Arnold Kling  

Market-Failure Theory vs. Soviet Theory

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The Soviet Experiment, Continu... Recalculation Story Watch...

I have just started reading Alan Brinkley's The End of Reform, about the evolution of liberalism during the New Deal. Very strongly recommended. It does what Jonah Goldberg claims that the Left refuses to do, which is make a serious examination of the history of liberal ideology. Although Jonah does not cite this book in Liberal Fascism, I think it supports a lot of Jonah's arguments, even though its basic perspective is sympathetic to FDR liberalism.

This material also pertains to a discussion that we have been having about the Soviet experiment. Many commenters want a more precise definition of market failure. Instead, I want to turn the question around and ask for an example of market success.

That is, try to name an industry in which there is no economic argument for regulation or subsidies. Food? imperfect consumer information. Health care? same thing, plus insurance market breaks down due to adverse selection. Education? Positive externalities. Manufacturing? Pollution. And so on.

Marxism is the theory that there is a generic, all-encompassing market failure that pervades capitalism. Class exploitation, waste of resources in competition and advertising, and other ills.

Market-failure theory eschews the generic, all-encompassing market failure story. Instead, it says that every industry is dysfunctional in its own way. But every industry is dysfunctional. And in every case, experts wielding the power of the state are presumed to make things better.

I think that market-failure theorists would claim to have a better understanding of markets than Lenin had. My concern is that their misunderstanding of markets in fact is as bad as Lenin's. But that will require a longer argument in a separate post.

For now, I want to get back to Brinkley, but below the fold.

The End of Reform was published in 1995, and Alan Brinkley was intending to write something that was meaningful in the context of an era where liberalism was generally on the defensive. However, much of it also feels very relevant today. For example, on p.17, he tries to explain how Roosevelt's landslide election in 1936 failed to translate into extensive new reforms.


In the weeks after the 1937 inaugural, members of the administration launched a series of initiatives...what they believed to be their popular mandate. Their efforts encountered unexpectedly intense opposition. Support for Franklin Roosevelt was not the same...as support for a liberal vision of a powerful state. By choosing to believe otherwise, the administration had propelled itself into a crisis.


Maybe Barack Obama is the next FDR.

On p.34, we find a passage on the way some FDR advisers thought about competition that is not too far removed from G. Liberty Nell's description of Soviet theory.


To them, the greater challenge was protecting the business world from excessive competition...the conflict and instability of a chaotic marketplace: destructive rivalries within industries, destabilizing clashes between capital and labor, disastrous swings in the business cycle..."We are resolved to recognize openly," Rexford G. Tugwell, a member of Roosevelt's original "brains trust" wrote in 1933, "that competition in most of its forms is wasteful and costly...Unrestricted individual competition is the death, not the life of trade."

Much of p. 31-64 concerns the differences between the views of two groups of advisers. One group I call "harmonizers" and the other group I call "regulators" (Tugwell was a harmonizer). Both groups favored government intervention, but not in the same way.

HarmonizersRegulators
Tugwell, Moley, Hugh Johnson...not against big business...think small enterprise is outmoded...think that the need is to reduce conflict and competition...National Recovery Administration...government needs to help plan business, impose order on market chaos...somewhat utopian...with the right plan, the economy can become a harmonious wholeTommy Corcoran, Ben Cohen, Harold Ickes...hated big business...need strong stick of regulation...SEC, FCC, NLRB, etc...regulators must be experts, insulated from Congress...do not expect conflict and problems to disappear, so will always need expert regulators

FDR started out with both groups in his "team of rivals" (to borrow an expression from a more recent book). The conflicts between the groups could be papered over, because they all agreed that capitalism was broken and government needed to fix it.

During Roosevelt's first term, the Harmonizers were in ascendance. However, they fell out of favor in the second term. Brinkley attributes this to the widespread perception that the NRA was a failure and to the panic that took hold inside the Administration when the economy had a severe recession in 1937-38. When the Regulators proposed the theory that evil business leaders had gone on a "capital strike," Roosevelt took comfort in this explanation for the downturn, which strengthened the hand of the Regulators.

Another factor that helped the Regulators was the fact that the focus of economic policy was shifting from the problem of production to the problem of consumption. The problem of production was to produce more. But people noticed that what America lacked during the Depression was not productive capacity. The problem of consumption was to ensure enough demand for output and to give consumers enough means (income distribution) and assistance (education, regulation) to spend wisely. Harmonizers will still solving the production problem, while Regulators were adapting to the consumption problem.

That takes me up to p. 80, which is as far as I have gotten. More later, assuming the book doesn't fizzle out.



COMMENTS (20 to date)
Hyena writes:

Marx doesn't hold a market failure as the central story of capitalism. Marx holds that capitalism is just such an enforced production arrangement as serfdom was. Basically, in Marxist thought, capitalism is Serfdom 2.0, a better way of managing an essentially disenfranchised labor force.

Nor does Marxism speculate that experts would correct inefficiencies of the market, merely that expert guidance is superior to that of the bourgeoisie. If you first recognize that, to Marx, capitalism is Serfdom 2.0, it is easy to see that Marxist thought sees capitalists as Manor Lords 2.0 and the market as a somewhat less important notion.

Your whole line of analysis, and thus all of your comparisons, rests on a critical misunderstanding of the project of communism in the 20th century. The notion that there is some continuum which begins at regulation and ends cruising through the gulag archipelago is propaganda left over from the non-ideological battle within Western market democracies. Communism is deeply opposed to all of this business and draws its intellectual power from Kantian and Hegelian ideas, not the font of market-based thought in the 18th and 19th century Anglo- and Francospheres.

regrehan writes:

Re: That is, try to name an industry in which there is no economic argument for regulation or subsidies.

Personal computers?

liberty writes:

Arnold,

I hope you write a book on the depression at some point--between your analysis of the recalculation and your breakdown of the different thinkers and policies of the era, I think you'd offer a fascinating and engaging story.

Snorri Godhi writes:

I think that comparing Marxism and progressivism in terms of one big market failure vs many small market failures is a useful simplification, even if perhaps an over-simplification.

Hyena:
The notion that there is some continuum which begins at regulation and ends cruising through the gulag archipelago is propaganda left over from the non-ideological battle within Western market democracies.

Actually, I think that the Anglo-American "left" (AAL) have only themselves to blame for this: at the end of ww2, Britain and especially the USA were culturally dominant within the West; the AAL was culturally dominant within Britain and the USA; and the terms "left" and "right" were not in common use in those countries. If the Soviet Union and the AAL ended up on the same side of the "spectrum", it is because the AAL allowed, even encouraged, the "left" label to be attached both to themselves and to Marxism. There was nothing predetermined about this, as can be seen by the many people (including Tocqueville) who thought that the whole of socialism is a "right-wing" phenomenon, and the many people who think that fascism is a "left-wing" phenomenon.

Communism is deeply opposed to all of this business and draws its intellectual power from Kantian and Hegelian ideas, not the font of market-based thought in the 18th and 19th century Anglo- and Francospheres.

Hegel also influenced Woodrow Wilson and British "new liberalism" (not to be confused with neo-liberalism); and French socialism influenced Marx.

Daniel Kuehn writes:

Food? imperfect consumer information. Health care? same thing, plus insurance market breaks down due to adverse selection. Education? Positive externalities. Manufacturing? Pollution. And so on.

I still think this is inadequate. In pollution, the market failure is in the market for carbon. In food and health the failure is in the market for information (plus some other issues for health). None of these are strictly problems with the primary market, none of them require the state to run the market. You can't justify the Soviet Union as a test if the "market failure approach" says "gee it might be optimal to require them to put some informative labels on", and the Soviet approach is "gee, we should make all the food ourselves in subsidized government factories". One has nothing to do with the other, and not only are the interventions in each situation blatantly incomparable - the justification for the interventions bear no resemblance to each other.

fundamentalist writes:

Hyena, It seems to me that Kling is trying to update Marx and translate his ideas into modern terminology. Of course Marx didn't think in terms of market failure. But his argument against capitalism can be translated well into that terminology. In fact, most market failure ideology is inspired by Marx.

Rebecca Burlingame writes:

None of these disciplines seemed to believe in the little guy or small business in general, which for me is what distorts the argument in the present. Moving ahead means putting all those economic elements together and no one was giving that a lot of thought in the early 20th century when everything seemed to be about harnessing technology for the big interests, no matter what they were called. Sure, Marx may have talked about the little guy but that got lost in translation.

Hyena writes:

Snorri,

Marx wasn't influenced by French socialism; he despised the French socialists and reformers of all stripes immensely. He's got a pretty powerful disgust for them emanating from his letters.

Fundamentalist,

I understand what he's trying to do, but I think it is fundamentally misguided and so obscures more than it illuminates. Marxist theory is so out of line with actual economic theory that it's not useful to really compare the two.

Here's an example: when Marx critiques Smith and Ricardo, it's not because he believes there is a problem with their predictions of markets. His critique is that the forces they discuss rely on a capitalist context and so are superficial.

Hyena writes:

Also, Snorri, your politics are showing. Just because calling someone a "Marxist" is a fashionable bit of rhetorical business in the dextrosphere doesn't mean it's accurate or important.

Lots of people on the right are incredibly anti-market, believing in massive distortions of market forces to create their own system of moral economy. But this doesn't make them "Marxist" or the like; it's possible to be pro-business and anti-market, a point lost on far too many.

Ed Dolan writes:

I like to think of a market failure as any situation in which the market does not succeed in facilitating all possible mutually beneficial exchanges. This definition is so broad that we can find failures in all markets, even personal computers. With this definition, market failure is not a matter of yes/no, but a matter of degree.

A symmetrical definition of government failure is a situation in which a government policy increases the value lost through missed mutually beneficial transactions. Also always a matter of degree.

Using these definitions of market failure changes the focus of the discussion of policy. Instead of "Here is a market failure, therefore we need a corrective policy" the burden of proof is put on the proposed corrective policy. Are the losses from the corrective policy greater or less than those in the unregulated market? Plausibly, sometimes they are less. For example [long pause to think of a good example . . . ah, I've got one] I think a policy limiting lead additives in gasoline is good. I don't want my neighbors to have the choice of mucking up my environment in order to save a penny a gallon on leaded gas as they might well do if both were available at the pump.

Stan in Sugar Land writes:

Re markets, I would suggest that in the US the best example of a free, unregulated market is religion. No entry barrier, no government regulations and no capital required to sustain.

Snorri Godhi writes:

Hyena:
Also, Snorri, your politics are showing.

Are they? what are they showing?

Just because calling someone a "Marxist" is a fashionable bit of rhetorical business in the dextrosphere doesn't mean it's accurate or important.

What does that have to do with what I wrote? this is not a rhetorical question: I am honestly confused.

Lots of people on the right are incredibly anti-market

Stop right there: if you read what I wrote without preconceptions, you'll see that I questioned whether the political concept of "right", as used in **modern American** language, makes any sense. In fact, I implicitly denied that it does. (The same applies to the concept of "left" of course).

You might perhaps be saying that I myself belong to "the right" in the American sense, but that means exactly nothing to me, so you'd have to explain yourself more clearly.

Hyena writes:

Snorri,

Specifically, you stated:

I think that comparing Marxism and progressivism in terms of one big market failure vs many small market failures is a useful simplification, even if perhaps an over-simplification.

This despite the fact that there isn't any connection between statist command economy and communism per se. (The UAE, Saudi Arabia and thankfully dwindling swaths of the third world are statist command economies, usually teeming with nepotism, but also virulently opposed to communism.) It's only useful as the rhetorical device I point it out to be and which you seem to be aware of.

Snorri Godhi writes:

Hyena: I was confused by your statement:
H1: Just because calling someone a "Marxist" is a fashionable bit of rhetorical business in the dextrosphere doesn't mean it's accurate or important.

Now you say you were addressing my statement:
SG: I think that comparing Marxism and progressivism in terms of one big market failure vs many small market failures is a useful simplification, even if perhaps an over-simplification.

Sorry, but I am now even more confused: I was not calling anyone a "Marxist" in the statement that you quote. (Nor elsewhere.)
You go on to say:
H2: This despite the fact that there isn't any connection between statist command economy and communism per se.

To which I reply: [a] Taken at face value, what you are saying is that communist countries were not statist command economies (or at least not all communist countries were), but I doubt that is what you had in mind; [b] neither your quote H1 nor my quote SG contain any reference to statism in general, only to Marxism and progressivism specifically, so how is H2 relevant?

My best guess is that you think that I am trying to equate progressivism with Marxism; but in this case I would also be forced to conclude that you have not read my comment from which you quote.

Hyena writes:

Snorri,

Basically, if you recognize that comparison as having no real basis but decide it's "useful" all the same, the logical conclusion is that you're either not clear on what it would mean for something to be analytically useful or by "useful" you mean "is politically expedient/makes my political priors feel nice and comfy".

The fact that you see no need to invoke statist command economies--which generally do justify their role in the markets on some form of market failure theory--makes it all the more clear to me that you have a need rather than a basis for seeing the Marxism-and-market-failure idea as "useful".

I seriously doubt you consider yourself "a wo/man of the left" and so basic confirmation bias would say you'd find this comparison gratifying given the his/rhetorical context in which it occurs.

Snorri Godhi writes:

Hyena: I give up; I just can't understand what you are talking about. You seem to be answering somebody else.
And BTW I don't know if you understand what I am talking about, but this strongly suggests that you don't:
I seriously doubt you consider yourself "a wo/man of the left"

Magnus writes:

The Soviet Union was not experiment - scientists doing experiment do it because they want to see what will happen.

Communists were absolutely certain they posess THE TRUTH. One Soviet propaganda slogan was: Marxism is all-powerful, because it is true.

Something like:

What happens when I mix sulphur, mercury and dog's excrement?

vs.

The Ancient Book says that mixing sulphur, mercury and white dog's excrement gives Universal Elixir, that cures all diseases and brings eternal life. Let's go!

liberty writes:

Magnus,

Out of curiosity - why should it matter whether they were sure it would work or not (or are you just nit-picking about semantics)?

Even if the "experimenter" made that concoction because the Ancient Book told them to, we could still sample the result and determine whether it was in fact the Universal Elixir as described in the Book as if it were an experiment, couldn't we?

Hyena writes:

Magnus,

Except the Great Book is nowhere near as prescriptive. It says merely to create a state where the workers own the means of production and the economy is centrally planned.

According to Marx, this system will be vastly more productive than capitalism but, more importantly, is also a moral imperative. So regardless of its inefficiencies, the Marxist seems stuck with central planning.

Tracy W writes:

Hyena - but we are not stuck with Marxism. Communists might have been absolutely certain, but people who were absolutely certain have changed their minds before.

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