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Markets Are Not Magic - by Mark Thoma

by Laurent GUERBY Mon Feb 5th, 2007 at 07:01:41 AM EST

An excellent post by Mark Thoma at Economist View which I'm sure is very close to ET'ers opinions:

February 04, 2007
Markets Are Not Magic
by Mark Thoma

To listen to some commentators is to believe that markets are the solution to all of our problems. Health care not working? Bring in the private sector. Need to rebuild a war-torn country? Send in the private contractors. Emergency relief after earthquakes, hurricanes, and tornadoes? Wal-Mart with a contract is the answer.

Whatever the problem, the private sector - markets and their magic - beats government every time. Or so we are told. But this is misplaced faith in markets. There is nothing special about markets per se - they can perform very badly in some circumstances. It is competitive markets that are magic, though even then we have to remember that markets have no concern whatsoever with equity, only efficiency, and sometimes equity can be an overriding concern.

From the diaries ~ whataboutbob

And the conclusion (please read the rest as well):

There is nothing inherent in markets that guarantees a desirable outcome. A market can be a monopoly, a market can be perfectly competitive, a market can be lots of things. Markets with bad incentives produce bad outcomes, markets with good incentives do better.

I believe in markets as much as anyone. But the expression free markets is often misinterpreted to mean that unregulated markets are all that is required for markets to work their wonders and achieve efficient outcomes. But unregulated is not enough, there are many, many other conditions that must be present. Deregulation or privatization may even move the outcome further from the ideal competitive benchmark rather than closer to it, it depends upon the characteristics of the market in question.


But rampant privatization based upon some misguided notion that markets are always best, privatization that does not proceed by first ensuring that market incentives are consistent with the public interest, doesn't do us any good. There are lots of free market advocates out there and I am with them so long as we understand that free does not mean the absence of government intervention, regulation, or oversight, even libertarians agree that governments must intervene to ensure basics like private property rights. Free means that the conditions for perfect competition are approximated as much as possible and sometimes that means the presence - rather than the absence - of government is required.

And my comment to his post:

Excellent post, this was the view not so long ago of reasonable european politicians. Some economics obvious rule even has constitutional status in France, here is the preamble of 1946 constitution (which has constitutional value):

"Tout bien, toute entreprise, dont l'exploitation a ou acquiert les caractères d'un service public national ou d'un monopole de fait, doit devenir la propriété de la collectivité. "

In short: all de facto monopolies must become the property of the state.

But now "free market" fundamentalism is all over the place there too, capitalizing of the wide power and democratic deficit of european union institutions.

by Laurent GUERBY on Sun Feb 4th, 2007 at 11:12:32 AM EST
(p.s. the title has a mistake in it)
by nanne (zwaerdenmaecker@gmail.com) on Sun Feb 4th, 2007 at 12:09:01 PM EST
[ Parent ]
Thanks now fixed
by Laurent GUERBY on Sun Feb 4th, 2007 at 12:30:35 PM EST
[ Parent ]
i ahve deep respect fro magic thinking... it is jsut that for me magic thinking is a different thing.

This is not magic thinking.. this is magic ideology.

Great article.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Sun Feb 4th, 2007 at 04:30:55 PM EST
[ Parent ]
isn't all ideology 'magical' by definition, as it expects a foregone conclusion, disregarding unintended consequences?

of all myths, i believe 'free marketism' to have overtaken every other religion in its ability to destroy our habitat, warp our societies, and most tragically, depress and enrage our youth into the vacuous anomie that is the seedbed for so much delinquency, spanning standard hooliganism to the scrupulously modern, middle class, straight A student, model son who is planning his suburban jihad against the civilians on london's public transport, who collectively wanted bushblair's criminal warmongering as little as he did in the first place.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Feb 5th, 2007 at 09:01:37 AM EST
[ Parent ]
actually magic is normally differentiated from ideology int he sense that magic thinking has a clear set of rules universal to all cultures.

Ideology is whne you set a whole set of personal spheres with a single perspective. In this sense, magic is just as good as any other ideology to cover it.

Free marketims is amyth in the same sense that it is any other myth we can or may live by.. the only thing is that it is an ideological myth that try to encompass everything... using a full set of magic thinking...

But in itself magic thinking and myths are well.. they are us..we are nothing without them..

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Feb 5th, 2007 at 11:34:32 AM EST
[ Parent ]
thanks for an illuminating reply, kc.

i guess i thought 'magical thinking' to be a derogatory term for those who believe their thoughts can affect their realities, ignoring when they don't, and 'blue-skying' their way through reality on the back of an illusion that is bound to implode sooner or later.

metaphysicians also believe that we 'create our own reality', so i guess they fall into a similar category, if you're categorising, that is!

myths i guess are arch-realities, in that they describe underlying eternal verities, often with 'cartoon' (overdrawn) characters - icarus or prometheus come to mind- that though they are surreal to us, embody and enact feelings and situations with which we all may resonate, in other words symbols take on a life of their own, and though we know they are symbols, they are somehow more descriptive of universal truths than whatever the opposite of myth is, to our perception...


what a limiting-by-definition concept!

very kind of you to try and help me understand such a difficult subject to language....thank god for the arts.

do you think we are destined to become 'heroes' in our own myths?

if we can 'discern' one worthy enough, that is?

or do we mostly want to live vicariously, through external 'mythmakers'?

 it's fascinating to reflect on your insightful comments.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Mon Feb 5th, 2007 at 06:08:50 PM EST
[ Parent ]
According to ComScore, Google's marketshare of the U.S. search engine space last March was 42.3%.

By July, that had grown to 43.7%.

And in December,

Google Sites captured 47.3 percent of the U.S. search market, gaining 0.4 share points from the previous month.  Yahoo! Sites grew 0.3 share points, maintaining its second place ranking with 28.5 percent of U.S. searches, followed by Microsoft Sites (10.5 percent), Ask Network (5.4 percent) and Time Warner Network (4.9 percent).

At what can we agree that it has acquired the characteristics of a national public service or de facto monopoly?

But even should it meet those criteria, is the state then automatically justified to nationalize Google?

I first wondered about this when I read this in Guillotines, da Vinci, peak oil and discount rates:

But in many industrial sectors, supply is far from being flexible: it can take years to build a new production factory, and thus market conditions may be quite different at the time of the decision to invest and at the moment the capacity actually becomes available. <...>

Our governments have slowly learnt to manage our economies so as to smooth out such cycles and avoid the worst of the boom-and-bust which is inevitable in pure market driven economies. <...>

But even today, sectors like electricity or oil are prone to such cycles, due to the long lag time of investment decisions.

Does Google fall into the same category, in that there is too long a lag between investment and productivity, or where supply can otherwise be said to be inflexible?

Also, richardk in a comment in Virtual people need more energy than most of the planet wrote:

... the computer industry, especially in microchips, is very mature. Maturity means there's little room for spontaneous innovation and that makes it ripe for regulation.

Can it be said that there is little room for spontaneous innovation in the search engine industry?

I don't know if know if those two criteria are generally agreed upon as being cause for regulation, but whatever the criteria are for nationalization of a company, it seems to me that the bar for that should be higher than the bar for regulation.  And assuming that a bar for nationalization can be clearly defined and agreed upon, I am not sure that just being a "monopoly" that fulfills a "national public service" is reason enough for appropriation of that company by the state.

Truth unfolds in time through a communal process.

by marco on Mon Feb 5th, 2007 at 05:41:02 AM EST
[ Parent ]
Software is not hardware, and it is not subject to the constraints you list. As for the "maturity" of the "search engine sector" you could just as eaily find comments here on ET decrying the pitiful state of web content searching and indexing.

"It's the statue, man, The Statue."
by Carrie (migeru at eurotrib dot com) on Mon Feb 5th, 2007 at 05:45:57 AM EST
[ Parent ]
I don't see any a priori difference between hardware and software with regards to what is a legitimate industry to nationalize or not.  But as for the criteria I cite (including the fact that Google is not "mature"), that was my point: because Google has not clearly met them, I am not sure that appropriating Google for the state is necessarily justified if and when it is ever deemed a "monopoly"/"national public service".

Truth unfolds in time through a communal process.
by marco on Mon Feb 5th, 2007 at 09:49:05 AM EST
[ Parent ]
The "constraints" I'm referring to is the fact that supply in industrial sectors is inelastic because of the time it takes to set up a new plant. That does not apply to software.

"It's the statue, man, The Statue."
by Carrie (migeru at eurotrib dot com) on Mon Feb 5th, 2007 at 10:03:31 AM EST
[ Parent ]
Doesn't it?

If we wanted to set up an alternative to Google, how long would it take us?

Google is difficult to fit into the pattern because it's actually a mix of software and hardware. The hardware is not a trivial part of the process, and a big element in Google's success has been its ability to do distributed processing cleverly. The search engine software is relatively simple.

It's possible to imagine an Oogle using open source distributed processing running on spare cycles, like so many screen savers we know and love.

Assuming that's a practical idea - it may or may not be - would Google respond to the competition in a predatory way?

Does anyone even know?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Feb 5th, 2007 at 12:19:42 PM EST
[ Parent ]
I have always thought that it is better to think of open markets than of free markets. A free market (as in, free of regulation) is not necessarily open and an open market is not necessarily free. I'm in favour of open markets where they can be constructed, but necessarily in favour of free markets. A lot of things that seem undesirable from a libertarian POV (such as government regulation to reduce market entrance costs, increase competition, decrease transaction costs or increase transparency all of which can make a market more open) become desirable from this perspective.
by nanne (zwaerdenmaecker@gmail.com) on Sun Feb 4th, 2007 at 12:07:33 PM EST
Might be a good distinction. But, how do you define open market precisely?

Yet, it is important for progressives to have better control of the notion of freedom. So far, conservatives dominate the rhetorics on freedom.

I would make a distinction between factual  freedom (factual as in de facto), and nominal freedom.

Nominal freedom is the principle that you can do anything you want, within boundaries of law and established moral code. More precisely, you can anything you have power to do, within the boundaries of law and established moral code. This is the freedom that conservatives and libertarians mean. If you are in powerful position, you are indeed royally free. If you are in weak position, this is your problem.

Factual freedom is a venture of more opportunities for yourself and everyone. Say, you don't want to be very much dependent of illness, nature disasters, or other stucks of luck. These risks can be diminished across a society by means universal health care, education, etc.  Social agreements can make life more free in a sence that people may feel more secure, or have more diverse options to pursue their goals.

The problem witht he nominal freedom is the caveat "within boundaries fo law and established moral code". Why there are those boundaries? Why are there restrictions on the "freedoms" to taking things that you can easily physically reach (but they belong to others), or eliminate hurdles (by just murdering someone on your way)? Is not because societies without these boundaries do not have a logical chance to succeed? But "established boundaries" do evolve with time. For example, slavery was compatible with nominal freedom at one time. Who knows, soon enough we might need to update moral imperatives to respect not only citizen property and rights, but also natural needs of the Nature in order just to survive on this planet. The freedom to abuse your power has to be restricted in principle - we already have proper restrictions on physical power, but a successful civilisation may need to restrict economic and consumative powers as well.

On the other hand, the progressive "factual" freedom has still to win more appeal. It has to show that social contracts do make everyone more happy. Social contracts do cost more (freedom is not free, yeah!), or they force you to refrain from an immediate benefit. The problem is to show that everyone can win much more compared with tax contributions or missed immediate convenience. Social contract do work. For example, traffic rules do restrict your freedom to drive wherever or however you may wish - bu without traffic rules the would not be any traffic to satisfy our massive trasportation needs!

by das monde on Mon Feb 5th, 2007 at 03:47:16 AM EST
[ Parent ]
Nominal and actual freedom can otherwise be phrased as positive and negative freedom. Although they are not necessarily the same thing, I guess. Negative freedom is what the libertarians want, it being the freedom from any non-contractual obligations within the bounds of refraining from doing objective harm to other people or their property. They see taxes, for instance, as an infringement of this freedom whereas it is in agreement with 'nominal' freedom (slavery is a more controversial topic amongst libertarians, but historic slavery was not entered into by a freely signed contract on the part of the slaves, by and large, so they oppose that as well).

Positive freedom, on the other hand, is the same as 'actual' freedom.

By an open market I mean a market which is transparent and on which the entry costs are relatively low (pretty close to the concept of a competitive market, now that I think of it, but it doesn't need to be perfect).

by nanne (zwaerdenmaecker@gmail.com) on Mon Feb 5th, 2007 at 03:38:30 PM EST
[ Parent ]
Is it worth bringing back the historic idea of a "market" to the modern use of the term?

You have stalls, you have sellers and buyers.  You also have rents for stalls (perhaps), you have...well...you have a series of rules and regulations surrounding the market so that...the customers get a fair deal (aren't ripped off) and the town can live with the market (the market doesn't destroy the town in its search for more buyers for ever more products.)

Sommat like that.

An "open" market would be one where everyone can be a (potential) buyer and seller (based on existing rules around space allocation etc...); a "free" market would be one where, beyond the basic expenses of running the facilities the market needs (water, electricity, access etc...) the profits of the sellers and the purchases of the buyers remain one with the other.

It's when the "market" decides it doesn't need the town--as if it could just exist independently of the space it is located and the facilities needed to maintain that space...

In the picture below, the market would be the shiny lights and the stalls, the buyers and the sellers; the infastructure (which needs different rules) would be the square, the buildings, transport (the buggy!), electricty for the lights etc...

The arguments could be about whether the town or the market stall holders were responsible for:

--putting up the tree
--putting the lights on the tree

...but somehow the argument has become about whether the market stall holders shouldn't also own the cobbles, the windows of the buildings, in fact the buildings themselves, and why not the very air in the square...?

Well...something like that...

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Sun Feb 4th, 2007 at 12:58:21 PM EST

Damn, now you created aching homesickness in me! The picture you picked shows the Weinachtsmarkt (Christmas market) at the Römer, the central place of Frankfurt am Main in Germany. Long years ago, I have been there on countless weekends.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Sun Feb 4th, 2007 at 01:35:18 PM EST
[ Parent ]
"the markets" have no interest in the problem.  Only in the bits that make money.  F--k the hard, difficult bits.
by HiD on Mon Feb 5th, 2007 at 04:23:00 AM EST
Privatization these days is almost always going tolead to an outcome no better than the previous socialized model.  Privatizing an auto company is one thing.  There's a huge, highly-competitive market for that.  But privatizing the administration of a government welfare service of some sort is, in reality, almost always going to result in severe principal-agent problems (or problems resembling these).

It's, typically, just the same system, but with different bureaucrats.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Feb 5th, 2007 at 10:14:43 AM EST

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