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why do you disbelieve in the power of the market? friedrich hayek. friedrich whats the other man. milton friedman. murray bothbard

Because the market is inefficient in a number of ways.

The first, and most traditionally socialist reason is allocation- private ownership of the means of production requires that a large amount of wealth go to those who already have wealth, so that wealth tends to concentrate, leading to vast inequality. This is an inefficient allocation of resources because someone making £25,000 a year benefits far more from an extra £1,000 than someone making £250,000 a year.

Friedman would not have any counterargument here, and would just say this is an irreconcilable difference in values. Hayek would argue that the wealth is deserved because it is 'earned'. I would argue that there is no meaningful sense in which a landlord who inherits their property is 'earning' their money, so there is no moral justification for them to have that money, certainly not one that outweighs the imperative to alleviate the poverty of their tenants.

This vast inequality, combined with systems like private schooling and billionaire financing of election campaigns, make governance much worse, as the political leadership will tend to come from the upper middle class or upper class, and will be heavily incentivised to court the support of the super-rich. This means the concerns of the poor get systematically neglected, and leftist reforms- even ones that would benefit everyone- become far harder to push though. This is in addition to concerns about general competence, which gets eroded by corruption and by the political and media leadership all coming from the same background who are benefiting from the way things currently are.

Friedman and Hayek would say that the solution to corruption is a smaller government, so that the government is less powerful and their is less incentive to corruption. I think this suffers from the same kind of 'end of politics' conceptions as many leftists- there is always going to be wrangling over the size of the state, as long as there are states, and there is always going to be the possibility of regulating industries that are not nationalised, so every industry is always going to be within the purview of corruption- the current size of the government can't change that. Hayek would say that means the government is already involved in the kind of unacceptable arbitrariness that he says is The Road To Serfdom. I, like Keynes, would say that Hayek failed to realise that the state of affairs Hayek warned about in his book is government-as-usual.

The market has huge problems with externalities- economics textbooks tend to portray these as small exceptions to the usual state of the economy, which can be easily fixed with a small tax/subsidy, but they are in fact large and omnipresent. The most obvious being climate change- an economy that decarbonised at the socially optimal rate would look very different to our current economy, including having very different prices. This means that the effect of carbon externalities is not just the price of energy being a little bit off, but all the the prices in the economy being a long way off.

And climate change is only one of these externalities- resource depletion and pandemic risk are other huge externalities, but there are uncountable smaller, but still important, externalities. Externalities are supposed to be addressed by Pigouvian taxes, so that a market system can still produce efficient outcomes, but the size of the problem, and the lobbying interest in it, makes it practically extremely difficult within a political environment that is used to giving primacy to the market (as opposed to e.g. China, which is still capitalist, but has an easier time making changes like this).

Moreover, many externalities can't be addressed within markets because they are too hard to measure in order to tax them. There are many more minor pollutants, but there are also things like human capital formation at work- companies are heavily incentivised to under-invest in training for their workforce, like the beauty and character of an area, and like the impact on surrounding infrastructure.

Friedman would argue that these externalities can be addressed by the market itself if you just expand property rights, but this is impossible because you can't give a company ownership of the air, or ownership of a stake in the health and skills of workers.

Hayek would correctly argue that the market doesn't reach an optimum anyway, as it is constantly changing, and instead the achievement of the market is in being able to dynamically respond to new circumstances, and account for information that would not be available to central planners. He would argue that non-market methods of addressing externalities would undercut this. I would argue that the size of these externalities is large enough that any concerns about how dynamic the market is are less socially consequential, and also that the sluggishness of many non-market methods to respond to changes in circumstances is not set in stone, and is a consequence, in part, of a culture of market primacy and of regulations aimed at preventing adverse impacts on market actors or, ironically, at preventing government waste.

Bothbard would sit on his bals then say ooh I sat on my bals.

An important case of externalities is land value- an acre of land in central london is very valuable not because the soil is very good quality for crops, or because of the weather conditions, but because of the easy access it provides to central London- the value is created by activities in the surrounding area, and was not compensated. This means most of the value of most properties in the UK come from externalities, amounting to an enormous misallocation of resources (in addition to the component of house prices that comes from lobbying and voting to keep house prices high).

Specifically, it is unnecessary to add housing to an existing town, which might not appreciate it, when you could just build a new town, and once built, the value of those houses would be just as high as the housing in an existing town, even though the land started out cheaper than land in an existing town. But market actors rarely have the resources to build an entire town from scratch, much less an entire city, so they are stuck adding to existing towns.

This creates problems like gentrification, where a wealthy town has to be gradually built on top of a poorer town, rather than just built somewhere else, because it can only be built gradually and the initial developments wouldn't be profitable otherwise. It leads to megacities, that have grown far past the point that any residents would like, and to regional inequality because one city will grown largest, have the highest land value, and so receive the most new developments. The market gets stuck going further and further along one path and fail to explore travel new ones.

Basically, the market can only optimise 'locally'- what increases value by the largest marginal increment right now, ignoring effect on adjacent land. Whereas planning can take a global approach, noticing that one house on its own in the middle of nowhere isn't worth very much, but once all the rest of the houses around it have been built, an entire extra town in a new location is more valuable than an extra town sized addition to an existing city that is already struggling under its own size. Admittedly this might not be a problem in the future due to increasing adoption of working from home.

Capital markets are inefficient in terms of social welfare- if they were efficient, investors would be asking about how much the firm benefits its stakeholders- or equivalent questions phrased in terms of prices. However the questions tend instead to be about barriers to entry and ability to build a brand, and on the stock market stocks get valued based on very limited information that largely ignores anything of relevance to social welfare, and encourages short-termism, as long-term strategy is difficult to commercially trade on. This leads to an enormous degree of misinvestment, which is rarely recognised, and I am being quite heterodox in claiming that it exists. Admittedly it is very difficult to invest well, with respect for various social priorities over long timescales- but in ignoring these priorities entirely, capital markets do a far worse job than intentional economic planning, or some hybrid system would.

Friedman would reject the possibility of so much misinvestment, at least once externalities are priced into the market, so that this is reducible to just the problem with externalities. He would argue that e.g. correctly predicting that a company is overvalued given the likely increase in the price of carbon over the coming decades and the difficulty they will have in adapting their business model to lower carbon methods would allow you to beat the market- to make above-market returns. Thus, if anyone is able to predict this, it will get arbitraged out, and the market will incorporate that knowledge into its prediction- making the capital market very accurate in valuing the company.

However, making money on a prediction like this requires consistently shorting that company's stocks over decades, waiting for the market to realise it was overpriced- and when they finally do, the mispricing will be small relative to share price. This uses up a lot of liquidity, and likely manpower, for returns that are only slightly better than the market in expectation, and have a high risk, as all sorts of other things will be affecting that company's share price at the same time. This makes it very difficult to diversify and get the reliable returns that investors want. Hence why more short-term trading based on shallower financial indicators tends to be so favoured, and why mispricing can be so persistent. Bothbard would accuse a butterfly of violating the non-aggression principle for landing on his face and shoot it.

The market will fail to provide services to niche markets- e.g. a free market would not provide disability accommodations for buses, as the small increase in demand would not pay for the costs of adaptation. In theory disabled people should be much more willing to pay, so that buses could charge disabled people far more, and then this would pay for the accommodations, but disabled people don't have that kind of money. This also applies to accessibility in shops, on websites, etc. so that the market has a strong tendency to systematically exclude disabled people from every aspect of life. Similarly, the market would not provide postal service to those in remote areas.

Friedman would argue that this is efficient- the service isn't provided because the willingness to pay is exceeded by the cost of provision. But lack of universal provision causes a lot of problems- what if someone needs to receive a legal summons? You end up having to design alternative and more complicated procedures for a wide range of things, which ends up being more expensive and less just than universal provision.

Other specific examples are provision of allergen-free food, niche medicines, and lawyers for the poor.

The market similarly has a tendency to exclude poor people from every aspect of life. If someone becomes homeless, for example, it is disadvantageous to hire them, and if someone doesn't have a job, no one will rent to them. The poor also have no ability to hire lawyers if they are wrongfully evicted, or injured as a result of workplace policies, or if they are a victim of crime. In absence of state systems to protect the poor they become an underclass who can be preyed on without repercussion. This similarly applies to people fleeing domestic abuse, or who were stay-at-home partners in a marriage and don't get awarded compensation in a divorce.

The market cannot deal well with services with large fixed costs, like telecommunications, and especially information including scientific discoveries. This is because to meet their revenue requirements, private corporations need to charge at above their marginal cost, which results in an inefficient level of production. In cases like social media websites, marginal social cost may actually be negative, due to network externalities. With scientific discoveries and artistic creations, this is addressed through intellectual property, deliberately turning the market into a monopoly. I think this is a bad approach for reasons I have outlined elsewhere. I could add that intellectual property has worrying fee speech implications.

The market involves a lot of waste, like advertising, loyalty programs, keeping things secrets because they would look bad to customers- e.g. a consulting firm not letting a client know how simplistic their 'methodology' really is, and the amount of cost involved in managing transactions and protecting property rights. This could largely be dispensed with if an industry was managed through non-market approaches, e.g. if medicine was free there would be no need to wait in line to pay at the pharmacy for 20 minutes every time I have to pick it up.

This is just a pure social saving, which means that even if a non-market approach is 'inherently' less efficient, it may still be more socially efficient. Some of these costs can't be fully dispensed of- if capitalism is abolished there would still need to be police dealing with property crime, for when people steal each others' possessions. And some level of transaction processing would be necessary to ration access to resources.

Advertising is also more than just wasteful spending, but can be actively harmful, such as clothing adverts that present extremely thin bodies as an ideal. More generally, advertising works best when it is unchallenging, so it tends to reinforce existing social norms.

Many services cannot be provided well by the market due to what economists would call asymmetric information. When you hire a lawyer, you don't understand the law, so you can't judge if they are doing a good job. The same with doctors, care homes, complicated machines like cars, and builders. Where something isn't measurable to customers there is a strong incentive to cut costs until provision becomes poor enough that is is measurable to customers. So for doctors, the incentive is to deny expensive medical tests except where the patient is sophisticated enough to be able to tell that doing this is malpractice, or for a builder the incentive is to use materials of quality almost poor enough that the building will fall down. When in 25 years a hurricane hits and all of those buildings fall down you've already made your money.

Friedman would probably argue that these can be addressed by hiring your own experts- you hire a surveyor before buying a house who you hope will tell you if it is structurally unsound. But this just moves the problem one step along, because you can't tell if the surveyor is doing their job properly either- and they often don't. It also adds a bunch of costs that non-market approaches don't have to worry about when you have to keep surveying and resurveying, searching for surveyors, and surveying the reviews of surveyors. Also surveyors don't really exist for many industries, like doctors.

Hayek might argue that these are information problems any economic system has to deal with- it's always going to be difficult to judge from the outside whether a doctor is doing a good job, and capitalism, in practice, does a good enough job that the market basically functions, at least (ignoring that when doctors were less regulated they were largely quacks, and quacks persist where they can escape regulation). But that oversight of doctors doesn't have to happen on the customer (patient) level. If responsibility for assessing the quality of services is put onto the state, instead of the customer, it becomes practical to spend a lot more time seeking out qualified, competent inspectors, as well as gaining the possibility of e.g. accessing the back of house to assess the hygiene of a restaurant. This doesn't trivialise the problem, as you still need to inspect the inspectors, and keep standards up to date, etc. but it makes the information problem far more tractable for a system that leans socialist than for a market system.

Bothbard would eat a burger and then another burger and then very many burgers and then throw up.

The asymmetric information problem is a particularly big deal for the job market, as employment is where most people spend half of their waking life, yet it's very difficult to know what it will be like working somewhere until you're in, and then it's costly to leave. Employees that warn prospective employees about poor working conditions risk being punished for doing so.

In addition to natural resources being used up more than is socially optimal due to externalities of extraction not being priced in, they also get used to too quickly because markets tend to be short-termist. This is because they use the real interest rate as the market discount rate. The discount rate tells how apples today you would trade for an apple tomorrow. If there is no discounting, you care about the present and future equally. The market does not treat an apple now as equal to an apple in the future, because you could earn interest with that apple- you could plant it and have many apples in the future. So a positive discount rate makes sense- resources are less valuable in the future because if we had them now we could turn them into more resources in the future.

However this creates a problem with natural resources like water levels in certain aquifers, or cobalt ore of a certain grade, or air with a given concentration of CO2, as these replenish slowly, so if we use them all up now, we won't have any left in the future. But businesses extracting those resources are subject to the same interest rates as everyone else, so have the same incentive to extract it all now, rather than waiting for later.

Friedman would probably argue that they aren't extracted more quickly than is economically efficient, because if they will be scarcer in the future, that means their price will be higher in the future, creating an incentive to wait. Theoretically, these increasing prices and positive interest rates perfectly balance the needs of the future against the needs of the present. If the rate of growth of the price is less than the interest rate, that means extracting the resources now, then using those resources to produce further value once you have them (cobalt goes into a laptop, which is used to do accountancy, etc.) will produce more value than leaving the resources and extracting them later. However, this depends on future prices being judged accurately, even accounting accurately for low-probability high-impact scenarios. This is very difficult for capital markets to do, but it is capital markets making these decisions.

Furthermore, this depends on the real interest rate being the actual social discount rate. The real interest rate is theoretically an estimate of the ratio of your marginal private value of income now and your marginal private value of income later, so it can be split into two parts: part of the reason why your MPV is lower later is that you will be richer later, so extra money matters less to you. And part of the reason is that you care less about the future than you care about the present. Which means that that second part is also getting baked into the market interest rate- that the market is assuming that the future is inherently less valuable than the present. Which is a bad assumption when it comes to management of natural resources.

Furthermore, the increase in income component of why real interest rates are positive is different on a social and individual level because of lifecycle effects- people tend to get richer with age, relative to the average of their society, whereas the interest rate that determines the social usefulness of a given resource is one based on the average increase in wealth of society as a whole. That means that interest rates set by a market according to individual preferences will undervalue the future relative to the present, from a social point of view. Essentially it bakes in 'well I'll have made my fortune by then, so who cares' as a principle governing the intertemporal decisionmaking of the entire economy. I think I am being quite heterodox in pointing this out too, though it seems a pretty inescapable conclusion so perhaps this is widely recognised and just wasn't addressed in my education.

Friedman and Hayek would likely argue that this difference between individual and social time-preferences is small, and that markets setting interest rates improves their accuracy more than it hinders it. I agree that setting interest rates through central planning would be extremely difficult, but I reject that this is a small effect. A small change in interest rates can make a large difference to how economical it is to extract now vs later, so that this makes a large difference to rate of extraction. And people in the future will be making the same extract now vs extract later decisions with whatever resources they have left, so if this mispricing causes extraction to happen 1% faster than it should, that means over time we are exponentially deviating from where we should be at a rate of 1% per year.

Bothbard would sit on his bals again.

Not all activity can practically happen within the market- childrearing, for example, has traditionally happened outside of the market. But when most of the economy is a market economy, only labour within the market will award you a claim to a share of society's production- non-maket labour goes unrewarded. This has traditionally left women in the position of being completely dependent on their husbands.

Friedman, if he was on board with feminist critiques, might have argued that this could be solved by making childcare part of the market- have husbands pay their wives a wage to take care of the children (or wives pay their husbands). However for obvious reasons this doesn't usually happen, and where it does happen it doesn't happen in a court-enforceable way, leaving all the economic power still in the hands of the person in paid employment. This is a non-solution, predicated on the idea that everything can easily be brought inside of the market. Children, also, are kept out of the market and thus denied economic power, made completely dependent on their parents.

Bothbard would say who cares because children are the property of their parents and I would say die bothbard die die die and shoot him.

Markets have done a surprisingly poor job of equalising wealth around the world. One would expect that labour costs being lower in one part of the world than another would mean that the capital goes there, to take advantage of the lower wages, but raises wages in the process, until this reaches an equilibrium where wages are the same everywhere. Human capital is sometimes proposed as an explanation- education is worse in poorer countries, so people there can't actually do as good a job, and they are being paid what their labour is 'worth'. However it is clear that people in poorer countries- and even recent immigrants vs citizens in the same country, are paid very different amounts for the same work. I do not think human capital can explain most of the difference.

I do not have a confident account of why global inequality has been so persistent, but it is clear that people in the Global South are not paid what they are worth, ethically speaking, given the amount of work they do, how important it is, and even how skilled they are. Contrary to popular belief and apologia, the market has no tendency to pay people 'what they are worth', in the sense of deserving, only in the sense of marginal productivity of labour- which is a very different thing.

Hayek would reject that the wages someone deserves can be different from what someone is willing to pay them- such a distinction depends on taking a global, non-transactional view of ethics, and adopting a different meaning of 'deserving'. To Friedman, what you deserve is what is contractually obliged to you, and if you have received it, no injustice has been done to you. This approach would say that workers in the Global South don't deserve more- they are treated fairly. This treats the gigantic chasm of a power disparity between workers in the Global South and Global North as irrelevant to the moral legitimacy of the contracts, and so as being as good a reason as any for them to be underpaid. Die Hayek die die die.

So this post turned out a little longer than I was expecting. I have probably also missed quite a few things. I'm not really trying to be comprehensive here, just to cover what immediately sprang to mind. Perhaps I should split this out into several posts on @gamingavickreyauction. But don't count on it. Die Friedman die die die.

#wow thank you this is amazing #future reference

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