The Music of the Market

by Don Boudreaux on August 22, 2008

in Complexity & Emergence, Myths and Fallacies, Seen and Unseen, The Economy

I shamelessly free-ride, in this letter to the New York Times, on an insight about jazz that I learned from Russ:

Jeffrey Lewis nicely
recounts the experiment of a band using extreme improvisational methods
to write music – no one or two identifiable composers, but
participation by all band members ("Communist Songwriting (Sort Of),"
August 19).  Mr. Lewis describes the goal: "The songs should never be
the recognizable product of one or two minds, but an ineffable,
dreamlike synthesis of three or more participants in which the final
result was sometimes quite mind-boggling."

Contrary to Mr.
Lewis’s claim, though, this method of composition has far more in
common with the free market than it does with communism.  Communism
turned each individual into, at best, a robot with a tightly scripted
role in a gigantic central plan.  The communist ideal was planned
‘progress’; nothing was to be left to unreliable individual
initiative.  Everything was directed, in mind- and soul-numbing detail,
from the top.

But in free markets – there the results are truly
and marvelously mind-boggling.  Consider the mundane pencil and ask:
whose idea was it?  Who planned its production from the raw-material
stages (felling trees for the wood, drilling oil for the paint, mining
bauxite for the ferrule and graphite for the ‘lead’) through to
pencils’ delivery to hundreds of thousands of retailers?  The answer is
no one.  Pencils – and cars and MP3 players and aspirin and romantic
B&Bs and you name it – are each the creative, mind-boggling result,
not of any one or two ‘composers,’ but of the efforts of millions of
individuals each doing his or her thing in the feedback-rich
environment of markets.

Play on!

Sincerely,
Donald J. Boudreaux

My colleague Tom Hazlett, after reading my letter, e-mailed this nice observation to me:

"… or have folks missed
that the corporation provides its ‘music’ through cooperation in a
shared ownership ‘commons,’ often blasted by critics of capitalism as
so smoothly blended to be anti-individualistic? "

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{ 26 comments }

Per Kurowski August 22, 2008 at 8:50 am

The rules for this “Experimental Band” created music include… “1. No member is essential, and anybody can participate in the band… 2. Every song should be written with equal participation from everyone in the band at that moment.”

The first rule sounds much very market oriented. The second rule, in order also to be market oriented, should perhaps be reformulated into a “no one will be allowed to have an overiding influence in the writing of a song”

Against this, let me then ask Dear Tenured Professor the following:

When financial regulators order the banks to have more or less capital according to what some very few credit rating agencies think about default risks, and even if these credit rating agencies are private… are we facing a communist or a free market policy?

mjh August 22, 2008 at 9:17 am

Not being the "Dear Tenured Professor" I'm aware that my response was not requested. Yet here it is none the less.

IMHO, in the continuum between free market and communism, the financial regulators are quite a bit closer to the communist side than the free market side. Take the "financial regulators order" part out, and it swings back towards free market. However, you also have to ask are there any other government regulations that preclude entry into the market for credit rating agencies? If so, even though those agencies are privately owned, they are receiving benefits that they wouldn't otherwise receive in a purely free market.

I realize that there is no such thing as a purely free market. The question isn't between a purely free market and pure communism. The question is one of relative terms. The more free the market, the better, even if the ideal of a purely free market isn't practically achievable.

Per Kurowski August 22, 2008 at 9:41 am

“you also have to ask are there any other government regulations that preclude entry into the market for credit rating agencies? If so, even though those agencies are privately owned, they are receiving benefits that they wouldn't otherwise receive in a purely free market.”
Posted by: mjh | Aug 22, 2008 9:17:19 AM

Indeed there are… so much that Angela Merkel recently suggested that Europe needed their own credit rating agency “in order to avoid bias” and any moment now mr. chávez will figure out that his Banco del Sur initiative is pitiful compared to a Credit Rating del Sur initiative.

The world has gone crazy allowing the capital flows to be directed around the world by a couple of credit rating agencies, and much crazier calling this set up “an unregulated free financial system”.

In my book the old central planners, when they lost a job in Moscow, moved down to Basel and started to regulate banks.

muirgeo August 22, 2008 at 10:09 am

Yes the market makes good music but it also makes things like CDO's.

"Under the surface, some unusual happenings that would make anyone worry. Look at financial system, at 3-month bank lending to each other, unusually high. Suggests banks are worried about lending to each other, unusual risk factor. Due to the fact that there are unusual securities out there, mortgage obligations that people don't know how to assess their value. If housing prices continue to fall, those securities will seem even more suspect. But how will that spread to the rest of the economy?"

muirgeo August 22, 2008 at 10:11 am

oops that quote was from the highlights of Russ's recent talk with John Taylor on the monetary system.

Charlie August 22, 2008 at 11:33 am

I don't think he is talking about top down central planning; I think he is more appealing to the small commune ideal, such that everyone 's contribution is equal and everyone owns everything collectively.

It is hard to equate the band to a market even thinking abstractly, what are the prices? what is being traded? what motivates the people to contribute? We could probably think of something if we tried, but I imagine it would feel kind of forced.

If the point of Don's post is "this band isn't like the USSR at all" then I agree. If it is, "this is just like what Wal-mart does every day" then I disagree.

muirgeo August 22, 2008 at 11:43 am

And maybe things like CDO's would go away if they were allowed to fail. But I just can't help thinking the guys who rescue the market under the guise of the fed are the same people.

Seered into my memory is the image of Jim Kramer fron CNBC's Mad Money screaming into the camera at the Fed to infuse him more money and to loewer the rates… it was pathetic and I'm not sure it wasn't exactly what was going on behind close doored meetings of the fed and with JPM CEO's pushing the buttons.

Oil Shock August 22, 2008 at 12:37 pm

Muirgeo,

Are you hearing other voices in your head? Your conitnuously criticize the regulators and make a strong case for getting rid of them all. But at that very moment of Nirvana, you suggest a solution that contradicts everything else you have said until that point – more regulators to regulate the regulators and get more to regulate those regulators and then some more regulators to regulate them and then some more regulators and so on and so forth.

You have this silly notion that regulations are written to favor the common man, it is not. Doesn't matter whether the government is communist, fascist, monarchy etc. The only solution is to strip the government down bare to just defence, courts, and some very minimal police work.

OregonGuy August 22, 2008 at 12:39 pm

When you think about markets, isn't there a great distinction between private transactions and public transactions? Are there solely private transactions that are beyond the reach of regulators?

If I volunarily choose to blow–and am otherwise under no compulsion to blow–isn't my playing a voluntary contract to the other musicians? That which can be simultaneously accepted or rejected? Do any of the other players have a right to restrict my playing…without my consent?

More importantly, at what point do they choose to include or exclude my playing? And how important is it whether or not we are playing in the commons, or not?

If I am playing in the commons, I have the right to continue playing whether others choose to listen or not. (But how do you choose not to listen?)

Eric August 22, 2008 at 1:41 pm

"Are there solely private transactions that are beyond the reach of regulators?"

Not under the current, broad interpretation of the commerce clause (post Wickard v. Filburn) :)

Crusader August 22, 2008 at 2:17 pm

OregonGuy – ideally you'd file that one under "Freedom of association". Unless of course you sign a legally binding contract to perform certain services.

Mesa Econoguy August 23, 2008 at 12:07 am

And cdo's are bad why?

muirgeo August 23, 2008 at 1:38 am

And cdo's are bad why?
mesa economy

Hey I'm all for Career Developement Offices. I also support the Chromosome Disorder Outreach and I think it IS important to have a Chef Data Officer. So I'm not sure what you're talking about Mesa.

Russell Nelson August 23, 2008 at 3:45 am

mesa, you're being trolled. See that bait? It hides a hook.

Mesa Econoguy August 23, 2008 at 4:31 am

No, no, no, no, no, no, no, no. Wrong.

Victor Niederhoffer has already tried this, and he blew up during the 97 “crash” (which I witnessed on the CME floor).

Refco shut him down, and that wasn’t quite so musical…

Mesa Econoguy August 23, 2008 at 4:47 am

and I think it IS important to have a Chef Data Officer. So I'm not sure what you're talking about Mesa.
Posted by: muirgeo

I’m thinking Chef Data Offisir is probably a good idea.

Bobby Flay, and all….

Now, since muirgeo has clearly handed off his constitutional surgical DNC typing duties to subpar backbenchers, I'm curious to know, muirgeo, why and how you suffer from [previously undiscovered] verbal sciatica?

Mesa Econoguy August 23, 2008 at 4:53 am

Why do you think, muirgeo, that big oil is out to get you?

That’s rather childish, don’t you think?

Mesa Econoguy August 23, 2008 at 5:50 am

Mingus big band.

muirgeo August 23, 2008 at 8:05 am

Why do you think, muirgeo, that big oil is out to get you?

That’s rather childish, don’t you think?
Posted by: Mesa Econoguy

Why do you think government is out to get you? I have fear of concentrations of any power weather they be in government or corporations or personal.

muirgeo August 23, 2008 at 8:15 am

mesa, you're being trolled. See that bait? It hides a hook.

Posted by: Russell Nelson

Russell you are a miserable person who can't even recognize basic humor. You need to chill out a bit and try to be a little more open and friendly.

Everyone who disagrees with you is not your enemy. I'm a good guy who's liked by his peers and friends (even my conservative ones), I contribute to society , I earn/pay my way. I obey the laws, follow the golden rule and have been married 22 years and a father of two daughters. I simply hold myself and my country to a high standard and I am looking for ways to leave this place a little better for those who follow. Nothing is more important then the future I leave for my daughters. If goading and provoking spirited intellectual debate in the interest of challenging mine and others beliefs is trolling then I suggest it is conformity you desire which is a boomerang striking right back at your supposed ideology.

Mesa Econoguy August 23, 2008 at 12:41 pm

Why do you think government is out to get you? I have fear of concentrations of any power weather they be in government or corporations or personal.
Posted by: muirgeo

Apparently not, since you decry corporate cronyism and regulatory corruption, then in the next breath call for more regulation.

You are highly confused.

Mesa Econoguy August 23, 2008 at 12:49 pm

I'm a good guy who's liked by his peers

Doubtful.

and friends (even my conservative ones),

You have no friends.

I contribute to society ,

No you don’t, you’re a leech.

I earn/pay my way.

No, you don’t. You piggyback on productive society. You're probably a really shitty doctor, judging by the amount of time you spend on this blog. I don't have that luxury, because I perform and monitor multi-million dollar transactions daily, which requires my full attention, unlike your medical hobby.

I obey the laws, follow the golden rule and have been married 22 years and a father of two daughters.

That’s nice. I’m sorry your daughters don’t have a good role model. That's quite unfortunate.

muirgeo August 23, 2008 at 12:52 pm

And cdo's are bad why?
mesa economy

Oh you meant collateralized debt obligations. Maybe you should ask Merrill Lynch that question. Also, maybe you could explain to us all how the Feds balance sheet has changed over the last 6-12 months.

Mesa Econoguy August 23, 2008 at 12:57 pm

You can’t even accurately quote my screen name.

Are you that imprecise with your patients, “doctor”?

vidyohs August 23, 2008 at 5:25 pm

mjh,

"I realize that there is no such thing as a purely free market."

I suspect, mjh, that you expand you're thinking. Pure free markets exist all around me here in Houston.

As a matter of fact one happened today in my driveway.

A young Mexican guy stopped and talked to me as I cleaned up my sunflower beds around my fence line.

He offered to performance my needed yard service for me and at my request gave me an estimate. I thought it over and rejected it.

Pure free market, and the fact that I rejected his offer changes nothing. If I had accepted it still would have been a pure free market.

There were no government controls or regulations even remotely considered in our marketplace, and no schedule except what we were choosing to place on ourselves freely from choice.

Per Kurowski August 24, 2008 at 4:39 pm

Are Collateralized Debt Obligations, CDO’s bad?

Of course not! They are great instruments! What is bad is to give a Debt Obligation Collateralized with pure junk a prime credit rating… like the credit rating agencies did.

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