Skip to main content

View Diary: The Most Important Economic Theorem You've Never Heard Of (174 comments)

Comment Preferences

  •  So many things wrong here (0+ / 0-)

    starting from the not-irrelevant point that Smith never said "A perfectly competitive market is perfectly efficient." Nor did he offer this thought in other words, nor title it some kind of "theorem."  He did have some stuff to say about "free" markets, which are not at all the same things as so-called "perfect" markets. What he actually did say in relation to that famous invisible hand was that a rich man may be "led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."

    I added the italics to point out that Smith is well aware that free markets are not perfect, and that the invisible hand works towards societal betterment often, not nearly always. Overall, "the perfect market" lambasted in this article is a straw creature.

    It is also worth pointing out, particularly to those rushing to talk up Keynes, that to the the extent that the "second-best" theory might provide a valid point of attack against models of supposed market equilibrium, it is an attack against all such mathematical models, Keynes' included. And it's also the case that the second-best critique offers virtually no help on which alternatives to choose.

    •  It is not a straw creature because (2+ / 0-)
      Recommended by:
      drewfromct, Calamity Jean

      so many conservatives believe it.  They act on their beliefs too, in the politcal arena.  That is why they were so ready to shut down the government and default on its debt.  That only makes sense if you are very hostile to any government presence in the economy.  Getting rid of the government only makes sense if you think the market is the most efficient way to do everything.  They act as if a totally unfettered financial market is efficient, despite history that shows otherwise.

      Of course, a lot of people think that many conservatives don't really believe in free markets, only in markets that are  dominated by them or the people who put them into power.

      The thing is that in the real world, a free market is unstable because of consolidation, leading to oligoploy or monopoly.  Or as a commenter put it above, the Highlander theory.

      "The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." Bertrand Russell

      by Thutmose V on Fri Oct 14, 2011 at 08:22:45 PM PDT

      [ Parent ]

    •  you bring up a couple good points (0+ / 0-)

      Yes, Smith never said specifically himself said "A perfectly competitive market is perfectly efficient."

      But he did believe that when all economic transactions are organized as a voluntary exchange, then all of the available improvements in efficiency will be exhausted. Basically, that a perfectly competitive market is perfectly efficient.

      I have corrected the article so that it does not look like this quote came from The Wealth of Nations.

      Can you help me out with a source on Smith being "well aware that free markets are not perfect"? I believe you are correct, but I'd be interested in reading his words.

      I personally think Adam Smith would be appalled at some of the religious beliefs in which his work is often cited.

      And you are absolutely correct that second-best theory does not offer suggestions as to how to organize markets. What it does suggest is that we should not be so religious in pursuing a "unified field theory" of efficiency in our public policy, but should rather look for solutions on a case by case basis.

      It's statements like this from a book called  The Welfare Economics of Public Policy that I'm against:

      "[The Invisible Hand Theorem] is probably the single most powerful result in the theory of market economies and is widely used by economists who believe that markets are competitive and that governments should not intervene in economic activity. Milton Friedman and the "Chicago School" are the best known defenders of this position. In addition, because of its efficiency properties, competitive equilibrium offers a useful standard for policy analysis."

      As you've stated, it offers no more useful a tool for policy analysis than any other tool. What I'm against are those like Friedman who have turned economics into a religion to justify a certain view of government.  

      Thanks for the thoughtful comments and close read.

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site