
Why Free Markets Make Fools of Us - jonathansizz
http://www.nybooks.com/articles/2015/10/22/why-free-markets-make-fools-us/
======
alxv
Previous discussion:
[https://news.ycombinator.com/item?id=10330280](https://news.ycombinator.com/item?id=10330280)

------
will_brown
>Very few economists foresaw the great recession of 2008–2009

I just can't get past the very first sentence. First, it ignores the realities
of both economists and financial insiders who made attempts to blow the lid
off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who
were equally ignored and erased from history. Second, even as a 17 year old
kid, in 2001, I wrote an economics paper about the impending housing collapse
- only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0%
down; and stated income.

The next thing will be people talking about how very few economists foresaw
the issues with reverse home mortgages, or how no regulators foresaw the
dangers of equity crowdfunding for non-accredited investors.

~~~
cpursley
Came here to say the same thing. The Austrian-school economists were screaming
at the top of their lungs:
[https://wiki.mises.org/wiki/Austrian_predictions](https://wiki.mises.org/wiki/Austrian_predictions)

~~~
ceejayoz
Aren't they usually, though?

~~~
loki49152
Given the century of economies dominated by Keynesians, Monetarists, Marxists,
and other UFO abductees pretending to be economists, why wouldn't they?

------
clarkmoody
The term "free market" is thrown around rather easily in this article,
oftentimes with the assumption that consumers have absolutely no recourse in
said "free market." A few places, you could replace "free market" with
"freedom of speech" and it would read the same. Of course the "progressive"
thing to do is to limit speech as well, for our own good.

When an economy has a strong central bank meddling with the interest rates,
firms and individuals receive an incorrect signal in the time-preference for
money, since the interest rates are not determined by the market. Coupled with
an inflationary monetary regime and Keynesian ideology throughout, the "free
market" has no chance to produce optimal outcomes.

Come back with a book that examines actual free markets and we'll talk.

~~~
ksk
>Come back with a book that examines actual free markets and we'll talk.

Do you have any examples of "actual" free markets?

~~~
cmurf
Part of that would be no protectionism. I seriously doubt that most in the HN
community are big fans of e.g. the H-1B visa program. And yet a free market
would not have an H-1B program because in such a market anyone anywhere would
be hireable strictly upon the discretion of the employer. The H-1B program
itself is an intervention.

The reality is that you cannot have completely free markets in a democracy. As
soon as a signifcant minority (let alone majority) do not like the market's
outcome, they will petition a legislative alternative to that outcome. So of
course there's going to be a hybrid system. Is there any 1st world country
with a less interventionist government in economics than the U.S.? There are
plenty of 3rd world countries where there's no regulation at all, I don't see
entrepreneurship flourishing there, rather it's exploitation, and might makes
right.

~~~
ksk
>As soon as a signifcant minority (let alone majority) do not like the
market's outcome, they will petition a legislative alternative to that
outcome.

But that presupposes that the populous would dislike the free market's
outcome, which if anything points to the idea that free markets are unworkable
in a practical sense.

------
tokenadult
I'm glad to see that this book review is by Cass R. Sunstein, who has devoted
much of his research to related issues. Human psychology works in ways not
completely anticipated by classical liberal economists like Adam Smith
(although Smith deserves more credit than he gets for a deep understanding of
human psychology). One interesting paragraph in the review tells the tale: "To
support this claim, Akerlof and Shiller point to an uncanny prediction by John
Maynard Keynes in 1930. Keynes expected that by 2030, the standard of living
would be eight times higher. We are on track to get in that vicinity. At the
same time, Keynes made a profound mistake. He predicted that the workweek
would plummet to fifteen hours and that people would struggle not with
financial problems, but with a surfeit of leisure. That isn’t going to happen.
What Keynes missed is that free markets generate new desires. In Akerlof and
Shiller’s words, markets 'do not just produce what we really want; they also
produce what we want according to our monkey-on-the-shoulder tastes.'" In
other words, producers can act jointly more effectively than consumers can in
exploiting weaknesses of human psychology. This seems to be a fair statement
with a lot of empirical support.

I think the reviewer does a good job at the end of his review of critiquing
the book's view of behavioral economics by asking for more specificity about
which mechanisms most lead to "phishing" (dishonest marketplace behavior to
fool consumers). To say that free markets take advantage of consumers does not
guarantee that making markets less free is any better for consumers, unless
some new form of regulation is based on careful research and an affirmation of
commonly held human values.

~~~
jessriedel
> "What Keynes missed is that free markets generate new desires. In Akerlof
> and Shiller’s words, markets 'do not just produce what we really want; they
> also produce what we want according to our monkey-on-the-shoulder tastes."
> In other words, producers can act jointly more effectively than consumers
> can in exploiting weaknesses of human psychology. This seems to be a fair
> statement with a lot of empirical support.

An alternative theory for explaining Keynes' mistake is just that people's
consumption is driven by desire for relative status, a zero-sum game, and
therefore people will continue to work to consume more no matter how
productive they become. But what is the evidence that free markets _generate_
these desires rather than merely fulfill them? Yes of course marketing will
have a hand in determining which goods are high-status, but I don't know much
reason to believe that people would stop consuming for status in the absence
of marketing. (To wit, there was plenty of conspicuous consumption
historically by the rich before there was any sort of marketing industry.)
They would just consume a different arbitrary basket of good.

~~~
tomp
> An alternative theory for explaining Keynes' mistake is just that people's
> consumption is driven by desire for relative status, a zero-sum game, and
> therefore people will continue to work to consume more no matter how
> productive they become.

I have a different explanation: that progress is uneven.

(1) There has been amazing progress with electronics, where computers have
increased our productivity practically unmeasurably, and in manufacturing,
where new technologies and materials have made products better and cheaper.

(2) On the other hand, in areas like human services (e.g. medicine, law),
housing (the price of land isn't falling with technological progress), and
transport (e.g. bus drivers, garbage collectors, everyone who needs to drive
around) there has been very little progress from free markets, rising GDP, or
technological advancement.

Since people _need_ things in (2), they need to work. And since (1) affects
most of us (rising productivity => falling wages), we need to work more and
more to afford (2).

~~~
jessriedel
Even if there are certain products we need that can't be produced more
efficiently with better tech, Keynes' would still expect overall hours worked
by most people to go down as tech made other products cheaper. But in fact,
hours worked continues to rise for the _most productive people_ whose wages
have _increased_.

------
pithic
Along with inestimable human livelihood and wealth, the free market creates
various possibilities to foolishly harm oneself. Some questions Sunstein does
not raise are:

1\. Does the option of self-harm have value? If such options are forcibly
removed, is the human condition degraded? For example, if one is stripped of
having the sense of self-ownership, is that person limited in their level of
human development and functioning?

2\. Can harmful products be forbidden without the threat and use of violence
against their would-be producers and consumers?

3\. How successful could we expect such efforts to be, based on similar past
and current efforts? And how costly, monetarily, socially, and in human lives?

4\. How likely are such efforts, and the institutions that exert them, to be
corrupted and bent to the service of powerful interests?

~~~
jdreaver
> Along with inestimable human livelihood and wealth, the free market creates
> various possibilities to foolishly harm oneself.

As opposed to the ability for the state to foolishly harm us? Sure, a free
market allows humans to be human and make mistakes, but allowing others to
take your freedom in the interest of self-preservation is a fool's compromise.

Certainly, you raise great philosophical questions though. One of my favorite
thought experiments is to imagine how many things done by the government today
could be accomplished without the government. I don't mean obvious things like
the postal service, I mean fundamental services like road building and a court
system. I plan to read David Friedman's book soon on this topic, called "Legal
Systems Very Different From Ours":

[http://www.daviddfriedman.com/Academic/Course_Pages/legal_sy...](http://www.daviddfriedman.com/Academic/Course_Pages/legal_systems_very_different_12/LegalSystemsDraft.html)

------
nileshtrivedi
Exploitation of irrationality is how rationality evolves in biological
systems. In other words, if we get the government to play the role of a
protective nanny, we the citizen will remain intellectual equivalent of
infants.

~~~
mikeash
Allowing rationality to evolve by allowing irrational actors to be exploited
is going to take thousands of years at the _least_. I'd rather figure out some
way to improve things sooner than that.

~~~
nostrademons
It doesn't have to be biological evolution or take thousands of years. Most
exploitation of irrationality works by playing off subconscious desires; once
that leads to a very public and consequential failure, it is very quickly
brought into consciousness, where future instances can be dealt with
rationally.

Someone who invested their life savings in dot-coms in 1999 is probably never
again going to invest in "the next big thing". That brings its own form of
irrationality - once everyone believes that it's foolish to invest in the next
big thing, the next big thing becomes very underpriced - but they are at least
not going to make the same mistake twice.

------
vezzy-fnord
Don Boudreaux has done a reasonable job of highlighting Akerlof and Shiller's
dishonesty in their latest book:

[http://cafehayek.com/2015/12/phoolishly-against-phreedom-
of-...](http://cafehayek.com/2015/12/phoolishly-against-phreedom-of-
speech.html)

[http://cafehayek.com/2015/12/a-baseless-
charge.html](http://cafehayek.com/2015/12/a-baseless-charge.html)

[http://cafehayek.com/2015/12/daffy-
elitists.html](http://cafehayek.com/2015/12/daffy-elitists.html)

[http://cafehayek.com/2015/12/mostly-
exaggerated.html](http://cafehayek.com/2015/12/mostly-exaggerated.html)

[http://cafehayek.com/2015/12/more-on-phishing-for-
phools.htm...](http://cafehayek.com/2015/12/more-on-phishing-for-phools.html)

[http://cafehayek.com/2015/12/the-role-of-market-forces-in-
pr...](http://cafehayek.com/2015/12/the-role-of-market-forces-in-protecting-
against-phishing.html)

I would also like to note that anyone criticizing neoclassical economics (and
it's full of dubious assumptions, don't get me wrong) based on straw men about
"rationality" is fighting windmills. But don't take it from me, take it from a
heterodox post-Keynesian:
[https://unlearningeconomics.wordpress.com/2012/06/29/how-
not...](https://unlearningeconomics.wordpress.com/2012/06/29/how-not-to-
criticise-economics/)

And, unsurprisingly, Akerlof and Shiller stop at yelling "market failure"
without proposing a theory of government and ignoring the very fruitful area
of government failures.

Anyone who argues for intervention on basis of asymmetrical information
without having read up on public choice is in no position to speak of
anything, since their model is stuck in assuming government is a mystical
exogenous equilibrator and that all of its constituents have virtually no
expectations whatsoever (which is an even worse assumption than full
rationality).

Akerlof and Shiller are obviously well aware, but their book is little more
than a political polemic.

~~~
notahacker
I can't see where Boudreaux's comments - themselves more polemic than analysis
- expose any "dishonesty". I mean, one of his posts pulls out the old
libertarian canard of "every potentially harmful product will be effectively
countered by competitors taking the equal and opposite opportunity to sell
good honest consumer-friendly protection" by speculating that a market
solution to smells designed to induce customers to over-eat could be rival
entrepreneurs selling a nose-attachment[1]! And as far as I can tell, he's
actually not trying to parody his own argument. If that's one of the _best_
objections he can raise to an example in Akerlof and Shiller's book it must be
remarkably good by the standards of popular economics texts.

[1]Perhaps the only reason America doesn't have a penchant for nose
attachments and no obesity problem is because the market isn't free enough!

~~~
vezzy-fnord
The reason his proposed solution of a "nose attachment" sounds ridiculous is
because the _original complaint_ by Akerlof and Shiller of "pastries that just
smell so good consumers can't resist them" is a complete non-issue that is
straight out of Poe's law.

To quote Alex Tabarrok: "Cinnabon pastries are hard to resist. Advertising can
be deceptive. Humans sometimes act in foolish ways. If these statements strike
you as anodyne then there is no need to read George Akerlof and Robert
Shiller’s new book Phishing for Phools, a disappointing foray into behavioral
economics from two recent Nobel Prize winners."

~~~
punee
Full article here for anyone interested: [http://newramblerreview.com/book-
reviews/economics/a-phool-a...](http://newramblerreview.com/book-
reviews/economics/a-phool-and-his-money)

------
dawnbreez
The central problem of a free market is also its greatest strength: it relies
on the people making the purchases to decide what constitutes a good product
or service. It asks us to vote with our wallets.

This works best when the individual educates him/herself about each purchase.

However, when individuals make purchases based on popularity rather than
merit, or based on what they're used to, their ability to vote with their
wallet suffers. And when producers begin to settle into a position of
comfortable mediocrity, when they refuse to compete and improve, they also
hurt the consumer's ability to vote with their wallet.

------
piker
Does the appropriation of the term "phish" disturb anyone else? To me, it
confuses the distinction between auspiciously legal capitalistic behavior and
the work of con artists. The appropriation equates tempting irrational actors
to act against their own interests with defrauding rational actors into acting
against their own interests. I also shutter at the thought of reading a 272
page book littered with various "phish", "phool", "ph"-etc'd terms.

[Edit: grammar]

------
ulrikmoe
Milton Friedman, why have you forsaken us.

------
swehner
... Microsoft also being one of those phishermen

