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Help me convince! market failures?

How would one respond to this politely? If I can convince this strong democrat to become a liberty / free market supporter, I think I could do it for anyone. At least I got them starting to question the federal reserve!

4 kinds of market failure:
Lack of consumer knowledge = markets fail
Public good = markets fail
Extranalities (like pollution) = markets fail
Monopoly = markets fail

We probably agree on a lot, but I'm not blanketly opposed to all government economic intervention and I like living in a country with a social safety net, and wish there was more of a net available. I do have a problem with the Federal Reserve and how mysteriously it works. It is really scary to think that no on knows who these people are, and yet they control so much!

The current mess was predicted by a lot of people because interest rates went way too low for so long, and the whole housing bubble. Investors didn't know how risky they're investments were = lack of knowledge = market failure. And investment banks are "too big to fail" = monopoly = market failure. And now there is a lack of confidence and trust = extranality = market failure. I don't see how de-regulation could have solved this; only more regulation to keep banks from getting "too big to fail."

Robert Reich actually has a book out, Supercapitalism, which argues that as we've grown stronger as a capitalist economy, it has grown weaker as a democratic nation. Power has shifted from government to large corporations, which are just as dominate and destructive.

I haven't read the book, but I want to. I really like his writing style; he's funny. It might be the opposite of everything that you've read. :)

This is what I've written so far:

Actually, I imagine Reich probably makes some goods points and states the obvious, but I would expect he would misdiagnose the problem. (btw, here's a great an open letter to Robert Reich from Kane, I posted on facebook awhile back, a freaking pro-wrestler knows more than me....http://www.lewrockwell.com/orig8/jacobs3.html)
the point Austrians try to make is that we haven't had a true free market system. They are the ones saying we have a sort of corporate fascism rampant in government. Things like bailouts creating moral hazard, or regulations written by big corporations so small businesses can't compete,... or federal reserve acts written by a banking cartel and so on.

I guess the first thing I've had to come to grips with is that we do not have true capitalism here. I've heard it called by some a Plutocratic Kleptocracy where the rich/powerful use the state to steal from the rest of us -- certainly not capitalism.

You'd think Ron Paul being a true free market guy would get tons of donations from corporations,and special interests/lobbyists knocking down his door etc, but he doesn't. the truth is the free market doesn't do big corporations any favors.

I'll have to do some research on your market failure equations. As I think it's going to take some time "logic or proofs" to counter-point these ;)
but I think I need a strict definition of what your strict definition of what a market failure is.
(side note: http://mises.org/story/1806 "Many erroneously believe that if a case of market failure, as defined above, has been proven, then the case for government intervention is a fait accompli."

"Lack of consumer knowledge = markets fail
Public good = markets fail
Extranalities (like pollution) = markets fail
Monopoly = markets fail"

This is where I need help from Daily Paul!

And a book I am waiting by Thomas E. Woods:"Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse " looks very interesting.
http://www.mises.org/store/product.aspx?ProductId=557
http://www.amazon.com/Meltdown-Free-Market-Collapsed-Governm... --cheaper
(I would even buy you a copy ;)



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I might be opening a can of worms here but...

Another very important thing to consider is corporations.

Contrary to common misunderstanding, while they are Capitalist, they are NOT free market.

They are by their very existence a government INTERVENTION into the market in the form of permission or privilege to conduct business in limited liability. Also, by their very nature as a RULE, management is separate from ownership.

While this arrangement has benefits for capital accumulation, it's drawbacks we are now seeing are manifest and unbearable.

Corporations BY NATURE are not responsible and so they require government regulation and oversight.

If ALL business owners were 100% liable for their actions in business, you would have little need for government regulation and most of today's laws could be comfortably voided.

And no, litigation wouldn't be an issue, in fact, litigation is the natural check against irresponsible behavior. In fact, it is BECAUSE of the irresponsible nature of Corporations as a RULE of their existence that you see so much litigation. The market is trying to correct a problem caused by a government intervention, and you have massive litigation, because you have massive intervention. It is so bad now, that people feel they are forced to incorporate to PURPOSEFULLY insulate themselves from litigation. None of that would be necessary if limited liability, non-responsible business arrangements, were never granted by government in the first place.

And yes, the market will find other ways, and obviously more efficient than behemothic leviathans like GM, to deliver products that are demanded by consumers.

A clear case can be made as well, that while corporations allow capital to accumulate, and can take advantage of economies of scale to lower the per unit costs of production, innovation and quality are usually sacrificed in the process.

If looked at carefully, it is easy to see how the corporate model fits perfectly with socialism. In fact, a few nations of Europe in the 30's came to that very same conclusion. This is why Moussolini said that while the term Fascism was in vogue, as was National Socialism (aka Nazi) that the proper way to understand it was "Corporatism."

Marx's ideology simply seeks to change who runs the corporations and for whose profit, not addressing the inherent problems in their structure and very existence.

Corporations are clearly the very antithesis both in nature and in experience to laissez faire or "hands off" economy.

They are the antithesis of decentralization and variation. They attempt to aggregate, centralize, control, and stifle everything that isn't 'theirs.'

That is not at all the same as the free market.

thank you, I have wondered about that,

when I first got in business I could not see why I should incorporate, if I had insurance...
it seems I read somewhere that we did not have corporations untill around the civil war, is that true?

" the important thing is to never stop questioning, curiousity, has it's own reason for existing..
Albert Einstien

No.

There was a certain famous one which eventually precipitated the birth of a new nation - The British East India Tea Company. There have been many more. I'm not sure of the origin. In the present form as a limited liability investment vehicle I think those have been around several hundred years. As I understand it, the Bank of England is such a creature, as was the First & Second Bank of the U.S. among others.

That's why I stated in my other reply below that we've never really had a free market. We went from mercantilism which had corporations to laissez faire (at least in pretense) but with corporations.

The only example I am aware of sans corporations was Ireland in the first millennium. But I don't know that much about it. I'm sure there are other examples in history though.

The first thing I would do is make the clear case that we never

had a market economy. At least not in the proper sense. There has always been some level of intervention. (don't confuse intervention with regulation, while they can be the same thing, they don't have to be in all cases)

It is usually someone advocating government INTERVENTION to solve a perceived problem that then causes unintended consequences which then precipitate another intervention. (I say 'perceived' because many people misinterpret differences or variations of status or distribution of resources as owing to accident or ill gotten gains rather than effort or lack thereof, or even personal choice.)

Intervention begets intervention.

The only way a market can 'fail' is if you prevent it from working.

Actually, even that is almost impossible. What we are witnessing today is not a 'failure' of markets but the inevitable bitch slapping we deserve, BY THE MARKET for intervening in the first place.

The market is TRYING to fix things, and we keep FUBARing it up with every intervention.

The second important thing to establish is that "the market" is not some abstract concept. It is precisely the interaction produced every person on the planet attempting to fulfill their unlimited wants with their limited resources - aka the pursuit of their own happiness.

You can't regulate or control that or even direct it. If you try, well, just read the headlines for the result.

And the notion that bankers didn't know they were investing in cowdung is preposterous. So is the notion that people who used their homes as ATM's were caught off guard. Nonsense. All the players KNEW they were cheating the system and that one day there would be hell to pay. They are feigning ignorance because hell showed up to collect sooner than they expected.

Third, it is important to establish that government has nothing of its own. It cannot give, what it first does not take.

If government gives, then it must take, but then by taking it is running counter to its mission to secure the rights of the people in their persons and property. (and thus their pursuit of their own happiness)

The end result is everyone is not happy, but miserable.

Have your buddy read Economics in One Lesson by Henry Hazlitt, or For A New Liberty by Murray Rothbard. (the latter is on audio for free at mises.org)

Money as Debt

The YouTube, Money as Debt is very easy for anyone to understand and it gets both of you on the same page talking apples to apples.

The day I can grow hemp and sell it is the day I'll believe there is a free market.

Interest rates being set too

Interest rates being set too low by the Federal Reserve causing the housing bubble is somehow a market failure? Investor's not knowing how risky their investments were was because interest rates were too low making it seem like savings were higher than they really were. How is this market failure?

Investment banks being "too big to fail" is nonsense. No company is too big to fail- and the government bailing out a large company it deems too big to fail...how does that mean market failure? And how does that mean the company was a monopoly? There is no such thing is too big to fail and that is one of the few misconceptions that should be cleared up right away.

Focus on "unintended consequences".

Draw your Democrat friend out as far as possible on his interventionist beliefs. Then policy-by-policy show him the consequences of each intervention. Understand that his intentions are noble even if the policy consequences would be disastrous.

One really important point is that lefties don't understand the difference between capitalism and corporatism. Point out that there are two forms of "privatisation". Rolling back the state and cutting taxes is not the same thing as giving public money to the private sector!

Explain that the "left-right" paradigm itself is a fraud.

http://brits4ronpaul.blogspot.com/

http://lpuk.blogspot.com/

http://northwestlibertarians.blogspot.com/

Beginning Now: The Panic Phase of the Collapse

http://www.moneyandmarkets.com/

~~~~~~~~~~~~~
World's Greatest Business
http://www.gbemembers.com/webintro.php?view=wmv

"The Number one reason people lose money is the FEAR of losing money." Sir John Templeton

Round & Round she goes

PEOPLE : I know there are some smart persons out there ,somewhere...Regulation is only needed in markets that are controlled by government ..True running capitalism takes care of regulating itself ,by way of loss & failure ...Thus a derivative is nothing more than an insurance policy, by loss averageing or risk averaging ,which is anti regulatory in itself...Insurance breeds taking higher risks just as risk itself regulates...Most problems in society are CREATED by someone regulating someone else...Government placing their nose where it should not be...WE do not have capitalism in America ,we have Regulism...IT is sure failure ..Don't forget where does your money go but to PAY the Regulators'....OVERHEAD...UNPROFITABLE ....ANTI PRODUCTIVE..
BUT it does create jobs , OVERHEAD...Who looses ?...WE all do...SEND your earnings back to China where your earnings come from...IT's the NEW circle of life...With interest..
you-no

I do believe in some limited

I do believe in some limited market failure. Like the inability of the market to prohibit its enemies from succeeding under its rules.

Ventura 2012

Refer the Democrat to the

Refer the Democrat to the Mises article. If he's even somewhat sentient, that should make him realize his 'market failure' definition is too simplistic, and that a more rigorous one renders his conclusions null and void.

More specifically,

Lack of consumer knowledge:
Obtaining knowledge has costs, as well as benefits. In a free world, nothing prevents consumers from spending months on end researching before they buy; or even, in the degenerate case, hiring the 'capitalist' who supposedly knows so much more than they do, to advice them. The reason most don't, is that they value their time and money enough to persuade them to take on some risk of being wrong, instead.

Also, absent 'regulation', people will approach this problem differently, some with more success than others. Then, those whose approach proves to be sound, will influence those whose weren't; over time leading to better and better approaches. In a heavily regulated system, even if the regulator is substantially better at making this trade off than the average guy, there is no mechanism in place for converging on better and better solutions.

Similarly, as long as different people makes different trade offs wrt. what and how much information they require prior to making a choice, the chances of anyone's approach proving misguided is less likely to lead to anything resembling 'systemic failures'. Just recently, we noticed regulators forcing everyone in credit space to hold reserves based on the credit rating of three agencies. Well, people did as told, but the regulators' approach turned out not to have been as sound as the regulators expected. If different actors had used different approaches to evaluate risk, some would still have failed, but many others would not. 'Resiliency by diversity' is a huge, under appreciated feature of free versus monolithically regulated systems and societies.

Public good:
In order for a good to truly be 'public', it will have to be a good for everyone. I'm not sure what your friend is referring to, but most people speaking of 'public goods' seem to speak of goods they, or some part of the population they consider themselves champions of, prefer to get for free, while forcing someone else to pay for or provide them. If that is the case, these goods are not truly public.

Extranalities (like pollution):
External to whom? For pollution to be a problem, it has to be a problem for someone. It's not like certain molecules in and of themselves are evil. They are only evil wrt. to the preferences of someone. The way to 'solve' these 'problems', are to extend the scope of property rights. Just as very few polluters dump toxic chemicals directly into their neighbors swimming pool, and very few fishing dam owners fish their dam empty every day, so more specific ownership claims to the oceans would prevent, or at least reduce, pollution and overuse of those, too. Polluters almost invariably dump their stuff in so called 'public' places, where those who may feel damaged by it have no direct property claims and legal standing to prevent it.

For stuff like highly diffuse air pollution, the same approach can be followed, by assigning every citizen a certain, and equal, amount of for example CO2 they are allowed to emit, and then let those who emit less than their 'share' sell their surplus to those who 'need' to emit more. Of course, this is a very general outline, as precise measurements is difficult, but it is a good general approach. At least much better than the current one where pollution limits are set by how good someone's lobbyists are at 'convincing' a politician that their particular emissions are somehow more 'necessary' than others.

Monopoly:
As long as the state does not grant monopolies, naturally forming ones are not a problem. No product out there has 'no' substitutes. If Microsoft charges too much for windows, people will use MacOS or Linux or whatever. If SO charged too much for oil, people would start drilling outside SO's area of control, or burn coal. Similarly, if all the electricians in a state, or even country, got together in a monopolized union and charged too much, people would buy their electrician services from abroad, or forego them until someone not in the union learned the trade and charged a bit less. Even where natural resources as geographically concentrated and 'important' as oil is concerned, Opec has hardly been universally successful at extracting monopolistic prices to any catastrophic degree. Left alone, people always find a way. It's only when governments starts to, directly or indirectly, dissuade or ban competition, that true monopoly rents can be extracted. And even then, as the UAW is in the process of finding out, only temporarily.

Thanks

Thanks for helping with this, this is all great stuff. I'm finding out the hard way what kind of intellectual battle we have on our hands..

What other people predicted

What other people predicted this?I haven't seen it besides Austrians. Are they ones they just said they predicted it now (i've seen this from a few pundits and it's pissing me off cause the media pundits seems to count on us having a short term memory), or were they warning against this years ago. Paulson/Bernanke (people you would think would know this stuff) certainly didn't about a year ago. Many people laughed at ron paul or peter schiff years ago when they talked about it...

"The current mess was predicted by a lot of people because interest rates went way too low for so long, and the whole housing bubble. Investors didn't know how risky they're investments were = lack of knowledge = market failure. And investment banks are "too big to fail" = monopoly = market failure. And now there is a lack of confidence and trust = extranality = market failure. I don't see how de-regulation could have solved this; only more regulation to keep banks from getting "too big to fail."

This is because the federal reserve distorted the market with it's artificially low rates! You are diagnosing the problem yourself, follow the money and you find the problem! nice!

also the market depends of on risk / reward. Profits are just as important as loses. You can't privatize profits and socialize the loses (bailouts).. how the hell is that capitalism..

Any suggestions?

Any suggestions?