(no subject)

[johnny9fingers]

You know the way it goes: you wait ages for a bus and then a bunch of them come along at once.
I read this by professor Joseph_Stiglitz in the London Review of Books.

www.lrb.co.uk/v32/n08/joseph-stiglitz/the-non-existent-hand

I draw it to the attention of those folk who are....um, rather less favourable to the idea of government regulation and who believe in Adam Smith's unfettered hand of the marketplace.

I'll quote from the Wikipedia article on Stiglitz.

Traditional neoclassical economics literature assumes that markets are always efficient except for some limited and well defined market failures. More recent studies by Stiglitz and others reverse that presumption: It is only under exceptional circumstances that markets are efficient. Stiglitz has shown (together with Bruce Greenwald) that "whenever markets are incomplete and /or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient". In other words, there almost always exists schemes of government intervention which can induce Pareto superior outcomes, thus making everyone better off.

Although these conclusions and the pervasiveness of market failures do not necessarily warrant the state intervening broadly in the economy, it makes clear that the "optimal" range of government recommendable interventions is definitely much larger than the traditional "market failure" school recognizes. For Stiglitz there is no such thing as an "invisible hand".

Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.

The real debate today is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place.

Also, as if to emphasise professor Stiglitz's point about information asymmetry it seems that Goldman Sachs has come a bit of a cropper with the SEC.

news.bbc.co.uk/1/hi/business/8625931.stm

www.guardian.co.uk/business/2010/apr/16/goldman-sachs-fraud-charges

I imagine they'll get off lightly, if convicted at all.

Comments

[johnny9fingers.livejournal.com]

The Greenwald-Stiglitz theorem doesn't state that governments are efficient. What it does do is show unregulated market failure as the norm and "that government could potentially almost always improve upon the market's resource allocation." [My italics.]

The Sappington-Stiglitz theorem establishes that an ideal government could be more Pareto efficient running a business itself than through privatisation.

Of course IRL neither markets nor governments are ideal.

From my understanding, this relegates most aspects of Classical economics and Keynsian economics to being normative.

So....The political question is, given that both the unregulated marketplace and government regulation are fallible, which is more accountable? Accountability being an important constituent of democracies of almost all types.

In the US, with the number of vested interests controlling government through donation and the other appurtenances of K Street, I'd suggest no easy clear-cut answer. But it is the case that though you can change government every four years, you can't change the nature of the market without legislation and a political mandate.

[johnny9fingers.livejournal.com]

If you substitute 'Pareto superior' for 'more Pareto efficient' I'd be less embarrassed.