The natural chaos of markets

Having just watched the second episode of All Watched Over By Machines of Loving Grace  by my favourite documentary maker Adam Curtis, in which he tells the “story of how our modern scientific idea of nature, as a self-regulating ecosystem, is actually a machine fantasy”, I am once again struck by what an absurd body of ideas, or more accurately, self delusions, much of modern economic prejudice-masquerading-as-theory is.

Curtis, in this episode, shows that the idea that there was a balance of nature was always flimsy, never supported by the empirical evidence, and based on extreme, self proving over simplifications. Ecological thought is about on the same level as economic thought, it seems. Nature is not in balance at all. Consequently all those ideas about self correcting systems — you know, Adam Smith’s so called invisible hand — also turn out to be a fantasy. The neo-liberal assumption that markets are like an ecology, a natural system that will self correct provided it is left alone, is also looking rocky. If, indeed, markets are natural systems — and they are not, they are created systems — then they will not self correct. The vegetative metaphor is extremely unpersuasive.

Curtis does not explore the implications for economics, his interest lies more in how we have given up the power to act because we have allowed machine driven systems to take us over. But what he traces is extremely damaging for General Equilibrium theory, a central plank of much economic “theory” and the basis of micro-economics. General Equilibrium theory basically borrows the vegetative metaphor, that there is a “balance of nature” and applies it to markets. This was always a nonsense move, because markets are not natural, they are artificial. As Curtis shows, it is double nonsense, because even if the metaphor holds, it leads to the opposite conclusion. That markets will probably not incline towards equilibrium at all. Quelle surprise.

In one sense, the assumption that there will eventually move towards equilibrium is typical of the kind of circular arguments of which economists are so fond. Balance is implied in the transactional structures. Balance sheets have to, well, balance; assets must match liabilities. Prices must reflect some sort of balance between supply and demand. That is what a price is. Debts must be repaid from income. And so on. In the artificial rules of finance, equilibrium is implicit.

But of course that is not what happens, especially when you allow markets to be “free”, and especially when you allow financial markets to be “free” to make up their own rules. They are not self organising systems that incline towards balance. They become out of control exercises in chaos that move towards anything but equilibrium. I cite the GFC, the Great Depression, the Latin American debt crisis, Japan’s asset bubble, the  Asian financial crisis and ever so much more, even back to Tulipmania.

Accordingly, what needs to happen, in financial markets in particular, is that equilibrium is ENFORCED, and continually at that. I recognise that such enforcement is difficult in today’s global markets, but the idea that if things are left free, the system will self correct — which was Alan Greenspan’s now exploded assumption — is just plain wrong. It is a system of rules. When traders are left to make up their own rules, the system of rules will be weakened and may collapse. Ergo, continually enforce the rules to ensure that the necessary balances are maintained.

Curtis goes on to show how the vegetative metaphor was used to justify the networking of machines, especially the internet and social media. That is exactly the type of shift that has occurred in finance, with machines being used increasingly to unleash the forces of financial “freedom” (derivatives, algorithmic trading, the mechanisation of risk models, etc.) that is supposed to lead to a self correcting system but which actually leads to its exact opposite. It must, quite frankly, be stopped before it does more harm to our system of money. Not that I see much hope of that happening.

It is always fascinating how bad ideas become so poular. No-one is better than Curtis at showing how it happens, although he does not really explain why it happens. Perhaps it is simply mysterious. Perhaps it is what Chesterton meant when he said that when people give up older beliefs they do not then believe in nothing, they believe in anything. Perhaps it is just that metaphors are powerful, we must have them, and we have become susceptible to very bad ones.

I don’t know. What I do know is that it is about time to jettison the assumption that markets, left free, will be self correcting and incline towards equilbrium. The opposite is the case. And human beings need to be put at the centre of human systems, not pushed to the side as just components in a “system” (how that is happening now is beautifully documented by Curtis). That, in turn, means putting the consideration of morality (an equilibrium that actually makes some sense) back into the consideration of economics.

Tomas Sedlacek’s book, The Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street, might be a good place to start to reconstruct the entire discipline from the ground up. This is what he had to say in a recent interview:

So, “Does the system behave the way we want it to behave?” is ultimately a moral question, one that we are banned from asking. In economics, this is exactly the sort of a question we’re not allowed to ask, because economics is supposed to be a positive science, not a normative science. The difference is clear: positive statements should describe things as they are (“facts only, baby”), whereas a normative statement describes things the way we want them to be.

Let’s take Milton Friedman, who was, of course, the biggest proponent of positive economics. He wrote the famous essay “Economics as a Positive Science.” In that essay, on the first page, you will find the following sentence: “Economics should be a positive science.” Now, please tell me if that is a positive or a normative statement. [Laughter]

Comments

  1. Whilst markets may be prone to corrections, the very nature of markets is that they are built upon human control and behavior.

    Markets and price signals are the result of humans interacting and performing voluntary exchanges as they express their preferences.

    Humans engage in meaningful, purposeful actions and decisions in order to attempt to increase their level of happiness, and their prosperity.

    Market forces always exist, even under command economies, as people seek to satisfy their needs, including the basic needs for food, shelter, clothing and security.

    It would be a monumental error to think that free markets capitalism is just a bunch of stock markets and bond markets getting volatile. It is much more than speculators getting involved in commodities or property markets.

    Its a system by which we can engage in trade and individuals are allowed to own and use property as they see fit, not just the state.

    I’m not by any means suggesting that markets are perfect, and that booms and busts can be avoided….but the idea that government intervention is superior to the knowledge captured by markets has been proven wrong so many times by all the failed command economies.

    On the theory side of things, you cannot get around the economic calculation problem described by Hayek and von Mises. It is indeed a fatal conceit to think that a government (comprised of humans) can direct a market without error.

    Governments make errors just like individuals, only when the government makes a mistake, it is magnified across the entire economy.

    How can a technocrat or central planner (who is nothing but human themselves) have more knowledge than all the market participants and intervene to improve outcomes ?

    What should the price of bread be ? What quantity of corn should be grown ? How many tonnes of rice ? How many iphones ?

    No sane person should try and answer these.

    • Some excellent points, Jono. Before interfering in markets, we need to be reasonably certain that the cure is not worse than the disease.

      The other point I would add is that many of the markets that have gone out of control are far from free. In many instances the triggers for chaos have in fact been government actions (viz the sub prime crisis in the US).

    • I’m sorry but you seem to be confusing government intervention in Western democracies with central planning, which is an extreme form of intervention, and typical of most command economies.

      The two types of intervention are at opposite ends of the spectrum; the former aims to influence economic outcomes via price signals managed by monetary and fiscal authorities, while the latter issues government directives in the form of consumption and production targets via a central planning authority.

      And, yes, a central planner cannot possibly have all the available information at hand to produce any number of efficient outcomes. But a central planner is also very different to a policymaker who is only required to influence economic activity with available monetary and fiscal tools to produce a desired economic outcome, ie., as directed by the democratically elected government of the day. It’s a subtle but key difference.

      It’s also quite disingenious to argue that a government (comprised of humans) can direct a market without error any less that the market itself (also made of humans) can direct outcomes without error. It follows that if the market is capable of producing efficient outcomes, via human interaction, then perhaps so is the government…

      • Frankc…

        YOU HAVE HIT THE NAIL ON THE HEAD…

        Your responses to Jono’s observations are on the money IMHO…

        If you look at the current debate around government intervention in the wake of the clusterf#@*k that was the GFC and the current Euro-debt crises, the neo-libs pull out the old command economy chestnut to scare everyone into thinking that somehow good government regulation of markets somehow equals the road to a centrally planned socialist economy…

        It’s funny how history repeats itself… In Soviet Russia, when each successive five year plan failed to meet its output targets, the response was always more planning and more control rather than accepting a role for markets… And we all know how that ended up…

        In the same way, the neo-libs try to kid themselves (and the rest of us who live in the real world) that somehow the problem is that the world has not embraced the market enough rather than putting too much faith in them. The reality is that we need markets that are tempered by good regulation and management.

        The problem is that the neo-libs have run out of ideas that can adequately explain the current mess, let alone address it… So what do they do??? They resort to scare tactics and generalisations to keep them in the intellectual game.

      • If government intervention is at the opposite end of the spectrum to central planning, then it is a very small spectrum indeed.

        I never claimed that markets wouldn’t make errors, only that when governments make errors, they are magnified.

        When markets make errors, like an inferior product, or an inefficient manufacturing process, the mistakes are most quickly and most efficiently uncovered and remedied by market forces themselves.

        The sub-prime crisis, Bernie Madoff, Enron, the dot-com collapse, carried on and were all somewhat magnified by blind, captive or outright corrupt regulators.

        Inquisitive reporters, a free press, and the investment community uncovered the accounting scandals behind these scams.

      • EpicurusMaximusMEMBER

        Story from my former home, Soviet Union.

        The central planners noticed a shortage of steel and ordered a big increase in production. As the machinery for steel production is itself made out of steel, the apparent shortages were made worse, prompting the planners to order an even higher production of steel. This funny little feedback loop continued for a decade until the Soviet Union had more capacity for steel production than the rest of the world combined with no use for it.

        Not sure if the story is true, but there is no disputing the shortages of most bare necessities that people had to suffer through during the communist regime.

        Market economy with moderate regulation has been shown to work best.

  2. Even in more stable circumstances than these, financial markets are chaotic because they’re dominated by feedback effects. That’s why I smile whenever I see some chartist prognosticating in where the market is headed, based on where it’s been.

    Recommended reading: Mandelbrot’s “The (Mis)behaviour of Markets”.

  3. Talk about society being in a decadent post rational phase. Anthony Flew’s famous book “How The World’s Most Notorious Atheist Changed His Mind”, lists literally hundreds of “conditions” that needed to exist in “nature” for human life to be possible at all. Flew was convinced by the mathematical impossibility of all these conditions existing by pure chance.
    The argument about nature being fragile and never “balanced” leaves us in a cleft stick – how and why have conditions as we know them, allowed for milennia of favourable conditions for “evolution” (according to science), if there never was a state of balance and robustness in “nature”? IF humanity today IS capable of upsetting that “delicate” balance, then there are plenty of “natural” upsets that should have been far worse, to the extent of eliminating human life long before we ever discovered fossil fuels.
    It is the worst kind of self exalting hubris on the part of mankind, to attribute “2012” style events to human action – which is the logical conclusion of the arguments of the Luddites and Malthusians today. “The end of the world”, when it comes, will presumably be “because of” fossil fuel burning and nuclear bomb tests; rather than something that was going to happen anyway regardless of anything puny humanity did.
    When it comes to transferring these arguments to “markets”, I say that the difference between “capitalism” and its most extreme competitor, communism, is like the difference between a society that achieves powered flight and one that does not. “Greed” or self interest is like air and “capitalism” is like the principle of aerofoil lift. Communism is like trying to achieve wealth creation WITHOUT using a distasteful medium – “self interest” – which is as good as trying to achieve powered flight without regard to “air”.
    Blaming “free markets” for the Global Financial Crisis, is like blaming air and the principle of powered flight itself, for the crashes of Airbus Airliners with malfunctioning Fly By Wire control systems. Ignorant people who do not understand derivatives markets, condemn “the free market” for something for which it, itself, was not responsible. PEOPLE plugged the wrong figures into control boxes due to mistaken assumptions – “house prices can never fall” – and a crash happened. The problem was the false assumption, not “the free market”.

    • Yeah, it’s the typical backwards logic of the creationist types. Everything has to be too perfect for us to exist, so therefore conditions must have been created, or tend towards some sort of balance.

      Of course the simple reality is the opposite. That we can only ever find ourselves in a time and place where conditions are perfect for our existence, or we simply wouldn’t not exist at that time.

      Given eternity, and the laws of nature, eventually anything and everything will exist somewhere at some time.

      I suspect markets are the same. Given enough time, eventually any event is possible.

      • But “eternity” is not “science”. “Science” is that time and the universe “began” in some “year dot”.
        Go beyond that, and you are outside of science and into religion, whether you call it religion or not. Some people call it “metaphysics”.

      • Actually, a certain kind of christian worldview (the non establishment, dissenting protestant one) seems to produce better analysis of everything. There are numerous positive correlations here – read Everett Hagen, “How Economic Growth Begins”. He notes some very striking historical connections between industrial innovation, and dissenting Protestants. These people tended to regard technological advance that benefitted mankind, as desirable; whereas “established” christian churches tended to be forces for status quo, stagnation, and entrenched helplessness of the people. In this, of course, they were no different to any other “establishment”, religious and political, in human history.
        The USA really did itself a massive favour by NOT “establishing a Church”.

        Hayek says in “The Road To Serfdom”:

        “……Perhaps the best guides through some of our contemporary problems will still be found in the works of some of the great political philosophers of the liberal age, DeTocqueville or Lord Acton, and, to go even further back, Benjamin Constant, Edmund Burke, and the “Federalist Papers” of Madison, Hamilton, and Jay…….”

        Christians? Surely not.

        Check out “The Online Library of Liberty”:

        http://oll.libertyfund.org/

        This is HUGE: see the “authors list” – page 1: the first of the “A”s

        http://oll.libertyfund.org/index.php?option=com_staticxt&Itemid=28

        Check out a few names. There are christians everywhere among those authors.

      • The BurbWatcherMEMBER

        No offense intended, but what you have said is simply not scientific, according to the conventions…

  4. I agree, the idea that markets tend toward equilibrium is nonsense, which of course implies that classical economics is nonsense.

    I’m puzzled that anybody would think the markets are vegetative. The markets are human and social, governed by man’s social nature. Greed and fear are both contagious.

    I disagree that rules control what happens in markets. I think you have it back to front. I’d say the rules that politicians place in operation at any point in time are determined by the markets behaviour in the preceding years or decades. When the market has been correcting and people have been losing money, they like to place strict rules and controls. When the market has been trending upwards for several decades, they relax the rules and controls.

    Charts of the share market (British and then US) over the past several centuries suggest that the coming and going of rules is just a sideshow. The market at largest degree always advances, and within that cycles between moving impulsively upwards and then correctively down or sideways. I’ll be surprised if that cycle ever disappears.

  5. Anyone who in their right mind still thinks that markets are perfect and always lead to an equilibrium have been living in a cave since, well, forever.

    Adam Smith’s invisible hand is based on a market which does not exist. It’s a theoretical model, not a truth. Markets are constantly distorted by personal biases, lack of transparency, conflicting interests, marketing (selling based on emotion rather than intrinsic value or use), the fact that external effects such as pollution are not priced in, the lack of truly homogeneous goods, etc. etc.

    The model of a perfect market does offer some very useful ideas such as the pricing calculation Jono mentions which is why governments should usually avoid intervention in markets, unless to correct flaws in the market (such as external effects not being priced in). (The shaky thing here obviously being the definition of a ‘flaw’)

    Anyone who in their right mind still thinks that centrally planned economies are viable must have been living in the same cave since, well, also forever. It’s so obvious I’m not even going to present arguments.

    If there is one thing which has proven itself to be true is that the only system which works is a system of checks and balances in which no one group or entity can exert too much power or influence over others.
    in my opinion the financial system was able to do that in the decade leading up to the GFC after government responded to the call for deregulation.

    Contemporary post 9/11 discourse is characterised by a weird polarisation between further-left and further-right. There are no absolute truths, we should all know that by now. Isn’t it about time we came back to the centre a bit and see that there is an important role for both government and the market?

    Heck, I suggest they aren’t two different systems at all. They are both part of one integrated much more complex system.

    • Adam Smith’s invisible hand is not the same as the efficient market hypothesis.

      The invisible hand is not saying that there is perfect information and equilibrium, and that markets always price things correctly.

      Rather, the idea is that people who engage in trade for self-interest and for individual gain tend to generate huge external gains for the rest of society.

      If you lay down the framework for a free market – property rights, individual freedoms, laws against theft and fraud and violence – then you see spontaneous order emerge.

      Markets form, you see the division of labour emerge, the fruits of our labour and the wealth of a society grow, simply because individuals are pursuing their own self interest.

      • “If you lay down the framework for a free market – property rights, individual freedoms, laws against theft and fraud and violence – then you see spontaneous order emerge.”

        Sounds a lot like regulation to me … I am not sure why people suddenly equate government or outside influence with command economies ?

        What we are really talking about is controlling the “framework” as mentioned above.

        If you are going to build something make sure that the “framework” is strong enough to resist the forces placed on it. The “market” is not going to do that itself.

      • “Rather, the idea is that people who engage in trade for self-interest and for individual gain tend to generate huge external gains for the rest of society.”

        I’m not disputing this idea but we can’t deny that some groups have so much capital/power that they can “guide” the invisible hand. I only have to refer to the antics of lobby groups to present a couple of prime examples.

        The way I understand it is that the invisible hand theory relies on people being able to carefully weigh pros and cons to select the optimum outcome for themselves. This requires a perfect, transparent market which does not exist.

        Sure, the theory explains that self-interest is probably the best motivator for improvement but it doesn’t address the notion that what a person regards as in his/her self-interest can be warped and morphed substantially.

        Hence, there should be more checks and balances.

    • The BurbWatcherMEMBER

      “there are no absolute truths”

      Is that absolutely true?

      😉

      Sorry, just had to point out the irony!

  6. “Governments make errors just like individuals, only when the government makes a mistake, it is magnified across the entire economy.”

    Jono, there are so many ideas in your post that are worthy of reflection and critique. This is just one. Of course, mistakes are inevitable. No-one would dispute that. Your claim is that the mistakes made by Governments necessarily have bigger consequences than mistakes made by markets.

    This is a generalisation that does not stand empirical testing. The creation and collapse of the sub-prime bubble is only one recent example.

    Consider, the Government did not create the supply and demand for credit that fueled the bubble. The Government did not compel economic actors to lend or borrow money. The Government did not compel private citizens to buy and sell their property or fix the price at which property changed hands. These were all private decisions made in a market.

    Now consider whether the market was optimising benefits for all its participants and whether or not the sum of the millions of decisions made by actors on the market were or were not “mistaken” in an important sense.

    Plain as day, the bubble has resulted in profound hardship for many tens of millions that will last for decades. Nor is the fallout from the creation and collapse of the bubble merely confined to those who bought and sold property. There are many many millions more who have or will lose their jobs, their houses, their businesses and the interior comforts and security of family life precisely because the market failed to correctly price risk and the value of property across several continents. These fundamental pricing errors were not isolated or anomalous. They were prolonged and were repeated many tens of millions of times.

    The State has tied to ameliorate this hardship, but assuredly was not the author of the bubble or its collapse.

    This is not to say that Governments do not make errors and that these errors can have wide consequences. No rational person would argue that case. However it is just not correct to say the consequences of market errors will be trivial by comparison. This sort of proposition is just wrong.

    It is the kind of claim that is made in order to prevent Governments from imposing limits on private actions.

    It is important to realise that when a large-scale market goes seriously wrong, “innocent by-standers” will also be injured. Even if you think the players in a super-charged property/credit market should not be protected, at the very least the State should be actively protecting the economic interests of the millions of “innocent bystanders” who will be harmed when such a market ultimately collapses.

    • “Consider, the Government did not create the supply and demand for credit that fueled the bubble. The Government did not compel economic actors to lend or borrow money. The Government did not compel private citizens to buy and sell their property or fix the price at which property changed hands. These were all private decisions made in a market.”

      ..Fannie Mae/Freddie Mac, there was no push from government to increase home ownership in the 2000’s??

  7. ceteris paribusMEMBER

    This article is spot on.

    The “wise market” theory is the propaganda of those talking their own book.

    In terms of morality, the inherent concept of “regulation” is good, just and proper.

    The actuality of regulation is bad, when it is misguided (stupid) and when pillagers themselves have captured the regulatory power (“Inside Job”).

    • Both “markets” AND “regulation”, depend for the goodness or badness of their results, on the wisdom of the people involved. Perhaps I didn’t make this clearer before.
      “Free markets” certainly do not “work” to the same result in every culture in the world at every time in history. In fact, the decadent phase of our own civilisation is leading to both bad “market” outcomes AND bad “government”. We really owe everything to a particular culture. Even Hayek says something quite remarkable in “The Road to Serfdom” to this effect. He refers to a culture where people are prepared to “submit to impersonal forces”. Honesty, enterprise, thrift, hard work, and an unwillingness to succumb to “the politics of envy” have all helped.

  8. Nature is indeed a self regulating system, but one in which the state of equilibrium is in a constant state of flux. If we disregard the influence of humanity, which has only come into existence in the last second of the geological timeline, we accept that different species that have inhabited the earth over the millenia have had exponnetially expanding populations that have come about for no other reason than the presence of the evolutionary compulsion to consume that which their environemnt provides so as to reproduce and ensure that species ongoing survival.

    This system resulted in species’ expanding their range and population size, and necessitated evolutionary adjustments to ensure competitive advantage. However this inevitably resulted in the contraction or complete extinction of many species/populations, as finite resources within the environments they occupied could no longer sustain everything. The flux of environmental and climatic conditions, exacerbated by external events (eg dinosaur comet event) effected the rate of coversion of the sun’s energy into energy available for syntheis into the worlds biota at any given time, so that there has been great range in the equilibrium of nature.

    Regardless of this equilibrium, energy has constantly accumulated within the earths crust as decomposing biomass converted to carbon rich fossil fuels. The arrival of the industrial age has obviously enabled humanity to extract and harness that energy, enabling us to take the same “evolutionary” path as all other species before us, only removing the restrictions imposed by naturally occuring ecosystem boundaries that ensured this naturally occuring equilibrial flux. For the first time the amount of energy removed from the global system exceeded the rate of sequestration, and this rate has increased exponentially along with the global human population that consumes it.

    This process of extraction, consumption and construction has been even further exponentially hastened over the last 30 or so years by the expansion of insidious financial innovations such as derivitisation and high speed trading which are promulgated by the predominant free market capitalist system.

    A system in equilibrium continuously cycles a contained amount of energy (or capital) throughout it, and therefore by definition does not grow. Natural and human development are growth-dependant, however nature has tipping points to ensure growth is contained and distributed. By conquering nature and releasing billions of years of stored energy into the environment in a couple of hundred years, and turbo charging this growth via the human-specific notions of greed and fear, we have clearly overshot our ability to exist in anything approaching equilibrium by an extremely long way.

    Arguments about the correct political and economical interventions required to achieve a balanced and fair system, while fascinating, are largely conducted in a vaccuum free of ethical considerations, and are tantamount to arguments about which buttons we should frantically press on the expansive control panel of the Starship Humanity, in the final minute before we get sucked into a black hole….

    • I disagree with the premise that economic development means infinite resource consumption and depletion.

      It often means being more productive, efficient and living longer and happier lives by using the resources and the labour we have most effectively.

      In terms of population, as wealth increases, birth rates drop off. I take most forecasts with a grain of salt (especially climate modellers and financial modelling) but demographers expect the world’s population to stabilise in a couple of generations.

  9. EpicurusMaximusMEMBER

    The obvious answer is that no regulation is bad and too much regulation is worse.

    Every piece of regulation needs to be assessed on the basis of benefits > costs.

    It’s really not that complicated – only idealogues with blinkers on make it SEEM complicated.

    But a worrying trend with this post, some of the comments and the Occupy Wall Street is this – the West has convinced itself that the capitalist ideology has lost and the command economy ideology has won. This is complete madness.

    The reason China is getting its people out of poverty, after decades of impoverishment, is through adopting the very same ideology of a market based economy. A 6 year old can see that.

    Enough angst.

    • “West has convinced itself that the capitalist ideology has lost and the command economy ideology has won”

      Sorry that is rubbish, neither the Occupy Wall Street protests or anyone in this thread are saying any such thing.

  10. [What should the price of bread be ? What quantity of corn should be grown ? How many tonnes of rice ? How many iphones ?

    No sane person should try and answer these.]

    Really? The fact of the matter is that Apple decide what the price of an iPhone will be, essentially without entering into any bargaining with buyers. There is no invisible hand. There is instead shrewd marketing, the application of proprietary technologies and the concentrated force of billions of dollars, guided by an elite management.

    There is no sense at all in which this (very contemporary model) matches the purely competitive market ideals that form the basis of Smith’s philosophy.

    • Prices are not set by Apple, they are set by the market which is formed by thousands of buyers and sellers.

      Apple isn’t the only seller of mobile phones, they have competitors.

      • “Prices are not set by Apple, they are set by the market which is formed by thousands of buyers and sellers.”

        Try that out next time you pass an Apple store. Go in and make an offer on a new phone. Ask for 5% off. You will find you have no bargaining power whatsoever and find yourself to the object of slightly amused indifference.

        There are not thousands of buyers and sellers. There are hundreds of millions of buyers and about four sellers. There is only one company that has been able to conceive, create and execute the Apple business model – and that is Apple. Within this model, Apple have figured out exactly how they are going to get consumers to pay truly extravagant prices for their products. They know what to do and they are doing it. An intrinsic element of their plan is to nullify price competition.

        The idea that some kind of even balance of power exists in consumer markets is largely fictional. If you don’t think this is realistic, try negotiating with your bank for the removal of fees on your accounts or a 25% discount on your home loan rates. Try getting your electricity supplier to lock in a 30% discount for three years and 90 days to settle their bill. Good luck with that!

      • a company can dictate any price it wants, if apple made an iphone $5000 they could, someone needs to agree on the price for it to be the market price, its not a one sided ledger of companies dictating prices and consumers always agreeing to pay it..

  11. > It is always fascinating how bad ideas become so poular

    There is a new area of study emerging on social “memes”. I came across it in a Richard Dawkins book. It really does explain a lot about.. everything. A gross-oversimplication but bad ideas can serve a purpose – just not the one we intended.

  12. The BurbWatcherMEMBER

    “That, in turn, means putting the consideration of morality (an equilibrium that actually makes some sense) back into the consideration of economics.”

    Bravo.

    • Whose morality ?
      The morality of the mob ?

      Or the morality of a market-place where only voluntary exchange between consenting parties in a mutually beneficial arrangement, takes place.

      Morality doesn’t belong in economics. Hayek wrote that market forces are impersonal, and that they may offend us, but that the only other alternative is a tyrannical form of central planning and economic directives.

      • well minus the child part, then why not? who do you think benefits the most out of drugs specifically being illegal?

        I gather if 51% of people believed drinking milk was ‘immoral’ youd be in favour of making that illegal?

      • “I gather if 51% of people believed drinking milk was ‘immoral’ youd be in favour of making that illegal?”

        Yes, that’s right. Child prostitution, heroin, drinking milk – all perfect moral equivalents.

        Are you seriously arguing there is no moral dimension to human behaviour (as subjective and imperfect as it may be) and the social, legal, economic and market structures they have created over history ?

  13. “Hayek wrote that market forces are impersonal…”

    Clearly Hayek knew nothing about marketing, consumer psychology or the neuro-chemistry underlying all human behaviour.

    Or if he did, in order to make his position appear more persuasive, he ignored these things: that is, he doctored the evidence to suit his argument.

    Hayek was a moral philosopher as much as anything. It is a mistake to call him an economist.

  14. Another way of looking at the market is from the point of view of the Theory of Multiplayer Games. The rules of the game are set by regulators and these rules determine a Nash equilibrium to which the game will converge over a period of time. At the same time the way the rules operate will depend on the changing environment e.g. climate changes.

    In a way the rules are set before the next round of the game starts and setting the rules is not quite in the domain of economics but politics i.e. lobbying and/or corruption.

    A good example of setting the rules can be the repeal of the Glass-Steagall Act after which gradually most major financial institutions used similar strategies that led to the current crisis and resulted in a lot of innocent losers who can’t really continue playing any market game i.e. the economic system breaks down. In this case the rules will be reset again but this time quite likely to satisfy the angry losers. If the rules are bent more towards a command economy the system will ultimately break again but in a different way and will require a reset which will very likely be done according to a different set of rules.

    It seems quite intuitive that the life cycle of such a system depends on the rules but at the same time it seems inherently unstable especially in the era of fewer and fewer large players i.e. corporations. The only question is how instability plays out over a period of time.

  15. Tedblack44MEMBER

    The equilibrium of natural systems may well be possible given a stable environment. However, there is no such thing as a stable environment. The universe is constantly changing. Evolutionary processes have developed to cope with this change.

    Politics is one example of an evolutionary process that we have developed to cope with changed economic circumstance. Rating agencies were supposed to be another.

  16. markets are so complex that we need someone to regulate and order a framework for us all to work in.. this seems to be the crux of what many of you think..

    this is the exact reason why a system should not be in the hands of ‘groups of the enlightened few’

    • No – more like, left to their own devices, humans are demonstrably biased towards acting in their self-interest and against the interest of others. That is why there are social, legal and other structures to regulate our behaviour. Markets are no different. Whether those regulating mechanisms perform as they are intended is a different question. To conclude the impulse to regulate is a reaction to complexity misses the mark.