Remembering Milton Friedman
A few days ago Milton Friedman passed away. He was one of the great thinkers in modern Economics. I studied Economics for several years. I majored in Mathematical Economics at Rice University, and spent three years at Stanford's Graduate School of Business studying quite a bit more in the field.
Friedman was fantastic. He is perhaps better known in the world outside the field because he made an effort to communicate to the outside world, and because he was good at that. His 30+ year attack on the drug war earned him a special place in my heart.
My personal favorite in Economics is Kenneth Arrow. Arrow also won the Nobel. For me his best work includes General Equilibrium Theory (sometimes referred to as the Arrow-Debreu model), and especially the Impossibility Theorem, which is one of the great examples of an economist taking the tools of the field and moving them into other fields, in this case Political Science.
While I am extremely fond of Arrow's work, I am less fond of his views on economic policy. I don't think he really translates the field into the real world as well as Friedman did. Fortunately he's usually quiet on this area.
A couple of my other favorite works in the field include George Akerlof's Market for Lemons paper and Michael Spence's paper on Job Market Signalling. These are brilliant stabs at the problem of asymmetric information.
Libertarians tend to oppose any government intervention. I'm sympathetic to this, but those who truly understand Economics understand the concept of market failure. While I love markets and believe they are generally the best approach, they have certain vulnerabilities. Market failures are the rare good reason for supporting government intervention.
Asymmetric information is one of the biggest causes of market failure. Akerlof's paper describes a simplified version of the used car market, showing how the sellers' better knowledge of the car can completely destroy the market. Spence showed how employers and job seekers can use schools to signal information about the quality of the job applicant, something where the applicant knows more about themselves than the employer can know. The Principal-Agent model of organizations is also insightful. The most substantial problems involving asymmetric information involve insurance, known as adverse selection and moral hazard.
Other notable causes of market failure include monopoly and other situations of market power, and externalities such as pollution.
All of these situations, where the resulting market failure is significant, can lead reasonable people to support some government regulation. Getting to the theme of this blog, liberals will use overly simplistic versions of these problems to support massive government interventions. Some conservatives ignore the problems, while others use them to support their own forms of government intervention, usually involving some kind of manufactured but non-existent social problem.
Friedman was fantastic. He is perhaps better known in the world outside the field because he made an effort to communicate to the outside world, and because he was good at that. His 30+ year attack on the drug war earned him a special place in my heart.
My personal favorite in Economics is Kenneth Arrow. Arrow also won the Nobel. For me his best work includes General Equilibrium Theory (sometimes referred to as the Arrow-Debreu model), and especially the Impossibility Theorem, which is one of the great examples of an economist taking the tools of the field and moving them into other fields, in this case Political Science.
While I am extremely fond of Arrow's work, I am less fond of his views on economic policy. I don't think he really translates the field into the real world as well as Friedman did. Fortunately he's usually quiet on this area.
A couple of my other favorite works in the field include George Akerlof's Market for Lemons paper and Michael Spence's paper on Job Market Signalling. These are brilliant stabs at the problem of asymmetric information.
Libertarians tend to oppose any government intervention. I'm sympathetic to this, but those who truly understand Economics understand the concept of market failure. While I love markets and believe they are generally the best approach, they have certain vulnerabilities. Market failures are the rare good reason for supporting government intervention.
Asymmetric information is one of the biggest causes of market failure. Akerlof's paper describes a simplified version of the used car market, showing how the sellers' better knowledge of the car can completely destroy the market. Spence showed how employers and job seekers can use schools to signal information about the quality of the job applicant, something where the applicant knows more about themselves than the employer can know. The Principal-Agent model of organizations is also insightful. The most substantial problems involving asymmetric information involve insurance, known as adverse selection and moral hazard.
Other notable causes of market failure include monopoly and other situations of market power, and externalities such as pollution.
All of these situations, where the resulting market failure is significant, can lead reasonable people to support some government regulation. Getting to the theme of this blog, liberals will use overly simplistic versions of these problems to support massive government interventions. Some conservatives ignore the problems, while others use them to support their own forms of government intervention, usually involving some kind of manufactured but non-existent social problem.
posted by Albany Lawyer at 9:00 AM
3 Comments:
I've never seen an example of a monopoly in the free market. But in NYS, they usually end with the word "Authority"
I agree with Ray that government controlled monopolies are too common, but there have been problems in the past with non-governmental monopolies. Phone companies and railroads in the past are examples I can think of off the cuff, but there are probably others. Microsoft is a fairly recent example.
The real question is whether the monopoly problem warrants government intervention. The case for intervention was better 50 years ago with the phone company than with Microsoft. The phone company had a physical monopoly. There were really no significant alternatives. By contrast, consumers could easily buy an Apple Computer, and there have been other choices at various points in time. Currently Linux is a significant alternative.
Today's phone companies don't really have a monopoly since there are now numerous alternatives, including cell phones and VOIP providers such as Skype and most cable companies. Similarly, the cable companies haven't been monopolies for a while with the availability of satellite TV including DirecTV and Dish Networks.
In many cases these monopolies came about with the cooperation of governments at various levels. Cable companies often got monopolies established through local governments.
I confess I don't know enough about history at the time of the Sherman Act to know the extent of the market failures caused by monopolies. But I do feel strongly that today's economy is so diverse that monopoly generally should not warrant any intervention. It's difficult to think of any product or service where there are no reasonable alternatives. While the theoretical world of economists might still find justification for intervention, the real world of politics shows that the costs of intervention will surely exceed the benefits.
Ma Bell could have never been a monopoly if it wasn't sanctioned by law, as in regulation.
So Ma Bell was in no way a product of the free market capitalism.
There was never a Railroad monopoly, except those created with the assistance of the paternal hand of government. The Transcontinental Railroads were government sanctioned monopolies, subsidized massively with taxpayer dollars. Would you believe they were rife with corruption, fraud and waste? They went bankrupt a number of times.
The real history of the 19th Century leading up to the Sherman Act is fascinating, the truth of it you will never likely learn in government school. If they did tell the truth, it would make the government look bad and those political sacred cows, the “trust busters” look like the typical crooked politicians that they were.
I’d recommend reading Tom DiLorenzo’s book “How Capitalism Saved America” as a starter. You can read an except of the book here…
http://www.mises.org/story/2317#_ftn25
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