Arnold Kling  

Defending Imperfect Markets

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Sean Gabb explains how Austrian economics differs from Anglo-American economics.

the standard economics textbooks provide an utterly unrealistic defense of the market. They begin with the claim that markets are efficient, and then define efficiency as it does not and cannot exist. A perfectly efficient market, they agree, is one in which there are many buyers and sellers, in which there are no barriers to entry or exit, in which all products are of the same quality, and in which all players know everything about prices, costs and production methods...
[Austrian economists] see the economic value of markets as a discovery process, in which particles of knowledge dispersed among billions of individuals - knowledge about wants and costs and techniques, knowledge that would otherwise remain dispersed - are brought together into a rational structure of opportunities for exchange. Markets allow people to blunder around, or make intelligent guesses, and every so often to light on some previously unimagined way of making the world a better place.

Now, real market outcomes will not necessarily look anything like a perfectly competitive equilibrium. There may be a single supplier in a market, which may earn very high profits in the short and long term. Or there may be general collusion among suppliers to fix prices. But, so long as there is no use of government force to close the market - as is the case with the British Post Office - this must be taken as an efficient outcome for the time that it endures.

More on Austrian economics can be found in this article from the Concise Encyclopedia of Economics.

For Discussion. Based on Gabb's description, the Austrian school almost surely would leave Microsoft alone. Do you think that this view is correct?

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CATEGORIES: Austrian Economics

COMMENTS (4 to date)
Scott writes:

I have both run data centers and developed and implemented software on multiple operating systems. Having only one operating system to deal with is a whole lot more efficient and economical. In that respect, Microsoft may have a natural monopoly in operating systems.

However, they have clearly engaged in non-competitive activities in other areas. For that, they should have been and were prosecuted. I don’t think the Austrian school would have let them get away with it either.

David Thomson writes:

I am hesitant for the government taking Microsoft to task for purely pragmatic reasons. The process is too slow in an economic milieu where change is unrelenting and dynamic. Also, lawyers are not required to address every problem afflicting American society. Why not shame Bill Gates and his cronies for their despicable predatory and immoral behavior?

Scott writes:

Because they have no shame.

Scott W writes:

I speak only for myself, of course, but as someone who devoted most of the late 80’s to studying economics in the NYU Austrian program before going off to do something else with my life.

One question from me: Are you asking whether the Austrian school would advocate leaving Microsoft alone, or whether Microsoft should be left alone? (Or, for that matter, whether most Austrian economists would advocate leaving Microsoft alone, even though Austrian economics is ambiguous on the matter? The answer to this is, I think, almost assuredly yes.)

Anyway, I don’t think any of my erstwhile colleagues in the NYU Austrian program would consider Austrian economics as categorically rejecting anti-trust legislation. The problem is that by misconceiving the fundamental economic problem as “how to get to the perfectly competitive equilibrium” point instead of “how to discover what the perfectly competitive equilibrium point is,” most anti-trust enthusiasts over-estimate the potential for government action to improve matters. But that doesn’t logically mean that constructive government action is impossible.

I doubt that many Austrian economists would fight too hard against forbidding naked price fixing contracts between entities in industries with large fixed to variable cost ratios, unless it was part of an argument based on in inability of the anti-trust litigators to constrain themselves to that arena.

Personally, when I look at the Microsoft situation I don’t see anything that the government can do that is likely to improve matters. I see a lot that it can do, and even has done, that does active harm (most notably, making the definition of the components of an operating system a regulatory matter rather than a market matter). I also see a bunch of economic fallacies in Judge Jackson’s decision, such as treating the low Linux market share as evidence that it isn’t a Windows competitor, rather than that, at that moment, Windows did a much better job than Linux at satisfying consumer desires.

I definitely arrive at that conclusion with an Austrian mindset.

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