So which economic myths need debunking?

I\’ve been approached to do a quickie little book. Economic myths that need debunking.

Anything leftie or green provides a target rich environment of course.

Infinite growth in a finite system is impossible.

There is no Laffer Curve (and debunking the idea that all tax cuts always increase revenues).

Companies pay taxes.

Maybe, just maybe, banks create money out of thin air.

You get the sort of idea.

But I need some more from the right side of the aisle.

Obviously, markets solve all problems (no, absolutely they don\’t).

There should be no regulation (it is who and how that is to be discussed).

What economic myths really need debunking?

79 comments on “So which economic myths need debunking?

  1. The banking crisis was a failure of laissez faire capitalism.

    We can spend our way out of recession

    What we really need are Landesbanken and Cajas

  2. 1. Markets are efficient (only a hypothesis or perhaps an aspiration)

    2. Taxing the rich kills their incentive to invest (it actually makes them move offshore) and its corollory, reducing tax rates for the super rich will make them invest more (not necessarily, it gives them more money to invest anywhere in the world, and they might be less inclined to invest here if taxation the burden of taxation was shifted from HNWIs to business).

  3. 1) All business activity is a zero sum game. One person’s profit must be another’s loss.

    2) Deficits can be dealt with by simply borrowing money and spending it, as the resultant economic activity and taxes will more than pay for itself.

    3) Deficits can be dealt with by simply cutting enough government spending as this will have no impact on the underlying level of the economy.

    4) Rent controls will solve the problem of housing being too expensive.

    5) Cutting taxes on the very rich boosts business investment and entrepreneurialism.

    6) Warren Buffet’s cleaner pays more taxes than he does.

    7) The UK has no manufacturing industry.

    8) Manufacturing widgets is “better” than globally marketing soft drinks.

    9) UK has sold off all its industrial and corporate assets to foreigners and it’s a bad thing that UK car plants (employing tens of thousands) are owned by foreigners.

    10) Free trade is good for all countries at all stages of their development.

  4. That CEOs need to be paid 200x their companies median wage so as to attract the best talent. And that this talent is global.

    That CEO “talent” is actually business talent (that is reflected in better corporate performance) and not just luck, being in right sector at right time and reaping rewards of previous investment or your workers efforts.

    Ditto investment performance. Is it investing skill or luck, leverage and poorly calculated risk-adjustments.

  5. The obvious right wing myth to debunk is libertarianism. Also that people always behave in a rational utility maximising way.

  6. Can you debunk that crap report from the fair pay conmission that seems to have been based on a 80% fall in the stock market that did not happen.

    Tim adds: I keep phoning the people who did that report but they don’t seem to want to talk to me for some reason……

  7. That technology is not the only reason why living standards are better. If that was the case then Russia and China would have been storming ahead during commie times. A free market is needed to in order to allocate resources.

  8. Ooh, goodie! Right-wing myths are more interesting than left-wing myths, because left-wing myths are embarassingly easy to debunk.

    That there is a difference between “consumption” taxes and “production” taxes. This is the right-wing equivalent of “companies pay taxes”. VAT is a tax on production, because if you buy something then someone else is selling it. As a result, VAT is bad: it reduces production.

    Right-wingers are also keen on decreasing interest rates to encourage “more investment and less consumption”: they think they can plan the economy by setting interest rates better than the market can (or setting policy to influence interest rates). This is the right-wing equivalent of lefty central planning.

    I call both of these the “you must be forced to be rich” fallacy. Yes, if proles spent less and invested more now they would have more money in the future, but that doesn’t mean they would be richer: everyone has their own interest rate, and if you force someone to save when they’d rather spend you are not making them richer.

  9. That prices are wealth. If stockmarket prices go up, it doesn’t necessarily mean there is more wealth. If land prices go up, it definitely doesn’t.

  10. The right-wing myth that the poor would be fine if only they had a lower discount rate. Ensuing policy failures include forcing the poor to save into a pension, and pushing more (poor) people into university. This fallacy infects thinking across the right: “they wouldn’t be so poor if they didn’t take out that pay-day loan from wonga.com”. The truth is that the poor actually do have very high discount rates, and that that is a natural result of poverty. If you have a choice between receiving £10 today or £20 tomorrow, most of us will wait one day; but if you have £0 then you need that £10 today.

  11. That property is a safe investment and that everybody should aspire to owning their own home for investment purposes (setting aside emotional reasons)

  12. “The Planning Hatred Fallacy”. The market doesn’t plan, individuals do. Companies can plan successfully without internal markets, so why can’t the government plan successfully? They rarely do because of a variety of reasons (size, incentive, no bankruptcy). But they sometimes do. The government is just a very large corporation.

    The Planning Hatred Fallacy leads to people equivocating between “planning” an economy (stupid) and “planning” a city (actually quite sensible). Corporations that found private cities will plan them. It’s just planning on a different scale. The lesson is that the larger the scale, the harder it is to plan successfully. But not impossible.

    And the related one, the Governments Cannot Be Productive Fallacy. Of course they can: legal systems have value, as we know because we can see around the world that different legal systems have different values. (e.g. Hongkong vs China. They actually hire retired British judges in Hongkong to come over and implement common law.)

    The answer is that while governments can be productive, the lack of prices means we cannot know how productive they are. Governments produce defense. They also produce roads. The former is productive; the latter — who knows?

  13. Andrew M, right on!

    Stuart, land (unlike the house, which depreciates) is a safe investment in a sense. Stocks always go to zero if you wait long enough: any company will eventually go bankrupt. But land can’t.

    True, land prices might fall dramatically, if, say, the UK gradually depopulated over the next thousand years and somewhere where land is currently very cheap (say, Kazakhstan) because very sought after. But it won’t go to zero. In that sense, land is safer than stocks.

  14. In addition to the labour theory of value, there’s the “land, labour and capital” theory of value (and its improved cousin, the “land, labour, capital and entrepreneurship” theory of value). Any objective theory of value is wrong.

  15. Non race-realist theories of immigration. If millions of Mexicans move to the US, the US will turn into Mexico. If millions of Somalians move to the UK, parts of the UK will turn into Somalia.

  16. the biggest myth to debunk is that politics is economics by another name, but this mostly afflicts leftist dreaming. Righties tend to be extreme in different spheres. Personally I would stick to the economics and steer it away from political leanings. Its too easy to trivialise by for example equating the existence of the magic money tree with left wing social engineering politics.

    However, one that seems to cross over the political divide is the myth that there is no cost to regulation.

  17. Lots of myths to go for here clearly, sorry if I repeat any from above:

    1. Success is just due to hard work
    2. Success is just due to luck
    3. Society can collectively save for retirement
    3a. One can study for 20 years, work for 40 years, and retire for 20 years saving 5% of their working income
    4. Economists ignore benefits over 20 years away (c. Sir David King)
    4a. discount future cashflows does not mean ignore future cashflows
    5. A strong currency is good
    6. A strong currency is bad
    7. Rising house prices make home owners wealthier (i.e. ignoring opportunity cost)
    8. Being against e.g. state provided education is not equal to being against education
    8a. If the state pays for a service it should also provide that service
    9. Macro economics is useless as it doesn’t make accurate predictions
    10. Useful predictions always flow from macro economics (whatever your flavour)
    11. An econometric study is ‘true’ because it is based on a Large Data Set
    12. Economics is a science because it uses data and equations
    13. Economists are free of bias because they are scientists
    14. Multi-national entities are benevolent
    15. There is such a thing as true value
    16. There are supply and demand curves (more like clouds
    17. Incentives are financial
    18. Health and Safety rules improve health and safety

    feel free to email if you want me to elaborate!

  18. Ooh, how about employment being absolutely fungible; that people can be fired from a job and find another with absolutely no retraining or lead-time in between. In other words, radically rebalancing the economy in a short period of time (i.e. closing all the mines) is absolutely fine, because people can instantly get jobs elsewhere without any suffering in between.

  19. Right wing myths

    – That government is always the problem (implying there should be none)

    – That taxation is theft (implying there should be no taxes at all)

    – That the market is a meritocracy implying that all competition is fair (if you are more wealthy than a terminally ill child, you deserve to be because somehow you beat the child in a fair fight. By the same token, the child deserves to be terminally ill and the market price of approximately zero for many poor and sick children is the optimum allocation of resources)

    – Loads around fiat currency and gold – for example that increasing the money supply is theft (therefore under a gold standard they should say that mining gold is theft)

    – That the opposite of right-wing is left-wing, therefore all who disagree with right-wing policies are commies and socialists (the opposite of right-wing is in fact the entire left+centre+some of the right – and of course left/right is a gross simplification in the first place).

  20. There will be an interesting set that left and right both share. Such as that economic things and activities can be good or bad simply because of who does them, or that (almost anything) is all bad (or good) all the time. Or that people/countries/governments are never motivated byprinciple or altruism or a desire for a better world, however wrong they may be…

  21. “Stuart, land (unlike the house, which depreciates) is a safe investment in a sense. Stocks always go to zero if you wait long enough: any company will eventually go bankrupt. But land can’t.”
    Time was, I’d’ve agreed with the statement. Before I ended up with a piece of land (as an amenity, thank heavens, not owned) worth precisely zero. Less than zero if you factor in the embuggerence of tax liabilities, maintenance. Zero because there’s no-one else with a reason to buy it, apart from its departed owner & he saw it as an investment. It’s made me realise that the only value land has is what you can do with it. Makes it much closer to the value of any other commodity with the added disbenefit, you can’t move it to an area of higher value.

  22. Deficits don’t matter; deficits do matter. The amount of GDP spent by governments does/does not matter.
    There are also a huge number of microeconomic ‘myths’.

  23. That politicians should seek to ‘do something’ about every perceived problem.

    That experts in a technical field (climate change?) have any more right or value than anyone else in saying what policy responses are appropriate.

    That Gordon Brown and Ed Balls are anything other than utter cunts.

  24. Frank O’Dwyer: You seem to have trouble distinguishing between a strawman and a myth.

    My Favorite Myths:

    1) The U.S. economy (GDP, employment, etc.) can be ‘managed’ via a combination of fiscal and monetary policy.
    2) That the vast majority of professional economists understand that which they study.
    3) Present day Keynesians actually understand Keynes.
    4) That the vast majority of present day Keynesians have actually read ‘The General Theory’ (it is a horrible slog, but nonetheless…).

  25. “Loads around fiat currency and gold – for example that increasing the money supply is theft (therefore under a gold standard they should say that mining gold is theft)”

    This is actually a very good point. If you choose to accept a currency (*i.e. you have not been forced to under legal tender*) you can’t complain if the producer prints more. They have gained purchasing power at your expense, yes, but you can’t complain because you chose to accept the currency. (Laws against counterfeiting are irrelevant because they could be recreated by a private paper money producer by using copyright or trademark law.)

    It is the responsibility of the money user not to use money that can be inflated, not the responsibility of the money producer not to produce more.

    The idea bitcoin uses of creating artificial scarcity through its definition was a stroke of genius.

  26. Right-wing myths:

    Cutting taxes always increases revenue (denying the left side of the Laffer curve).

    Parents’ rights to raise their children and aid them in achieving their goals are compatible with meritocracy (an argument against meritocracy, not one in favour of abolishing parental rights).

    Meritocracy is fair, or economically efficient.

    The world is capable of being fair, or that a free market will be fair to people. [First, define fair in a way that doesn’t beg the question, then there will always be edge cases – the terminally ill child being one for many definitions of fair].

    Economic efficiency / effectiveness is more important than other values.

    ZMP and NMP (zero marginal product and negative marginal product) people are not a problem.
    Corollary, abolishing minimum wages will solve the ZMP/NMP problem.

    Because the only solutions anyone can think of are economically insane, anthropogenic global warming must not exist. [doesn’t mean it does exist, but coming up with solutions that aren’t economically insane would be an awfully good idea]. Note, it’s the syllogism that I’m refuting, not the consequent.

  27. “Frank O’Dwyer: You seem to have trouble distinguishing between a strawman and a myth.”

    Not really. I’ve encountered people explicitly making all of the arguments I mentioned above (ad infinitum, in fact).

  28. It’s not so much the dozens of specific myths as the troublesome few that underpin most media/political thinking on the subject, namely:

    The 5 deadly myths.
    1. The world is a zero-sum game.
    2. Profit is evil.
    3. Local is better than global.
    4. Jobs are a benefit, not a cost.
    5. Your desire can be centrally predicted and planned for.

  29. Stick this on whichever column you fancy. Or both.
    “I have a university degree & my opinion is valuable”
    Grade uselessness from PEP down through humanities to hard sciences. Grade down from Oxbridge or country equivalent.
    These are the people who run the thing now & look at the bloody mess they’ve made.

  30. Frank O’Dwyer: “I’ve encountered people explicitly making all of the arguments I mentioned above (ad infinitum, in fact).”

    And just how does that make them myths, as opposed to strawmen?

  31. PaulB’s Myth #2: Free markets lead to optimum results.

    Of course it’s a myth… And will remain so until you take a stab at defining “optimum results” with a bit of precision. Duh.

  32. Re: “That taxation is theft (implying there should be no taxes at all)”

    I wouldn’t call it a myth, I’d say its true. And it only implies there should be no taxation at all, if you also believe that there should never be any theft no matter what the consequences, or if (in addition to believing as most do that theft is wrong), you don’t see sufficient benefit from this theft to justify it.

  33. More of an old-wives tale than an ideological “myth” but ‘house prices only go up because they aren’t making any more land’ could use some debunking.

  34. Dennis the Peasant:

    “And just how does that make them myths, as opposed to strawmen?”

    That people actually make those arguments is what makes them not strawmen. Nobody has argued that was what made them myths. There’s a word for attacking arguments that nobody has made, isn’t there?

  35. Tim,

    “I wouldn’t call [taxation is theft] a myth, I’d say its true. And it only implies there should be no taxation at all, if you also believe that there should never be any theft no matter what the consequences, or if (in addition to believing as most do that theft is wrong), you don’t see sufficient benefit from this theft to justify it.”

    Well, ‘taxation is theft – but count me in as long as there something in it for me!’ isn’t quite as catchy and doesn’t have quite the same moral force, does it? No doubt it would be more honest though.

    In any case theft only has meaning with respect to a system of property rights. If someone has a private definition in which taxation is theft that’s nice for them, but the rest of us are not obliged to take a blind bit of notice of a price they unilaterally set at zero. (Even less so if when pressed they actually turn out not to be averse to a bit of theft as long as it serves their own ends.)

    In the system of property rights and contract law that we actually have, the legal system that is enforced, the mechanisms for which somehow have to be bootstrapped and paid for as a public good, taxation is not theft. Not factually, not legally, and not necessarily morally either.

  36. ermmm, the myth that you are able to debunk anything?

    Citing extremist soft-porn collusion with the ASI (Rilly, Adam Smith?), the IEA, TPA etc, and that you were a phalange chez Farage (Rilly, that twat? – oh you think he’s a good guy, don’t you?)

    Really, your authority is based on prejudice. The politics of envy, the politics that rips reality from your whimsy.

    Whimsy.

    I enjoyed your comment that you would contribute to the media, no, not would,but be inevitably be quoted by the UK mass media.

    I would relish Worstall on my telly.

    I bet you like Fraser Nelson too. And that tool from IEA.

    Get on telly worstall. Dispell the myth you’re a twat that shouts twat like a twat. Let me get a point of access.

    Coward.

  37. Frank O’Dwyer – Considering government to be vitally important, and thus taxes to be theft but also a necessary evil, doesn’t equate to “taxation is theft – but count me in as long as there something in it for me”. The “something” is for society in general, not just, or even particularly me, and its not just a nice bonus, or something profitable, but the avoidance of (probably violent and unstable) anarchy.

    As for being obliged to take notice. Of course you are not obliged to take notice of my opinions, but pointing that out amounts to zero as an argument against them.

    They aren’t reflected in property laws but

    1 – So what? – This is an argument about the principles behind property and taxation. Not about what the specific current laws say. I stated a point of political philosophy, not a legal opinion.

    2 – Even I’m not arguing that taxes should be illegal. Note I called them a necessary evil. They are also a legal evil. The legal part doesn’t change the evil part.

  38. Tim,

    ” Of course you are not obliged to take notice of my opinions, but pointing that out amounts to zero as an argument against them.”

    My point is that not that your opinions are worthless, just that there’s nothing special about you and that if you can invent private definitions of property then so can I. Therefore I can help myself to what you say is “yours”. I might even be justified in doing so – after all perhaps you imagine you own my bicycle as well as every penny you earn.

    A system of property rights is useful in order to come to some kind of consensus about who owns what, all backed up by courts and whatnot, and those aren’t free. You do not get to unilaterally set the price you pay for participation in such a system to zero. That’s simply not on offer, not part of the deal.

    “The “something” is for society in general, not just, or even particularly me, and its not just a nice bonus, or something profitable, but the avoidance of (probably violent and unstable) anarchy.”

    Indeed. And getting something that is worth what you pay for it is a definition of theft so meaningless as to be worthless. If you didn’t think it worth paying *something* for that then you would not call it ‘necessary’.

    The fact that you also call it ‘evil’ is equivocation and doesn’t change the fact that you are getting something that you concede has value and must therefore be worth paying money in order to get. I can just as easily say that paying for food is a ‘necessary evil’. After all I’d much rather get it for nothing – but that wouldn’t justify my calling the restaurant bill theft.

    I’m not saying that this justifies any and all tax, of course. Just that it justifies a tax more than zero, and a justified bill is not theft.

  39. There is nothing special about me, and in the same sense there is nothing (or at least little) special about the government, other than the fact that it has power.

    Its not just my conception of property anyway. Even the government recognizes my right to my own property. It just also grants itself a legal right to take it. It defines the taking as “not theft”, and after it take the property it might define it as “not mine”, but before its taken it does (generally) recognize the property.

    RE: “And getting something that is worth what you pay for it is a definition of theft so meaningless as to be worthless.”

    That statement could be read different ways. You seem to be at least implying that if you get something for what you pay it isn’t theft. If that’s what you mean I disagree, and I think in general terms most other people would as well. If you came to my house, and took something from me, but you also gave me something I like even more, you still stole the thing you took (unless I agreed to make the exchange).

    The fact that you also call it ‘evil’ is equivocation

    You might think its wrong, but I don’t see where you get equivocation. I’m not using the term in two different ways. I use it in the same sense throughout my post.

    Re: “After all I’d much rather get it for nothing – but that wouldn’t justify my calling the restaurant bill theft.”

    The restaurant bill is a voluntary exchange. Taxes are not.

    Re: “and a justified bill is not theft.”

    A justified by involuntary bill can be.

  40. Tim,

    “The restaurant bill is a voluntary exchange.”

    And demanding that others must recognise and protect (whatever you may believe to be) your property rights, for free, is a voluntary exchange, is it? Or are involuntary exchanges another thing like theft, OK as long as the end justifies the means?

    Certainly I don’t agree to pay extra for services that benefit you as well as me, and that you admit are both necessary and desirable, if you can afford to pay and want to take them for nothing.

    Besides, plenty of people do a runner from restaurants. They clearly haven’t volunteered to pay, and they can even say so. The only thing that says they must anyway is not the fact that the owner claims it was a voluntary exchange, which is their word against the thiefs. It is the law of implied contracts and all the rest to back that up.

    And again, all of that isn’t free, and we don’t have to pretend it is. If you want to play along, then it’s not in any sense theft to require you to pay the price of admission. You don’t get to decide what that price is all on your own.

    ” Taxes are not.”

    Sure they are. You don’t have to earn above the taxable threshold, you don’t have to buy goods or services with VAT etc on them, and last but not least you can leave.

    There are effectively no taxes in Somalia, for example, so if you really find taxes evil then they aren’t necessary at all. You can send us a postcard, let us know how you’re getting on.

  41. One person’s word against another’s doesn’t imply that there isn’t some actual reality. The alleged thief is probably the more likely liar, but the restaurant may also be lying or mistaken.

    Paying taxes isn’t paying the price of admission. I’m already in the country, and was born here. Even if I wasn’t the US doesn’t have an immigration tax that I know of, certainty not a significant one, and if it did, other taxes would still not be the price of admission.

    ” Sure they are. You don’t have to earn above the taxable threshold…”

    The fact that I could avoid taxes by rearranging my life, doesn’t make them anything else other than an initiation of force against me. One that may be justified (esp. for relatively modest taxes), by practical concerns, but its still a forced taking of my property, and thus theft (or perhaps technically extortion). It isn’t a voluntary exchange.

    Re: “There are effectively no taxes in Somalia”

    Not true, various warlords and gangs collect taxes in areas under their control.

    Also not really relevant. Your point seems to be that I could leave the US and not pay taxes but

    1 – The IRS (or really the politicians who wrote the rules the IRS enforces) thinks that it has the right to grab wealth from Americans anywhere. One could perhaps evade taxes, but that would just make it an unsuccessful attempt at theft. One could renounce citizenship, but that isn’t necessarily enough to keep the IRS from going after you.

    2 – Even if I could easily avoid US taxes by leaving, that would just subject me to other taxes. Having a choice of which stationary (or potentially roving) bandit to pay, still leaves me paying a bandit, hardly voluntary.

    Even if I could easily avoid all taxes by leaving, and choose not to leave. That doesn’t make paying taxes “paying admission”, or a voluntary exchange.

    See
    http://www.cato-unbound.org/2010/12/06/daniel-b-klein/against-overlordship/

    http://www.cato-unbound.org/2010/12/13/ilya-somin/creation-consent-and-government-power-over-property-rights/

    http://www.econlib.org/library/Columns/Jasaydog.html

  42. Re: “And demanding that others must recognise and protect (whatever you may believe to be) your property rights, for free, is a voluntary exchange, is it? ”

    Demanding they recognize/fail to violate my property rights, is just demanding they treat me justly, not that they do something for me.

    As for protecting property (and other) rights, that’s one of, perhaps THE, main justification for government. If they don’t do that much and still demand taxes, then they are even more like bandits, or the mob, with a protection racket that doesn’t even protect you. But they don’t provide this protection at my demand, they provide it generally largely as a public good, and without consulting me. I might like it. I also might like the music some street musician is playing. It might be reasonable to give some money for both, but in neither case is my paying a matter of paying my bills rather than trying to skip out on the check.

  43. I might have missed someone else saying these but

    a) “private pensions do not suffer from adverse demographics” is a surprisingly common one
    b) “a floating currency regime is necessarily more free-market than a fixed rate regime”

  44. That austerity increases GDP and wealth.

    The time to cut public spending is not when there is a downturn in the business cycle, it’s when there’s an upturn.

  45. That CEOs get lots of money because they are worth it. In reality, they get lots of money because they can, because they’re on each others’ remuneration committees.

    There are pleny of examples of crap CEOs getting absurdly high salaries — Sir Fred Goodwin springs to mind.

  46. Old chestnuts such as the lump of labour fallacy and the broken window fallacy — these turn up all the time, on both the right and the left.

  47. Simultaniously arguing that a policy will both save money and create jobs. This is a very common one.

    For example, when the abolition of fox hunting was debated, it was claimed that fox hunting is both (a) the cheapest way of controlling the fox population, and (b) banning it will put loads of people out of work, increasing unemployment.

  48. “That austerity increases GDP and wealth.”

    This is hardly a fallacy, it is a point of debate. Indeed the term “Austerity” is fallacious as used when applied to government spending. The correct term is reduced government spending. Reduced government spending is not more “austere” than increased government spending is “generous”.

  49. There is nothing wrong with the idea of patents. Definitely there is a lot wrong with them as implemented in particular in the field of computing. However, it is hard to see how we can expect a drug company to invest around a $billion and decade to develop a drug without a patent to allow them to recoup their costs.

  50. PaulB’s Myth #2: Free markets lead to optimum results.

    Of course it’s a myth… And will remain so until you take a stab at defining “optimum results” with a bit of precision. Duh.

    Formally, a Nash equilibrium need not be Pareto Optimal. And the idea behind Pareto Optimality is that it’s an uncontroversial minimum requirement for any real-world definition of optimality. Duh.

  51. Wow, Paul, you missed your own point. That’s hard to do.

    Pareto efficiency is indeed a minimal notion of efficiency, but that’s all it is… a minimal notion. Just where in the world do we have completely free markets? Governments routinely – and rightly – alter free markets (via laws, regulations, etc.) to produce outcomes they see as desirable (for society at large, for specific groups, etc.). One needs a bit of precision about defining real-world outcomes to actually be able to judge real-world outcomes. One also needs to be able to isolate, with a certain amount of certainty, the effects produced by the unhindered market and those produced by governmental intervention.

    Sorry, but Pareto and a dash of game theory don’t cut it.

  52. Huh? You seem to have forgotten what we were talking about. It may well be true that perfectly free markets seldom exist, but that’s irrelevant to what I wrote.

    There is a tendency in neoliberal circles to assert that whatever the market outcome is must be for the best. That is a myth, and Tim was asking for economic myths to write about.

    I agree with you that it is appropriate for governments to alter the market to produce better outcomes.

  53. “There is a tendency in neoliberal circles to assert that whatever the market outcome is must be for the best.”

    Um, Paul, that isn’t what you said. What you said was this:

    “Free markets lead to optimum results.”

    Those are two completely different statements, and one could not reasonably infer the second from your original statement.

    I’m happy to note that neither Pareto efficiency nor the Nash equilibrium have anything to do with the second statement, so the reason for throwing them into the discussion remains anybody’s guess.

    People don’t pan the performance (or more accurately, certain outcomes) of ‘free’ markets because they are unable to find a convergence between Pareto efficiency and the Nash equilibrium on a piece of graph paper. They pan performance/outcomes because they do not conform with their own ideas of what the markets should/should not be doing. Hence the need for precision when making either of the statements you’ve made above. Without that precision your ‘myths’ approach, as Wittgenstein put it, “meaning zero”.

  54. @Fred – No I’m not Tim Worstall, or any other famous or semi-famous Tim.

    @PaulB – “a Nash equilibrium need not be Pareto Optimal” is rather different than “Free markets lead to optimum results”. Free markets are not the only type of competition where Nash equilibriums are potentially relevant. They would also be relevant to political competition over economic decisions. Also “Optimum” has more meanings than just “Pareto Optimal”

    The free market may be the best solution in a particular situation, and thus in a sense optimal for that situation, because any realistically possible political solution would be worse.

    For a looser definition of optimal, more like “the best way to go”, rather than “perfect” or “Pareto efficient”, the market is generally optimal, because it deals with economic allocations and decisions most efficiently overall.

    For your specific definition of optimal, Pareto efficiency, I’d say “the free market is optimal” is more a straw man then a myth. Plenty of people might say that a free market is optimal, but few of them, likely almost none of them, perhaps exactly zero of them, believe “a Nash equilibrium is always Pareto Optimal”

  55. DtP: I hesitate to revive a slumbering thread, but I am genuinely interested to know what important difference you see between
    “Free markets lead to optimum results”
    and
    “whatever the market outcome is must be for the best”

    Tim: you may not be aware that “Pareto Optimal” is a weak requirement. Your (unsupported) assertion that “the market is generally optimal” is (roughly) the assumption I wish to debunk. The market outcome may sometimes be optimal, but that is to be determined case by case, not assumed axiomatically.

  56. For the whole of a large economy, Pareto optimal isn’t a weak requirement, its a very strong one, probably an impossible strong one in strict terms, at least if you include actually being able to demonstrate that the situation was Pareto optimal.

    The market generally being optimal, is a much weaker requirement. Essentially its something like “much more often than not, a market allocation will be closer to optimal, then other forms of allocation”.

    Market transactions often result in some people worse then they otherwise would have been if that action didn’t happen. For example if I open up a new business, and undercut some previous company that had been overcharging its customers. The lower prices and/or lost business will make the old companies owners and/or employees worse off. But competition is still a move to a more optimal situation.

    The knowledge problem also represents a difficulty for any attempt to make a case by case determination that some effort at political command and control, was more optimal than market operations, both in that it suggest that market operations are more likely to be optimal, and in that it creates a difficulty for measuring how optimal the command and control attempt is.

  57. Free-market-thinktank types are often very keen on what they wrongly call “consumption” taxes. They have a large deadweight cost as Mark Wadsworth has documented. They are worse than corporation tax because corporations have to pay VAT whether they are making a profit or not.

    Tino Sanandaji provides another reason against them here: http://super-economy.blogspot.com/2012/08/sweden-cuts-consumption-tax-for.html

    Since price sensitivity is different for different goods, the percentage consumption tax should be different for different goods.

    Consumption taxes therefore require the government to know the price sensitivity of every good! Absurd! And distortionary. Therefore income and corporation taxes are better than VAT: pretty much the same effect without the downsides.

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