"Laissez-faire" Economics: Fact or Fiction?

[Jinx]

I wonder. I wonder why people in power believe so highly in “laissez-faire” economics, but then…I looked deeper. And, I wondered if “laissez-faire” can even exist? People equate such a term with phrases like “let the market decide”. Many of my staunch GOP friends go as far as to equate it to Social Darwinism. And, that made me think even deeper…

Remaining true to Social Darwinism, and the like, why would a government bail out corporations like Chrysler, or the airline industry? And then, looking deeper, I think about, now as perhaps always, the market DOES NOT behave on its own nature, like physics, but it is OBVIOUSLY controlled by the movers, the shakers, and the spin makers…like Enron, the iceberg of America’s titanic economy.
Does the little investor really stand on a level playing field?

So, can there really be a true “laissez-faire” economy? Or, does it another bad theory that, put into practice, would soon tear itself apart? …And, after asking myself such questions, there can only be ONE conclusion. Even “laissez-faire” is NOT laissez-faire for those who hold the gold make the rules.

I hope those who defend “let the market decide” thinking come out of their myopic, protective shells and start seeing not just the error of their ways, but the damage, too! Did you ever stop to wonder, too…? - Jinx

[Kel_Varnsen_Latex_Division]

Remaining true to Social Darwinism, and the like, why would a government bail out corporations like Chrysler, or the airline industry?

Because there are positive externalities that these corporations create that they can’t necessarily charge for.

So, can there really be a true “laissez-faire” economy? Or, does it another bad theory that, put into practice, would soon tear itself apart? …And, after asking myself such questions, there can only be ONE conclusion. Even “laissez-faire” is NOT laissez-faire for those who hold the gold make the rules.

It kind of depends what you mean by “laissez-faire”. You will still need the government or some body to take control and enforce a rule of law, otherwise you start running into real problem. Just look what happens when capitalism is introduced to places that don’t have a strong rule of law. However, I don’t think you will find many people arguing for this kind of economic system.

I am not sure what the those who hold the gold make the rules comment is supposed to mean. If you mean those with money make rule that only benefit themselves I think you are being myopic. Most people with money are just as likely to be both sides of deals at different time. For example they will be buyers as often as they are sellers. Also, if you look at the UCC defaults they are very protective of the consumer.

I hope those who defend “let the market decide” thinking come out of their myopic, protective shells and start seeing not just the error of their ways, but the damage, too! Did you ever stop to wonder, too…? - Jinx

Look around at the places that have free-markets and those that don’t. Where do you want to live?

Free-markets with limited controls produce the best results for people.
This should be in GD.

[Hyperelastic]

@Kel Varnsen - Latex Division

Because there are positive externalities that these corporations create that they can’t necessarily charge for.

There are also negative externalities for which they cannot be charged, like pollution. Oddly, the free-market boosters seem to talk about the positives but not the negatives. I wonder what accounts for their bias?

[Sam_Stone]

Laissez-Faire works within the boundaries of civil society. That is, if everyone dealt fairly with each other, and the price system was allowed to operate, capital would flow to those who can use it most efficiently, and economic output would be maximized, as measured by its providing what the public has decided it wants with the highest efficiency.

The real world is somewhat more complex than that. The market can and does break down in some limited areas, and minimal regulation is needed. But Laissez-Faire is the ideal, and the role of good regulations should be to create the regulatory climate to allow the market to function as close to the ideal as possible.

The other thing is that markets only provide economic efficiency. They have little to do with what the public perceives as socially just. So there’s going to be conflict between the two. After all, the poor are often poor because they turned out to have poor judgement, physical deficiencies, or other conditions that left them fairly non-productive. From an economic efficiency standpoint, that’s natural. But is it socially just? That’s a political question.

The one problem is that our politicians do not debate the issues on their merits. They will not admit that they are trading social justice for economic efficiency. They won’t say, “We’ll make us all a tiny bit poorer so that we can live in a more just society.” Instead, they engage in class warfare, demagoguery, and promises that are economically goofy as they attempt to have it both ways.

[Maeglin]

They will not admit that they are trading social justice for economic efficiency. They won’t say, “We’ll make us all a tiny bit poorer so that we can live in a more just society.”

This tradeoff should not be blithely accepted; rather, it must be proven. Many influential pieces in the formal literature argue just the opposite, that increases in equality yield increases in efficiency. It is an article of faith that we cannot have it both ways. The idea that progress must come at the expense of social justice is an article of faith and is, in my opinion, rather lazy.

I hope those who defend “let the market decide” thinking come out of their myopic, protective shells and start seeing not just the error of their ways, but the damage, too! Did you ever stop to wonder, too…?

People who say things like “let the market decide” usually have a very poor understanding of what the market actually is. The market doesn’t decide anything. People do. The problems that arise in market economics occur when the rational, self-interested behavior of many individuals yields suboptimal outcomes when aggregated. It is no secret to economists that this is not a “limited” phenomenon as Sam argues but happens extremely frequently and with disastrous consequences. This isn’t the market’s “fault” so much as a failure of incentive coordination among individuals.

In order to reach optimal outcomes, people have to cooperate, and institutions (usually governmental) are necessary to provide the incentives for cooperation. The market has no will, no decision-making power. When suboptimal outcomes are reached, the individuals who perpetrated the failure must take responsibility. Once again, enter the role of government.

[Trigonal_Planar]

This is slightly OT (in fact I might start a thread about it), but I don’t understand why economic theory assumes the existence of a “rational agent” and/or “rational decision”. This is such an unfounded assumption to make; people are not rational and people very frequencly do not make rational decisions! How you can base entire theories on something so obviously untrue is beyond me.
(Of course, IMO, this is precisely why laissez-faire capitalism works on paper but not in the real world - people are not rational!)

[cards]

Rational, in this case, refers to an individual’s choices based on their tastes and preferences. So, if I my tastes run toward basic straight heterosexual sex, I might purchase straight hetero porn. If Trigonal Planar tastes are more into S&M, he might purchase something a bit more, um, exotic .

My purchase is based on fulfilling my tastes in a rational manner for me, his fulfillment based on his tastes. Thus, even within the same topical sphere, a wide range of tastes leads to very different choices, some of which may make no sense to one set of individuals, but makes perfect sense to another set. Therefore, I may appear to be irrational to Trigonal Planar because my purchasing behavior is not in line with his tastes and preferences.

Take this out to a wider scale, encompasing an entire market place. I often wonder who the hell is purchasing some of this stuff (if you want an SUV, why would you purchase one made by Porsche?). But, with so many different types people and so many different preferences, there are going to be behaviours that don’t appear rational to you.

[Hyperelastic]

@Sam Stone

The other thing is that markets only provide economic efficiency. They have little to do with what the public perceives as socially just. So there’s going to be conflict between the two. After all, the poor are often poor because they turned out to have poor judgement, physical deficiencies, or other conditions that left them fairly non-productive. From an economic efficiency standpoint, that’s natural. But is it socially just? That’s a political question.

The one problem is that our politicians do not debate the issues on their merits. They will not admit that they are trading social justice for economic efficiency. They won’t say, “We’ll make us all a tiny bit poorer so that we can live in a more just society.” Instead, they engage in class warfare, demagoguery, and promises that are economically goofy as they attempt to have it both ways.

Very well said. There used to be a field called “political economy” that addressed the normative questions of economics, but it seems to have gone the way of philology and starched collars.

[Maeglin]

There used to be a field called “political economy” that addressed the normative questions of economics, but it seems to have gone the way of philology and starched collars.

As someone who just received a graduate degree in political economy and an undergraduate degree some years ago in philology, I can assure you, both disciplines are alive and well.

I don’t understand why economic theory assumes the existence of a “rational agent” and/or “rational decision”.

The idea of a rational agent is very straightforward. Rationality in this context means that individuals have goals and that they take actions in order to achieve their goals. That’s it. All this assumption contends is that individual behavior is not completely stochastic. In economics, the word “rational” does not carry the normative weight that it does in ordinary speech.

Individuals vary in preferences, taste, and cognitive ability. Sometimes they make wrong decisions. This does not render them irrational. Furthermore, rational choice economics does not offer any theories of preference formation nor does it try to predict the behavior of individuals. Rather, it focuses on aggregation of behavior, from which is is possible to abstract away individual preferences and examine the decision-making processes of people in general.