Friday, April 10, 2015

Neoliberals miss something in all that math: the market is not rational

NakedCapitalism has an interesting piece by Ed Walker titled, "Why the Claims Neoliberals Make About Markets Are Wrong". It's an interesting overview of the claims made by neoliberals concerning the ways in which markets work to allocate resources. The article shows that neoliberals (that's "conservative/libertarian" to most of us), are doing a lot of work but unable to show how their math adds up.

The article also makes an interesting point. If markets are so rational, who gets the good stuff? The wealthy. They get the clean air, water and food. Everyone else? Well, they don't unless they organize politically to get what they want.

After reading the article, I realized that many economists seem to think of people like widgets. You know, something that can be approximated by a number, something that has a known and predictable behavior. Something approaching rationality.

But that is an assumption. Markets are not rational. If you don't believe me, try reviewing the hidden, unregulated market of credit default swaps prior to the collapse of the housing bubble. Because the market was hidden, with no true third party accounting of who had the liability or the assets, there was no way to allocate resources in the market. So when it came time to sell the assets, or pay for the liabilities, no one could figure out what to do except sell, sell, sell.

From water privatization to internet access, from the bankruptcy of Orange County to the dot com bubble collapse, we can prove that the market is not rational. It's easy. Americans spend $100 billion a year on illicit drugs. Have you ever seen anyone on drugs make a rational decision? 70% of Americans use prescription drugs, often advertised on TV. Is that rational? There is a huge fast food business in America that doesn't even sell food, they sell something that is an approximation of food. I see people waiting in line to buy it for breakfast before work as I drive to work eating an apple. Is that rational?

I could go on. The point is, there is no way to assume that the market is rational. The market is good for allocating luxuries. We need government to help allocate resources that everyone needs. That's why water, sewer and electricity have been successfully managed for decades as public utilities. That's why commodities are sold and bought in places like the Chicago Mercantile Exchange.

I want to put one more idea out there for you to consider: the market cannot be rational without transparency. If you don't know what's going on in the market, you have no way of knowing what price the market will bear for what you are buying or selling. Therefore, you cannot make a rational allocation of resources.

Most of our markets are not transparent. Take the labor market for example. Employers will not tell you the salary range for a job. "Everyone is different, so we cannot tell you how much you will earn in this position." Employers often prohibit the sharing of salary information to prevent comparisons and jealousy. But that very policy prevents people from making a rational decision about what to ask for in negotiations for salary. It's why women often make less money than men at the workplace. That lack of transparency provides the opportunity for discrimination.

When a market is transparent, all participants can review the data to make an informed decision about how to respond to market conditions. They can make a rational decision about how to allocate resources. Making markets transparent is the only way to ensure a rational market. But it's not a guarantee that the market will be rational.

Without transparency, the market is guaranteed not to be rational. Since most American markets are not transparent, there is little hope of a rational allocation of resources. That's why we need government to act as a third party arbiter of transactions to at least bring some semblance of fairness and accountability to society.
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