I'm Not for Markets, Per Se
Matt Yglesias isn't a fan of per se rules, apparently. I've been meaning to write a post about per se rules and my general distaste for them, but for this post I'll focus on something that David Boaz writes (and Matt excerpts):
I may want Amtrak to run fast trains between Washington and New York, or I may want to keep my own factory in business. But if I remember that the free-market economy produces the best results for all of us, then I will accept the outcomes of the market process.
[me again] So I'm sympathetic to the point that lots of conservatives/libertarians are hypocrites. This point was well made in Catch-22 in the description of Major Major Major Major's father. Certainly some exceptions are inherently suspect, because they're so clearly motivated by self-interest.
The relevant question, though, is whether it makes sense to truncate our analysis at the "free markets are best" stage. After all, if Boaz is right, we could/should ignore all proposed exceptions and save a lot of time. The problem is that no such presumption is warranted, and we need look no further than his Amtrak example for a good illustration.
Railroads are a classic example of a "network industry." The short version of the story is that in some industries, the fixed costs are high and the marginal costs are low. As a result, the lowest-cost way to produce a given amount of the good in question is with one producer (this is called a "natural monopoly"). However, we face deadweight loss when a monopolist controls production of a good (this is the standard justification for antitrust law). It gets worse: nothing about "natural monopoly" implies that only one firm will enter the market. In a free market, we face the possibility of "ruinous competition" in which we get super-optimal investment or, anticipating the inability to recover fixed costs, we get suboptimal investment or no investment at all.
Network industries, which are a subset of natural monopolies, tend to have the problematic features sketched above. This does not suggest that regulation, much less centralized decision-making, is always the solution. In fact, it's just such a per se rule that I find so annoying. The point is that the per se rule doesn't work in the other direction, either. Network industries are a legitimate and glaring exception to the rule that free markets do a good job of allocating resources.
Now perhaps a real libertarian doesn't care about resource allocation. Government regulation is creeping socialism and is totally unjustified even if it increases aggregate wealth. For libertarians who care about efficiency, though, a "free market is best" presumption is unwarranted. Certainly it's misleading to frame libertarian arguments in terms of economic efficiency and then turn around and say things like "the free-market economy produces the best results for all of us." If only it were so.
[UPDATE: Brad DeLong piles on]
I may want Amtrak to run fast trains between Washington and New York, or I may want to keep my own factory in business. But if I remember that the free-market economy produces the best results for all of us, then I will accept the outcomes of the market process.
[me again] So I'm sympathetic to the point that lots of conservatives/libertarians are hypocrites. This point was well made in Catch-22 in the description of Major Major Major Major's father. Certainly some exceptions are inherently suspect, because they're so clearly motivated by self-interest.
The relevant question, though, is whether it makes sense to truncate our analysis at the "free markets are best" stage. After all, if Boaz is right, we could/should ignore all proposed exceptions and save a lot of time. The problem is that no such presumption is warranted, and we need look no further than his Amtrak example for a good illustration.
Railroads are a classic example of a "network industry." The short version of the story is that in some industries, the fixed costs are high and the marginal costs are low. As a result, the lowest-cost way to produce a given amount of the good in question is with one producer (this is called a "natural monopoly"). However, we face deadweight loss when a monopolist controls production of a good (this is the standard justification for antitrust law). It gets worse: nothing about "natural monopoly" implies that only one firm will enter the market. In a free market, we face the possibility of "ruinous competition" in which we get super-optimal investment or, anticipating the inability to recover fixed costs, we get suboptimal investment or no investment at all.
Network industries, which are a subset of natural monopolies, tend to have the problematic features sketched above. This does not suggest that regulation, much less centralized decision-making, is always the solution. In fact, it's just such a per se rule that I find so annoying. The point is that the per se rule doesn't work in the other direction, either. Network industries are a legitimate and glaring exception to the rule that free markets do a good job of allocating resources.
Now perhaps a real libertarian doesn't care about resource allocation. Government regulation is creeping socialism and is totally unjustified even if it increases aggregate wealth. For libertarians who care about efficiency, though, a "free market is best" presumption is unwarranted. Certainly it's misleading to frame libertarian arguments in terms of economic efficiency and then turn around and say things like "the free-market economy produces the best results for all of us." If only it were so.
[UPDATE: Brad DeLong piles on]
posted by James | 9:37 AM
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