I know little about economics in general and probably less about Milton Friedman, but what I keep hearing about him is that he believed that federal oversight of the market was unnecessary because an unregulated market will behave rationally and will regulate itself because it is in its interest to do so.
Now, like I said, I don’t know much about these things, but I’ve been observing the US economy for many years, and while markets may, in the very longest run, appear to act rationally and self-righting, in most short to medium spans, from days to years, they appear anything but rational. Not surprising, since they are human constructs operated by humans with the very human desire to make out like a bandit, so why on earth would Friedman have conceived such a counter-intuitive concept? Especially after it is repeatedly shown to be wrong, from the Robber Barons to our current difficulty. The market seems “self-correcting” only after a few convictions.
And yeah, I know why it appealed to so many people, referring readers to my “make out like a bandit” statement. Theft is easier to justify if you have the University of Chicago behind it.
IMHO, because it justified slashing regulations and government. Unless you openly admit to supporting being ruthless, sociopathic and amoral, claiming that everything will take care of itself is the only way to justify that.
ALthough you did not technically violate the rules, your post, Der Trihs, was both horrifically unfounded and massively irrational. There is no adequate way to correctly respond to the vileness you have deposited here, except to say that unless openly admit to being ruthless, sociopathic and amoral, there is no reason for you to have posted that.
I think it derives from the attempt to layer intellectual constructs on top of capitalism, the attempt to rationailize capitalism as though it were an ideology, rather than something that seems to have just more or less “happened”.
More to the point, though, is the effort to create an intellectual rationale to preserve as much lazy fair policies as possible. They seek to pretend that they have an economic science basis for their faith in the Free Market and its wonders. Its nonsense, of course, as anyone who studies the Dutch tulip craze, hula hoops, or any other of a number of irrational market behaviors that need to be explained away under the “rational actor” model.
The chigger in the wood pile is greed. A rational capitalist might very well limit his profit for the greater good of the system, taking no more than he needs and letting the rest circulate. But all it takes is one greedy mofo with an opportunity to manifest that irrational greed, and the shit hits the fan.
There are far more Rockefellers and Morgans than there are Buffets, because, as a general rule, only rats win rat races.
It wasn’t just Friedman. Standard economic thinking for most of the second half of the 20th century assumed that markets were rational. Conventional economic thinking is still that markets are rational, as far as I know. The idea is that markets are rational because people behave rationally.
Remember what rationality means…it pretty much just means that actions can be ranked in order of preference (Completeness), and that if action 1 is preferred to action 2, and action 2 is preferred to action 3, then action 1 is preferred to action 3 (transitivity).
More generally, neoclassical economics is based on three assumptions…that people have rational preferences, that they act to maximize utility/rpofit, and that they act independently on relevant information. So markets act rationally in that sense…but saying that markets are rational doesn’t mean that markets are neccesarily beneficial. My rational actions can nevertheless lead to a negative result for you, or even for society.
No…that’s an irrational action. A rational capitalist tries to maximize his profit. If he’s limiting his profit, he’s acting irrationally. He might limit his short term profit for long term gain, but his goal is to maximize his overall profit.
Because it’s a lot harder to come up with an economic model based on irrational behavior.
(though maybe I’m just bitter since I still haven’t won a Nobel for my “people just do insane crap, and there’s no frickn’ way to predict it” theory of economics)
The markets mostly are rational, certainly more rational on average than government-directed markets. Where I disagree with Friedman is that he believes individual short-term rational decisions are almost always the best decision for the market at large. I believe that they usually are but not always (the environment and the current meltdown being two such examples.)
I don’t think it isreally politically driven. It’s more of a precondition to be able to make theories. Like Simplicio said, you can’t get very far if you start with the assumption “people just do insane crap, and there’s no frickn’ way to predict it”. You need to make the assumption that people act predictably, otherwise, there’s no point in even studying economics. Even those economists who advocate a government interventionalist role in the economy, start out with the assumptions of rationality. Even Keynes, for the most part, assumed rationality.
Remember, too, our “economic man”, who always acts rationally, is part of a model, and by their nature, models are more simple than reality. (And, remember, also, that a lot of economic models, especially the better ones, talk about “bounded rationality”…that people don’t always behave optimally, but sometimes close to optimally).
“Rational” is a technical term in modern economic theory, which like many other technical terms, might not quite mean exactly what you think it ought to mean from common usage. In economic terms, the desire to make out like a bandit is, in fact, rational, and is very close to being the definition of rationality.
I do think it’s politically driven. As I said in my first post; unless you assume that people are perfectly rational and perfectly informed, they’ll make bad decisions, decisions that go against their own and/or everyone else’s interest or even survival. So, you need government intervention and support to keep the market and the rest of society from falling apart. This economic idea that people are all perfectly rational mainly serves as an excuse for cutting government and regulations under the claim that they aren’t necessary. That the market will act in enlightened self interest and take up the slack even if you reduce the government to nearly nothing, which doesn’t work.
This makes no sense because what you are saying is that government bureaucrat knows what’s best for me better than I do. How is a government bureaucrat more rational AND better informed AND know more about what’s good for me than myself? I don’t buy it. There have been countries with political systems based on this premise and the results were not good. Nobody knows what I want better than I do.
Well, a nuance there, maximize his utility - one can imagine a rational capitalist who may trade profit for … free time say. That is economically rational if he values the free time more than the next dollar in cash profit (and presuming that there is a trade off between the two).
How many misinformed threads are we going to have about “markets” that start with “I don’t know much about economics but…” and then degenerate into socialist/libertarian rhetoric and capitalism bashing? I’ve been observing the fucking sky for years. That doesn’t make me an astronaut.
For the most part, markets are “rational”. You generally want to sell for the most you can get and buy for as low as you can, right? And they generally are “efficient”. The price of goods generally reflects what you think they are worth.
The big mistake people like Greenspan made about the residential mortgage business was to believe that the banks would self-regulate out of self-preservation. The problem is that there are really several different entities interacting in such a way as to not adequately communicate information between different markets.
Mortgage lenders not adequately screening borrowers. Rating agencies not properly quantifying risks associated with CDOs consisting of securitized mortgages. Bankers interested in short term profits. You have several different markets interacting without the right information being properly passed between them.
I think one of the problems is that the world is necessarily more complicated than models, and that one of the first actions of rational actors is to, when confronted with a scenario in reality that mirrors an economic model, find holes in the model and kick it over.
For your consideration, I submit the Southampton team’s winning solution to the 20th-anniversary Iterated Prisoner’s Dilemma competition, which was not by tit-for-tat, but by a single side submitting several entries, which used the first few rounds of the game to communicate their identity, then work to accumulate points for their own side while serving as spoilers for all other programs.
The problem was that no real-world situation (even one set up to model the prisoner’s dilemma as closely as possible) can totally screen out external factors. When these external factors are significant enough to totally change the optimal behavior of a system, your model is not worth a great deal when it comes to predicting behavior.
So, what to do about this? Have the science of economics involve less math and more sociology, I say. If all economists analyzed transactions with the assumption that all participants would try to find a way to go off-model, I think we’d get better models.
Because, say, they have in hand a study showing that the medicine you want is poison. Thus the FDA. Or that the building you want to move into is in danger of collapse. Thus building codes. Or that regardless of your opinion and/or resources, your child should at least be literate. Thus public schools. Or that regardless of how much more it costs to dispose of safely, it’s bad for everyone if you dump cyanide in your local river. Thus the EPA. Or that the business you want to buy from is a scam, or is collaborating with others to fix prices; thus business regulations. And so on.
Because they have data you don’t, and can’t get. And because they care about the big picture even if you don’t.
False dilemma. there’s a whole lot of grey area between unregulated markets and Communism.
Quite often you don’t even know that what you want is a bad idea - just because you, for example demand a medicine to make you better, doesn’t mean that the medicine actually works. And quite often what you ask for isn’t what you’ll get anyway, without the government keeping the predators under control.