|0:36||Intro. Listener question:|
How do you distinguish when the government or the market is the more appropriate route for fixing a problem? Standard, mainstream economic approach: Look for market failure. So long as markets are competitive, no externalities, public goods, imperfect information, monopoly, then everything will turn out fine. Leads to the conclusion that if any of those things do exist, everything won't turn out fine and government is necessary. Some conclude that that's what government does--it fixes those things. Called "market failure" but technically they are not market failures. They are failures of the institutional arrangements to allow markets to work. E.g., if property rights for say fish in the ocean are too costly, then markets can't work to efficiently clear. When people say "the market" or "free markets" they're often talking about commercial transactions, but economists are really talking about decentralized, uncoerced decision-making within some sort of institutional framework. Traffic, fishing: If you go fishing and nobody owns the ocean or individual fish--called a commons--there is an incentive to over-fish, stock of fish gets too small, fewer or smaller than the fishermen, if they could act in concert, would like to achieve. Economists are not just talking about retail markets. Foundations of what markets need don't exist. That said, standard view is probably more questioned now. Francis Bator, market failure, Paul Samuelson, public goods; Coase introduced more sophisticated view. General agreement among economists on standard view with regard to public goods, but what about unequal income distribution? Often described using the words "market failure," but it's not clear why it's a market failure on economic grounds. Different category.
|9:44||Fishing: Host of ways to increase the size of the fish catch over time, both size of average fish and quantity. In a world of free market fishing there is too much fishing because the ocean is not owned, so the size of the average fish decreases and the quantity caught in each time period decreases. Different ways to solve that problem. |
More ways, but these are some. Of those solutions, which one will government choose, and which one do we want government to choose? Which will be most effective in terms of cost and outcome, and which will be most attractive to politicians? Not necessarily the same thing. Public choice scholarship, Buchanan and Tullock, George Mason U. and Charlottesville. A government is a human institution just like markets, and it's just as illegitimate to presume that government will work in an idealized way as it is for markets. "The notion of government as ideal problem solver still seems to be the default mode" for a lot of people. Confusion between what we'd like and what is. It still may be that in a particular situation government regulation is the better solution to just letting things alone, but it's a scientifically mistaken approach to say that this institution doesn't work very well, therefore this other institution is the way to go. Shocking and surprising idea to many. Journalists often offended or bewildered by it. We like the idea that politicians will help us, but we understand they are not saints. They say they are in public service and public sacrifice, but what's the evidence that government is going to do what politicians claim? Sometimes those of us who say we like freedom we get mocked as seeing the world through rose-colored glasses. But it's equally absurd to think the government will handle it. Big, insoluble problems may have the best solution of letting a thousand flowers bloom, competition among different creative ideas is more likely to result in a solution than letting the government deal with it. Why do we expect a single hierarchical institution, even if can hire lots of individuals, will do it better than lots of individuals? Once government gets going in a given direction it creates interest groups. Market has bankruptcy, failure, losses, no incentive to maintain people in mistaken courses of action. "Let the market handle it" is more sophisticated and humble than saying "Let the government handle it" because latter presumes an expert exists and can be depended upon to act in the public interest.
- 1. Do nothing. Let stock of cod become smaller. Will be an incentive to farm cod. Might or might not work, but some fish can be farmed.
- 2. Regulate it. Command and control. Put limits: you can only catch a certain number, only can fish at some times, have to throw back ones that are too small. Problem: Have to monitor it. Punish people: if we catch you catching a fish too small we punish you.
- 3. Create system of property rights. People can buy and sell rights.
- 4. Do nothing and see if moral system evolves, like littering--social norms.
|21:04||Pollution example. In 1980s problem with smokestacks from power plants, sulphur dioxide in atmosphere. Government mandated a particular form of technology, scrubbers, unbelievably expensive. Alternative way--which would still involve government--would have been, "For every pound of SO2 that you pump into the atmosphere, you have to pay a fine." Gives people incentive to find cheaper ways to reduce pollution. Government solution doesn't have to be one-size-fits-all. Sometimes call the latter a "market solutions" or "market-based solutions"--tradable emission rights. But they are not markets! But they are more attractive than fining or sending someone to jail. Decentralized. Actual politicians have an incentives to prefer centralized solutions. Automobile pollution: cars required to have catalytic converters was the method chosen by the politicians. Works but there was a better way to do it--tax or fine car-makers for polluting a certain amount. At the time of the law requiring catalytic converters, Honda was already doing better than required, but it was required to put it on anyway. Goal was to handicap a foreign competitor. Nothing to do with making the world a better place, everything to do with making Chrysler and Ford more profitable. Turned out that GM held the patent on the catalytic converter. When we advocate for issues like pollution control it's not enough to say, "Private individuals acting in their own self-interest will often pollute, and therefore we need regulation." That's true. Regulation has the ability to make the world a better place. But not every kind of regulation does it equally well. Honda story is identical to what happened with the coal-burning power plants. Bruce Ackerman and William Hassler book, Bird Amendment, affected Senator Bird's home state of West Virginia. Coal in W.V. is closer to the surface than coal at west but is dirtier. By requiring scrubbers, a firm will now buy the cheapest coal available. Bird did it to protect jobs and profits in W.V. Environmentalists by and large supported the Bird Amendment. But no obvious reason. Levels of pollution were not changed in any significant way--it was a more costly way to get there. Motivation of activist groups is to signal that they are on the job, impressions they make. Typical donor doesn't follow the debates in detail. "The best is the enemy of the good." Reality of politics that compromise is inevitable is sometimes invoked to justify things that are not really attractive.|
|31:41||Antitrust. Virtues of decentralized outcomes, competitive markets. We teach people in economics what's called the "competitive market." A lot of undergraduates are taught that this means an infinite number of firms selling a homogeneous good, free entry, perfect information, one price for all transactions. Maybe that works for wheat, but everything else is not competitive under these restrictions. People jump to the conclusion that governments have to make conditions competitive. In economist's point of view, power is constrained by competition; in centralist world-view, government is what constrains power. A lot of people who love free markets argue that the key is anti-trust. But what is anti-trust? Just because an industry does not have an infinite number of firms doesn't mean it has monopoly power. Knowledge of history is very useful. Doesn't prove it, but it does shed light. History of anti-trust laws: first statute commonly believed to be 1890 Sherman Act. But in fact State statutes began in 1889 and continued to be enacted through 1892. Common view is that you had the robber barons, and they had monopolies, they were exploiting the consumer so the government had to step in to help the consumer. The railroad, the telegraph, personalities, the Carnegies, the Rockefellers; government just couldn't let it go on, so we'll pass the Sherman Act because we care about consumers. The first hint that this story is not that accurate when you realize that John Sherman was the sponsor in the Senate for the McKinley Tariff, passed in Oct. of 1890, largest tariff increase in U.S. history. Tariffs are in fact a tool for granting monopoly power. The industries that were singled out as being the most monopolized were the industries that were growing large; but prices in those industries were falling by more than average (it was a period of general deflation, gold standard era); and outputs were expanding by more. Tom DiLorenzo, 1985 article in International Review of Law and Economics. No evidence of monopoly. Standard Oil, American Tobacco, Carnegie Steel. They were growing and had big market shares but in fact they didn't have monopolies and they were benefiting consumers, as evidenced by their price declines. Gary Libecap, economic historian, at Arizona, came to same conclusion. The legislation got sparked by the meat packing industries. Gustafus Swift had brainstorm that by centralizing the slaughter of beef, chicken, and pork he could make a lot of money. Very quickly was shipping beef, refrigerated railroad cars helped; prices of beef from 1879 to 1886 price had fallen by 30% in real terms for consumer. Local butchers were undercut; and other meat-packing competitors sprang up. Explosive industry. Reaction to that industry sparked anti-trust. Economy was becoming so much more competitive that the old-line producers complained and got the ear of legislators, giving rise to antitrust. Antitrust was an attempt to halt that competition.|
|43:09||Antitrust in modern times. Political forces always make it different from economists' models. Is it maybe more attractive now than its historical roots? Since about the mid-1970s it's gotten better. Triumph of scholarship in ideas, Federal Judiciary became influenced by scholarship, U. of Chicago, which showed overwhelmingly that much of what economists and lawyers thought of as anti-competitive behavior was actually innocuous or pro-competitive. Judge Richard Posner, Judge Robert Bork, are yet advocates of antitrust legislation even though they are aware of the scholarship. Would like to see evidence of predatory pricing actually working to hurt consumers, of mergers actually leading to long-run consumer harm, of firms becoming so large and secure that they raise price, reduce quality, and lower output in ways that hurt consumers. Tying or exclusion behavior--show evidence that it hurts consumers. Collusion--competitors getting together to agree on a high price and that they won't compete--may not even hurt consumers. George Bittlingmayer, writing under Lester Telser, showed how collusion under plausible circumstances can actually help consumers over the long run. What the FTC and Justice Department worry about is if your market share gets sufficiently large you have enough control over the price that you can take control and take advantage, exploit consumers. Taken as a fact, but that worry may be misplaced. Schumpeter. If two companies want to get together and one wants to buy another, most people would say that shouldn't be allowed. Won't it inevitably lead to lower competition and consumer harm? Tradeoff between today and tomorrow. There is a long-term benefit from letting firms swallow each other. "Capital is greedy and capital is fast." If a large firm starts making above-normal profits, others will jump in. Real form of competition is not just via imitation of same products, but by innovation. The higher the profits, the greater the lure for competitors. Overwhelming evidence that this kind of competition is real and seldom fails except when stomped on by state interference. Schumpeter said only source of monopoly power is government. Companies are always subject to the "gales of creative destruction." Wal-mart: Why do they keep lowering their prices if they are a true monopoly? The best long-run strategy is to continue to innovate, making small amount on a lot of sales, reduces the possibility of attracting competitors. You can raise your price, and lower them only if a competitor comes in. But it turns out to be rare. Instead they just keep their prices down because someone could be enticed to come in and do it a totally different and maybe even better way. IBM example. Recent example: Microsoft, one of the claims is that it is so dominant and has so large a market share that it will just grab markets for all its applications. But Firefox is now the dominant web browser. Ironic. Stan Lebowitz and Steve Margolis research: MS kept pushing its prices down and its quality up. If it truly had monopoly power why would it have done that? If there'd been no antitrust laws would they have exploited monopoly power that they did have?|
|57:22||Dynamic process. At any point in time there's a firm that scary, large. People complain about MS that it's software is dull. Other competitors that have grown up--Apple, but even more open-source software; Google--and now people are afraid of Google. People don't seem able to look to the past and see that in the past competitors came along, and found new ways to do that activity. Wal-mart vs. A&P (Atlantic and Pacific Tea Company)--A&P was dominant supermarket chain but now isn't even remembered. Big four auto makers: How could you start a whole new car company? Looks silly now to have considered them so big. Our children will live to see Wal-mart go bankrupt and people will then be sad to see it go; and it will happen with Microsoft; iconic firms. Nature of a dynamic economy. Schumpeter: maximizing output today is at the expense of reducing output over the long run. People always try to do better in their personal lives; but that might not be the best analogy for government despite its universal appeal. Directed and controlled solutions may not be best. Tendency to want to leap in is in reality then filtered by the political process, and also by our lack of knowledge. With centralization, discovery and experiments in a decentralized market process is dampened.|