Precise Mathematical Conditions for Perfectly Competitive Markets Inhabited by Perfectly Rational Agents

Some econ­o­mist blogger called Dani Rodrick neatly trans­lates my sus­pi­cions about eco­nomics and econ­o­mists into economist-​​talk. He also manages to explain why some economic theory seems rea­son­able and forth­right while other of it seems impos­sibly ridicu­lous, or at least plau­sible and inter­nally coherent to some alter­nate universe into which graduate students of schools of eco­nomics are whisked during their ori­en­ta­tion weeks, and where they continue to live their intel­lec­tual lives while their physical shades wander still in our world, saying these things which con­se­quently seem so strange to us.

The gut instinct of the members of the first group is to apply a simple supply-​​demand frame­work to the question at hand. In this world, every tax has an economic dead­weight loss, every restric­tion on indi­vidual behavior reduces the size of the economic pie, dis­tri­b­u­tion and effi­ciency can be neatly sep­a­rated, market failures are presumed non-​​existent unless proved oth­er­wise (and to be addressed only by the appro­priate Pigovian tax or subsidy), people are rational and forward-​​looking to the first order of approx­i­ma­tion, demand curves always slope down (and supply curves up), and general-​​equilibrium inter­ac­tions do not overturn partial-​​equilibrium logic.…Those in the second group are inclined to see all kinds of com­pli­ca­tions, which make the textbook answers inap­pro­priate. In their world, the economy is full of market imper­fec­tions (going well beyond envi­ron­mental spillovers), dis­tri­b­u­tion and effi­ciency cannot be neatly sep­a­rated, people do not always behave ratio­nally and they over-​​discount the future, some oth­er­wise unde­sir­able policy inter­ven­tions can generate positive outcomes, and general-​​equilibrium com­pli­ca­tions render partial-​​equilibrium rea­soning suspect.”

There’s a problem here, for me. The bud­dhists council against believing some­thing just because it fits with your existing points of view (or pretty much any other reason actually), and so I’d better watch it with this stuff. The internet will always supply somebody who’s got your back on what you already believe.That expe­ri­ence of having your ‘common sense’ sus­pi­cions ele­gantly reified is a guar­an­teed zinger, and I think it’s where long-​​lasting ide­olo­gies are born. I don’t need any more ide­olo­gies. I’m finding the ones I already carry heavy enough, thank you.

So I’ll thank this Rodrick for being less con­vincing in future, and keep my eye open for some Uncle Milty apol­o­gists who can blithely rebut him, prefer­ably quickly, as I am busy.

Cosma Shalizi, as quoted at Crooked Timber, is clearly not the man for that job:

Now, I am the last person to deny that the invis­ible hand is a very powerful and valuable concept, and I’m cer­tainly not going to deny the fun­da­mental theorems of welfare eco­nomics; Debreu’s Theory of Value is one of my favorite books. Under certain pre­cisely spec­i­fied math­e­mat­ical con­di­tions, per­fectly com­pet­i­tive markets inhab­ited by per­fectly rational agents will allocate scarce resources in ways which cannot be altered without making some people worse off. Whether those con­di­tions are sat­is­fied by any economic system in the real world is an empir­ical question, and the answer is of course No. Given that those theorems do not apply, the effi­ciency of markets is another empir­ical question, or rather a whole series of ques­tions, with answers depending on the market and the tasks they are being asked to perform. There are many sit­u­a­tions where markets are a very valuable and powerful social tech­nology, a useful way of coör­di­nating actions, allo­cating resources, and elic­iting valuable efforts. … There are other sit­u­a­tions where they produce awful, even perverse results, and still others where they’d never begin to get off the ground, like funding basic research or national defense. … ”

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