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Quotation of the Day…

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… is from page 152 of Ronald Coase [2]’s and Ning Wang’s superb 2012 book, How China Became Capitalist [3]:

But it is important to keep in mind that the ultimate rationale for the market is human frailty. Were the central planner as omniscient and omnipotent as in the classical model of socialism, the market would indeed be a wasteful game.

DBx: Indeed. And further, the market would be a wasteful game even if consumers and producers were as well-informed, as able, and as ‘rational’ as mainstream economists assume them to be in competitive markets.

Mainstream economists model competitive markets as working as a result of all producers and consumers possessing all the relevant information – as well as all of the behavioral characteristics – necessary to make competitive markets work. For such economists, if producers or consumers (or both) are inadequately informed they remain so and, thus, markets fail. And markets fail also to the extent that the findings of behavioral economics accurately describe the decision-making of market participants.

In a contrast that could not be more stark, Austrian economists [4] (and old-school Chicago, UCLA, and University of Virginia economists) model competitive markets as working precisely because each consumer and each producer possesses knowledge that is limited, local, ambiguous, and often rapidly changing – and because consumers and producers do indeed often behave quirkily. For these economists, market competition is the process through which producers and consumers, through trial and error, discover the knowledge minimally necessary for each to act in ways that generate an overall, productive, and ‘efficient’ – although by no means ‘perfect’ (whatever that would mean) – result that appears to an external observer to have been designed by an extraordinarily well-informed mastermind.

To accuse these latter economists of believing that – or of assuming that – the “agents” who populate their “models” are unrealistically well-informed and rational is to reveal a complete misunderstanding of the work and world-view of these latter economists. And to seek policy advice about economic intervention from mainstream economists who, oblivious to the reality that real-world competitive markets are processes, do make these unjustifiably strong assumptions about the agents in their models of competitive markets, is to run a high risk of receiving very bad advice.

One reason this advice is likely to be very bad is that the economists who offer it don’t understand that markets are justified economically in large part because the knowledge necessary for humans to cooperate productively is discoverable only through the trial and error of markets. Such economists see only the existing imperfection of knowledge and then – in a fabulously unscientific move [5] – presume that government agents somehow know that which market participants do not currently know.