As you likely know, soon incadescent lightbulbs will be illegal in the United States. When contextualizing this fact, consider that the Supreme Court has held that the 1st Amendment protects computer generated child pornography:
http://en.wikipedia.org/wiki/Ashcroft_v._Free_Speech_Coalition
This is a perfect example of liberals' insidious combination of economic tyranny and moral anarchy. This should not be surpising, as liberals consistenly seek to make the lives of decent people worse, while assauging the deviant and criminal. See e.g. http://paulkrugmaniswrong.blogspot.com/2011/01/i-think-that-may-be-backwards.html.
We live in a country where incadescent lightbulbs will soon be illegal, but computer images of child pornography are Constitutionally protected. In other words, people who prefer incadescent lightbulbs have less legal protection than child pornographers. It makes one weep.
Monday, March 28, 2011
Friday, March 25, 2011
Imperfect Information and Markets
In mainstream economics, perfect information is assumed, and from this the desirability of free markets follow. I think this insight, while true, is conceptually virtually useless and politically dangerous.
First, perfect information is virtually never available. More importantly, if you have perfect information, its actually largely irrelevant whether you have free markets or government deciding. When information is perfect, all parties will make equally good decisions (assuming away the government's incentive problems). Take the issue of rat poison in bottled water. There exists perfect information on this issue -- its a terrible idea. Accordingly, there is a law that says that you can't put rat poison in bottled water. But, even if no such law existed, it is impossible to imagine any producer of bottled water putting rat poison in their water -- it would destroy their business instantly. In this context of perfect information, not surprisingly, government, via laws and regulations, and private industry, via their practices, have reached the same conclusion -- no rat poison in water. In the context of perfect information, in terms of outcomes, it does not matter who makes the decision.
Of course, the rat poison example isn't very illuminating. In the real world, with imperfect information, there is no clear right answer that is ascertainable ex ante. Businesses decisions are routinely based on nothing more than informed speculation about future costs, consumer demand, etc. In instances of imperfect information -- which is essentially every scenario -- a free market is essential to the proper allocation of resources. It is only through constant trial and error of businesses that information can be ascertained. We know now that New Coke, the Edsel, the McLean, and a whole host of other products are failures and a waste of resources, but there was no way to know that until they were subjected to the marketplace's judgment.
In the context of imperfect information, who makes the decisions is vital. Everybody knows not to put rat poison in the bottled water. But, not every company is capabale of flourishing in an environment where imperfect informtion requires decisions to be made when only a fraction of the relevant information is available. It bears repeating that companies that don't do this well squander resources; New Coke, the Edsel, and the McLean made America poorer. The only way to ensure that companies make decisions well, and hence allocate resources efficiently, is through market processes, which will drive poor decisionmakers out of business.
The insight that markets are more important, not less, in the context of imperfect information is vital. Advocates of government intervention will often concede the point that when perfect markets exist, there is no need for government intervention, but argue that whenever there is imperfect information -- which is virtually every instance -- government intervention is necessary; the exception swallows the rule. This is why the argument for free markets should not be predicated on the existence of perfect information.
Advocates of government intervention point to the existence of imperfect information as creating the possibility for government intervention increasing efficiency. In some trivial sense this is true. A law banning the production of New Coke would have made America a wealthier country. However, there is simply no way that Congress could have known that New Coke was a bad idea until it actually failed (i.e. was subjected to market forces). The intractable problem is that the imperfect information that allegedly creates the need for government intervention also makes successful government intervention impossible. Imperfect knowledge is not an artifact of free markets, or indeed any economic institution or phenomenon; it is rather a product of tremendous limitations of human knowledge and foresight. These limitations of human knowledge apply to both the public and private sector; the same problems that plague industry also plague government.
Proponents of government intervention virtually always engage in a thoughtless contrast between real-world market imperfections and the blithe assumption of an omniscient, disinterested government. Not surprisingly, in a competition between real-world markets, with all their imperfections, and idealized, flawless government, government is an attractive option. But, an intellectually honest argument for government intervention in situations of imperfect information would acknowledge that nobody -- public or private -- possesses perfect information, and articulate a basis for why the government has superior information with which it can correct market "failures". I've never heard of any real basis for the government's purported superior knowledge. Indeed, it is unlikely that government possesses superior information for several reasons:
1) Government workers do not work in industry, and are thus far less likely to have relevant knowledge about the industry they are regulating that its actual participants.
2) Government workers are virtually always less intelligent than private sector workers.
3) Government workers do not bear the consequences of their decisions to nearly the same extent that private sector workers do, necessarily degrading the quality of their decisions.
4) Government decisions are not subjected to market tests in the same way that private sector decisions are, meaning that government, unlike private industry, lacks an effective feedback mechanism by which decisions can be evaluated.
5) The same knowledge limitations that prevent perfect decisionmaking in the economic sphere exist in the political sphere, specifically elections, meaning that there is no particular reason to assume that elected officials are competent. In fact, I'd be willing to bet that the average person spends far more time researching decisions about what car to buy than what candidate to vote for (which, as an aside, is a totally rational decision), suggesting that the former is in fact a far more informed decision than the latter. The implication is of course that government officials are not particularly competent, having been chosen on criteria (e.g. charm, looks, charisma, "who I'd like to have a beer with") that are totally irrelevant to fitness for office. Its the political corrolary to the "Garbage In, Garbage Out" principle.
6) Any monolithic situation is likely to lead to poor outcomes. If GM produced every car in the United States, its virtually certain that cars would be of lower quality. The government, through antitrust law, acknowledges this reality, seeking competition in order to ensure that private industry meets consumers' needs. But, this commitment to competition goes out the window when it comes to regulation, and somehow depriving consumers of choice, so baleful when a purported monopolist does it, is salutary when the government does it.
Any criticism of any performance in any context has to answer the implicit question of "compared to what." The bare assertion that imperfect knowledge leads to inefficient market outcomes is true but useless. The relevant inquiry is, given the limits of human knowledge, is there a better method of allocating resources than through markets? Both theory and experience say no.
First, perfect information is virtually never available. More importantly, if you have perfect information, its actually largely irrelevant whether you have free markets or government deciding. When information is perfect, all parties will make equally good decisions (assuming away the government's incentive problems). Take the issue of rat poison in bottled water. There exists perfect information on this issue -- its a terrible idea. Accordingly, there is a law that says that you can't put rat poison in bottled water. But, even if no such law existed, it is impossible to imagine any producer of bottled water putting rat poison in their water -- it would destroy their business instantly. In this context of perfect information, not surprisingly, government, via laws and regulations, and private industry, via their practices, have reached the same conclusion -- no rat poison in water. In the context of perfect information, in terms of outcomes, it does not matter who makes the decision.
Of course, the rat poison example isn't very illuminating. In the real world, with imperfect information, there is no clear right answer that is ascertainable ex ante. Businesses decisions are routinely based on nothing more than informed speculation about future costs, consumer demand, etc. In instances of imperfect information -- which is essentially every scenario -- a free market is essential to the proper allocation of resources. It is only through constant trial and error of businesses that information can be ascertained. We know now that New Coke, the Edsel, the McLean, and a whole host of other products are failures and a waste of resources, but there was no way to know that until they were subjected to the marketplace's judgment.
In the context of imperfect information, who makes the decisions is vital. Everybody knows not to put rat poison in the bottled water. But, not every company is capabale of flourishing in an environment where imperfect informtion requires decisions to be made when only a fraction of the relevant information is available. It bears repeating that companies that don't do this well squander resources; New Coke, the Edsel, and the McLean made America poorer. The only way to ensure that companies make decisions well, and hence allocate resources efficiently, is through market processes, which will drive poor decisionmakers out of business.
The insight that markets are more important, not less, in the context of imperfect information is vital. Advocates of government intervention will often concede the point that when perfect markets exist, there is no need for government intervention, but argue that whenever there is imperfect information -- which is virtually every instance -- government intervention is necessary; the exception swallows the rule. This is why the argument for free markets should not be predicated on the existence of perfect information.
Advocates of government intervention point to the existence of imperfect information as creating the possibility for government intervention increasing efficiency. In some trivial sense this is true. A law banning the production of New Coke would have made America a wealthier country. However, there is simply no way that Congress could have known that New Coke was a bad idea until it actually failed (i.e. was subjected to market forces). The intractable problem is that the imperfect information that allegedly creates the need for government intervention also makes successful government intervention impossible. Imperfect knowledge is not an artifact of free markets, or indeed any economic institution or phenomenon; it is rather a product of tremendous limitations of human knowledge and foresight. These limitations of human knowledge apply to both the public and private sector; the same problems that plague industry also plague government.
Proponents of government intervention virtually always engage in a thoughtless contrast between real-world market imperfections and the blithe assumption of an omniscient, disinterested government. Not surprisingly, in a competition between real-world markets, with all their imperfections, and idealized, flawless government, government is an attractive option. But, an intellectually honest argument for government intervention in situations of imperfect information would acknowledge that nobody -- public or private -- possesses perfect information, and articulate a basis for why the government has superior information with which it can correct market "failures". I've never heard of any real basis for the government's purported superior knowledge. Indeed, it is unlikely that government possesses superior information for several reasons:
1) Government workers do not work in industry, and are thus far less likely to have relevant knowledge about the industry they are regulating that its actual participants.
2) Government workers are virtually always less intelligent than private sector workers.
3) Government workers do not bear the consequences of their decisions to nearly the same extent that private sector workers do, necessarily degrading the quality of their decisions.
4) Government decisions are not subjected to market tests in the same way that private sector decisions are, meaning that government, unlike private industry, lacks an effective feedback mechanism by which decisions can be evaluated.
5) The same knowledge limitations that prevent perfect decisionmaking in the economic sphere exist in the political sphere, specifically elections, meaning that there is no particular reason to assume that elected officials are competent. In fact, I'd be willing to bet that the average person spends far more time researching decisions about what car to buy than what candidate to vote for (which, as an aside, is a totally rational decision), suggesting that the former is in fact a far more informed decision than the latter. The implication is of course that government officials are not particularly competent, having been chosen on criteria (e.g. charm, looks, charisma, "who I'd like to have a beer with") that are totally irrelevant to fitness for office. Its the political corrolary to the "Garbage In, Garbage Out" principle.
6) Any monolithic situation is likely to lead to poor outcomes. If GM produced every car in the United States, its virtually certain that cars would be of lower quality. The government, through antitrust law, acknowledges this reality, seeking competition in order to ensure that private industry meets consumers' needs. But, this commitment to competition goes out the window when it comes to regulation, and somehow depriving consumers of choice, so baleful when a purported monopolist does it, is salutary when the government does it.
Any criticism of any performance in any context has to answer the implicit question of "compared to what." The bare assertion that imperfect knowledge leads to inefficient market outcomes is true but useless. The relevant inquiry is, given the limits of human knowledge, is there a better method of allocating resources than through markets? Both theory and experience say no.
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