 The topic for this class is a market failure mythology and What I'm going to talk about is a little bit of my own research on this and then some of us some other people's research on this and That made me to put it into a little historical perspective and the economics profession in the 1950s and 60s the theory of market failure was all the rage and And this is at the same time when economics became much more much more quantitative and the the model the basic model of of markets changed radically from You know from before the time of Adam Smith until about the 1930s and 40s Anybody who wrote about markets and competition Wrote the same way the Austrians did Competition is dynamic rivalrous process. They wrote about entrepreneurship and invention and product differentiation And the constant struggle to win over the consumers, but then in order to model competition Mathematically the new model of perfect competition was was developed and I talked about this in my other talk a couple days ago And so And that was that was developed I think actually in Frank Knight's famous book risk uncertainty and profit he the you know the 1930s He sort of laid out or maybe 40 something like that around 1940 He laid out the state of the art of competition theory today And he had a chapter there on the on the perfect competition model So from then forward the the economics profession sort of went crazy with the spinning theories of market failure Because they had this new tool. They had this this utopian vision called perfect competition and of course nothing on earth is perfect and so They they wrote hundreds and hundreds of articles about all the the myriad failures of markets markets fail everywhere and Along along with that they had the monopolistic competition revolution which said that even even if you have a thousand competitors if If 900 of them Differentiate their product just a tiny little bit then you have 900 monopolies because that's a monopoly is a single seller And if you differentiate your product you're a single seller you're a monopoly And so the so the world is just just plagued by a monopoly and market failure And so and so if you if you went to say one of the Ivy League schools for a graduate school in 1950s or 60s You would have been assigned a book by a man named Francis Bator. It's about his name like this On market failure, there was a big long book of readings on there was sort of state of the art This is why markets always fail and and so and that was the state of the art as of about the 1960s And so and then along came the public choice revolution in economics And of course the the the Austrians never went along with this because the all Austrians always understood markets as dynamic So and then so they never they never fell for this nirvana fallacy of Comparing the real-world markets to some utopian ideal and and by the way another thing the Austrians never always insisted is that a lot of the things that are called market failures or imperfections are You know, they talk about legitimate problems pollution and something like that legitimate problems But human beings are problem solvers and a lot of times you look at these problems when markets work Slower than you would like them to work or the results are not the best Well, people solve these problems without government all the time And so the the Austrians always understood this and even to this day a lot of the research that is done Applied research that is done by Austrian school economists is looking at some of these same old problems externality problems and so forth that have been just assumed to be big problems for the society and See how private institutions solve them for example our friends at the Political Economy Research Center in Montana In the free market environmentalists they call themselves they invented the word Enviropreneurship It's a combination of environmentalism and entrepreneurship And they work with a lot of people out there in businesses who deal with environmental issues pollution issues or erosion issues the denuding of forests and things like that and and they use private contracts private property Voluntary solutions to solve these problems Eleanor Ostrom the first woman to win the Nobel Prize in economics a few years ago spent her whole research career researching on Private voluntary Solutions to environmental to commons problems and the environmental commons problems of communal property Okay, and that's what she won the Nobel Prize for shockingly Yeah, she didn't win it for coming up with some new rationale for government interventionism and socialism and so And so and so she would have and she was a big friend You know I met Eleanor Ostrom and her husband many years ago And and she she used to lecture from time to time at George Mason and some of the Austrians there would invite her as a She's a fellow traveler of the Austrians and and if you're interested that whole area I would recommend looking her up her writings up. It's OS. I'll spell her last name Eleanor Ostrom Okay, and so so the public choice revolution came along and You know developed this whole theory of what they call government failure It's all about the incentives that exist within government and how the incentive system creates failures that match Market failures that so there's sort of the method of the methodology was individualism methodological individualism But as applied to political decision makers and so they came up with this big body of literature in public choice economics That said well, yes markets fail But that that's not a sufficient condition for government intervention because government could come in and make things even worse Because government also fails. So they call this a theory of Comparative institutions they would compare the failed markets the imperfect markets with the imperfect government and And make a statement about it Governments might make things even worse and that and that did slow down The zeal of the market failure theorists because they no longer could simply declare that a market fails. Therefore Governmental angels will come in and fix things Because they want even if they are angels the public choice people would say The incentive system will cause them to screw up, you know, so they're sort of screwed up angels You know, even so and I heard James Buchanan my old professor say this a thousand times You know that when people leave the private sector and go into government They don't sprout devil's horns that I thought he was wrong about that But that's that was his theory that they're just like you and me, but they face vastly different incentives There's no market feedback mechanism and for example I've written many times that in government failure is success in government The worst job they do educating the kids the more money we spend on the schools The worst job they do helping poor people get out of poverty the more we spend on poverty programs NASA blows up the space shuttle We give them a NASA law 50% budget increase the next year to do better next time So the incentives are totally screwed up. They reward failure So the worst you are the the wealthier you get in government just the opposite of the market of the real market but so There's but some of us never bought into this this so so where we were as of in the economics profession as of Let's see the heyday, you know Buchanan won the Nobel Prize in 1986 So by then I think the economics profession had taken a big step back on the market failure Not just because of the public choice people. There were a lot of Chicago school and Austrian school Publish publications that also critique the the market failure model and But we were at the stage where they had taken a step back and on top of that we have government failure So it was just not legitimate to to make the argument that market failure alone is Necessary and sufficient to argue for government intervention, but But some of us kept began persisting and challenging a lot of the basic ideas of market failure in the first place and In a lot of different ways and so that's what I want to talk about through the rest of the talk is some examples of how Some of us from an Austrian perspective have looked at some of the main claims about market failure and have challenged them and a claim number one is is anti-trust the the basic the basic rationale for antitrust regulation is that in the United States anyway and in other countries that have adopted antitrust regulation of all The American model in fact when when communism collapsed in the late 80s and early 90s One of the first things the US government did was to send left-wing economists All over Eastern and Central Europe to to make sure they put put in any trust laws in their new the new regimes Among other things, you know, you know, you need antitrust laws. You need our environmental laws You need you need to be like us is what is what they were saying and and so So so this is not just an American thing, but their basic rationale is that there was rampant monopolization Because of corporate mergers in the late 19th century, especially in the 1880s we particularly in the 1880s if you read almost any book in the United States about the hit It says anything about the history of antitrust. That's what it will say From from the Chicago schools Richard Posner was now a judge. He wrote a widely cited book on antitrust It's been in print for about 40 years. I think he says he uses the word rampant cartilization. It was happening They all say the same thing and that was supposedly the rationale for antitrust laws to protect Americans consumers from from the the effects of rampant cartilization And so one of my publications There was in the international review of law and economics way back in 1985. I was five years old at the time They're very young. Yeah, somebody believes that I guess I'm in some of you actually that well I never I never bought this idea about rampant cartilization because I never saw the proof You know, I was an economics major in school. I went through got a PhD I've been teaching antitrust economics for several years industrial organization courses at George Mason And I'd never run across a single piece of proof that there was you know, what do you mean rampant cartilization? And so I looked into it and none of the books in the George Mason library at the time had evidence of this And none of them mentioned one statistic Richard Posner You know, you think the Chicago school which was at the time more critical than anyone of antitrust would have some Evidence to support this claim about sort of the immaculate conception of the antitrust laws But but but no and so so I looked into it and I got and I got a research assistant to send them to the to read through the congressional record from 1888 to 1890 the two years prior to the Sherman antitrust act and write down all the industries That were being accused by members of Congress of monopolizing Because that's that's who passed this law the federal government. So we had a list of industries And so the step number two was we need to find data with the economics profession tells us The mainstream tells us that monopolist restrict output and raise prices So what was going on with production levels and prices, you know over time in these industries We have now have a list of they're being accused of monopolizing and so we got some For the first time ever we gathered data, you know, I'm no one else had ever done this and we got what days? It was scattered kind of spotty and it's hard to get you know come from several different sources And you know, I sent them down to the the Census Bureau and this was before the internet where you couldn't just sit on your butt and type in US Bureau of Census You know statistical abstract the United States. So we did some serious digging around and and basically what we found Was that in all of these industries? This was a period of price deflation the post civil war era in the United States from 1965 to the turn of the century There was price deflation the CPI fell by about During the decade the decade before the Sherman Act 1880 1890 it was negative seven percent So the price the CPI Fell by seven percent every one of these industries the prices fell much more than seven percent So so these were these were the the biggest price-reducing industries in the country Yeah, it was relative of course that's relative to inflict civil war inflation, but that was 25 years prior and the Civil War ended in 1865 and I'm looking at 1889 Here so that was a long time. So so so we had And the price the price level fell beginning around 1866 anyway the constant deflation in the US all the all during that time And so so we found that these were the most vigorously price-cutting industries For ten years prior and then then we also got the data for the next ten years and the same thing was happening prices Continue to go down faster than the CPI and these these industries and then the data We got on production levels. We found many of these industries This was in this was in a period of expanding production in the US too This was the industrial revolution in the United States You know all the great the great entrepreneurs Vanderbilt and Carnegie and people like that James J. Hill They're building railroads and the steel industry was being developed to the cement industry and and and so forth And so production was increasing and we found that these industries many of them were increasing Production three or four or five times faster than GDP had been growing And so as a group these industries that were singled out as being monopolies Were the fastest growing most innovating most vigorously price-cutting Industries and they were usually led by a few industry leaders like Rockefeller and the oil industry You know wasn't everybody in these in these industries And so and so that piece of evidence is just the opposite of what you would expect from rampant Cartilization isn't it from a mainstream perspective because the consumers were being tremendously benefited By all this price cutting and it could not have been predatory pricing Because no fool would cut prices for 20 years and lose money on purpose lose money intentionally for 20 years In hopes that someday someday we're going to make a killing You know and this was back at a time when what was the average lifespan 50, you know 55 It's in the 1880s You know and so so yes But that's that's a theory that some people rely on that that that that Wiley John D. Rockefeller Cut prices for 50 years hoping the corner of the oil market You know it's not some day drive everybody out from it the predatory pricing Yeah there's one of the one of the The most harshest critiques of Rockefeller is a book by Ida Tarbell and the the chapter on on prices is called cutting to kill And so there's there's sort of this hysteria over over these people It was all based on envy for the most part because they were doing great things like cutting prices of People in America lived in the dark until Rockefeller came along once the sun went down Uh, you know if you didn't have money if you weren't affluent you had you couldn't afford Light You know, but now all of a sudden everybody could afford kerosene for their lamps You know, you know, he literally helped Average working class americans quit living in the dark Things like that. And so he's gone down as you know one of the biggest villain villains in there I think tom woods coin a little slogan a couple years ago that I don't know if I can paraphrase it That's something like You know anyone who does great things for the american consumer is vilified as a criminal for the rest of his life something like that You know, whether it's sam walton or bill gates or rockefeller And not that they've never done anything bad, you know bill gates might might have beaten his children I don't know, you know Like that football player for minnesota. I might have broken a tree branch off and clubbed his son I don't know but but but I do know that his competitors have always hated him And competitors only hate you if you're cutting your prices. They love you when you're raising your prices You know your competitors Clarification or something. I don't we'll do a q&a at the end, but go ahead Okay, so So that's we find and so another thing I did with this research project is I got this My research assistant who still had some eyesight left because in these days He had to read the congressional record on microfilm in a library There was no book of the congressional record, you know when the machines where you crank some plastic roll Roll plastic on and I said well, I want to know what the media were saying about all this at times So let's look at the new york times the paper of record and the new york times originally thought this antitrust law was a good idea Then they changed their mind and and they came out against it Because they observed all the antics of of the members of congress passed the law And what the antics were was the the the sherman antitrust act was passed in july of 1890 And senator john sherman's name was on it. He was the brother of general william tecumseh sherman by the way the civil war Dude And who at the time had just 1890 had just he died i think in 1890 And he had just finished a 25 year war of genocide against the plains indians out west So so these were two charming gentlemen senator john sherman and his brother in in but anyway The new york times came out vigorously against the sherman act because in october of 1890 same man john John sherman sponsored the mckinley tariff bill Which at the time was the biggest increase in tariff rates in american history So the great protector of the cons of the consumer john sherman with his sherman antitrust act three months later Signed what every sponsored what everybody knew was a gigantic rip-off of the consumer the big tariff increase And so the new york times concluded that the sherman act they said it was a fig leaf Designed to fool the public into thinking the republican party was the party of the consumer. They were protecting the consumer from these big bad monopolists You know john d rockefeller and all the other all these other companies that were they were Sort of madly cutting their prices decade after decade We needed to be protected from that they said and but then they saw that sherman himself Raised tariffs and everybody knew the tariffs were bad You know new york city even during the civil war new york city almost seceded from new york state And from the united states during the american civil war years because it was a major international trade Port and they did a lot of business with the southern cotton traders and tobacco traders and they didn't want a war That would interfere with their lives and destroy their commerce. And so You know fast-forward 25 years or so The new york times was still a free trade newspaper and they and they recognized this as being horrible for the port of new york You know protectionist tariffs and so uh, so they and so they immediately snuffed it out And I think they had the right interpretation there And so so this myth number a big myth number one that antitrust was created to uh to protect consumers from monopoly I think is a myth. I think I I proved it as a myth And I had a second paper also that was in the review of austrian economics about how the state governments passed antitrust laws first before the federal government and the same thing was true the Prices were falling and they saw that as an emergency when he did do something about the falling beef prices They said so let's let's raise the price of beef by force You know can't have cheap meat, you know, what a what an offense to society that would be In uh, so myth number two is the myth of natural monopoly And the basic story the economic students in a room have heard the the basic story. Well, by the way, a great book on The Austrian view of monopoly and antitrust is this one Dominic Armentano antitrust and monopoly There's a skinny little version of it downstairs But the big the fatter one is a classic Armentano looked at the 55 most famous federal antitrust cases as of the early 80s Which is when it was published. So this is an old classic And he found that in every single case of the 55 Most famous federal antitrust cases the companies were cutting prices expanding production inventing new products doing anything But acting like monopolies And so that's that's why it's a classic and that tells you something doesn't he he doesn't talk about the origins though I did the origins in my my research But because the chicago school people will look at Armentano's book and they will say Well, yes, that's true. We agree with all of this But there was a golden age of antitrust. So we still need it as long as you put smart guys and gals like us in charge Then it'll work, you know, put give us jobs at the federal trade commission. It will make it work, right But so the purpose of my research was to make the argument that no, there's something inherent Antitrust is inherently incompatible with free market competition. It infers with it the myth of natural monopoly And you've all seen the standard story goes something like this That in certain types of industries with heavy fixed cost The long run average cost lac Okay, is declining here's quantity and cost up here And the story goes that in these types of industries like electric power But uh one big company will get here And produce at this level In a low low average cost And will therefore be able to under price everybody and become monopoly It's sort of a version of the predatory pricing argument And so and so once this one big company does that it'll be able to Price everybody out of the market and the story of the basic theory goes that well, that's not all bad You know because after all we want it'd be nice to have one big company with economies of scale and produce things like electricity cheaply But on the free market, they would charge a monopoly price, you know, they would charge some price up here Oops p.m. Monopoly price therefore the government The story goes should create on purpose a monopoly give a monopoly franchise to One electric company one elect one water company one telephone company And then regulate the prices in the public interest Okay, set some kind of price in the middle here. Let them make enough money to to make a profit In uh, I'll call that the regulated price pr That's in a nutshell the theory of natural monopoly And it has nothing to do with reality Okay, this this never happened the story of one big company monopolizing electric power and water supply and telephone Never happened in the united states. I don't know if I don't think it ever happened anywhere else Either I doubt it and here's one example. There's an article by uh, herald dem sets the the old ucla economist herald dem sets Who looked into this once And uh, this is in a book of his called efficiency competition and public policy about the history of So-called natural monopolies in the u.s. He said Six electric light companies were organized in one year of 1887 in new york city 45 electric light enterprises had the legal right to operate in chicago in 1907 Prior to 1895 the luth minnesota was served by five electric lighting companies and scranton pennsylvania had four in 1906 During the latter part of the 19th century competition was the usual situation in the gas industry in this country Before 1884 six competing companies were operating in new york city Competition was common and especially persistent in the telephone industry Baltimore chicago cleveland columbus detroit candy city minneapolis philadelphia pittsburgh and st. Louis Had at least two telephone services in 1905. So this period that the turn of the 20th century was supposedly when we had all this rampant natural monopolies being created It's not untrue where there's vigorous competition That that happened in all these all these areas But we did end up with monopolies. How do we get monopolies? well and one of my paper I'm reading from one of my old publications called the myth of natural monopoly from the review of australian economics and I I read across an old book Uh called the gaslight company of baltimore by george t brown And this was a very useful book because uh, it relied a good bit on some of the research Done I found this book in the johns hopkins university library right down the street from my office and In Richard tealy the co-founder of the american economic association had taught at johns hopkins during this time And this book was based a lot of the footnotes that things are based on his his research He'd done all kind of writing on the whole issue of electric gas utilities the gaslight company and this whole natural monopoly business At the time and so anyway, this book the gaslight company of baltimore Uh explained how monopoly Originally did appear at least in the city of baltimore, you know the so-called natural monopoly And and then this was one of the first and once it once the the politicians figured out this model this technique of creating a monopoly Cities everywhere in the united states did the same thing and other countries do So here's what it says when monopoly did appear Uh, it was it was solely because of government intervention In in 1890 the year 1890 same year as sherman act a bill was introduced in the maryland legislature Which called for an annual payment to the city? From the consolidated gas company, which is what it was baltimore Gas company was called of ten thousand dollars a year And three percent of all dividends declared in return for the privilege of enjoying a 25 year monopoly So the creation of the so-called natural monopolies through monopoly franchises Was a share the loot scheme on the part of government They said we want to create a monopoly and what what what do monopolies do? Well, they create monopoly profits, don't they? So give us Thousand dollars Plus three percent of the profits every year And then and we will give you a permanent monopoly So it was a way of taxing the consumer of you know the products of the gas-led company and then later the electric power companies That's the real reason why these were created. It wasn't it wasn't that there was uh This story right here in the graph It wasn't the free market was creating this awful Awful menace It was the politicians wanted to create monopolies as a way of sharing in the loot of of government sponsored monopolies There's another old article that I found there's a It's kind of weird how these things that one of my specialties in graduate school Was urban economics I'm you know, you had to take a bunch of electives So and when I went when I was in graduate school back when the dinosaurs still run the earth The hardest pre-limb to pass was micro everybody knew the micro because uh, James Buchanan was in charge of it And it was always the hardest thing to pass And so all my electives were labor economics urban economics Environmental anything that was micro oriented all my electives. So I thought that would that would help me pass You know any questions I have on the comprehensive exam on micro I you know have micro up to my eyeballs And I used to read the journal of land economics in one of these glasses And so I ran across this old article by this guy Horace Gray On on the the origins of natural monopolies and it was very interesting article 1940 Horace Gray and uh, and he uh And he pointed out one of the things he pointed out is once this happened once a couple of cities like Baltimore Settled on this scheme to create I'll give a grant of monopoly as long as you share some of the loot with the king And the king was the mayor city council whoever it is He said every industry every industry in the country all all of a sudden was saying hey, I'm natural too You know look how natural I am he said, you know And so they all they all started calling and this included the words his list the radio industry the real estate milk Air transport coal oil agriculture And not only that but then they also wanted patents subsidies tariffs land grants monopoly franchises that all happened So all of these forms of monopoly were created now It's now now George Stigler the late George Stigler who also won the Nobel prize in economics One of the things he wanted for was his early research on this topic on natural monopolies and he did some statistical Publications with a woman named Claire Friedland. She was his econometrician at the University of Chicago And there's a book called the citizen in the state that has all of George Stigler's essays on this in it if anyone is interested ever interested And basically what Stigler found was that once the government created all these net monopolies and then Started regulating them they were supposed to regulate the prices in the public interest He found that the prices all went up You know for a shock the government took over and set the prices They all went up and then one of his students Greg Gerald updated this several decades later and he found that Once the state governments took it all over this there was sort of some of the cities Started regulating these electric utilities and so forth Then state governments took it over for the most part and he did a study of 25 states is that The substituted state for municipal regulation of electric power between 1912 and 1917 And the effects of this was to raise electric rates by 46 percent And profits went up by 38 percent And so that's the true history of the the natural monopoly story It's the it's not it's not that the free market failed and the government bureaucrats came riding to the rescue and white horses And and and rescued the consumer It was exactly the opposite that these were created as a taxing scheme To rip off the customer and then blame it all on veracious capitalists You know that's that's an old story, isn't it? another Another well-known example of the myth of market failure is is you all know what this is let me see You know what that is That's what's on a keyboard a computer keyboard. Yeah, there's a There's a there's a myth related to qwerty and that there's a I think the first economist to write about this was a guy named Paul David He's a I'm pretty sure I might have been somebody else, but he's kind of known for that And and he argued that this is an example of of the locking in there how the free market locks in A a bad technology an inefficient technology and that's another form of market failure Because the qwerty keyboard became the keyboard everybody uses qwerty and he argued that There there was there was at least one superior configuration of the keys Out there, but the free market You know this damn stupid consumers picked the qwerty keyboard. What do they know? And the and the other one was this was the name of the other one Dvorak And so so the people who advocate this theory that this is a form of market failure They'd be locking in of an inferior technology Claim that this dvorak keyboard Was superior and They they relate the reason they gave was there was a couple of studies that were done by the united states navy In during world war two On this keyboard the dvorak keyboard that claimed that it was a it was better to use this than the qwerty keyboard More efficient fewer mistakes faster typing and so forth and so And so we had a new in the 1980s. We had a new type of market failure, you know path dependence I'm calling path dependence and so Two economists challenge this Stan Liebowitz and steve margolis who wrote a very interesting book by the way called Winners losers and microsoft if you're interested in the the antitrust issue In this in the context of the high technology industries from a free market perspective This is a good book to read Liebowitz and margolis They challenge us because they so the first thing you did was to say well, well, what is what is this dvorak? Keyboard where did this come from turns out it came from A a lieutenant the united states navy named dvorak who had a patent on the keyboard and it turns out that He he employed his own personal secretary to do these tests of the two keyboards And and and then he declared that his was superior That's kind of like general motors Getting a toyota And saying we have driven the general motors cars and we have driven the toyota And we have concluded that general motors cars are better So don't buy toyotas And so and so that was a death blow to the dvorak theory and then they did additional real tests You know, they got people who are Good typists and they did over and over again How many mistakes per minute and all that and found that it was pretty much a wash But the consumers for whatever reason the consumers spoke they chose the courty keyboard So that was disproven also Another type of market failure that's popular is asymmetric information And it's not spelled like ass as in the donkey. It's sort of as just one s So if you've spelled it in a paper of yours don't don't spell like that and people make fun of you Do that asymmetric information And uh, you know people like george stiglitz have had fun with this in I guess the origins of this was a 1970 article in the american economic review that that That created what is known as the lemon's problem. There's always a problem with free markets a lemon's problem And it was written by uh, janet yellen's husband Okay, and then another another left-wing commie commie economist like like uh, like the fed chairman And let's see if I can get you the citation It's uh Yeah, it's george ackerloff and it's in oh, it's in the qje. Sorry. I wasn't in the american economic view quarterly journal of economics 1970 Yeah, george ackerloff is Is mr. Fed chairman. He's the husband of the fed chairman And so anyway this uh, the original argument was that the sellers of products Have more information about the products than the buyers Therefore the sellers of products have the ability to dupe you into buying crap You know, he didn't use that language. That's my language But he didn't he didn't use the word crap, but he's the word lemons You know a lemon is just you know slang for a bad product And he he wrote mostly about the automobile industry He claimed that the used car business would become progressively worse and worse and worse more and more lemons And then it may even disappear altogether because people can't trust Car dealers you just can't trust them. So who's going to but who's ever going to buy a used car? And so therefore we need government regulation more government regulation of uh of the car industry and But as a matter of fact, uh, even at that time 1970 the the free market had solved the lemons problem with with warranties And so even like today for example I'm I'm about a car from car max in a while about maybe six or seven years ago I sold one the car max but But uh, they have out in the windows of all their cars seven day No questions asked money or money back guarantee as long as you don't wreck it And or drive more than 3000 miles or something like that And of course on top of that there's a 30 day warranty that comes with it So so there's no chance that you're going to buy a lemon You have plenty of time to bring it to a mechanic and have it checked out, you know And so the product warranties had already solved the lemons problem before George Akerlof Published his article about the lemons problem And but he but he didn't even acknowledge product warranties at all. He made this Apocalyptic prediction. It's all going to disappear. But but there's all in general this whole idea of asymmetric information You know modern economists have gone wild with this, you know the the crash of 2008 They blame on asymmetric information mortgage brokers have more information about mortgages than you do So they these evil evil free market monsters Therefore caused the mortgage crisis The the crash of 2008 not the Fed but bank mortgage lenders But the austrians have wrote about this a long time ago when you think about it In one of my papers in the the Qt quarterly journal of Austrian economics I asked these rhetorical questions. Who knows more about home building home builders or home buyers Who knows more about supplying grocery stores with fresh meat Ranchers and farmers or average consumers. Who knows more about manufacturing automobiles Automobile engineers employed by the automobile manufacturers or car purchasers Who knows more about producing and marketing clothing clothing manufacturers? Or clothing shoppers. So so in other words Asymmetric information as a form of market failure What is an attack on the division of labor in society? I mean we all have specialized labor in doing something in our work lives And so the thing that makes markets exist markets exist because of asymmetric information You know, I don't know how to build a house But I do something else and I make money and I pay somebody to build my house. Who knows what they're doing You know, I don't grow all my own food You know, I don't grow any food because I'm not a farmer. I don't know what the hell I'm doing But I work doing this and I make money and I pay people who specialize in farming and in the distribution of food To do that. It's called the division of labor in society. It's also called asymmetric information, isn't it? It's it's the same thing. So it's it's what makes markets work. It's that's why they exist And the austrians all recognize this. I can quote Hayek for example at a 1964 publication This is in in his book individualism and economic order page 80 He said this we need to remember only how much we have to learn in any occupation After we have completed our theoretical training how big a part of our working life We spend learning particular jobs and how valuable an asset in all walks of life is knowledge of people of local conditions and of special circumstances The shipper who earns his living from using otherwise empty or half filled journeys of tramp steamers Or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities Or the arbitre jour who gains from local differences of commodity prices are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moments not known to others So Hayek would call this the division of knowledge in society You know the when uh when mesis wrote about this also in human action But he wrote during the machine age And we really hadn't had any of the information age yet and Hayek also wrote during machine age But of course he was a prophet of the information age his his writings on the use of knowledge in society There's even an article by the way in the new yorker magazine in the early 90s called the price profit about Hayek Which I highly recommend it's fascinating You know it's called it's it's called the price p o p h E t It's called and it's about Friedrich Hayek and how his his article the use of knowledge in society Which the mystery speaker last night said is the foundation of all his whole business overstock.com That uh You know that that it foresaw the internet age It foresaw the information age that we're in now You know because it talked about the the importance of the use of information in society Okay, and but mesis himself Said this in an economic system in which every actor is in position to recognize correctly the market situation with the same degree of insight He said he wrote the adjustment of prices to every change in the data would be achieved at one stroke And if everybody had the same information, uh, there would be no no ever changing in prices It is impossible to imagine such uniformity in the correct cognition and appraisal of changes in data Except by the intercession of superhuman agencies We would have to assume that every man is approached by an angel informing him of the change in data Moreover, even if market participants did possess the same data and information They're bound to appraise it differently. So mesis even mesis was saying in human action that to have Symmetrical information it would be sort of an angel would have to come to earth and Enlighten us all and you know put all this information in our heads And so that and that's what that's sort of george stiglitz economics, isn't it? You know and these people who who write article after article after article after article about the failures of the market due to Asymmetric information, you know, how easy is that? You know to to to to to claim the aha. Here's another industry Where the people who produce the product know more about the product than the consumer is the product You could you know, you could if you live 300 years you can continue writing articles about this over and over And that's how stiglitz won the Nobel Prize pretty much uh Doing that but me but and then the final thing i'll say here is the real asymmetric Information there is a real problem But the source of the problem is government Who knows more about foreign policy machinations? The bureaucrats in the state department hillary clinton or you You know, who knows more about what the epa is up to epa bureaucrats or you you know pick your government agency We're all rationally ignorant about almost everything government does. So if you want to know where there's a massive You know gigantic spectacular difference In information It's with government versus the the citizens of the society You know, no human mind could possibly comprehend even the tiny percentage of one percent Of what government what even the auburn city government does today let alone all all government That's the real asymmetric information problem there And so, you know, we can be banned the whole country can be bamboozled into waging wars in the middle east over what? You know over over some slogan. I think who was I think was napolitana who said the purpose of the iraq war was Sadam Hussein tried to kill my daddy Quoting quoting george w bush and I believe that's probably true. That's probably why we had that war in iraq Revenge against Sadam Hussein and he did try to assassinate bush bush Bush went over bush senior went over to Saudi Arabia the king of Saudi Arabia gave him a some kind of award for Helping him rip off american consumers in the oil business And and and some some some bomb went off somewhere and they blamed Sadam Hussein on it They said it was an assassination attempt gone bad, but that's probably the reason for that So I guess we're about out of time. I had a list about five more here But uh, but uh, I'll stay here if you want, I'll stay here for the next 45 minutes if we can do that But no, we'll quit instead. Okay Thank you very much