The Murphmonster’s latest insanity about economics

In that case then I think it worth explaining just why I find free market economics so frustrating. Fundamentally this is because of the absurd assumptions that underpin the logic of those who adhere to these beliefs. Saying that, many of those who do so will, I am sure, say that what follows represents beliefs they do not personally recognise. I hate to disillusion them, because the reality is that all this will reveal is that they are the unwitting slaves of some far from defunct economists because what I will describe are the assumptions that underpin the vast majority of economics journal papers in the UK, including those that result in the policy prescriptions of almost all free marketeers (including, depressingly, on tax).

So what are these assumptions? You can give and take a little on these, because once you get above about eight there is some overlap or substituitability between them, but each is common and worth noting. I should, in fairness, add I started with a list from here, but expanded a little as I thought appropriate. Free markets to work require that there be:

Many sellers each of whom produce a low percentage of market output and cannot influence the prevailing market price.
Many individual buyers, none has any control over the market price
Perfect freedom of entry and exit from the industry. Firms face no sunk costs and entry and exit from the market is feasible in the long run. This assumption means that all firms in a perfectly competitive market make normal profits in the long run.
Homogeneous products are supplied to the markets that are perfect substitutes. This leads to each firms being “price takers” with a perfectly elastic demand curve for their product.
Perfect knowledge – consumers have all readily available information about prices and products from competing suppliers and can access this at zero cost – in other words, there are few transactions costs involved in searching for the required information about prices. Likewise sellers have perfect knowledge about their competitors.
Perfectly mobile factors of production – land, labour and capital can be switched in response to changing market conditions, prices and incentives.
No externalities arising from production and/or consumption.
Markets that clear, which requires that for all sellers there is a buyer.
Markets that reach a state of equilibrium i.e. there is an optimal outcome to economic activity.
Rational expectations, which means that people accurately forecast statistical expectations and all errors are random.

Well, we might argue about a few of these. Rational expectations for example really doesn’t mean that. Only that people are not systematically biased in what they think the future might bring. And the point is not so much to insist that markets only work if they do think this way as to examine whether the point it true or not. Also worth noting that this is the basis of Keynes’ ideas on the origins of the business cycle too. It’s not a new or “free market” idea.

Coase in part won the Nobel for pointing out that externalities can, but only in certain circumstances, be dealt with in a purely free market with the appropriate property rights. And everyone else, from Marshall through Pigou onwards has pointed out that the right thing to do about them when this isn’t possible is to incorporate them into market prices. This is the argument both for a carbon tax (negative externalities) and public subsidy of basic research (positive externality of a public good).

Which brings us to his complete misunderstanding of markets that clear. This doesn’t mean that there is a buyer for every seller. It means that prices change so that markets clear: at £10 each there’s not a buyer for every seller of lovely fresh pears, at 1 pence each there’s too many buyers for willing sellers and at some number inbetween the market clears as the willing supply and willing demand becomes equal. Our biggest problem being that we’ve no way at all of determining what that market clearing price is without using the market as a whole as our model. Which is why, when we’ve those externalities, we’ve got to change the price through either tax or subsidy and then let the market deal with it, find that market clearing number. This is why Stern concentrated on working out the damage from emissions: once we know that (whatever you think of the answer he came up with) then we can tax at that rate and then the market clears giving us the correct amount of emissions.

At a slightly less detailed level he’s describing the simplifications that we make to build a model. The vast majority of what happens next is relaxing one of more of those simplifications and seeing what happens to the model. There’s reams and reams of papers on oligopolistic competition, imperfect information, bounded rationality and all the rest.

Which brings us to the next point at again a higher level of abstraction:

As I have said, you can argue that one or two extra conditions can be added to this list and that a couple may overlap. It does not make a lot of difference to the outcome because the fact is that all these conditions need to exist simultaneously if markets are to provide optimal outcomes for the economic organisation of society. If any one of them fails then because of the simple application of chaos theory and the power of small numbers the outcome from leaving markets to themselves are wholly unpredictable.

Dunno what the hell that chaos theory and small numbers stuff is about. But he’s not getting the real meaning of “optimal” here. The real meaning being “as perfectly perfect as anything can be”. And there’s not a single economist out there who wouldn’t agree that there are times when a pure market solution, only a pure free market solution, might be in this sense sub-optimal.

It’s at exactly that point that the argument then gets interesting. When we bring in things like public choice economics (essentially, the people who make, enforce and administer laws are greedy thieving bastards like the rest of us), bounded rationality (the people who make, enforce and administer laws are just as ignorant as the rest of us) and so on and so on then we want to ask the extremely important question. OK, so a pure free market outcome is sub-optimal. And is whatever we get from the ignorant musings of a retired accountant from Wandsworth optimal? Or sub-sub-optimal?

Hmm….

47 comments on “The Murphmonster’s latest insanity about economics

  1. Tim

    You have often speculated that Ritchie didn’t stay awake during his economics lectures. I think this is proof that he did. How would he have been able to lift the conditions of perfect competition word-for-word from his Economics 101 lecture?

  2. I think it was one commentator on a previous thread (one where Arnald last appeared) who said that he creates so many straw men he should go into the manufacturing business – once more the similarity with Owen Jones is apparent. When you challenge either on the collectivist aspect of their beliefs and the rather unfortunate historical legacy of various collectivist regimes (USSR, PRC,Cuba and North Korea) they get very defensive, starts throwing out the word ‘troll’ liberally and accuse you of gross over- simplification.

    Turn around and what do we have here but a parody of free market beliefs apparently unimpressed by reading any papers which might offer more complexity than the absurdly simplistic vision he outlines. It’s fairly typical of the man – when challenged by one of this parish about the risks that his preferred solutions would result in a couple of ‘lost decades’ a la Japan as money was swallowed up by inefficient state subsidized businesses, his response ‘I know nothing about Japan’ really summed his attitude up- no attempt to educate himself – just blithe dismissal of the commentator as a ‘Neoliberal’ or such like. Fortunately I think his star is on the wane as most people have rumbled his agenda….

  3. by his standards that’s a reasonably decent description of a model of perfect competition.

    The question is what proportion of papers published in academic journals assume perfect competition, and what policy prescriptions rest on perfect competition.

    in macro settings, monopolistic competition with varieties of goods that are imperfect substitutes so that firms are price setters is the norm.

    elsewhere we might find models that have strategic behaviour, barriers to entry and so forth.

    my guess is that the vast majority of economics paper deviate from perfect competition in significant ways, and only assume it for parts of the model where it’s thought to be unimportant and innocuous.

  4. Luis

    Bits of finance assume perfect competition. MPT/CAPM for example – although that isnt the end of bad things that are assumed. But there are lots of papers that then build on CAPM and relax said assumptions.

  5. I believe in free markets, so that I can buy fresh bread from the baker and meat from my local butcher at a higher price than I should pay in Tesco because it tastes better.
    Murphy wants to believe that free-marketeers want all the food in a to be homogenous so abolishing freedom of choice for those who want to eat free-range chickens instead of battery hens. It is obvious that Murphy has no grasp of logic.

  6. ken,

    I know zero about finance and models of asset pricing – I’m used to seeing models where at the interesting action takes place in a part of the model that deviates from PC, and then PC is just used to fill in the bits that are (thought to be) incidental to the point of the model. So for example in a model of structural change which may have quite important deviations from PC (maybe wages do not equalize across sectors, workers are heterogeneous etc. ) you may assume PC in the goods market within each sector, or something. Does something like that happen in finance?

  7. It’s all very dreary.

    Murphy ascribes to his oppponents arguments they don’t actually use. He then extrapolates them out with his silly percentage chance of each happening. Then says he has proved that free markets don’t work. And his lick-spittle cadre of followers tell him how wonderful he is.

  8. Plus he misses or ignores the main point completely; perfect markets and perfect competition may or may not exist, but imperfect as they may be in practice, they have been proved every time to give better outcomes than the alternative, central planning (presumably because that would be run by people like Murphy).

    But… what’s the point? he’s just a fascist cunt.

  9. Van Patten

    “Fortunately I think his star is on the wane as most people have rumbled his agenda….”

    Murphy’s star may or may not be on the wane, but we have had Jim Sillars calling for a day of retribution and nationalisation of business in Scotland post a Yes and the redoubtable (and bright orange skin toned) Tommy Sheridan saying “the only banks that will be leaving an independent Scotland will be the food banks” (this contrary to all logic following the announcement by several retailers of likely higher food prices if the vote is Yes).

    The basic religion therefore still exists in vast numbers.

  10. What’s this damn requirement that trade be optimal?

    “Perfect is the enemy of good.” – Voltaire

    Qui decernit? The buyer and seller decide. Third parties: stay out of it, it’s none of your business.

  11. I think this is a typically wordy way of explaining why Cameron (who is ever so like Dick, but posher) didn’t implement increases in gun licences and VED for Chelsea Tractors.

    He knows a lot of people who own Purdeys and Range Rovers.

    It’s just like giving the Fair Tax Mark to your mates to enable them to continue trading in the UK. Ironically, the only difference being that, if you’re a lefty, you charge your mates for the privilige…

  12. In his post Richard links to this AS level revision note (http://tutor2u.net/economics/revision-notes/a2-micro-perfect-competition.html) that:

    (a) shows a lot better than Richard does the shortcomings of a perfect competition model and why it will not exist in practice, and

    (b) explains why the model is still useful and how it can be adapted to be of practical use

    thus suggesting that he has not yet fully grasped AS level economics.

    Bravo, sir. Bravo.

  13. @Ben,

    According to his CV, his degree is in “business economics and accounting”. Those with more knowledge than me might know how much economics is covered in that compared to an economics only degree.

  14. I’ll own up.

    I was posting on his site yesterday (on the topic of his claims that the OBR vindicated the last Labour government) and poked enough holes in his argument for him to get all riled up and send me an email. Which promptly got blocked by my spam filters…(clever spam filter).

    He then accused me of not existing. So I sent him an email to prove I did, with the observation that anyone who criticizes him is accused of trolling or hiding behind anonymity. I also pointed out that none of his sycophants get the same treatment.

    He came back with the usual diatribe about neo-liberalism, how I want to crush the poor and free-markets being totally wrongheaded. I pointed out that he should have paid more attention at university as he doesn’t understand the basic concepts behind free-markets, introduced Hayek and suggested he do some studying.

    He responded with another diatribe where he compared himself directly to Jesus (I kid you not) before blocking me on his website (I gather this shouldn’t be a shock to me). Seems our little set to kept poor old Ritchie up at night though as it spawned a blog post this morning.

    I can’t work out if the man is simply insane and delusional, is playing up to his hard left audience as simply it pays him a lot to do so, or has such a fragile ego that he knows when he is wrong but is simply unable to admit as much, digging himself deeper into the hole.

  15. Noel

    If it’s “business economics”, then I would guess a decent amount of basic micro and a bit of macro (business cycles). Probably not much public economics and econometrics.

  16. Squander Two

    perfect competition, if it applies anywhere, applies to deep commodity markets with lots of small sellers and buyers (imagine lots of farmers producing wheat and lots of bakers buying it) so that the choices of individual suppliers/buyers have no effect (i.e. if one farmer decides to increase/decrease their output, the market won’t notice). Of course prices come from collective choices.

  17. Murphy is not ‘a retired accountant’. If you can’t get basics facts right then you may as well not bother.

  18. Squander Two

    To follow up on Luis’ post. In a PC market, each individual seller faces a flat demand curve. No matter how much the seller sells, he gets the same price. This is because each individual seller is infinitesmal relative to the overall market. Each small farmer finds that he can sell as much wheat as he wants at that price. But in aggregate as new farmers enter the business, the aggregate supply shifts to the right (eg more production for a given price) and the price that everyone receives in the market changes. (goes down)

  19. LE,

    > perfect competition, if it applies anywhere, applies to deep commodity markets … so that the choices of individual suppliers/buyers have no effect

    Well, I would say a negligible effect rather than none, which is after all the whole point of markets: the price is of course the aggregated choices of all the individual sellers and buyers, even if we can’t see their effect at the individual level.

    But, that quibbling aside, this is backwards. Murphy isn’t saying “Here are some examples of markets in which near-enough perfect competition occurs and where individual sellers and buyers therefore have no influence over the price”; he’s saying “All proponents of free markets always assume that individual sellers and buyers have no influence over the price in any market; this is obviously untrue; so free markets can’t work.”

  20. Arnald seems to be correct
    ICAEW membersearch finds no-one called Richard Murphy.
    Either Murphy is an ex-accountant or he wasn’t Chartered in the first place.

  21. No, Murphy is a member of the ICAEW, so far as I’m aware. FCA and all, so he’s been in for at least 10 years.

  22. Squander Two

    I think that Luis’ point is where the idea that individual sellers have no impact on price comes from. In PC as evidenced in a commodity market with small buyers and sellers, individuals’ actions do not change the price, but in aggregate they do. Which is why Murphy is wrong.

  23. AS level revision note!

    And there was me thinking he had stayed awake for one lecture at least. I do apologise.

  24. P.S. Unless he is actively looking for work (and who would when you can sit in your shed a thumb through your kids’ homework for a living) then he is a retired accountant.

  25. Murphy doesn’t even know what non-linear dynamical (= chaotic) systems are, let alone whether or not a free market is an example of one.

  26. Astounding. He actually fails to read AS Level revision notes. He simply isn’t interested in credibility, so we can’t try to deny it him!

  27. “Many sellers each of whom produce a low percentage of market output and cannot influence the prevailing market price.”

    Hmm, Intel and AMD. Two sellers. Fucking ferocious competition, low prices, gigantic R&D efforts to even stay in the game. Everyone who owns a PC or other device using these chips has benefited massively from this “free market” nonsense.

    I can’t be bothered to read the rest of his shit, though I’m sure he has vomited up another host of straw men in his incoherent rage.

  28. Rob

    What you are describing is close to Bertrand competition in an oligopoly. Even in duopolies results close to perfect competition can be achieved.

  29. ken,

    > In PC as evidenced in a commodity market with small buyers and sellers, individuals’ actions do not change the price, but in aggregate they do. Which is why Murphy is wrong.

    Yes, because Murphy didn’t say “change”; he said “influence”. Which was my point.

  30. Bravefart

    Oh, I agree – we only have to look at history to see that malicious ideas will always have their adherents. never more so than when they are trying to create a Utopia. My point was that he himself has, I think been rumbled to the extent that people are starting to distance themselves from association with him. You are correct, however, that the kind of simplistic thinking he represents will always have a minority adhering to it.

  31. TGR

    Welcome to the world of Murphy’s opponents – Comparing himself to Jesus comes as no surprise to me – his acolytes (those not of an atheist bent) have already deified him. I have often wondered why the fragility of ego, and hypersensitivity.
    As I said before, to me it comes down to a combination of intense fear and pride. He is 56, and by all accounts has been at this for two decades or more. It’s got to be hard when something you have spent your life campaigning for is proven to be manifestly ridiculous, and your only response is to ban the other person’s opinion – as I say, he has become a faintly ridiculous figure, more worthy of pity than contempt.

  32. Arnald

    Richard would be proud of you. Faced with a barrage of criticism, a hundred points made against him, Murphy will pick on one tiny point which might be misplaced and use that as an excuse not to respond to the rest. You’ve done the same.

    In the sense that he’s no longer in active practice, Murphy could be said to have retired from accounting but in a sense that he’s not dead (although some may argue that his brain is) and pontificates on topics related to accounting then he hasn’t retired.

    Well, done. I’m sure that in Richard’s and your world, you have dealt with every point made against him with your 2 line post.

    Tell you what, here’s a deliberate speling mistake. Pounce on that and use it as an excuse to ignore the rest of my post.

  33. Andrew

    I was merely emulating Worstall and being a ‘pendant’. I certainly wasn’t directing anything your way.

  34. Pingback: A Link to the Past 12/10/2014 | In Defence of Liberty

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