View source for Defending Markets

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{{DES | des = "Nobody would seriously defend a market economy because it is optimal. Instead, the intelligent defence of markets is that they are (often) the least bad ways of coping [...] Now, of course, the notion that markets are always a less sub-optimal institution than the state is silly." | show=}}
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I have often accused rightists of making a "small truths, big error" rhetorical trick - of using a small truth to disguise a big mistake. I fear, though, that this post by Richard Murphy shows that the left can do the same thing.

He points outthat the conditions required for markets to work optimally are extremely unlikely to exist in the real world.

This is true.

It is also irrelevant. Optimality is a massively demanding standard. if we were to scrap all institutions because they were sub-optimal, we'd have nothing left.  

Nobody would seriously defend a market economy because it is optimal. Instead, the intelligent defence of markets is that they are (often) the least bad ways of coping with the fundamental problems of complexity, limited knowledge, bounded rationality and the (occasional?) human propensities for venality and greed.

For example, Hayek's defence of a market economy wasn't that it fulfilled the requirements for optimality; he described the textbook theory of perfect competition as "of little use." Instead, he said, markets were a way of aggregating dispersed information (pdf); countless traders and customers, taken together, know more than a central agency ever could. This, for example, is why prediction markets can be (pdf) more successful than individual pundits. And it's why computational experiments show that agents with limited rationality can produce efficientish markets. Under some circumstances, there is wisdom in crowds.

Similarly, when Smith wrote that "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest" he was capturing the possibility that markets could channel greed for useful ends. By contrast, the argument against state control is that the state will be captured by the rich used used to serve their interests - a claim for which there is surely abundant evidence.

Now, of course, the notion that markets are always a less sub-optimal institution than the state is silly. How well markets work will vary from  place to place and time to time, and often depend upon quite subtle differences in incentives and structure; sometimes, for example, bubbles occur in usually efficient markets. Most of us, I reckon, would favour tougher regulation of banks than greengrocers.

Personally, I feel a little embarrassed to say all this, as I think it's bleeding obvious.

But it's not just anti-market types such as Richard who don't realize this. Hayek's point about the virtues of disaggregated information-gathering is also underweighted by fund managers who rip off their clients by falsely claiming to be able to beat (pdf) the market, and by corporate bosses who think they deserve mega-million salaries for controlling big organizations.

It's insufficiently realized that the 1% and leftist anti-marketeers have a lot in common.

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