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.
“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 coordinating 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. … “