24.1.16

COMPETITIVE MARKETS ALLOCATE RESOURCES EFFICIENTLY.

And yet, not all markets operate competitively.  The purist can suggest that, as real firms are not infinitesimal, and no agent is fully informed, there are no competitive markets.  The pragmatist can note that economies of large scale relative to demand and irreversibilities lead to markets served by relatively few firms that can conspire to take advantage of consumers, or to a monopolist that can do so without any messy conspiracies.

Allocative efficiency, however, is a useful starting point for the study of economics, in that it provides a basis for evaluating observed outcomes.  We thus contrast situations in which there are no mutually beneficial rearrangements of resources (allocative efficiency) with situations in which such rearrangements remain (allocative inefficiency) as a prelude to thinking about how the rearrangements might be realized.  In the vulgar version of the Welfare Economics Paradigm, these are the market failures that warrant government intervention.

There are more subtle ways to think about inefficiency, and there is no shortage of efforts by scholars and polemicists to provide a framework within which people might study economics without being led into fantasylands.  But to do so well takes a lot of work, and perhaps the vulgar version of the Welfare Economics Paradigm exists to alert the intelligent layman to the possibility that not everything is easy.

On the other hand, to propose to dispose of the logic of competition completely can lead to errors of a different kind.  That's the message of Book Review No. 2, featuring Michael Perelman's Railroading Economics:  The Creation of the Free Market Mythology.  Professor Perelman is a disaffected economist.  He opens by explaining that "railroading" functions both as a noun (a metaphor for a low-marginal-cost business with large and long-lived sunk costs and economies of large scale relative to total demand) and as a verb, "the ideological straitjacket of modern economics, which teaches that the market is the solution for all social and economic problems."

But the reader will learn little about cartel problems or empty cores or the wide variety of situations in which economies of scale are achieved at levels of output small relative to total demand, which is to say either about the very careful analysis generations of economists, working under the rubric of industrial organization, have brought to bear on the major departures from competition, or about the practical reason that teaching competition is useful both as positive economics and as intellectual ammunition in debating normative positions when the student, professor, or policymaker ventures into political economy.

Perhaps that is Professor Perlman's intent.  Here's his conclusion.
I do not pretend to have a road map that can guide you to the future.  I can say that our present economy is inadequate and that changes are afoot that will make it more so.  I do know that our present economic thinking precludes us from commencing on the hard and joyous work of building a better world in which the economy will not continue to produce for the narrow interests of those who control capital.  In that spirit, I call for the end of economics and the beginning of something better.
I'll give Cafe Hayek's Don Boudreaux the final word. "What is required of anyone wishing to cast doubt on the efficacy of private-property markets guided by real-world market prices is a believable explanation of how the economy might be operated better by an alternative system."

Critique is simple.  Praxis is hard.

(Cross-posted to 50 Book Challenge.)

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