- Company A buys up company B in order to stop producing a slightly different product that rivaled Company A's product.
It sounds like this is reducing waste not increasing it.
Drug companies spend R&D money producing slightly tweaked versions of existing drugs so they don't lose out when the existing drugs go generic.
An actual paper showing that the banking sector is less efficient now than it was in 1912.
http://www.nber.org/papers/w18077
Another one showing that most large mergers actually destroy shareholder value. http://www.nber.org/digest/aug03/w9523.html
The standard free market argument is that consumers would buy the better product, and a natural winner would emerge. This is sabotaging that process and leading possibly to a worse product dominating the market.
3
The standard free market argument is that consumers would buy the better product, and a natural winner would emerge. This is sabotaging that process and leading possibly to a worse product dominating the market.
And when the natural winner emerges it is more efficient for them to buy out the losers and use their facilities (and workers) to produce the better product.
2
In general there are economies of scale in production so that it is more efficient to have a few large scale producers.
5: And when the loser is produced by a richer company, they can buy out the emergent winner and use their facilities and workers to produce the worse product. This is the situation that I'm describing.
7
And when the loser is produced by a richer company, they can buy out the emergent winner and use their facilities and workers to produce the worse product. This is the situation that I'm describing.
Why would they do that rather than use the combined facilities to produce the better product? Well I realize for various reasons companies do not always act optimally but it is not inherent in this situation.
Anyway the hypothesis was that the products were only slightly different so the economies of scale from combining production is probably the most important factor.
Well I realize for various reasons companies do not always act optimally but it is not inherent in this situation.
Yeah, she's not after reasons why capitalism must at all times be inherently inefficient; just examples of when it actually is.
Why would they do that rather than use the combined facilities to produce the better product?
Because it's cheaper to retool the smaller factory than the bigger one.
Or they've sunk a bunch of money into an advertising campaign for the worse one.
Like how "Head On" drove all the other phony headache medications out of the market.
If capitalism ever fails, it's because it hasn't been properly tried.
I say that in jest, but the first example that pops into my mind is regulatory capture and the libertarians would stop me at "regula".
In general there are economies of scale in production so that it is more efficient to have a few large scale producers.
This is true far less often than you might think. It depends not only on the industry but also on the scale you're talking about; suffice it to say that the textbook cost-volume curve is bathtub shaped, not slope shaped. Diseconomies of scale are also a thing.
We hear more about economies of scale because they are used to justify mergers (which, vide supra, generally destroy value) by senior executives who stand to gain personally from running a larger though less efficient company.
Ooh, principal-agent problems. That's another one for you, heebie.
2.1 sounds like it would at least benefit people who have some adverse reaction to the original drug.
And presumably drugs that do something to the body and are safe are more likely to be similar to other drugs that do something to the body and are safe, than you would expect two randomly chosen molecules to be.
There's also lots of serendipity in drug discovery, for example Viagra was originally supposed to be a drug to raise blood pressure.
I have no idea whether that kind of tweaking is a socially optimal use of researcher time, though.
What's the principal-agent problem? I suppose I should go google that.
it does seem to produce helpful results in other domains. I'm glad Apple kept tweaking the design of the computer, Intel keeps tweaking the design of the microchip, etc. Different can be valuable even when it doesn't strictly dominate what came before. (The iPhone has a lousy keyboard, not great for spreadsheets, but it's mobile and you can make phone calls.)
16: If you hire someone to do something, you don't always have perfect ability to make them serve your interests. The more freedom you give them, the better able they are to use the resources you've entrusted to them, to enrich/better themselves instead of you.
Managers enriching themselves at the expense of shareholders is a classic example. They "work for" the shareholders but there is little direct practical control on their actions.
- Planned obsolescence. What are the industries that actually do this? Cell phone companies?
You're going to need a more rigorous definition of inefficiency in a minute here.
Oracle bought out PeopleSoft to kill their product.
16: You really don't have the incentive to do so.
The amount of time and effort spent trying to figure out how to arrange things to wait as long as possible to pay your suppliers. And which many suppliers often just bake into their prices (unless they are small and /or not wealthy--sucks to be them) so everyone gets into the arms race. Procurement Dept. management negotiates net 60+ for the end of year bonus win!
The "maximize shareholder value" ideology does tend to the principal-agent problem somewhat, as every MBA has been indoctrinated in it so they tend to police each other, and view managers who don't care about it as somehow unserious or unprofessional.
Which is one reason I'm slightly waryof asking managers in general to use more holistic utility functions (benefiting all stakeholders, social responsibility, &c.), since this might do harm by weakening existing effective norms, giving managers more freedom to do what is good for them personally.
Though in practice I am a hypocrite and work with hypocrites who would rather do something to help the public than the shareholders, and if we have to dress it up as shareholder value, that's fine.
...tend to mitigate the principal-agent problem...
13
We hear more about economies of scale because they are used to justify mergers (which, vide supra, generally destroy value) by senior executives who stand to gain personally from running a larger though less efficient company.
From reading the first sentence of the paper you cited above, it claims to show aquiring companies tend to overpay which is bad for their shareholders but good of course for the shareholders of the companies that they buy. It does not appear to show value is destroyed overall.
The "maximize shareholder value" ideology does tend to the principal-agent problem somewhat, as every MBA has been indoctrinated in it so they tend to police each other, and view managers who don't care about it as somehow unserious or unprofessional.
Hang on. I got read the riot act in some thread in the past year or so for presuming that share value affected the way companies behave, or something like that. Or that companies are motivated by increasing their shareholder value. Don't I know that the stock market is just side-bets placed on the company, and the company acts in blissful independence? I think I was told I was being dumb.
26: If companies on average overpay for mergers, that implies that they are overestimating the value of the merged company.
Implicitly:
merger_value = merged_value - buyer_value - seller_value
So this implies that mergers are less valuable than expected, and it's quite possible that their social value is negative.
Then there's the M&A bankers taking their cut. Even if the merger has a positive value, it could be less valuable than the opportunity cost of the time of the bankers, who could presumably be doing something else that's productive.
9
Yeah, she's not after reasons why capitalism must at all times be inherently inefficient; just examples of when it actually is.
This seems kind of pointless if the examples are just due to human imperfections and not somehow inherent in capitalistic structures.
re: 19
Almost all consumer electronics. Certainly cameras/photo gear [now, not in the past].
What's the nature of the obsolescence? That the parts are too flimsy? Or they won't support the software for more than a few years?
29: I for one look forward to our new robot overlords getting capitalism right.
27: I'd be surprised if it were the most important component of managers' decisions, but they usually have to at least convincingly pretend that they're maximizing shareholder value. And if a company is too far undervalued activist shareholders or hostile buyers can profit by replacing the existing management.
The pressure would be quite a bit stronger if hostile takeovers were easier, but it's definitely there.
28 conflates mergers and acquisitions (oops), but really the difference is immaterial, and I think my point is clear enough anyway.
27
Hang on. I got read the riot act in some thread in the past year or so for presuming that share value affected the way companies behave, or something like that. Or that companies are motivated by increasing their shareholder value. Don't I know that the stock market is just side-bets placed on the company, and the company acts in blissful independence? I think I was told I was being dumb.
Whoever told you that is an idiot but what does the existence of idiots have to do with anything?
31: There's little point in making parts durable if the processor or lens or whatever will be obsolete within the other parts' expected life already.
I don't really care if my Palm Pilot would be falling apart by now. I don't want or need my iPhone to last more than 5 years. (Probably less, as 4G would be nice.)
Ajay, take this thread to 100!
Only if you pay me double for every comment past 90.
27 -- This is largely correct, but the management are betting as well, so it's not even a straight up casino following laws of probability. More like Mark Twain's poker game, with you as the patsy.
what does the existence of idiots have to do with anything?
Now we're getting deep.
Most HR departments. Sitcoms. Coupons. Billboards. My continued gainful employment.
"Also, Heebie's responses here are . . . not smart."
For decades, incandescent light bulbs were manufactured to only last 1000 hours or so. By improving the seal between the glass part and the metal part, it would have been easy to manufacture them to last far, far longer. But then people wouldn't buy so many light bulbs.
Most HR departments. Sitcoms. Coupons. Billboards.
How are these things inefficient? Sitcoms, because they run on advertising dollars? HR departments, in practice? In theory, HR ought to be fine, right?
I should amend 38 to say that management manages for the benefit of management, in their dual roles as employees and bettors on stock value.
Coming up with as many as possible is more interesting than picking over the details of previously-named ones. And in fact, the dynamic of market economics, rather than human frailty, does in fact lead to most of these problems (the tendency toward oligopoly/monopoly without antitrust, information asymmetries, externalities, etc.). Let's see:
1. The lemon problem.
2. Environmental damage.
4. Shedding workforces and infrastructure for short-term gain (like Bain does) when more long-term gain may exist in keeping the workforce and upping its skills (as is the tendency in Japan, though some hollowing-out still occurs).
5. In the 19th century, railroad companies buying up steamship lines to forestall competition.
6. Employees being reluctant to share their skills and knowledge around to preserve their own job security (this is something that unions and fair-termination laws mitigate).
7. Usury.
This ties in with something I've been wanting to ask: are there good examples of ways power differentials put individuals at a disadvantage, but in ways so commonplace that we don't really think about them in that light? My example is how rent is due the first of the month, and salaries come at the end of the month (or pay period). Short end of both sticks.
re: 31
What Benquo said, more or less. The market has changed and people expect (or are expected to) change gear much more often than they once did, so the stuff is largely built to a price point that doesn't revolve around long-term use. Stuff has gotten, relatively speaking, much cheaper* and something has to give.
* to buy. You could argue that it's not cheaper in the long term, when you factor in depreciation and regular kit 'churn'.
42: there was an executive at the CEGB (English national electricity company) whose prized possession was a framed letter on his wall.
The letter was dated from the 1950s. The text of the letter:
"Sir,
The half dozen electrical light bulbs that you sold me have failed. Kindly send me another half dozen immediately. "
and it was signed, in huge letters:
"MONTGOMERY OF ALAMEIN"
3 was going to be Tricor, which you should read about, but is really the fault of regulations / the FDA.
In the 19th century, railroad companies buying up steamship lines to forestall competition.
Oooh, that's a good one. Didn't Detroit sink public transportation efforts in a half-dozen cities?
Also, for another example of capitalism being inefficent, Hotelling's Law - the principle of minimum differentiation. This is the reason that, in exurbs across the land, the Home Depot is invariably built right next to the Lowes.
42, 47:
There is already an organization, a human one, known as "Phoebus," the international light-bulb cartel, headquartered in Switzerland. Run pretty much by International GE, Osram, and Associated Electrical Industries of Britain, which are in turn owned 100%, 29%, and 46%, respectively, by the General Electric Company in America. Phoebus fixes the prices and determines the operational lives of all the bulbs in the world, from Brazil to Japan to Holland (although Philips in Holland is the mad dog of the cartel....)
My example is how rent is due the first of the month, and salaries come at the end of the month (or pay period). Short end of both sticks.
I don't get this example. Isn't this deliberate so that your tenant is most likely to have money to pay the rent? I mean, I get that that's rigged because the tenant has no power in the situation, but I'm not clear on how he's being screwed.
52: Time value of money. Similar to my 23. Small pays before, big pays after.
52: The tenant is advancing money to the landlord (in exchange for a place to live over the whole month), while as employee is advancing labor to their employer (to be paid back at the end of the pay period).
In both cases without collecting any interest explicitly.
Obviously it's in the interests of the landlord, but if they were negotiating on an even playing field, they could come to some middle ground agreement, not the date of maximum benefit to the landlord. The screwing is to the tenant's cash position - the tenant had better have savings to rent at all, and having to keep living on this basis worsens the impact of unexpected expenses.
The way markets are rigged to overcharge people who have less money. For example, if you can only afford to buy pre-paid phone cards in $10 intervals, you are going to be paying about 30 cents per minute, but if you have enough to buy a $100 phone card, the per-minute cost is about 5 cents.
aka, before ajay leaps in, Sam Vine's Socioeconomic Theory of Boots.
Andrew Sullivan has had a lot of posts lately about how Mitt Romney's old company, Bain Capital, basically made its money by putting other companies into overdrive. It would allegedly take companies with a conservative business model and dependable growth and mortgage them to the hilt to fund massive short-term expansions and/or simply stockholder payouts and share price increases. Some such companies have turned out OK or even better than they started, but not as many as you'd expect if the new management's policies were motivated by long-term overall profitability.
That isn't exactly an inefficiency in capitalism - it depends on how you define things - but it's the same general topic of the free market not functioning the way people think it's supposed to.
Re: planned obsolescence, I'll bet this depends greatly on how you define it as well. I'm sure very few companies deliberately build things to break after a relatively short period of time, with unreplacable batteries or deliberately shoddy materials or whatever. It's just that very many companies don't build things to last either. The technology exists to make cell phones that would last for 10 years easily - a combination of classy watches and military hardware - but there's no point in it, and no one would pay extra for it, because cell phones go obsolete in five years at the most.
28: The evidence is that the value of the merged company is greater than the value of the two separate companies, but that all of the additional value goes to the shareholders of the acquired company.
I think the story in 49 may have been overstated.
20's got it -- 'efficiency' doesn't tell you much unless you're explicitly clear about what goal you're going for. There are probably arguments for everything in this thread to be at least reasonably 'efficient' if you pick your goals right. Maybe 'harmful to the public interest' would be a better metric for what you want?
58: No, that's just an ordinary example of backwardation. The spot price is higher because of the time value of money, because probably phone service gets cheaper to provide over time, and because there's a better chance the person spending $100 might not use all the time they buy.
45: 2. Environmental damage.
IME this is often thrown in as an afterthought, but my suspicion is that if this was rigorously factored in as an externality, market capitalism would start looking like a seriously awful deal.
Robert Reich made a nice summary of how Bain works.
Robert Reich made a nice summary of how Bain works.
Poker is efficient, if you're not the game's patsy.
Selling tulip bulbs is efficient, so long as you liquidate your inventory before the bubble bursts.
Is captialism responsible for double-posting?
Capitalism gives you the freedom to double-post.
I think that there are two confounding factors that make this exercise pointless in many cases.
First, there is no market-independent assessment of what people want, so nothing valid to compare to. Advertising is the case in point here, people in their aggregate behavior show that they like it even though they will not say so as individuals. You might disdain preferences for Bud Light and Vogue magazine, but there's no good way to say that people don't want them.
Second, pricing of natural resources (fisheries, CO2 emissions) is set politically, and governments generally try to keep the prices as low as possible.
Monopolies and credit markets, maybe. The existence of business cycles seems pretty surprising to me.
The technology exists to make cell phones that would last for 10 years easily - a combination of classy watches and military hardware
No offence, Cyrus, but that line could only have been written by someone with no direct experience of using military hardware.
There is (surprise! it's Unfogged) a definitional problem at the root of your question: idealized laissez-faire capitalism (which has never existed) or actually existing capitalism? I think everyone here understands that, but your hypothetical refutee may not.
What we and every other "market" economy have is a mixed economy. To LB's point in 63, no society has yet been willing to live without socializing some resources because maximizing efficiency is demonstrably not the only thing people value.
Itemizing the kinds of environmental damage can give you a good sense of the amount of inefficiency here, eg.: costs of pollution to disenfranchised third parties, loss of species, loss of habitat, etc.
I have talked with some particularly stupid libertarians (haven't we all?) over the years who claim to really, really believe that nothing should be run or regulated by the state except the military. Then I tell them about privatized fire departments and they shut up.
Further to 74.2: Obviously a mixed economy can be mixed in many different ways, which is what we're arguing about much of the time.
I think that there are two confounding factors that make this exercise pointless in many cases.
75 comments of great examples says you're wrong.
That isn't exactly an inefficiency in capitalism - it depends on how you define things - but it's the same general topic of the free market not functioning the way people think it's supposed to.
Technically it's an efficiency. What the PE companies are doing, in capitalistic terms, is arbitraging the mispricing of debt relative to equity, by loading up on cheap debt and using the proceeds to increase returns to equity.
My other go-to example is Medicare, which is significantly more efficient than private insurers. This is a good summary of the evidence and reasons.
I don't know if there is a name for this phenomenon, or even if you can say it is unique to free markets, but there is a general problem with people trying to create inefficient systems because the inefficiency is precisely their profit and then creating artificial transition costs to discourage people from leaving the inefficient system.
No offence, Cyrus, but that line could only have been written by someone with no direct experience of using military hardware.
.
Heh. One of the UK's biggest recent procurement disasters has been military radios.
81: Like, say, the health insurance market.
By "efficiency", I'm thinking of how capitalism was originally explained to me: "Buyers pick the best item, and so companies compete to create the best item at the lowest price!" Loosely speaking, public good, but I'm thinking about examples that violate that principle more absurdly than just over-fishing. Where the gap between what turns a profit and what makes a great item is most ludicrous.
No offence, Cyrus, but that line could only have been written by someone with no direct experience of using military hardware.
Fair enough, bad example, but the basic point ("planned obsolescence" is a dubious concept when applied to consumer electronics these days) stands, agreed?
81/83 are the type of thing I am looking for.
I tell them about privatized fire departments and they shut up.
Then you're dealing with more reasonable libertarians than I generally encounter.
The OP mentions cases where company A buys company B to stop production of a slightly different product, but what is far more galling is when they do it to stop production of a vastly more efficient product.
The canonical example here is GM and other car companies buying public transportation systems through a front company and then dismantling them.
81: Oh, here's one I like, price discrimination. The sort of thing you see with airline tickets, where someone who's willing to invest a bunch of time in price comparisons and waiting for the prices to change can buy tickets much cheaper than someone who just looks up the price and buys when they decide to go. That extra effort the good shopper puts in is pure waste, but it allows the seller to charge higher prices to lazier shoppers.
78. If you say so.
I'm saying that due to these factors, various inane behaviors are problems whose causes are not just due to markets.
Railroads buying steamship lines is a good example of monopoly behavior.
I know what central european socialism was like, and so have a different perspective than many people here. I don't have much faith in powerful regulators behaving well.
I'm also not that interested in doctrinaire libertarians. If the goal is only to silence an imbecile, ask about the Koch brothers takeover of the Cato institute, and why don't libertarians complain about that?
IMO the main problem touched on is environmental damage, which is a political rather than a market problem.
And 90 crossed with 85, but I think it's exactly what you're looking for: companies deliberately evading that 'companies compete to create the best item at the lowest price!' process by hiding the information necessary to make it work.
A partial taxonomy of well-known market failures:
- Tragedy of the commons (covers environmental degradation, overfishing, etc.)
- Provision of public goods
- Collective action problems more generally
- Principal agent problems (covers self-serving management, shirking employees, etc.)
- Imperfect information (Accounts for most of the inefficiencies associated with advertising and marketing)
- Asymmetric information (accounts for the lemon problem mentioned above)
- Monopoly/oligopoly power (describes a large portion of the economy)
- Barriers to entry (often deliberately erected by incumbents with the connivance of governments--yes, libertarians, this includes patents)
- Path dependence (everyone buys Windows because everyone else bought Windows)
- Irrational exuberance (market bubbles)
- The business cycle and depressions
I'm sure I'm forgetting a few.
79: An efficient arbitraging process would eliminate the mispricing.
81 describes regulatory and monopoly behavior both. Recreational bureaucracy existed before wireless carriers.
73: Why, is "-" not a permitted character?
Where I would agree with the hypothetical idiot libertarian is that state action tends to distort markets, leading to inefficient outcomes. Where I would disagree is that I think there's a lot of evidence, based on the capitalism we see now, and historical examples, that unfettered capitalism tends to lead to a state, or state-like action. Once the state genie was out of the bottle, it's very hard for big capitalists to justify not using that mechanism (a monopoly on violence) to advance their own interests, and support the capitalist system. Pace Schactman, we see the same thing happening in state socialist economies, where the bureaucratic class tends to use the mechanisms of capitalism to further their own class interests, and prop up the state.
92: IMO the main problem touched on is environmental damage, which is a political rather than a market problem.
It's not clear to me how it's useful or even possible to put it in one place or the other.
Oh, here's one I like, price discrimination. The sort of thing you see with airline tickets, where someone who's willing to invest a bunch of time in price comparisons and waiting for the prices to change can buy tickets much cheaper than someone who just looks up the price and buys when they decide to go. That extra effort the good shopper puts in is pure waste, but it allows the seller to charge higher prices to lazier shoppers.
Actually, price discrimination is not inefficient in a technical sense. Under certain circumstances (e.g. Ramsey pricing), it actually increases aggregate welfare. It does, however, transform consumer surplus into producer surplus, which is why consumers don't like it (unless they're getting the cheap tickets).
Where I would disagree is that I think there's a lot of evidence, based on the capitalism we see now, and historical examples, that unfettered capitalism tends to lead to a state, or state-like action.
What does this mean?
99. Well, agreeing that it's an objective and ameliorable problem rather than an inevitable side-effect is a starting point. Ideally, doing that would lead to identifying commonly beneficial policies that would be helpful without needing to agree on first principles.
Also, what's that line about another Einstein or Newton spending their life in a rice paddy or cotton field?
101: See here for the canonical expression of the view.
101: Like, where you have people setting up capitalist enterprises on a national scale (Rhodesia, Dutch East India Co., etc.), basically the most efficient way to maintain that expression of inequality is through state action, or sometimes private monopolies on violence that are states in all but name.
Just read the beginning of the thread but Shearer is going off in a weird direction -- he seems to be arguing for natural monopolies, which make free markets impossible.
Basically, the textbook story is that economies of scale mean that free markets are inefficient. In a purely economic sense (cost per unit sold) I think economies of scale are pervasive and market power is everywhere. There is also pervasive market power in the purchase of products (big players get volume discounts).
Add in externalities, principal-agent problems, etc. and it is totally clear that free markets are highly inefficient in an absolute sense. This would be hard for an informed person to disagree with. The smart libertarian-type argument is not that free markets are efficient, but that government is even less efficient. Also to rest on Hayek-type arguments about decentralization rather than a claim of absolute efficiency.
Of course, free markets are not the same thing as capitalism, so this may not be responsive to the original question. Heebie's definition of efficiency may differ from the textbook as well.
Of course, free markets are not the same thing as capitalism
Insofar as they describe slightly different aspects of the economy? Or are they at odds with each other?
Heebie's definition of efficiency may differ from the textbook as well.
My definition is in 85.
IMO the main problem touched on is environmental damage, which is a political rather than a market problem
Its a market failure; reclassifying it as a political problem is capitalism not taking responsibility for its inadequacies.
107: ...free markets are highly inefficient in an absolute sense...
...but that government is even less efficient...
This may be a dumb question, but what's the comparison point, then? Governments and free markets are both highly inefficient in relation to what?
I think there's a lot of evidence, based on the capitalism we see now, and historical examples, that unfettered capitalism tends to lead to a state, or state-like action.
I would go further than this and say that you cannot really make a coherent distinction between capitalism and state power. The emergence of capitalism (as opposed to small-scale exchange that has existed forever) is completely bound up with the growth of the state. Capitalism is one form of the delegation and action of state power. Basically, the thing to realize is that businesses cannot grow to truly efficient scale and reach the level and organization of investment they need without the active cooperation of the state.
Actually, price discrimination is not inefficient in a technical sense.
right, price discrimination ameliorates the production inefficiencies from economies of scale, although it has horrible distributional consequences. But as long as people can resell price discrimination cannot be perfect.
110. The Aral Sea and China's environmental problems before Deng are due to free markets? Closer to home, what about Hanford?
112.1: Yeah, pretty much, I was just thinking of examples where there was at least the fiction of capitalism without state action.
I had really high hopes for that movie The Corporation, but it was way too limited in its scope. I wanted to see more about how the modern corporation/corporate structure developed in early modern W. Europe, then stuff about the Robber Baron period in US capitalism. I don't know what Ol' Graeber says about this in Debt, but that whole business of the original, French Credit Mobilier seems like it's pretty crucial to understand when we're talking about capitalism as-we-know-it. I mean, if you could only, now, get loans on land or buildings + land, we would have a very, very different economy.
This may be a dumb question, but what's the comparison point, then? Governments and free markets are both highly inefficient in relation to what?
In economic theory the comparison point has to do with satisfying the most wants we can with the resources we have -- some theoretically optimal solution to the scarcity problem.
Insofar as they describe slightly different aspects of the economy? Or are they at odds with each other?
It's hard to come up with a one-line description of the difference between free markets and capitalism. I guess free markets would just be purely voluntary trade. That has been happening for all of human history, well before the emergence of modern capitalism as a means of social organization. Capitalism is the entire arrangement of society, law, etc. such that wealth is channeled to actors who invest it for their own private future profit. Private profit is the reward system that determines what decisions are made. Capitalism results in big concentrations of wealth used for purposes of rationalized economic investment. Capitalism absolutely requires the state to enforce contract law so that capitalists are not simply robbed all the time -- prior to capitalism the central actors were the most effective users of violence. Capitalism requires the state organizing a monopoly of violence and then using that to grant power to the merchant class.
As merchants grow wealthier and firms grow bigger they will restrain trade, this is a natural means of commerce. Also, the rules the staet sets up to help the merchant class accumulate and rationalize capital are themselves interferences with free markets. This is perhaps most obvious in the case of patents and intellectual property, where the entire structure by which merchants benefit from their investments relies on a state restraint of trade.
114.2:
Michael Hudson article "Banking Wasn't Meant to Be Like This" 1.27.12
A start was made with the Crédit Mobilier, founded by the Péreire Brothers in 1852. Their aim was to shift the banking and financial system away from debt financing at interest toward equity lending, taking returns in the form of dividends that would rise or decline in keeping with the debtor's business fortunes. By giving businesses leeway to cut back dividends when sales and profits decline, profit-sharing agreements avoid the problem that interest must be paid willy-nilly. If an interest payment is missed, the debtor may be forced into bankruptcy and creditors can foreclose. It was to avoid this favoritism for creditors regardless of the debtor's ability to pay that prompted Mohammed to ban interest under Islamic law.
And onward, to Germany, Robber Barons, Fed, etc...
lw, saying that environmental damage is an inefficiency of capitalism is not the same as saying that only capitalism produces environmental damage. Good grief.
Yes to PGD and Natilo. Exploitation, slavery, and theft built up the resources needed to start industrialization; the market economy does not exist independently of the state. Monopolization, collusion, regulatory capture, public assumption of downside risk, using up of public goods, etc. are not occasional aberrations that can be assumed away but systemic habits as long as the ideology is toward laissez-faire.
115: In economic theory the comparison point has to do with satisfying the most wants we can with the resources we have
But how is that even determined without some reference to the institutions and practices which have steered the resources into the wants?
Another Hudson this one on Fictitious Capital, much longer and more theoretical. A snippet:
In 1852, Emile Pereire and his younger brother Isaac formed the Société Génerale du Crédit Mobilier as a joint-stock bank. Their aim was to provide low-cost long-term equity financing for industrialists to expand production, replacing the Rothschilds and other banking families who had monopolized French finance by. However, as government insiders got into the game they corrupted the institution. The Austrian Credit Anstalt für Handel und Gewerbe became a more successful application of Credit Mobilier principles.Banking in the English-speaking countries remained more in the character of what Marx described as usury capital. British and Dutch practice had long used debt leverage to establish royal monopolies, e.g., as when the Bank of England's monopoly of money issue was obtained in exchange for payment in government bonds. (U.S. bankers do much the same to today's debtor countries, threatening them with financial crisis if they do not relinquish financial control of the public domain to global banks.)
Based on capitalizing existing income streams as collateral, Anglo-Dutch banking seemed obliged either to modernize along more industrial lines or make its economies financially obsolete. Foxwell warned that British steel, automotives, capital equipment and other heavy industry was in danger of becoming obsolescent largely because the nation's bankers failed to understand the need to extend longterm credit and promote equity investment to expand industrial production.
The problem had its roots in the conditions in which British banking took shape.
In a lot of these discussions there's an implicit assumption that efficiency is inherently good in some sense. I think that's a mistake, as efficiency tends to be at odds with robustness. Systems with lots of slop in them can take hits that shatter highly optimized ones.
118: "It's only business."
A very short phrase which unpacks into a massive huge world changing thing.
118:...the market economy does not exist independently of the state. Monopolization, collusion, regulatory capture, public assumption of downside risk, using up of public goods, etc. are not occasional aberrations that can be assumed away but systemic habits as long as the ideology is toward laissez-faire.
I was around when the thread started, but barely knew what to say. "Inefficiency" and maldistribution (accumulation, concentration) is the very essence of capitalism, is what it's all about, is what it is for. It is like complaining that the resistance of a hot stove is a waste of electricity.
I guess free markets would just be purely voluntary trade. That has been happening for all of human history, well before the emergence of modern capitalism as a means of social organization. Capitalism is the entire arrangement of society, law, etc. such that wealth is channeled to actors who invest it for their own private future profit.
This is the essence of Polanyi. Capitalism is a historical anomaly. Laissez-faire (and its handmaiden, the nightwatchman state) are not, contra libertarian illusions, a default natural state.
But how is that even determined without some reference to the institutions and practices which have steered the resources into the wants?
One of the central flaws in economics is that it abstracts away from how wants are created. (Some economists have tried a crude evolutionary psych explanation).
Monopolization, collusion, regulatory capture, public assumption of downside risk, using up of public goods, etc. are not occasional aberrations that can be assumed away but systemic habits as long as the ideology is toward laissez-faire.
I would again go even further and say that these are not necessarily 'bad' things but fundamental parts of social life that appear under any system. The basic issue is that production requires organizing cooperative effort toward an uncertain future. This is a problem of institutional design that does not get solved by heroic individuals. It is about how to organize cooperation through time. Capitalism addresses the cooperation problem through the way it channels power and rewards to particular decision-makers through property rights, but the entire society is always backing the particular rules for doing that. That's true in any system.
To my mind a big win for capitalism is simply that it moves power and rewards away from violent predators toward people who are at least making some productive efforts. In that sense it is a much better way of organizing cooperative effort than the systems that preceded it. But a more genuinely cooperative society that empowered many more productive contributors than capitalism does would be even more productive. I'm not sure we have the institutions in place to move to such a society though.
We think all this talk about efficiency is bullshit.
The very basic assumptions that even raise questions about the "efficiencies" of capitalism are stuff like people work for the money and stuff, scientists and artists need to get paid, only a market can incentivize innovation and extraction...
It's "assume a commodity wage labour society" and then look for the friction points. Sticky wages?
Fuck it, I don't have to assume shit.
No, it's the fairest and most efficient system possible.
Similarly to the US giving huge amounts of public land to railroad companies to get them going, in India the British Raj guaranteed railroad companies a constant rate of return, paid for out of taxes on Indians.
It's a rich man's game, no matter what they call it, and you spend your life putting money in their wallets.
we see the same thing happening in state socialist economies, where the bureaucratic class tends to use the mechanisms of capitalism to further their own class interests, and prop up the state.
What do you mean by using the mechanisms of capitalism? Neither the nomenklatura (1) system nor the allocation of scarce goods based on an informal but complex system of favor trading with strong barter elements are particularly capitalist in nature. The closest thing you got to market mechanisms were in the black and grey markets for food.
(1) In colloquial speech 'nomenklatura' is the 'bureaucratic class' but the term comes from the system whereby pretty much every significant position from very junior management on up was assigned to a specific party committee who decided who got the job. So a foreman would be named by a district or village committee, and the head of a flagship factory would be named by the Politburo while a department head at a major hospital would be assigned to the provincial committee and so on.
We made our own luck!
You whiners should bend over and grab your bootstraps. We'll give you some luck.
WOULD YOU HAVE ANY GREY POUPON?
What the PE companies are doing, in capitalistic terms, is arbitraging the mispricing of debt relative to equity, by loading up on cheap debt and using the proceeds to increase returns to equity.
The problem with this kind of argument is that there is no 'natural' pricing of debt relative to equity. If everyone has a short time horizon and doesn't want to invest for the future, is it efficient to accomodate this?
In practical terms the question isn't are there inefficiencies but which inefficiencies are a necessary evil and to what degree, assuming you want a well functioning market economy. Of the two in the OP, I think government can and should intervene to limit the occurrence of the first one with anti-trust regulation, but I don't see what you can do about the second.
132: I'm probably playing too fast and loose with the term "capitalist" here, as others have, elsewhere in this thread. I guess I'm thinking about, on the macro level, counter-trade deals with Pepsi or whatever, the wage system, fiat currency, etc. And on the micro level, the level of day-to-day corruption implicitly endorsed by the nomenklatura, competition among workers, that kind of thing.
Back to the OP, a couple of concrete examples (right next to each other) in downtown MPLS:
1. For many years there were two competing newsstands with the same name, owned by different members of the same family. Eventually, one out-competed the other (mostly due to stocking more pron, I believe) and was left as the only newstand downtown. Then it got bought out by a sort of Ivan Boesky Jr. type, who pulled all the profits out of it in order to live a drug-fueled life of excess for a few years. Eventually, it collapsed, of course, and so now there are no newstands downtown at all, and the barriers to starting a new one seem very high, given that everyone is used to buying their papers at little convenience stores and their speciality magazines at Barnes & Noble.
2. Right next door to the newstand, there was a theatrical costume shop that served the entire region, but specifically the downtown and West Bank theaters. It was in a neat, weird old building, and it was open and available to members of the public for Halloween or costume party purchases, and what not. Idiotically, the landlord decided to jack the rent up to a ridiculous level, forcing the costume shop to move way out from downtown, to a location far from theaters and with very little walk-in traffic. The building, which is semi-protected as a historic building, is now completely empty, and has been pretty much the entire time (8 or 10 years, I think), leaving downtown MPLS that much more beholden to chainstores and big developers, and that block in particular moribund and depressing.
But a more genuinely cooperative society that empowered many more productive contributors than capitalism does would be even more productive. I'm not sure we have the institutions in place to move to such a society though.
We already have an existing proven example of a well functioning system that allowed for broad increases in prosperity, created a rising floor at the bottom of the society, and enabled considerable upward social mobility all while leaving sufficient room for the market economy to generate the wealth needed for this to function: the postwar version of capitalism as practiced in the wealthiest countries in the decades following WWII.
94: The tragedy of the commons is normally viewed as a failure of socialism, not markets. (Hence the "commons.") The common resource is depleted because no one individual has an interest in maintaining it. Classically, no one has an interest in maintaining the quality of land that is held in common. The capitalist solution is for someone to own the land, and hence have an interest in its upkeep.
The tragedy of the commons only actually occurs when people behave as homo economicus. In many real world situations, including common land in early modern England, social norms of the sort economists cannot measure keep people from abusing the resource.
The real tragedies come when the commons is beyond the reach of government, like the oceans. Or upper atmosphere.
(And beyond the reach of social norms)
The tragedy of the commons is normally viewed as a failure of socialism, not markets.
Its also a load of Enclosurist propaganda.
- Imperfect information (Accounts for most of the inefficiencies associated with advertising and marketing)
To put this back in terms you could use with your refutee, "perfect information" is fundamental to the idealized view of capitalism and free markets. Two parties engage in a transaction knowing all the relevant information, so the transaction is free and fair.
If you're selling potatoes that came from your farm and I know you don't use pesticides I don't want (or nitrogen fertilizers that damage the watershed or whatever), ok.
But the reality is that you have no fucking idea what crap Procter & Gamble puts in its shampoo. Sure, you could wait until the "market" figures out that it makes your hair fall out and the "market" punishes P&G, but in the meantime, you've wasted your money and don't have any hair.
And the better shampoo made by a competitor at a better price was placed on a shelf below eye level so you didn't stop to look at it.
This sounds silly, and it is. But the assumption that decisions in the marketplace are made by rational actors operating with perfect information is built into currently accepted microeconomic theory:
Joseph E. Stiglitz spoke to the faults of standard economic models and the faulty policy implications and recommendations that arise from their unrealistic assumptions, writing:
"I only varied one assumption - the assumption concerning perfect information - and in ways which seemed highly plausible. ... We succeeded in showing not only that the standard theory was not robust - changing only one assumption in ways which were totally plausible had drastic consequences, but also that an alternative robust paradigm with great explanatory power could be constructed."
On preview, semi-pwned by 125.1.
"In many real world situations, including common land in early modern England, social norms of the sort economists cannot measure keep people from abusing the resource. "
I thought what actually happened was that there were not implicit social norms but very definite and explicit rules about who was allowed to keep how many animals of what kind on the commons, and compliance was checked by regularly rounding up and counting all the animals. Similarly for other rights over common land like acornage and turbary. That's certainly the way it's worked in my experience of common land farming.
143: re perfect information, here is a great quote from some high-up financial economists in a paper on the financial crisis:
The prevailing macroeconomic paradigm requires a very strong form of rationality: agents make decisions in a fully optimising way, with complete knowledge of the underlying economic model....Casual (and not so casual) observation of past boom-bust episodes suggests an absence of rationality
There is also of course the problem that if everyone has perfect information you don't really need much of a financial sector in the first place, hence this other excellent quote from that paper:
Needless to say, if you want to build a model where finance matters, so that there is a link between developments in the financial sector and those in the real sector, you will have to model the reason for finance existing in the first place
143: I should add that the examples don't have to be based on malfeasance or malice and don't have to be a lone consumer vs. a giant corporation.
The problem with economics is that what they call assumptions are, in fact, counterfactual assumptions.
It occurs to me, heebie, that you're be in a good position to actually learn the mathematical proofs that theoretically link perfectly competitive markets to welfare maximization, and therefore understand all the false assumptions that are required. I'm not sure where those proofs are found, though; my link is to a Wikipedia page.
198: Also, 's/The/A/'. Fact/counterfact can go too.
Google search for "acornage" "turbary" returns one result, an Unfogged comment by one "ajay".
149: I don't even think it's worth it. Too much bullshit to wade through. The assumptions are just too crazy to make it worth it to follow the math.
Actually, though, the models where the math would be worth following would be the applied predictive models like DSGE macro models . Those are actually used by people. Heebie (or anybody else better at math than me...a large set), if you are interested in hacking through some of those models than drop me a line at the above email address. I could use a better understanding.
The first and second welfare theorems are proved in Debreu's "Theory of Value", downloadable from the Cowles Commission. I don't see any reason to think this is a model of capitalism. Some argue that it is a model of central planning.
151: good grief. It appears that I may have made up the word "acornage" - I think I am getting confused between Right of Herbage, which is grass, and Right of Mast, which is acorns. But turbary is real.
And, obviously, 152 to 151.
This isn't precisely to Heebie's question, but the papers going around about the venture capital industry are really interesting. (Basically, all positive value and then some created by venture firms for investors is generated by the top few firms, your Sequoias and A12Zs; everything else produces results worse than just investing in index funds. But because of the value produced by the top few firms, pensions and university endowments have basically bottomless appetite for getting investing in venture capital, which enables the mediocre-to-worse firms to skim their profits while producing negative results.)
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There's a bill in the California Assembly requiring parents opting out of vaccines for their children to be notified by a medical practitioner of the attendant risks. Good direction, I thought. Then I looked at the text and saw an amendment adding naturopaths and osteopaths to the list of allowable practitioners.
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157: A reminder that in the US, osteopaths are basically part of the standard medical profession and represent 11% of licensed doctors.
Yeah, it's naturopaths who based on some quick searching seem to be a problem.
This isn't precisely to Heebie's question, but the papers going around about the venture capital industry are really interesting.
Link to Felix Salmon's post which says essentially the same thing as snarkout, in slightly more words, and includes a link to the original data.
Turbary is in my old edition of Blacks. Not much call for it in the arid west.
In a lot of these discussions there's an implicit assumption that efficiency is inherently good in some sense. I think that's a mistake, as efficiency tends to be at odds with robustness. Systems with lots of slop in them can take hits that shatter highly optimized ones.
126 got there first, in pointing out that what some people call inefficiencies, other people call their careers (or the middle class). But this point of
togolosh's is also really important.
People who argue for markets to make the world more efficient need to first convince me that I would like a more efficient world more than this one.
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I've restarted my blog, though I am still working out the css kinks (since I've not yet really figured out css).
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As you might imagine, turbary rights are a live issue in my neck of the woods. http://www.irishtimes.com/newspaper/ireland/2012/0406/1224314437689.html
I've mentioned repeatedly that my mother's cousins cheated her out of her rightful one-eighth share of a peat bog in Clare, right?
On the OP, I have 5 different ereader apps on my phone. Stanza is far and away the best IMO but doomed since Amazon bought it. http://www.cultofmac.com/129207/amazon-releases-one-last-stanza-update-before-killing-off-support-for-good/
165: Now that I know your family might have stolen it from a commons and denied the common folk their turbary, I am no longer sympathetic.
I know Minivet is kidding but to cut some boring land tenure history, it wouldn't have happened that way. There's still plenty of commonage on mountains and hills for grazing sheep.
LB, if you wanted to be obsessive about it you could actually download copies of the Land Registry maps etc for a few dollars. Unlike in some countries the records here are open to the public and online access has now been given to anyone with a credit card.
("some countries" actually probably only Northern Ireland)
The tragedy of the commons is normally viewed as a failure of socialism, not markets. (Hence the "commons.")
And, right on cue, a guest-blogger at McMegan's gestures vaguely toward the idea that granting property rights to air will solve our air pollution problem. (Please don't follow the link, but if you do, see if I'm exaggerating.)
169 is sad, but it's the kind of thing that happens when you're 88.
The need to day is to keep moving beyond property in land and adopt property institutions to a wider array of ecological resources so that property institutions can have the chance to succeed in those areas where mutual coercion, mutually agreed upon has failed.
From politicalfootball's link -- in case anyone doubted him.
169: Is Poetic Meter and Form still used in Introduction to Poetry classes?
Seems weird that folks who bitch about the tragedy of the commons tend to be hostile to regulations which would prevent said tragedy.
137.2 (the item number, not para number): I've always held that real estate is an incredibly common and ubiquitous example of the free market not being efficient*. And it's idiot landlords that provide the best examples. There are countless examples along the lines you describe, and it's because very very few economic agents have the ability/aptitude/interest to actually make smart decisions. Everything you describe was foreseeable, but the landlord's analysis pretty much began and ended with "If I charge more rent, I'll make more money"**.
I have a related rant about restaurants and "the market", but I can't bear to type it out right now. I'll skip to the summary, which is that it's absurd to say "there's no market for an X restaurant", when the restaurant market doesn't work that way. Latent demand for Ethiopian food (or whatever) can't magically conjure up an entrepreneur who can combine a good cook with a good location and competent waitstaff and adequate marketing.
* more precisely, that the system we have is neither efficient nor a free market, and that it's nothing to do with gov't interference: it's inherent in the systemcircumstance
** I'm sure that, in his mind, there was more of a plan. But I think that reality has shown the value of the plan, no?
That is indeed some vague gesturing.
176: They have a different understanding of what is tragic about it. The tragedy for them is the existence of a commons -- if every possible entity in the universe were privately owned then all would be well.
172. If it's any comfort, Kilgore Trout got there first, IIRC.
OK, I own a column of air straight up. If you send any particulates into it without my permission, I'll have you arrested.
Problem solved!
176: Tragedy's an essential part of the human condition. Were we to do away with it, would we not be less human?
I've always held that real estate is an incredibly common and ubiquitous example of the free market not being efficient.
This makes sense, as free market theories work best when there is high liquidity and low transaction costs, which is basically the opposite of real estate.
OK, I own a column of air straight up.
But you don't. The air was sold off in 10 square metre columns as far as the tropopause and you couldn't afford any.
Problem revived (as you will need to be if you don't get to breathe soon.)
182: I'd prefer the comedy of the commons if it could be arranged. I envision Benny Hill style music playing as McMegan's sub and fellow travelers run around trying to assert property rights over individual blobs of the atmosphere, staking their claims with colorful balloons and wringing their hands as the balloons are popped by activists from Occupy the Sky using pins on sticks.
175: I use it every time I teach Intro to Poetry. There's nothing better, and students love it for some reason. I think it's wrong on a number of fronts, but damn, after reading it, there is not an undergrad alive who won't hear anapestic trimeter as clearly as they identify colors.
I love the internet. Sally was just having trouble grasping the concept of metrical feet, and I was thinking vaguely that I should get a book. I have just bought PM&PF.
175: OK, I'll buy it. I'm meter deaf, and it's a constant source of shame.
172. If it's any comfort, Kilgore Trout got there first, IIRC.
As did Heinlein, in The Moon Is A Harsh Mistress. I mean, he didn't think it would solve any pollution problem, but he got a kick out of imagining air as a market good that had to be purchased.
In the same book, he discussed a looming environmental catastrophe in which the necessary, obvious and agreed upon solution involved massive intervention in the economy. It's a little embarrassing to admit enjoying Heinlein, but he was the rarest of creatures: A libertarian with an imagination.
185: If only there were a way to brand individual elementary particles.
I can certainly brand a column of air.
189.1: Are you thinking of the Man Who Sold the Moon or is there a similar concept in Harsh Mistress? My take away from the latter was don't live at the bottom of a well that has assholes living at the top.
186: Do your students ever get mad at him (like young peep did) for trashing Allen Ginsberg?
Nobody on the bus knows whose brand it is. Stealth marketing.
190. To think! If Murray Gell-Mann had patented up and down quarks in 1964 he would be a rich man own the universe. What a mug!
195: Not to mention John Wheeler.
I thought of two more specific examples.
Microsoft sells volume discounts for Windows to hardware vendors, like Dell. The way the discounts used to work was that you had to pay per computer you sold. Not "PC with Windows you sold", but "PC you sold". So if you bought a computer to run a different OS, Microsoft still got paid.
Companies like Procter and Gamble basically rent the shelf space in supermarkets to sell their products. Even if you make a better consumer product, supermarkets aren't going to stock it unless you can pay them to. But if you're a new business, where are you going to get the money for that?
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Do you remember a week or two ago we were discussing (I guess) the rise of sexynessism in pop culture, and I mentioned a Wild Turkey ad with totally gratuitous cleavage? Well, they're now using a still of it as a sidebar ad (on pages where the ad runs before a video), and it's the shot of the woman with the cleavage. It literally lasts only a few frames (and it's beside the point of the ad, such as it is), but they're using it to highlight the sexyness of the ad.
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192: What's funny is that I get mad at him, and tell my students that, and they defend Fussell. They like Ginsburg, but really want me to realize that it's important to understand and respect the fundamentals of poetry. This, from classes of students who on Day One said they were there because they needed a writing class credit and thought poetry would be the least reading. Fussell makes disciples.
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Does anyone know any Australian academics in the biological sciences and/or know anything about the hiring situation there?
I know a biologist with a good Ph.D. in ev bio studying circadian rhythms of hamsters, another postdoc at a top school in that area, plus a current post doc studying this in humans at a top academic hospital's sleep lab.
The job market here sucks.
His wife is Japanese and trained as a doctor (but is not qualified to practice in the U.S. and hasn't for at least 8 years) with an extra fellowship in geriatrics that she did in Australia. In Australia she'd be closer to her family in Japan.
The NIH grant situation is getting difficult. I think he's thinking about getting a high school credential to stay near family--despite lots of publications. Feel free to e-mail me.
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154 is Robert Vienneau, enormously important heterodox economist.
Where I grew up, there were commons and people kept sheep on them. Seemed to work.
The tragedy for them is the existence of a commons -- if every possible entity in the universe were privately owned then all would be well.
Except as ajaj pointed out, the commons were in effect a form of privately owned property. It was uncompensated land reform in reverse.
or is there a similar concept in Harsh Mistress?
Yup. The revolutionaries are arguing two courses: less regulated trade with earth, or total embargo. Because of the looming catatrophe (they are shipping all of their water to earth via crops), embargo is deemed utterly necessary. I wonder what Heinlein would say about global warming.
200 -- My summer law clerk, an Irish law student, tells me that people are leaving Ireland in droves on account of the austerity, and that Australia is a favored destination. They need all sorts of different skills there. They do not seem to need lawyers, however. Don't know about academic scientists.
199: Funny. Have you read Nicholson Baker's 'The Anthologist'? The bits on meter and rhyme are rather Fussell-esque.
Good thread. Makes me look forward to the forthcoming Red Plenty symposium at CT. (I am not looking forward to two-thirds of the comments there.)
Oh, sorry to hear about Fussell. GW&MM was a touchstone. Lots of problems (historiography of the Great War has changed too) but a masterpiece.
That's sad news about Fussell.
153: I found DeJong and Dave's Structural Macroeconometrics useful, along with Christensen and Kiefer's Economic Modeling and Inference. But then DSGEs are a hobby-horse, to the point where I am writing a paper whose working title is "Your Favorite DSGE Sucks".
154: Let me second the recommendation for Debreu, it's really some beautiful math.
206: I almost declined to participate because of the comments, but then I told myself I don't actually have to read them.
163: Ain't got no comment form, I see, but your sugar snap peas are looking better than ours. We'll catch you yet, though!
This is not really about capitalism but since sir kraab mentioned P&G I'll say that I heard today that their Olympics/Mother's Day ad is now the most viral ad ever, the claim being that one in three viewers passes it on. Previous record was one in eight and presumably not held by P&G or they'd have trumpeted that fact. Knowing this sort of gives me the uh-oh feeling, but I don't have anything concrete to comolain about.
233.last - My guess is that there would be a lot of fulminating about hockey sticks and sunspots and how climate science is a sham, but maybe I'm doing the man a disservice and he'd jump straight to the idea that we need to start geoengineering now now now.
107
Add in externalities, principal-agent problems, etc. and it is totally clear that free markets are highly inefficient in an absolute sense. This would be hard for an informed person to disagree with. The smart libertarian-type argument is not that free markets are efficient, but that government is even less efficient. Also to rest on Hayek-type arguments about decentralization rather than a claim of absolute efficiency.
This really depends on what you mean by efficiency. For example our society spends a fair amount on locks, alarms, guards etc. Is this actually inefficient or just necessary overhead?
204: I heard that too which is why I was asking.
Oh, here's one I like, price discrimination. The sort of thing you see with airline tickets
In addition to what KR said about the notional efficiency of this, there's a pretty good argument that price discrimination is essential to the existence of airlines. The claim is that if you charged a single fixed price for a route, there is no combination of a single fixed price and buyers at that price that would actually cover the airline's costs (A more sophisticated version of this argument compares the actual demand curve for flights with the actual costs of operating an airplane).
There is an additional, more empirical argument that airlines, as an industry, are not in fact profitable at all, but it doesn't invalidate the price-discrimination point.
213
In addition to what KR said about the notional efficiency of this, there's a pretty good argument that price discrimination is essential to the existence of airlines. The claim is that if you charged a single fixed price for a route, there is no combination of a single fixed price and buyers at that price that would actually cover the airline's costs (A more sophisticated version of this argument compares the actual demand curve for flights with the actual costs of operating an airplane).
This doesn't make any sense as stated. If there were only one monopoly airline it would surely be able to charge profitable prices (albeit perhaps with fewer planes and flights than currently exist among the airlines combined).
If there were only one monopoly airline it would surely be able to charge profitable prices (albeit perhaps with fewer planes and flights than currently exist among the airlines combined).
Not in the real world, no. It's perfectly possible that the breakeven price for a good is higher than anyone is prepared to pay.
I am interested in the argument in 213.1. 213.2 is arguably true, but it's more of a cyclical argument - the losses made by the US airline industry in 2001-2, for example, were greater than the profits made by the industry in 1903-2000.
I bet Amtrak could've used the billions of dollars that the Essential Air Service subsidy cost the Federal government.
Does anyone know any Australian academics in the biological sciences and/or know anything about the hiring situation there?
Kind of. I know a (British) biochem PhD who moved to Australia and has yet to get a job, academic or otherwise, in his field. But that may be as much to do with his temperament as the hiring situation.
215
Not in the real world, no. It's perfectly possible that the breakeven price for a good is higher than anyone is prepared to pay.
But airline travel obviously isn't one of these cases.
Presumably the link in 208.2 was meant to go here, or someplace very similar (online Theory of Value).
219: Don't know. I know it doesn't sound intuitively likely, but that's what Nathan Williams is arguing, and I'm holding off on dismissing it until I can see the details of the argument.
Isn't the airline possibility disproved by the fact that they didn't always engage in price discrimination to the extent they do now, and profitable or not, they existed? (There's a reasonable argument that back then tickets were generally more expensive, so maybe the status quo is better. But it can't be true that the status quo is absolutely necessary.)
Anyway, you get that kind of hassle-mediated price discrimination in other contexts as well, so the argument isn't limited to airlines.
Presumably this paper is worth a read on the subject ("ON THE PERSISTENT FINANCIAL LOSSES OF U.S. AIRLINES: A PRELIMINARY EXPLORATION" Severin Borenstein - Jan, 2011)
.But that analysis did not address the level of profits, the fact that the domestic airline industry has reported negative net income in 23 of 31 years since deregulation and a strongly negative aggregate net present value of earnings. There is no conventional long-run equilibrium explanation for an industry that perpetually loses money, but there are a number of disequilibrium theories that have been suggested by industry participants, financial analysts, and researchers. In this short paper I discuss these theories and attempt to narrow down the range of plausible explanations.
Further on Debreu and Theory of Value, I am curious if this paper, "Debreu's apologies for mathematical economics after 1983" (Duppe, 2010) represents current mainstream thinking on the history and current place of the work. I found it an interesting read/scan.
OK, so there's a really good example for heebie: the entire airline industry. If capitalism were efficient, it wouldn't exist, or at least not in its present form.
225
OK, so there's a really good example for heebie: the entire airline industry. If capitalism were efficient, it wouldn't exist, or at least not in its present form.
Efficient in what sense? The fact that airlines lose money doesn't mean society as a whole is worse off.
And it's not the entire industry, Southwest Airlines has paid a dividend for 30 years (albeit a small one).
You could generalize from the airline industry to transportation as a whole. Trains don't make money either, nor does mass-transit, and highways and automobiles also entail massive subsidies. We keep those things around because transportation has very high positive externalities. But if they had to pay for themselves through the free-market, by and large, they wouldn't.
One thing...the prevalence of idiot libertarianism on the net leads this kind of thread to be sort of weighted toward debunking straw men about the glories of the market. It should sort of go without saying that decentralized markets have some huge strengths in promoting common-sense versions of efficiency. Also that it it is a big institutional challenge to get state monopolies to be properly responsive to the people they serve. I'm a mixed economy guy more than anything else. But my sense is that even a truly egalitarian socialist society should retain a significant role for market mechanisms in managing the economy. That's an interesting question though -- to what extent do market incentive mechanisms rely on the generation of inequality?
I said this earlier, and other people in the thread have said it as well, but I think that if you're in a situation where you're convincing people that capitalism can produce inefficient results, you should be trying to refocus the conversation onto "What do you mean by efficiency, and why do you think it's always a good thing?" I think it's perfectly possible that the unfettered operation of the free market would be maximally efficient in some sense, and also that it would suck as a society in some very concrete ways that people who talk blithely about efficiency wouldn't be prepared to accept.
"Efficiency" as an unexamined good probably comes from idiot libertarians at some remove, but it's not limited to them.
Efficiency is being able to get the most stuff for the least amount of money. I think that's a good thing, and - while its not the be-all-end-all - I think a lot of the skepticism about it is unwarranted. Yes, inefficiency often represents people's jobs, but also, people need to pull their own weight, and being a cog in an inefficient system doesn't really accomplish that.
To say that free markets sometimes do a poor job of delivering efficient outcomes, on the other hand, I think ought to be blindingly obvious to anyone who has ever interacted with the US healthcare system.
Well, it's not really a free market. If some of the stultifying regulations were gotten rid of, you might get much more efficient results. More dead bodies in the parking lots, but considering the system as a whole, more efficient results.
My meaning is that the free-market based US healthcare system is far less efficient than nationalized healthcare systems. And that dead bodies in the parking lots are the ultimate inefficiency, when you consider the wasted potential each of those dead bodies represents.
And that dead bodies in the parking lots are the ultimate inefficiency,
Well, not all of them. Old people don't have a lot of economic potential left in them, and there's probably a point well before we give up on most sick people where it'd be economically efficient to pull the plug, if you do the math on what they're probably going to produce given their odds of survival.
Seriously, if 'efficient' is your goal, you really can't count on the outcome being humane. Might be -- efficiency, depending on the specifics, is usually going to be a good thing -- but unless it's meaninglessly unspecific, it's not the same thing as 'good'.
233: I was just talking to a twenty-something I know about student loans, and he mentioned that he was informed that one of the only ways to get your student loans forgiven was death. Which struck me kind of funny: that's not so much getting your loans forgiven as just not being around to pay them. But it'd be even funnier if they didn't forgive your loans at death, and came after you for the resale value of your parts.
The U.S. system isn't free-market based in most aspects. Over half of the funding comes from the feds and much of the part that doesn't come from the feds is (or was historically and now can't be shifted) structured that way for reasons of tax law and trying to make sure states don't game the feds too much. It is efficient if the goal is to hide costs and make old people both grateful and scared of losing what they have.
that's not so much getting your loans forgiven as just not being around to pay them
Well, the forgiveness is meaningful if you leave behind an estate.
If you leave behind an estate big enough to pay off loans, you probably didn't have that much trouble paying on them.
The U.S. system isn't free-market based in most aspects.
This is true, but the free-market part is the part that makes it suck.
And the forgiveness is actually meaningful for a co-signer; if your parents signed for your loans, it'd suck if they had to pay them back after you wrapped your car around a tree.
Even worse if it was their car wrapped around their tree.
239: I'm not sure how you separate the two so completely (except for for-profit insurance which does just suck). The employer-based system of providing health insurance isn't just a nice thing for people who get it. It distorts the pool so much that it is a large part of what makes health insurance impossible to buy outside of employment. Plus all the other economic inefficiencies that come from having to keep a specific job to keep health care.
The employer-based system of providing health insurance isn't just a nice thing for people who get it.
I was considering the employer-based insurance system as part of the free-market aspect of the system, and also as one of the suckiest.
Also, I had a long response to 234 that got eaten by my browser... please assume I said something witty and insightful.
243: It now has ossified, but it was a tax dodge at the start.
Now that I think on it, at the start it was a way to dodge wage controls during WWII, but it persisted for tax reasons.
Moby can change the past by thinking!
Yeah, there's tax implications. But it basically consists of employers shopping around in the market for insurance companies, and insurance companies shopping around in the market for health care providers. All of this activity represents a massive inefficiency which is eliminated in nationalized and single-payer systems.
if you're in a situation where you're convincing people that capitalism can produce inefficient results, you should be trying to refocus the conversation onto "What do you mean by efficiency, and why do you think it's always a good thing?"
I mostly thought that a list of examples of when companies gum things up would make an interesting thread to read.
But it basically consists of employers shopping around in the market for insurance companies, and insurance companies shopping around in the market for health care providers.
If that happened very often, it might become more efficient. My view, possibly distorted by my location, is that we you see isn't shopping so much as monopoly capitalism and from the usual weaknesses thereof.
249: Purely selfish! No consideration of how Unfogged can fix the world!
I did it for you, peep. For you!
I mean, a more market-based system would still leave a bunch of people without health care, but I don't think that competition is what is raising the costs.
I don't think that competition is what is raising the costs
I think what raises the costs is the massive overhead associated with supporting what limited competition there is. For every doctor in the United States, 2.5 people are employed in health-care billing.
Plus, all the paper used to print pages with "This is not a bill" in the header. But, unless you assume becoming a single-payer is going to magically make government procurement of health care services efficient, I don't see how it gets much better. Nationalization would probably be more efficient but my views on nationalization are basically, "Go nationalize whatever field you work in first."
But, unless you assume becoming a single-payer is going to magically make government procurement of health care services efficient, I don't see how it gets much better.
I don't think its magic. When you look at the single payer systems we do have in this country - Medicare - it has a far lower overhead than the private alternatives. And when you look at the limited, full-on socialized medicine system we have here - the VA hospital system - its even better still.
While we're talking about defining our terms and economics, as I've occasionally cogitated on aspects of the Centipede Game/backward induction after our discussion here I've come to the not-very-original conclusion that the use of "rationality" in econ, game theory etc. is not only wrong, but perversely wrong. That's been my opinion for a long time, but that discussion made me come to grips with the full force of the wrongness. What a stupid, fucking co-optation of a concept*. In my mind, I now replace "rationality" with "idiocy" (so bounded idiocy, complete idiocy** etc.--actually I'm trying to think of a less loaded but appropriate term, maybe just utility-maximizing or something).
*I'm actually of split mind on whether it's use has been actively harmful in the world or just irritating and deceptive.
**Chess masters stop sooner in the Centipede Game per Wikipedia? Sure, because they're more likely to be complete idiots.
The VA is not directly comparable. It does work very well and has improved hugely*, but some of its recent success at controlling costs is due to demographics (i.e. trading in WW II vets for younger ones and more disabled WW II vets for less disabled ones), Congressionally-mandated cheaper meds, and starting from a very low baseline. Some of its successes could, one assumes, be copied more widely. I'm thinking of the medical records infrastructure.
I think Medicaid, which tried harder to control costs, isn't something that you can ignore here.
*Full disclosure: I am not completely unconnected from it.
All I know is, when my brother-in-law came down with the cancer, the VA system did right by him. And when my wife came down with appendicitis, the public hospital we took her to was a shithole.
And, if I've learned one thing in this grand, wonderful journey we call life, its that everything can be judge by my own anecdotal experience.
Isn't the airline possibility disproved by the fact that they didn't always engage in price discrimination to the extent they do now, and profitable or not, they existed?
That was back when routes and fares were subject to government approval. An airline could neither enter nor exit a market, nor raise or lower its prices, without permission from the Civil Aeronautics Board. (And even then, there were embryonic forms of price discrimination, such as KPEX fares and youth fares.)
It took less than three years from the full implementation of airline deregulation to the universal adoption of price discrimination yield management.
260: Sure -- price discrimination happened as soon as it was allowed. But it's not impossible to keep an airline industry running without as much of it as there is now, because the regulated industry had less of it. All I was saying is that 'what spontaneously emerges from market forces' isn't the only possibility here.
I wonder what the dollar value of all the time wasted by people trying to find the best on airline tickets is. But that's a cost offloaded to the consumer, so it never get accounted for.
It used to be quantifiable when people paid a "travel agent" to find the best price on airline tickets.
This draft paper by Cosma & H.F. on democracy as a generalized problem-solving institution vs. markets & hierarchies is not entirely off-topic. (The version at Cosma's place is better formatted, but CT is where the discussion is.)