On Mar 8, 2009, at 2:16 AM, David Cake wrote:
At 12:35 AM +0000 8/3/09, Stefano Mori wrote:
I invite everyone to the premise of this thread that some things are
best handled by government and some things are best handled by
individuals and corporations.
And I wonder if we can make a list of which is which.
My take on it is
This is actually quite a good summary of the conventional mainstream
economic viewpoint except for some nits I will pick below.
- perfect markets also assume everyone is rational. Everyone
isn't.
"Rational" doesn't mean what you think it does here. Economic
rationality merely requires that peoples preference functions have
the transitive property. You can be pretty batshit and meet this
requirement.
And that everyone has perfect knowledge. Everyone doesn't.
Sometimes a small number of actors are able to clearly understand a
situation that the majority are unable to - sometimes this is
virtually guaranteed, if some of the information needed is highly
technical.
The problem of asymmetric information, AKA the Principal-Agent
Problem, is endemic to large complex economies. Greenspan confessed
that his lifelong mistake was to ignore the problem in market
economies while recognizing it in socialist ones. It would be a
similar error to do the converse.
- if a government thinks it can, by regulation, make a market behave
more or less like a perfect one, it probably should do so.
It is easy to find examples of markets that are very far from perfect,
very expensive to regulate, and simply can't be made anywhere near
perfect for reasonable social cost. Real estate is one example because
no piece of property is a perfect substitute for any other and because
so much of the value of any piece of property is composed of positive
externalities due to public and private investment in nearby property.
The question isn't whether or not to regulate, the question is how and
how much. Anybody advocating either zero regulation or enough
regulation to make the market nearly perfect is probably an ideologue
who should be regarded with suspicion.
I get upset and a little fearful when I hear someone like Giethner go
on TV and talk about disappointed he is in Wall Street executives who
are making 'the system' fail by acting to maximize their personal
wealth. If people behaved so as to maximize social well being rather
than their individual well being, we wouldn't need either a market or
a government. I want to say "Really? You supported the dismantling[1]
of the regulatory structure during the Clinton years and later because
you thought Wall Street was populated with altruistic Marxists?"
[1] Non-enforcement was actually much more of a problem than repeal.
--
The fundamental delusion of humanity is to suppose that I am here and
you are out there
-Yasutani Roshi, Zen master (1885-1973)
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