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Bonus Quotations of the Day…

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… are, first, from pages 53-54 of Denis O’Brien’s important 1975 tract, The Classical Economists [2]; it’s quoted on page 14 of Frank Machovec’s outstanding 1995 volume, Perfect Competition and the Transformation of Economics [3] – a must-read for anyone interested in the history of economic thought (especially as this history reveals the roots of economists’ thinking about competition and industrial organization – hint: the classical economists had a far more realistic and sophisticated understanding of competition than do modern mainstream neoclassical economists, who mistake non-horizontal supply and demand curves to be the essence of, as well as conclusive proof of, monopsony and monopoly power) (emphasis original to O’Brien; brackets and ellipses added by Machovec):

The classical view of competition was a dynamic one and it is misleading to interpret their writings in terms of the [perfectly] competitive model….  It is because of the dynamic nature of … competition that owners of capital were able to exploit new profit opportunities, sell new commodities, obtain supplies from new sources, and sell in new markets.

Second is Machovec himself, on page 15 of his 1995 volume:

[T]he equilibrium paradigm, as epitomized by the model of perfect competition, was, in Kuhnian terms, a revolutionary development due to its impact on the cognitive dispositions of many influential economists.

And it was an unfortunate impact indeed.

What Frank Machovec correctly calls “the equilibrium paradigm” hides from modern economists the fact that the very essence of real-world competitive market activity is the ceaseless entrepreneurial search for, and frequent discovery of, profit opportunities.  These opportunities lurk in ever-present disequilibria and in ever-present market “imperfections” (that is, real-world market arrangements that ‘deviate’ from those alternative arrangements that innovative entrepreneurs envision creating).  So if, for example, (1) some low-skilled workers at the moment in fact enjoy insufficient prospects of moving from lower-paying to higher-paying jobs, and (2) the current employers of these workers are paying them less than the value of their marginal products, a profit opportunity exists.  If the size of these underpayments is sufficiently large to warrant concern, entrepreneurs can be relied upon to notice this opportunity and to exploit it by figuring out how to hire these workers away from their currently underpaying employers.

That’s what entrepreneurs do.

Of course, in reality entrepreneurship itself is imperfect.  Entrepreneurs might not recognize profit opportunities that actually exist.  Such obliviousness, without question, happens frequently.  But if (1) such opportunities do in fact exist, and (2) knowledge of these opportunities is pointed out publicly, then it’s highly unlikely that these opportunities will remain unexploited for any long length of time.  And if such alleged opportunities do remain unexploited by private entrepreneurs despite the fact that prominent people (for example, Ivy League economists) continually insist that such opportunities are real – “Look, look!  Underpaid workers!  Look, look, look!!  Those workers are underpaid!!” – then the most reasonable conclusion is that, in fact, no such profit opportunities exist; that the workers who are allegedly underpaid consistently by their employers are in fact not underpaid.  If no one finds it worthwhile to grab the profits that would be grabable by entrepreneurially correcting this market ‘failure’ – a market failure that is rooted neither in public-goods nor free-rider problems – then the most realistic conclusion is that the prominent people who shout “market failure” are mistaken.

And certainly this much is unquestionably true: there is zero reason to trust academics and politicians who call for government action to correct the alleged market imperfection but who themselves neither stake their own money and time on private efforts to correct such imperfections nor are even able to convince people with far more practical skills and savvy than they possess to take shots at exploiting the profits available from the alleged market imperfections.

If folks such as Paul Krugman, Robert Reich, Alan Krueger, and Daniel Kuehn are unwilling to put their own money where their mouths are, the rest of us are more than justified in refusing to let them put our – or anyone else’s – money and livelihoods where their mouths are.  Ability to talk endlessly about this blackboard theory and that academic proposition is, in this context, wholly unimpressive if this talk inspires only politicians but no one else to act, and inspires absolutely no one (not even the confident talkers themselves or the politicians who the talkers regard as trustworthy social engineers) to stake anything personal to act on the assertions of the talkers.