HOISTED FROM ÞE ARCHIVES: Why Do Economists Ignore þe Greatest of All Market Failures?
A rhetorical question...
Trevon D Logan: ’This is actually a deep point DeLong is making: we have not recognized the single largest market failure in the economy. And we rarely talk about it as a market failure at all. The answer: that’s how they wanted it when they sold it to you! Anyone who has seriously thought about equilibrium theory knows that the lack of attention to endowments is pretty shameful. DeLong extends that here to thinking of the weights we apply and why it should encourage, not discourage, redistribution. But we never quite get there…
Ben Boehlert: ’I’m consistently shocked in my undergrad Econ classes how inequality of opportunity almost never comes up. In a world where everyone is perfectly rational, it seems like pretty big deal!…
Brad DeLong: I remember back in the… spring of 1981, I think it was. I asked my professor, William Thomson, visiting from Rochester, roughly this:
The utilitarian social welfare function is Ωu = U(1) + U(2) + U(3)… The competitive market economy maximizes a market social welfare function Ωm = ω(1)U(1) + ω(2)U(2) + ω(3)U(3)…, where the ω(i)s are Negishi weights that are increasing functions of your lifetime wealth W(i)—indeed, if lifetime utility is log wealth, then ω(i)=W(i). Market failures drive wedges between what the economy achieves and what it could achieve. There are massive, massive differences between the Ωu that is the true social welfare function and the function Ωm that the well-working market maximizes.
Why isn’t the unequal distribution of ex ante expected lifetime income—inequality of opportunity—conceptualized by us economists as the greatest of all market failures? And why isn’t the distribution of political power that creates & preserves a property order of unequal wealth seen as the greatest of all “regulatory capture by a special interest group” flaws in the working of society, economy, and the state?"
Thomson did not have a good answer. My other teacher Joe Kalt, however, did. “These Chicago Boys are all right-wing Marxists,” he said:
They buy the Marxian proposition that the state is an executive committee for rigging the economy in the interest of the ruling class. But they think that that is a good thing as long as the ruling class is based on wealth, however previously acquired. All their objections are to those who use some form of societal power other than wealth to try to rig the economy in their interest. And while there is an argument that a wealth-based ruling class is in general best, it is a weak argument.
And do remember that I learned much of my political economy from Richard Musgrave and his TA Manuel Trajtenberg, who explicitly conceptualized public finance as having 3 branches: (1) repairing Pigovian externalities, (2) fiscal policy for full employment, (3) redistribution to shrink all the Negishi weights in the market’s SWF toward one.
The Chicago School underwent an enormous change between the Midwestern Populist days of Henry Simons, for whom private monopoly was the big foe and large inequalities an enormous menace, & the monopoly-tolerant fundraising paradise that Stigler & co. created. This transformation from Simons to Stigler was possible only by “othering” the non-rich by every means possible, so that their low weight in the market’s Negishi-weighted SWF could be dismissed as deserved.
I put it to you that taking the Murray Rothbard Road in race relations—trying to bring to life their anti-New Deal monopoly-tolerant union-busting economic policy agenda by white racism and supremacy, as Frankenstein’s monster was brought to life by the lightning—was a very important part and remains a very important part of that shift away from economics understood as a policy science that attempts to implement a Benthamite or a Millian utilitiarianism that seeks the greatest good of the greatest number.
LINK:
(This has been a rhetorical question: I think we all know why almost all neoliberal and further-right economists ignore the greatest of all market failures. I think we know that well.)
I remember this post well. I guess the reviewer who said Slouching was Second International Marxism was correct.
Musgrave's point 2) is better outsourced to a competent Fed. If "fiscal policy" is maximizing national income according to points 1 and 3, it will still "look" Keynesian over business cycles, right?