I think that’s my point. There is always the criminal mind that finds ways to exploit the theory for their personal gain. Therefore, you have to construct limitations and penalties to prevent that occurrence. You can’t just stick to your base theory. That’s where regulation comes in.
Civilized society is not “law of the jungle”. We need rules, regulation and law enforcement to protect those that don’t have the resources to protect themselves. If that is not what you want then have at it. There is always someone who is smarter, stronger, faster, better looking, well resourced and able to pound you into submission. Do you want a world of one Top Dog or a more egalitarian society that makes life a positive experience for a variety of people with an innumerable amount of talents?
I feel like we’re confusing laws with regulations. Or maybe I’m the one who is confused.
A ‘law’ to me is something that protects my rights. Someone cannot point a gun at my head and take my wallet under threat of force. Someone cannot sign a contract that says they will deliver X if I pay them Y, and then not be subject to prosecution in a court of law for fraud if they do not deliver X when I pay them Y.
‘Regulation’ (to me, anyway) is a restriction that prevents a voluntary transaction from otherwise taking place between two consenting parties. I would like to lend money to Sam next door at an annual rate of 100%. Sam is willing to borrow from me and pay an annual rate of 100%. However, a usury law is passed in my state that says interest rates are capped at 40%. Therefore, I do not lend to Sam, and Sam does not borrow from me. And I would argue there is an overall loss to the economy as a result.
And yes, I suppose that it is now illegal to act in contravention of that regulation. So I guess it is the same as a law.
But the two words mean two very different things to me. Am I the only one here?
There was certainly not “truly no regulation”. The Federal Reserve system had already been well established, and the government at the time of the Great Depression actually made it worse with stupid protectionist policies that caused prices to actually rise. And the New Deal was not effective; WWII and the market’s natural tendency to recover pulled the U.S. out, not any policies of the New Deal.
And FTR, I still oppose the current bailout, even though it’s already too late.
Different people will define “free” differently, but, generally, you can say that a free market is one where price operates independently of anyone in the market (no one has enough market power to dictate price). Things that can guarantee this are perfect competition, perfect substitutes, perfect information, low barriers to exit and entry; and other things that don’t or can’t exist in reality. To the extent that they don’t, the government can do things to help make the market more free. For instance, it can help enforce contracts; it can decide boundries on contracts (is a market only “free” if there are contract killings?); it can impose taxes to account for externalities from missing markets (pollution; the missing market is “air” i.e. no one owns it); it can bust up monopolies; and so on. To the extent that they can’t, well, of course nothing is going to help us there.
This is a moral question. It might be, as a matter of empirical fact, that disallowing it helps more people than it hurts, in some kind of total welfare sense. If so, it’s a wise move, economically.
Not necessarily. I am free to travel, even though there are laws regulating travel (e.g., driving on a certain side of the road). The small cost to me in terms of avoiding driving on the other side of the road is far outweighed by the benefit to me of ease of travel. Well, ok, I live near Boston, so I must qualify, “…in theory…” But seriously, regulating a market is not necessarily the same thing as saying a market is not free. Even the government “interfering” in price mechanisms doesn’t necessarily constitute an unfree market because certain conditions must be met for efficient pricing to obtain and those might not (practically, don’t) exist. For example, insurance is a quintessentially imperfect market from the perspective of individuals. It is hard to price insurance for individuals because the agent has extremely limited information regarding the individual’s behavior which, if the agent had it, would enable the agent to price accordingly as the risks would be known. In a sense, then, insurance markets can only exist imperfectly because of this. To some extent, the government can help this (make DMV records available, for example, or enforce penalties for lying about behavior to the agent). So, if it takes government regulation to make a better approximation to a perfect market for insurance, is this more or less “free”?
It would strongly depend on what sort of economic theory you adhere to, as there’s plenty different schools of thought, so my statement is a bit misleading; there isn’t a definition, there are rather several, and several criteria for determining what constitutes “better.” To the extent that people prove things about markets, they lay down technical criteria. For a taste of the kind of assumptions made, take a look at wiki’s page on perfect competition or welfare econonics.
Usually they discuss things like perfect information (everyone knows everything) for mathematical reasons, though of course models exist where people have imperfect information (game theory can be used to model this behavior). I’ve never seen a definition of efficient pricing that didn’t implicitly rule out coercion, but “fraud” is a loose term. For instance, I might fraudulently represent myself to my insurance agent, but that doesn’t mean there’s no way to price insurance at all, it just means that everyone’s rates are a little higher to compensate.
I gave an example above, nobody owns air, so pollution cannot be accurately priced. As for the pair thing, Steven Landsburg gave an interesting example. “…[T]he governor of Colorado… recently spoke amusingly about leaf blowers. He told of going for a walk on an autumn day and watching each Denver homeowner blow leaves into the next homeowner’s yard. He concluded that the problem consists of too many markets – we’d all be better off if nobody bought a leaf blower… The governor was onto something, though: two missing markets can be better than one… [G]iven the fact that there is no market for yards-as-trash-cans [erl: missing market], it can be better to eliminate the market for leaf blowers as well.” [From “The Armchair Economist,” emphasis original] Leaf-blowers of course have legitimate uses besides exploiting your neighbor’s property, so take this as a simplified example of the idea.
That is half of it. The other half of externalities are positive externalities, where the benefits are not directly reaped by the parties involved. Negative externalities mean a good is overproduced (because the costs aren’t accounted for directly) while positive externalities are underproduced (because the benefits aren’t directly realized). Wiki has a great example of a positive externality: beekeeping. How does the beekeeper and the customer seeking honey accurately reflect the benefits of pollinization given to nearby farmers or etc? Maybe we should make more honey!
What I mean by the last part is an elaboration of the answer to your first question. The benefits of a free market are a mathematical fact to the extent that we have made mathematical models of free (and unfree) economic behavior. The promise of the free market is guaranteed in the mathematical models; as we strive for that, we reap the benefits.
One thing I’ve never seen pure free marketers answer adequately is how the free market can deal with prisoner’s dilemma style situations. The cause of our current financial crisis stems can be fundamentally reduced down to a prisoner’s dilemma. Each party rationally did what would maximise their financial gains but which the end result was massive financial losses.
Incidentally, I am a layman. Please don’t take what I say as gospel but look into it yourself and judge my characterizations for yourself. But I am also someone who, in fact, changed their tune. Old-timers may remember it happening on this very board before their eyes. The rest will just have to take my word for it. Hopefully all my more embarassing posts are lost in the sands of time…
I still strongly believe in the free market. But now I just have a different definition of “free.”
Many financial experts are asking about what went wrong with regulators. The Financial gurus developed complex instruments to avoid regulation. They managed to hide the amount of money wrapped up in swaps and mortgage papers . Transparency was fought and lobbied against successfully. Even at this point we do not know how much bad paper is actually held by the financial institutions. How can you fix it ,if you can not even define it. Regulation is always behind the curve. New banking scams are thought of endlessly and regulators have to become educated in them before they can even determine jurisdiction, let alone how to fix them.
Free market advocates could not even see the sophistry of their philosophy. But many CNN gurus are begging for regulation now. But dopers do not give up so easy.
The market will close below 8000 today. That will scare them into asking for the feds to fix everything. The caveat is that if it gets fixed .they want to continue like it was before. OK, you fixed it now get out of the way.
I’m not sure what you mean here. Do you think there should be some sort of limit on aggressive investment? Do you think I should be forced to put more of my 401(k) into bonds? I had a friend in college who spent his summers playing Black Jack in Tahoe with investor (i.e. other people’s) money. That risk may be unacceptable to some, but to his investors it was. If the investor can’t determine the level of risk, who should?
There already is. You can’t buy stocks on margins, which is one of the things that escalated the 1929 crash into a depression. That doesn’t apply to banks, it seems, and the leveraged position of the banks is one of the things making the current situation worse.
Was your teacher Alan Greenspan? Because in an article in the Times yesterday about his fading reputation, it said that he still doesn’t consider the cause of the current problem to be deregulation, but rather Wall Street people acting dishonorably. He won’t talk now, but this is in his book, and his spokespeople direct reporters to his book for his take on things.
I read alot of free market economists and none of them deny the possibilty of bad outcomes from free markets, they would just deny that the outcomes from government interventions would be any better. Regulatory capture is the most likely outcome of increased regulations because of the incentives involved. Warren Buffets gives an example:
It is the regulators job to take away the punch bowl just as the party is starting to get good. However the regulators owe their jobs to the good graces of the party guests.
Wow, you just completely defeated the entire science of economics with that one liner.
Prrhaps you didn’t say anything worth answering. Hollywood-style one-liners aren’t really answerable.
One thing I think I can say with a tremendous degree of confidence is that whatever the solution to this problem is, it’s not something that the government can whip up in a week and pay off in a month. Regrettably, they seem politically driven to pretend they can do exactly that.
Can bad things happen with deregulation? Absolutely. But regulation has its costs as well - too much can choke off economic activity or drive it underground. Even leaving extreme examples like Communist countries aside - Great Britain in the 1970s was an economic basket case, and Ireland’s biggest export seemed to be people until it reformed its own economy a few years back.
I can as easily ask whether advocates of regulation have changed their tune given these examples - but that would be a question as broad and unanswerable as the OPs, so I won’t do so. What we ought to ask instead is what regulations are necessary for the operation of an otherwise free market.
I may have an opinion different from others on this board, frankly, but at least we’d move the discussion to a worthwhile area and not keep it at a juvenile level of badmouthing regulation and deregulation. Some of both are needed, some of both were poorly thought out, and it doesn’t take a genius to understand that.
erislover is right. People like to confuse freedom of the market with unregulation and then knock them both. It is a straw man. Freedom in a market means that all parties should be allowed to compete on equal terms so that the positive effects of competition can be produced. It does not mean that there is no regulation but that regulations affect all parties equally and, as F. Hayek says in “The Road to Serfdom”, that
In other words, as long as regulation affects all parties equally and the state is not pushing for certain ends, then we consider there is a free market. When the state passes laws which favor dertain people over certain others or push certain ends then prices stop reflecting all information and competition cannot produce the best results.
For example, when the government passes laws granting privileges in pricing to certain groups, (old people, farmers, students, etc) then the market is distorted and is no longer said to be “free”. Also when the government passes laws which favor certain ends (like cement or oil be cheaper for certain uses) then, again, the free exercise of competition cannot happen nor produce the desired results.
Regulation does not in any way contradict freedom of the market in that sense. Making all food list the ingredients and things like that are in no way contrary to a free market but some people love to create that misunderstanding so they can then attack the “free market”. In some cases it is ignorant stupidity and in many cases it is plain malice.
Also, no one, not even Hayek, has ever said that this is absolute:
The whole post makes no sense whatsoever. Who said “let the market set the rules”? That is just nonsense. You are painting a made up distortion. The one in denial here is you.
It seems to me that the real problem with the markets is that there needs to be more transparency. And therein lies the rub. If everything were completely transparent, you’d have very little money to be made as the value of a company would be as objectively based as possible. However the more obscured and hidden these things become (like those ridiculous financial instruments) the easier it is to make money. The way you make money in the market is by buying a stock before it goes up. Now why would you do that? You buy things because you have reason to believe they are going to go up. Really in the end it’s a war of information. The more you know about things the better prepared you are to act on it. Whoever has the best information is in the best position to make money off of it.
I don’t know if we should necessarily have government in the mix telling banks what they can and cannot do. But how in the fuck is the market supposed to regulate itself when they’ve gotten into a position where nobody actually knows what the hell anything is even worth anymore? If the government can somehow impose transparency and somehow ban these redirection tactics that make such information less clear then I’d say we don’t need the regulations.
But this is all the result of decreased market transparency. I think that’s what we need to focus on in this country more than anything now. We need more transparency EVERYWHERE. The “oligarcy” has run away with greed and power and really fucked us all over. We need to keep tabs on their asses to make sure this shit doesn’t happen again. I just think we need to make everyone keep their books open. That way we won’t have these problems in the future.
But seriously, regulating a market is not necessarily the same thing as saying a market is not free. Even the government “interfering” in price mechanisms doesn’t necessarily constitute an unfree market because certain conditions must be met for efficient pricing to obtain and those might not (practically, don’t) exist. For example, insurance is a quintessentially imperfect market from the perspective of individuals. It is hard to price insurance for individuals because the agent has extremely limited information regarding the individual’s behavior which, if the agent had it, would enable the agent to price accordingly as the risks would be known. In a sense, then, insurance markets can only exist imperfectly because of this. To some extent, the government can help this (make DMV records available, for example, or enforce penalties for lying about behavior to the agent). So, if it takes government regulation to make a better approximation to a perfect market for insurance, is this more or less “free”?