David R. Henderson  

Seven Myths about Free Markets

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That's the title of a talk I gave to Stephen Hicks's philosophy class at Rockford College on Thursday morning and to economics students of Josh Hall and other economics professors at Beloit College on Thursday afternoon. After my talk at Rockford, Stephen Hicks did an 11-minute interview in which we managed to hit all 7 myths.

By the way, I lead with a "bonus" myth, not about free markets per se, but about why economics was called the "dismal science." I'm willing to bet that under 5% of economists know the origin of the term and that under 20% of economists who are in the field of history of economic thought know the term's origin.


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CATEGORIES: Economic Education



COMMENTS (13 to date)
Steve writes:

I was unaware that it was a free market response that reduced water pollution, acid rain and the highway litter that we had in the 60s and 70s. having lived through those years, I thought there were laws passed that played a part in cleaning things up, which ignores how we got to that point to begin with.

Steve

Tim Worstall writes:

"but about why economics was called the "dismal science."

In short, because it shows that racism doesn't pay and Thomas Carlyle thought this was a very dismal result.

David R. Henderson writes:

@Steve,
Those examples you give are all examples of the tragedy of the commons. So they're like the Soviet example with no private ownership or the African elephant example with no private ownership.

Editor writes:

Hicks's = Hicks'

Rockford College on Thursday morning and to economics students of Josh Hall and other economics professors at Beloit College = Rockford College on Thursday morning, to economics students of Josh Hall and to other economics professors at Beloit College

Under 5% = Less than five percent.

Under 20% = Less than 20 percent.

david writes:

How's this: people have differing preferences, and rich people often have systematically different preferences from poor people. Privatizing ownership of a commons would thus reflect the preferences of the wealthy - who would be able to purchase more shares of said commons - much more than preferences of the poor. There is no obvious reason why this would be ethically preferable.

The initial distribution of endowments matters a lot in standard neoclassical econ. Take acid rain - if producers had to purchase acid rain permissions from all the individuals on whom raid would fall, they would not be able to obtain universal permission and no acid rain permission would result (it is, after all, impossible to avoid raining on the select few resistant individuals who would refuse acid rain at any reasonable price). So the most obvious property-rights assignment over the nature of rain - namely, onto the people rained on - does not work. All externality markets function by coercing people into accepting compensation for something they might have preferred not to sell to begin with.

david writes:

(which, I should add, does not render the concept of externality trading invalid. It does mean that Prof. Henderson's casual confidence about the powers of private ownership is perhaps excessive)

Jacob AG writes:

I have been perusing Google Books for a little while, looking for references in the decade after 1849 to Malthus, Carlyle, and the dismal science.

I'm finding some uses of the term "dismal science" which clearly refer to Malthus' "growth is dismal" story, and some uses that clearly refer to Carlyle's "abolition is dismal" story.

Apparently either Carlyle was misunderstood almost immediately, or he used the term differently in private conversation from how he originally used it in print. Or maybe both.

D writes:

I highly recommend Stephen Hicks's book Explaining Postmodernism!

Didn't pollution started declining before the EPA?

Tracy W writes:

Privatizing ownership of a commons would thus reflect the preferences of the wealthy - who would be able to purchase more shares of said commons - much more than preferences of the poor. There is no obvious reason why this would be ethically preferable.

Um, you miss that the problem is that under a system of open access, resources get over-used, which is in no one's interest. Take for example open-access fisheries. If the cost of getting the fish is low relative to what the fish can be sold for, then under open-access arrangements the fishery will be over-fished, and the fish can even go extinct. The over-fishing means that people invest capital and labour in endeavours to get to the fish first, before some other fishing vessel grabs them. This is bad both for the capitalists who lose out in the arms race in that they spend money on the fishing vessel that gets there second, and for the workers, who wind up risking life and limb doing things like going out in bad weather.

Then if the fishery collapses, the capital and labour invested is lost, and people also get less fish to eat. This has happened, eg the cod fishery in Newfoundland, Canada.

These bad results can happen even if the preferences of everyone, rich and poor alike, are for the fishery to stay open producing an ongoing stream of fishing. (Of course, if there are some piscogynists out there, they probably regard fish extinction as a happy outcome, but that's an uncommon preference).

Economists favour privatising property where possible because the goal is to improve efficiency for everyone.

MikeP writes:

why economics was called the "dismal science."

John Hodgman knows the answer...

They don't call economics the dismal science because it's fair.

They call it that after Sir Eustice Dismal, the 18th century English economist who proposed making smokestacks out of children.

It was a very interesting proposal but ultimately flawed. I mean if you make the smokestacks out of children who will you force to clean them?

It's referred to as Dismal's paradox.

david writes:

@Tracy W

Yes. You may notice that limiting overuse is also possible via other means, like cap-and-trade or taxing use, or blunt application of regulatory prohibition against certain uses. Some of these solutions are better than others at avoiding the distributional issues I mentioned, on which your analysis is silent.

Tracy W writes:

David - I am rather surprised that you say that I didn't mention distributional issues. I thought I did, extensively (for a blog comment). I pointed out all the ways in which open-access fishery harms capital, labour and consumers. I also mentioned that some people might regard fishery collapsing as a good thing, but that this was uncommon (I've never come across anyone who argued that all fish should go extinct, but I mentioned it as a possibility anyway for completeness).

As for your other suggestions:
Cap-and-trade - this is privatisation - create a property right and let people trade it.
Taxing use - how is this better at avoiding distributional issues? And of course, if the taxes are partially avoidable, people will spend some effort avoiding the tax, which wastes resources.

Regulatory prohibitions - I was at first surprised that you thought this was a better way of avoiding distributional issues, because regulations tend to favour the rich and large companies that can afford to devote overhead to complying with regulations, and tend to be better politically-connected, while from your earlier comment you appear to be worried about privatisation over-reflecting the preferences of the rich. But on re-reading, I see that you didn't claim that all of the issues you mentioned address distributional issues, I'm guessing you were just trying to sneak this one in under the radar. Of course, if there's a way that regulatory prohibitions does do a better job at avoiding the distributional issues you raise, please tell me. (And remember we're talking about real-world political systems here, where governments sometimes do thinkgs that are not in the national good).

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