For The Sage Of Ely

A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called “market failure.” In my view, however, the degree of “market failure” for the American economy is much smaller than the “political failure” arising from the imperfections of economic policies found in real political systems. The merits of laissez-faire rest less upon its famous theoretical foundations than upon its advantages over the actual performance of rival forms of economic organization.

If only it were possible to beat this point into him.

Looking around the world, we don’t have any examples of countries with successful model of state-run economic organization that have consistently over the long-term provided a higher level of standard of living or faster growth than the many countries with market-based systems–that is, not just a different set of constraints and rules to a fundamentally market-oriented economy, but a genuinely different model where the economy is run primarily through the political system. That fact tends to confirm Stigler’s suggestion that real-world political failures in economic management can be severe.

28 comments on “For The Sage Of Ely

  1. This is the blog to come to to see economists telling me things now that my father told me many decades ago.

  2. Yes, obviously. Economics attempts to describe what human beings do. It’s thus largely a codification of what perceptive humans already knew.

  3. If only it were possible to beat this point into him

    Cerebral corpulence rules out any chance of success.

  4. ‘A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called “market failure.”

    ‘Market failure’ being a pejorative of statist creeps who can’t stand freedom.

    Exact conditions aren’t met because of government interference. Freedom doesn’t reign. And this is a ‘market failure.’ Dumbass.

    ‘In my view, however, the degree of “market failure” for the American economy is much smaller than the “political failure” arising from the imperfections of economic policies found in real political systems.’

    The American government hasn’t taken over COMPLETE control of the economy. Democrats are trying to fix that.

    ‘The merits of laissez-faire rest less upon its famous theoretical foundations than upon its advantages over the actual performance of rival forms of economic organization.’

    The merits are self evident. They need no validation from other ‘forms of economic organization.’ FREEDOM DOESN’T NEED HIS APPROVAL!

  5. “The merits of laissez-faire rest less upon its famous theoretical foundations than upon its advantages over the actual performance of rival forms of economic organization.’

    It seems as if the Spud is becoming a Frenchman. The very idea of reality being better than theory is abhorrent and has to be accepted with a Gallic shrug

  6. Ah ther usual handwaving, as that “famous theorem” is also based on gross modeling mistakes (euphemistically called “the exact conditions of the theorem” here), and in any case the Second Theorem of Welfare Economics says that even if it were not, it cannot apply to any possible real economy, because there is no degree of proportionality between how short real economies fall of those conditions and how short their outcomes are from the ideal, and usually it will be very far from that ideal outcome. But I guess not many people would admit knowing about that theorem, however fundamental and old (1950s) it is.

    «we don’t have any examples of countries with successful model of state-run economic organization that have consistently over the long-term provided a higher level of standard of living or faster growth than the many countries with market-based systems»

    That’s the usual handwaving too: we don’t have any examples of countries with market-based systems that have done that either: we only have examples of economies where over the long-term eventually growth stopped or even declined, whatever their politics. But perhaps Japan in the past or south Korea are examples of economies that were state managed rather than “laissez faire” during their long-term periods of higher growth.

    Anyhow in pre-industrial pre-fossil fuel economies there were long runs of extra growth (centuries) in economies not based on markets, but on extractive systems (from the roman empire to the english empire).

    My impression is that too many “motivated reasoning” handwavers “misunderstand” the growth that comes from switching to an industrial economy based on very cheap, energy fossil fuels, with the growth that comes from their favourite model of politics (e.g. the very real and impressive run of soviet growth 1930-1970 often cited by stalinists), so for example when the possibilities for diffusion and deeping of that type of economy have been mostly used up, and growth stalls (e.g. post 1973 “atlantic” economies) they are at a loss.

  7. @Diogenes

    “The merits of laissez-faire rest less upon its famous theoretical foundations than upon its advantages over the actual performance of rival forms of economic organization.”

    For avoidance of doubt, this quote comes from George Stigler (with Nobel memorial prize) not from Richard Murphy (without one).

  8. Blissex, how did the Soviet economy match up against industrial revolution Britain or 19th c USA, or late 20th c China? Are there proper comparisons?

  9. Guys,

    For The Sage Of Ely”

    Ritchie didn’t write it. A sensible chap did.

    Summary: Everything market does well that Gov’t meddles with becomes worse & more expensive.

  10. @ Blissex
    The figures quoted by Stalinists are always lies.
    Under Communism Russia could not even feed itself. Under the Tsars, Russia exported wheat. It does so again now. 40 million tons in 2018.
    Are you a Holodomor-denier?

  11. “the very real and impressive run of soviet growth 1930-1970”

    What you really want to be looking at is total factor productivity growth. IIRC the Stalinist era saw a big rise in output due to a big rise in inputs, and very little in the way of long-run productivity improvements as were a hallmark of Western growth and development.

  12. Capitalism, at its core, is the PERCEIVED creation of more value, since obviously what constitutes “value” is normally subjective.

    but what Tim never, ever explains is why there needs to be MORE value. that is, aside from the obvious implied fact that some people WANT more PERCEIVED value.

    but WANTING something is not at all a justification for GETTING something, much less is it sufficient for regarding anything as “valuable,” again except in a subjective sense.

    so, Tim, please explain–objectively and as a matter of categorical principle–why there needs to be more value….ever.

  13. The Black Death killed off a third of Europe. Their wealth was per force distributed amongst the remaining two-thirds.

    Stalin killed off 40,000,000 Russians. Wealth was thereby similarly redistributed. Unless they found you had wealth. In which case you were one of the 40,000,000.

  14. Capitalism, at its core, is the PERCEIVED creation of more value, since obviously what constitutes “value” is normally subjective.

    What constitutes failure under The Five Year Plan is also normallay subjective so a PERCEIVED failure of the FYP etc. etc.

  15. There doesn’t need to be more value. The only reason to have more value is because people like there to be more value. I assume – take it as one of those founding assumptions – that people organise themselves in order to gain more of what they want. That’s therefore the point of an economy, to provide more value to people as that’s what people want more of, more value.

    In more formal terms, people maximise utility. That’s the thus the purpose, to provide more utility. Simply because that’s what people want.

  16. Why do we want more wealth?

    Well, for started, I’d like to see cures for cancer and other diseases that still kill too many. I’d also like to see the number of people in absolute poverty reduced to zero and I’d like better technology to help the disabled.

  17. so, Tim, please explain–objectively and as a matter of categorical principle–why there needs to be more value….ever.

    Because being a hunter-gatherer utterly sucked?

    And the vast majority of the entire world’s population scratching a living in the dirt at under $1.90 constant dollars per day, which was a vast improvement on hunter-gathering, also utterly sucked.

    In other words, stupid contention is stupid…

  18. Looks like, in Zan, we’ve got our very own communist. Blissex ma7y be another one. The Ceausescu Remedy is often efficacious with them.

  19. Further to last – when Ugg first made a spear as an improvement to hitting his food over the head with a stick, he added value since the hunt was safer and more efficient, increasing his utility.

    When Ugg Jr made a bow and arrow to hunt game from greater distances, he added value and increased his utility.

    When Ugg’s grandson knapped a flint to tip the arrow, he added value and increased his utility.

    If you think there’s no categorical principle why this value add should take place, you’re very dim indeed…

  20. The irony is that Communism / State Socialism was supposed to be BETTER and more efficient at producing value than market capitalism. Labour politicians even in the 50’s could unironically make statements like “when the peoples of Eastern Europe start to reap the material benefits of central planning”.

    But since that failed on a massive scale, now it’s unironically “why should we be increasing value ever”.

  21. Karl Marx reincarnates in 2019, in the first world. Looks around the place. Sees the material wealth of the poorest in society, and says “Aah, so I see you managed to reach Full Communism then, my predictions worked out perfectly! Well done to you all for getting there!”.
    “Err, no Karl, this is market capitalism”.
    Karl strokes his beard and ponders, before replying, “Wow, full communism will be so much better than I predicted!”

  22. Zan

    I suggest that rather than posting a comment bemoaning perceptions of value on a computer powered by electricity to be transmitted via the internet (and all the associated servers supporting it) on telephony systems using copper and optical cables, you consider sending a letter with your comments by post instead.

    Then, having reflected that to do that involves stamps, paper and pens etc as well as a whole international postal infrastructure, you instead pick a big leaf from your nearest wood and etch your comments in mud on the leaf using a stick and walk and swim to Tim’s house in Portugal to deliver it to him.

    Or (assuming you’re UK based) you could climb the highest hill near to you and shout your comments in a roughly south westerly direction for Tim to hear them.

  23. “Capitalism, at its core, is the PERCEIVED creation of more value, since obviously what constitutes “value” is normally subjective.”

    No. “Capitalism” was Marx’s pejorative of free enterprise. Being free, one might choose to create “more value.” As the person making the choice is also the one being subjective, it’s nobody else’s business.

    “but what Tim never, ever explains is why there needs to be MORE value. that is, aside from the obvious implied fact that some people WANT more PERCEIVED value.”

    Their lives, their choice, their freedom.

    “but WANTING something is not at all a justification for GETTING something, much less is it sufficient for regarding anything as “valuable,” again except in a subjective sense.”

    It is for the person making the choice.

    “so, Tim, please explain–objectively and as a matter of categorical principle–why there needs to be more value….ever.”

    “Need” has not a damn thing to do with it.

    This is the legacy of communism. All you “need” is a hut and the daily gruel. A miserable life with NO HOPE FOR BETTER. The grand evil of the 20th century. Yet people wish it upon the 21st century.

    Zan, your utopia is alive in the streets of San Francisco.

    http://justice.gawker.com/the-streets-of-san-francisco-are-covered-in-human-shit-1679930931

  24. A wonderful line seen elsewhere:

    Let’s face it, if Murphy didn’t agree with your own views, you wouldn’t even be mentioning him. That he is a professor at what was previously a branch of World of Leather wouldn’t even impress you at all.

  25. I wonder in a rambling way if the survival time of socialist regimes is increasing.
    I mean, if life is pretty good right now, and socialism results in no economic growth (or decline for that matter) then no-one should starve under some variant of Corbynism/socialism over and above the current level. So while the rest of the world gets richer and invents driverless transport, and GMO crops and fracking and automated elderly care and gene therapies and new types of telescopes and goodness knows what that we haven’t thought of yet, the socialist country would still hold on for an exceedingly long time.
    So long as clean water, shelter and food are provided, it’s hard to see a total collapse from socialism into barbarism these days. Imv, of course.

  26. Bongo, you don’t comprehend the gray existence under communism. You may survive, but you will wish you hadn’t.

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