John Keane — Capitalism and Democracy [part 3]

Part two of this series on capitalism and democracy introduced the unusual idea of ‘democracy failure’. Instead of seeing democracy as the hapless victim of capitalist markets, as Marxists and others have typically done in the past, it examined the way market failures happen when the power-humbling mechanisms of monitory democracy are not applied to capitalist markets. This third part extends the point. It probes Jane Mayer’s recent fine book Dark Money to understand how democracies such as the United States are not only ruined when the wealthy try to buy their way into political power, but also why plutocracy is preparing the way for further market failures.…

The Conversation
Capitalism and Democracy [part 3]
John Keane | Professor of Politics, University of Sydney

Brad DeLong — Econ 101 – The Market

Econ 1: Spring 2016: U.C. Berkeley: "The Market" as an Institution

Econ 1: Spring 2016: U.C. Berkeley: The Market Economy: Pro

Econ 1: Spring 2016: U.C. Berkeley: The Market Economy: Con

Mark Thoma — The Problem with Completely Free Markets

Some weekend reading.

Econ 101 — because some people need constant reminding of the difference between so-called free markets and genuinely competitive markets. 

Mark Thoma reminds that government institutions and supervision are required for competitive markets. Markets "free" of government "intrusion" are not likely to be competitive, and imperfect competition constitutes market failure, e.g., rent extraction based artificial market power.

The Fiscal Times | Opinion
The Problem with Completely Free Markets
Mark Thoma | Professor of Economics, University of Oregon

John Quiggin — Economics in Two Lessons

I’ve been promising for a long time to write a new book, framed as a reply to a free-market tract Economics in One Lesson by Henry Hazlitt, published in 1946, but still in print and popular among free market advocates. Its popularity reflects the fact that it’s a reworking of Bastiat’s “What is Seen and What is Not Seen”, still one of the best statements of the case for free markets.... 

But as a general statement, Hazlitt’s One Lesson is false, which is why my working title is Economics in Two Lessons”.

I've been wondering when someone was going to write this.

Lesson Two is “Market prices do not reflect all the opportunity costs we face as a society”

To someone trained in mainstream economics, as I have been, the immediate examples of this Lesson are “market failures”, such as externality, monopoly and information asymmetries. I originally planned my book to focus on these market failures, making it a somewhat idiosyncratic take on what is usually called public economics. But I kept feeling that I was missing out too much that was important: unemployment, income distribution and many other issues.

John Quiggin
Economics in Two Lessons

Ajay Shah — Become a public policy thinker in three easy steps

Step 1: What's the market failure?

When should the State intervene? The technically sound answer is: When you are certain there is a market failure, and when you are confident you know how to setup the correct State capacity for the intervention.

Market failures come in four kinds: 1. Asymmetric information, 2.externalities, 3. market power and 4. public goods. These are technical terms in microeconomics and each needs to be carefully understood.

The first hurdle that must be crossed in policy thinking is: "Is there a market failure?" Every proposal to do something in public policy faces this test.

Step 2: What's the proposed intervention?

Once we agree there is a market failure, we have to figure out what we'd like to do about it. Here, it's important to understand the anatomy of the market failure, and solve it at its root cause.

If there is a causal chain x -> y -> z, and there is a problem with the outcome z, don't use the power of the State to change y or z. Understand the root cause, and solve it there.…

Step 3: The hurdle of public administration

Okay, you are all dressed up and ready to go, with a demonstrated market failure, and a minimal intervention which solves it. Now the question arises: Can you design a feasible solution with real world public administration?

Ajay Shah
Become a public policy thinker in three easy steps

Ajay Shah | Co-Lead of the NIPFP-DEA Research Program, India

Brad DeLong — What Do Econ 1 Students Need To Remember Second Most From The Course?

How markets fail. Oldie but goodie.

I count seven ways that market economies can and do go badly wrong."

Grasping Reality

What Do Econ 1 Students Need To Remember Second Most From The Course?

J. Bradford DeLong | Pofessor of Economics and chair of the Political Economy major at the University of California, Berkeley

(h/t y in the comments)

Mark Thoma — 'Synthesis Lost'

As someone who had a series called "Market Failures in Everything" when this blog first started over nine years ago, and as someone who believes market failures remain important even when the economy is operating at full capacity, I'm glad to see views evolving. (Market failures and business cycles form the basis for my calls for government intervention, though as I have written many times, I am coming around to the idea the intervention may also be needed to redistribute income as an offset for those who reap where they never sowed. That is, redistribution is needed to claw back income that flows unjustly according to my definition of equity to those at the top as a result of their economic and political power, e.g. monopoly power that distorts income flows, and political power that allows rent-seeking behavior. Markets have had 40 years to solve the inequality problem, and it has only gotten worse -- being at full employment for many of those years has not reversed the growing inequality problem. A "hands off" policy when the economy is operating at full capacity, a capacity that can be limited by market failures, is not helpful in this regard.)

Power —> privilege —> rent.

Economist's View
'Synthesis Lost'
Mark Thoma | Professor of Economics, University of Oregon

Mark Thoma — 7 Important Examples of How Markets Can Fail

Omitted the one that Bill Black has been documenting — white collar crime, the creation of criminogenic environments, and control fraud. The global financail crisis can be traced largely to this as the chief causal factor.

Enron and Bernie Maddoff were not outliers. Jailing Martha Stewart for insider trading was a joke.

The Fiscal Times

7 Important Examples of How Markets Can Fail
Mark Thoma | Professor of Economics, University of Oregon