Alex Tabarrok briefly and effectively describes the problem with assertions that market theory itself shows that interventionism is warranted. This is furthering the discussion about Dani Rodrik’s argument about first best vs. second best economists (which does not mean one is better than the other, but their way of looking at things) which Tyler discusses here and is best summed up by Dani with this statement:
You can tell what kind of an economist someone is by the nature of the response s/he offers when confronted with a policy issue. 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. The First Fundamental Theorem of Welfare Economics is proof that unfettered markets work best. No matter how technical, complex, and full of surprises these economists’ own research might be, their take on the issues of the day are driven by a straightforward, almost knee-jerk logic.
Alex also asks a pretty good related question at the end:
But really what kind of standard is perfect efficiency anyway? The internal combustion engine isn’t even close to being perfectly efficient but my car gets me to work every day, is fun to drive and gives me the freedom of the open road.
Of course some will certainly quip that it also pollutes or other uses of the analogy which are really just clever ways to use the analogy to distract from the main point of using it in the first place. A game I engage in at times, and shouldn’t, but generally dislike.
Lawrence White elaborates in a way that suits my Hayekian leanings. Definitely worth reading in full:
One of his commenters gave an anecdote which made me smile:
I coincidentally sat in a meeting yesterday with a group that is preparing a grant application to fund research into a new technology. They needed an economist to prepare the cost-benefit analysis associated with their new product. They have some idea that they’ll be able to produce their product for around $25, which is more than competing product Y, a product which receives heavy government subsidies and sells for around $20.
To a first-best economist, the solution is clear: get rid of the subsidies on product Y. I believe that to second-best economists and everyone in the room except me, the solution was equally clear. Let’s call our congressman and see if we can get some subsidies too.
It was a frustrating meeting.
