Monday, March 07, 2011

Prejudiced People Unprepared to Listen

Foolishly I decided to engage in a debate on the Taking Hayek Seriously blog (specifically here and here), thinking maybe some of the folk there might be a little bit more enlightened than they pretend to be, and might like to explain why they are so strong in everything they say (opponents are "brain dead" for example). However, I'm giving up as it is like talking to a brick wall.

I mentioned the information problem in markets, and mentioned both moral hazard and adverse selection, about how these are problems independent of the existence of government.  Of course they aren't though, these folk respond - it's only stupid governments forcing insurance companies to insure these people that creates the problem.

Now, let's just state the definitions of these two things in fairly abstract terms:

Moral Hazard: The probability of the event (being insured against) and the loss incurred are endogenous, i.e. influenced by the applicant/buyer.

Adverse Selection: The buyer or seller in a market has information relevant to trade and incentive to conceal information.

Now it has to be pretty clear to the average person that these two concepts can exist even if there is no government in existence.  If I am HIV positive, it is clearly in my interest to conceal this information if I am duplicitous and want to take out a life insurance policy, since I will get a lower premium as a result.  This is clearly a far-fetched example, but it makes the point - this can exist regardless of whether government exists.

Additionally, even if the government didn't exist, and only private insurers provided insurance against unemployment, this would not change my ability to affect my probability of being made unemployed.

Now we're discussing this entirely independent of any response to the problems in these markets - market or otherwise - we haven't even thought about externality problems which would affect the efficient level of provision of insurance in many markets.

The simple point is, these two things can exist independent of government.  You might have thought that statement self evident.  But clearly not for people like those at Taking Hayek Seriously.


At 2:40 am, Blogger Roger McKinney said...

“The primacy of markets was around way before Hayek was. I’m inclined to think you overstate his influence”

Would you consider yourself knowledgeable about economic history? I don’t know because I don’t know what British economic education is like. I know that in the US economic history was dropped from the curriculum 30 years ago and most US economists are very ignorant about it. I earned an MA from a good state school and never read any history.
On the other hand, Austrian economists are obsessed with history. Hayek was an amazing historian, as was Mises and Rothbard. I learned all I know about economic history from them, Douglass North, and some from Fernand Braudel. And if you know the history, you know that markets before capitalism were nothing like markets after the advent of capitalism.
North, though not Austrian, makes the strongest case for the differences between pre-capitalist and capitalist markets. Precapitalist markets were not free and were very personal. Knowledge was scarce, transaction costs high and trust very low because of rampant corruption and cheating. Production was craft production for the wealthy, not mass production. Property rights were weak. As North shows, pre-capitalist societies didn’t have the institutions to protect property. As a result there was no investment in large businesses or mass production.

Capitalism introduced real protection for property by creating the appropriate institutions (rule of law, honest police and courts, equality before the law). As a result, commerce switched from being very personal (a lot of time spent in negotiating) to impersonal (posted prices with guarantees for quality). Transaction cost plummeted. Production switched from craft to mass production, production of cheap goods for the masses.

Beyond your direct questions, I would warn you that you will never understand Austrian econ by trying to fit it into your mainstream background. It won’t fit. I earned an MA in economics but it took me a couple of years to understand Austrian econ. A good starting place is Roger Garrison’s “Time and Money” because he compares the four schools of macro so you can see how they relate.

As a Christian, I would like to discuss the Church Scholastics of the School of Salamanca, Spain in the 16th century. But I’m taking too long now. For now, suffice to say that the godly scholars at that school promoted free markets as the only path to just prices and the sanctity of private property.

God Bless in your search for the truth!
Roger McKinney
Broken Arrow, OK


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