efficient market argument?

 

[Togo]

There are certainly inefficient markets.

The efficient market argument is not "markets are efficient" but "markets tend toward efficiency".

The fact that someone somewhere sometimes produces a product that loses money is not strong evidence one way or another.

Can I take it that you didn't understand the examples I gave you? Neither of which remotely concerned with a 'product that loses money'?

 

[dismal]

The efficient market argument is not "markets are efficient" but "markets tend toward efficiency".

The fact that someone somewhere sometimes produces a product that loses money is not strong evidence one way or another.

Can I take it that you didn't understand the examples I gave you? Neither of which remotely concerned with a 'product that loses money'?

You can take it that my comment had little to do with your post except the part I quoted.

 

[dismal]

The efficient market argument is not "markets are efficient" but "markets tend toward efficiency".

No, the efficient market argument says "markets are efficient."

http://www.investopedia.com/terms/e/efficientmarkethypothesis.asp

DEFINITION of 'Efficient Market Hypothesis - EMH'

An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Or are we talking about some other efficient market argument?

Oh, I didn't realize we had an expert.

In the theory, what causes markets to "be efficient"?

 

[ksen]

You should ask Investopedia.

While you are waiting for an answer maybe you could dig up some sort of evidence that the efficient market hypothesis says markets only tend toward efficiency. I mean, I understand that Dismal's Efficient Market Hypothesis says this but what about the EMH real economists know about?

 

[dismal]

You should ask Investopedia.

While you are waiting for an answer maybe you could dig up some sort of evidence that the efficient market hypothesis says markets only tend toward efficiency. I mean, I understand that Dismal's Efficient Market Hypothesis says this but what about the EMH real economists know about?

I'm asking you.

Do you have any idea what causes markets to be efficient?

 

[ksen]

I don't believe they are efficient.