Many of the public services were provided thus because no private supplier stepped into the market.
Free education and healthcare for the masses came about because there was no profit in it. Now, as a taxpayer, who has funded the infrastructure, product and training, I do not want my investment turned over to some johny-cum-lately. That’s where my investment in gas, electricity and telecom services ended-up.

“A free market can only function effectively when there are: no barriers to entry, no externalities, numerous sellers and no economies of scale. ”

Nonsense. You are confusing the strictures that we use to model such markets (barriers, economies etc) with the reality. What we need to assume (same things) in order to provide a logical proof of the superiority of free markets are not the same as the restrictions on how well they work in reality. There are (very well known) economies of scale to food distribution. But that does not mean that the current market for food distribution does not work well, does it?

“When any of these conditions are breached, we have market failure, which is a cue for the government to step in and make a correction.”

No, breaches mean that we “might” have a market failure. And before we ask government to step in to correct it we also need to ask ourselves whether government action might lead to a larger failure than that which we moot might be happening in the market.

You’ve managed to go from “in theory markets don’t work in the absence of all of these things” to “government action today!” which misses at least two major points: does the absence of one of the theoretically necessary points mean that there has indeed been failure and secondly, will government screw it up even more?

“The private sector is more efficient than the public sector, but that’s because they only produce the minimum quantity upon which they’re making a profit on each unit.

And so the wider societal benefits that arise from the consumption of healthcare, education etc, even the most perfectly functioning free market will under-produce with respect to the socially optimal quantity.”

This is only true of public goods. And no, public goods are not things good for the public, not things the public think would be good for them nor even goods for the public. They are very special case of things which are non-rivalrous and non-excludable. (Go and look it up!). This means that because it is not possible to make a profit from them some other arrangement has to be made. For example, with copyright we create and artifical property right. With others we provide subsidies for their production. Sometimes (and only sometimes) the correct answer is direct government provision. There are many ways of dealing with the public goods problem.

For example, not all health care is a public good: vaccinations are, a hip replacement for Tim Worstall isn’t. In education ,basic primary education is almost certainly a public good. Degrees in media studies not so much.

There are, of course, other reasons why we might want (or not want) direct government provision, subsidies etc, but if you’re going to use the “public goods” argument then you a) need to nkow what it is and b) which are such public goods where some arrangement must be made on these grounds. And not that such arrangements do not always devolve down to government must do it: only to “something must be done”.

“In a lot of cases, it’s only feasible to have one firm operating: like the London Underground, or the national rail service.”

That’s not the public goods argument, that’s the natural monopoly argument. And no, the national rail service isn’t a natural monopoly (LU could well be though).

“The point of a government is to protect us from the side-effects of the free market medicine, not force-feed it to us.”

Snigger. Next time you get ill try to find drugs to treat you that didn’t come through the free market medicine system.

“Snigger. Next time you get ill try to find drugs to treat you that didn’t come through the free market medicine system.”

I suppose the snigger is meant to get people’s backs up.

I thought the system of drug development, marketing and distribution was highly regulated. Is it really a free market?

This post and comment #2 from Tim Worstall indicate, to me at least, the dangers of trying to conduct this discussion on the traditional territory of public economics within the constraints of a blog. If you’re going to operate on that territory it is complicated. I agree with Tim Worstall that some of the economic arguments in the original post are rather tangled. And they do not point to very clear cut answers in quite the way the post suggests. But equally I would argue that some of the points in Tim Worstall’s response are not quite as clear cut as are suggested there (and the example of vaccinations vs hip operations; primary vs secondary education are surely better analysed in terms of the size of the accompanying externalities not public goods).

It is true that the presence of a market failure cannot be taken by definition as a justification for government provision, or even government intervention. And conversely there is a risk of government failure (indeed, we now think in terms of individual failure also). But there is no widely accepted method for calibrating either market or government failure that would allow any form of ‘scientific’ adjudication between the comparative effectiveness of different institutional arrangements. The answer is typically determined, in different societies, through political discourse. This may in some cases entail ceding control to economists because they claim to have the benefit of a “technical” answer (cf. process of transition in post-soviet Central and Eastern Europe). That approach doesn’t always work out very well (cf. post-soviet Russian society being largely dominated by Oligarchs).

I would argue that this issue can be approached at two levels (and have done on my blog a few times). You can argue it at (a) the level of public economics and (b) political economy. This post combines both but perhaps not entirely successfully.

There are certainly good economic arguments around market failures that are relevant to thinking through why the state is doing something in the first place and what the likely consequences of privatisation are. Our current government seems either completely ignorant or completely indifferent to such arguments. That isn’t to say that the state must continue doing everything as it does now. It may be that some combination of increasing provider diversity plus regulation or subsidy could deliver the same outcome. But it does mean that incautious privatisation is likely to see the re-emergence of a range of problems that are entirely predictable (around asymmetric information, externalities, failures of competition and all the rest). Similarly, public economics might note equity arguments alongside the efficiency arguments for non-market provision. The traditional objections to such equity arguments (that they typically undermine efficiency) are increasingly being challenged by the developments in behavioural economics.

The post makes the point that we need to distinguish between arguments in theory from models of perfect competition and the practical reality of market economies. This is absolutely correct. Here we are in the realms of political economy, and things about which economists (including, unless I missed something, Tim Worstall) have traditionally had very little to say. While the comparative static analysis of the economic textbooks deals in analyzing the properties of equilibrium states, the dynamic of real world market economies is the impetus to seek to increase market share, to exercise control over the market and to dominate other actors where possible. Adam Smith knew that perfectly well. Such control can never be absolute and is rarely more than temporary, but that doesn’t mean private suppliers won’t seek it.

The danger is when the political system ceases to see its role as combating or countervailing that accumulation of economic power and just steps back and lets markets do their thing. Markets doing their thing is not, in the long term, good for democracy because it results in a political system that is beholden to powerful economic interests. I think that is the point the author of the post is seeking to make. It is a valid point. But it is not one that is captured very easily – if it registers at all – in conventional economic thinking. It is no doubt a point that the Conservatives understand perfectly well. But they aren’t so worried about it. They are a party traditionally reliant upon or subservient to sectional economic interests. The question is whether we should be indifferent to letting them change the institutional fabric of society in a way that means such subservience is spreads broader and deeper. And once it is further entrenched will be, by definition, more difficult for future politicans to address.

For a defence of free markets given non ideal conditions, see: http://www.iea.org.uk/multimedia/video/mark-pennington-robust-political-economy

The brownshirt’s free market health care plan is simple .

You get sick, you can’t pay, you die…… Simple.

Compassionate conservatism is nothing more than economic Darwinism.

4
Adam Smith knew about the conditions that existed in the 18th century, to continue to keep referring to him is as rational as attempting to treat cancer with a little prayer from the priest.
Although economists like to think that there is some ‘scientific’ way of predicting the behaviour of millions of people over zillions of miles, with a mechanical view of all behaviours, along come the blood donors and give it away for free just to confound their models

[2] Before I start to defend SJ from you, Tim (although God knows why I should, if he’s deluded enough to be a Hammer 😆 ) just a quick question to you – am I right in thinking that you have no respect whatsoever for the intelligence of those who think that, in the real world, markets do not produce the greatest good for the greatest number?

We perhaps need to remind ourselves here that other west European countries don’t have anything like the NHS where a government managed organisation is a verging on monopoly provider of healthcare services employing c. 1.3 million people, the largest employer in all Europe.

Instead, other west European countries have government managed social insurance schemes to cover personal healthcare costs. Looking at healthcare outcomes elsewhere, such as average life expectancy and five-year survival rates after cancer diagnosis or independent, international assessments, it is not stark-staringly obvious that healthcare in other west European countries is grossly inferior to what we get in Britain.

At one time, we used to think that we couldn’t have a telephone service unless a state monopoly provided one, or an airline service without a state-owned airline, or gas or electricity supplies without state owned monopolies supplying those utilities. But times have changed and we know different now.

9
Much of the technology associated with providing the services you mention was developed through state-intervention including most of the interventions and treatments used within the NHS. Certainly modern communications systems were not available when the G.P.O. provided the telephone service.
It is clear that healthcare, and education for that matter, is a universal need in a modern society and yet without state intervention no private provider stepped-up to service that need. Instead, the tax-payer funded the infrastructure and training for those services and now we are expected to be happy to pass this on to private business. Sometimes monopoly is the best outcome we can expect, and in view of the massive number of consumers requiring healthcare and education surely creating a proper market (as against a quazi internal market) would only add to the taxpayer’s burden, taking into account market failure.
What we should be doing is ensuring treatments and interventions are the best we can give for everyone, driven by quality control,not handing it over to private business.
I would further add that my own exprerience of current electric and gas companies is that they are inefficient and are not customer friendly although the shareholders are probably happy.

“Tim (although God knows why I should, if he’s deluded enough to be a Hammer 😆 ) just a quick question to you – am I right in thinking that you have no respect whatsoever for the intelligence of those who think that, in the real world, markets do not produce the greatest good for the greatest number?”

No.

You are not correct in thinking that I think that.

My opinion is better summed up as: most of the time markets do provide the best outcome we can possibly manage to get. Occasionally/sometimes, they don’t.

The art is in determining which is which, where do markets provide that best possible result and where do (with all the problems with government failure etc) not markets still produce the best result that we can get?

Where I would question the intelligence (indeed, mock, make fun of, even insult) of those making economic arguments is where they do not understand the basics of the economics which they put forward.

As above in the OP. I’m absolutely delighted to confirm that public goods (again, as defined above) are a special case and that without intervention (which could be subsidy, changes in the law, even direct government provision) are by their very nature different and have to be treated differently.

But when some Whazzock gets confused between public goods and goods supplied to the public then I shall indeed, mock, make fun of, even insult.

I have respect for the intelligence of the ignorant, for ignorance can be cured by information being provided to the intelligent who are ignorant.

I, of course, have no respect for the intelligence of the not intelligent, who cannot grasp what that information means for their former opinions.

At which point we cycle back to the definition of public goods again……if you want to use the public goods argument as a reason for intervention in a market, even for direct provision by government of a good or service: well, shouldn’t you know what a public good is first?

The private sector cannot be allowed to supply entire public services because we know our objectives aren’t the same. The state’s main aim is universality, because the value to us of education, healthcare and support for vulnerable people won’t show up on the bottom lines of financial reports.

What vulnerable people, new Labour sorted that one out we are all able to work.

A model of perfect competition is only a way of explaining how things would be in an ideal system. The model helps us to see how far away we are from perfect competition, and is there some way to improve the provision of goods and services by moving closer to it. Absolutely no one believes perfect competition describes our economy. There is no long-run profit in excess of the opportunity cost of capital in perfect competition. For lefties who think profit is evil that means, er, you want more competition. That natural monopolies, public goods, tragedy of the commons, market failure, collusion between government and industry and asymmetric information exists is a revelation to no one.

We do not want a free market in nuclear and chemical weapons. However, that does not mean we should not have one in auto insurance. There are just some things that the private sector does better than the public sector. We live in a world of scarcity not abundance. In a world of abundance the state could provide everything as there would be no scarcity and as a consequence no need for a price mechanism. However, in the absence of that world we need a price mechanism to allocate resources efficiently. Statist and socialist systems the world over all have the same deficiency and that is their inability to price things properly. That is why they are inefficient and over provide some goods and services and under provide others. Bringing some degree of price mechanism pressure to the provision of public services will not make them inherently better. However, it should make them more efficient. If some service delivery is better remaining being delivered by public sector workers then that is where the service delivery should remain. However, the knee-jerk reaction that the state should always deliver services is just as ideological as the notion that the private sector is always best.

It is disingenuous to point to private sector market failure and ignore government failure. The education system after having pupils for eleven years are churning out to the labour market just under 20% of pupils who are innumerate and functionally illiterate. Looks like government failure to me. We also have some of the highest youth unemployment ever. Private sector failure, right?

My main point is that markets for valuable goods will always fail, whether it be by sinister means or just because some companies will be better than others, and because demand is rarely high enough to sustain more than a handful of suppliers in the long run.

Public goods are a necessity, that can’t be trusted to the free market, because whether it fails or not, it will still underproduce.

@Tim: Obviously this has been significantly cut down for the convenience of LC readers. To go down to your natural monopoly point, that is correct and I did have that originally, it was an unfortunate victim of the backspace button. The same principle still applies, sometimes it is more efficient to have one big (state subsidised) firm providing than numerous profit-maximising smaller ones.

The economies of scale point is not nonsense. If economies of scale arise, older bigger established firms have an advantage over smaller newer ones, that is inefficient because the big firms have price-setting influence which is obviously the scourge of free markets.

And again I beg to differ on your hip replacement point. I’m sure whatever it is you do, you make a huge contribution to society. So when Tim Worstall’s hip is playing up not only is he in a lot of discomfort; he can’t work, smile and chitchat with his neighbours because he can no longer go for his morning walk, and it drives Mrs Worstall crazy because he’s stuck indoors all day moaning about wishy washy liberal students writing stupid things on the internet.

When he does get his hip sorted, he and the whole of society are better off because he’s in less pain and everyone can enjoy things the way they used to be.

@10: ” Instead, the tax-payer funded the infrastructure and training for those services and now we are expected to be happy to pass this on to private business. ”

IMO it’s a good rule-of-thumb in the present context to compare what happens in other west European countries before making sweeping claims. As I’ve posted often enough, credit for first implementing a national insurance scheme for healthcare goes not to Britain for creating the NHS in 1948 but to Count Otto von Bismarck, first Chancellor of the German Emprire.

“The Health Insurance bill . . was passed in 1883. The program was considered the least important from Bismarck’s point of view, and the least politically troublesome. The program was established to provide health care for the largest segment of the German workers. The health service was established on a local basis, with the cost divided between employers and the employed. The employers contributed 1/3rd, while the workers contributed 2/3rds . The minimum payments for medical treatment and Sick Pay for up to 13 weeks were legally fixed.”
http://en.wikipedia.org/wiki/Otto_von_Bismarck

Bismarck also pioneered state pensions for the aged.

In the Netherlands, the majority of secondary schools are independent private institutions but their running costs for educating school students to agreed standards come from public spending financed out of taxes.

A presumption that healthcare and education are best provided by the public sector institutions falls at the first hurdle when we compare what happens in other west European countries.

In the 1940s, Britain developed a fetish of creating state-owned and managed monopolies which was not shared in much of the rest of western Europe. State ownership of the British-Leyland Group – later renamed the Rover Group – cost taxpayers over £3 bn but wasn’t successful in preserving an indigenously owned motor industry.

It has perhaps escaped the attention of those here without an economics education that there is a well-developed professional literature on market failures which goes back at least to Marshall and Pigou c. 1900 or, arguably, to Adam Smith and his third duty of the sovereign.

Instances of market failure may justify several forms of state interventions in markets, such as specific taxes, subsidies, price regulation and so on. It is quite a jump to claim that market failures can only be rectified by state ownership and management of the offending institutions.

Common observation informs us that we also have problems from government and regulatory failures – such as the failure of the Financial Services Authority to act in time to prevent the surge in high risk mortgages which promoted the recent financial crisis.

“A model of perfect competition is only a way of explaining how things would be in an ideal system. The model helps us to see how far away we are from perfect competition, and is there some way to improve the provision of goods and services by moving closer to it”

But is it ever going to be feasible to create the conditions of perfect competition? And if it isn’t, then how useful is the model for policy makers – i.e. to what extent should we let it inform decisions on how to provide health care etc.

To put it another way, if I assume that gravity and friction don’t exist, I can theoretically prove all kinds of cool things are possible. But it’s not going to help me in designing real world technology.

I wonder to what extent Tim Worstall actually subscribes to the things he says.

There are people that think the whole deck of cards is about to fall down, mainly because you and I are too stupid to understand it. Which we, and indeed Tim are:

http://www.newsnetscotland.com/economy/1748-news-economy-banks.html

This, for me at least, was a difficult read, but well worth it.

The conclusion was:

There are no regulations which oversee money or the banks, once money is on the move. And keeping money on the move is what modern banking is about. It is an unregulated, extra territorial, global power for and by a global elite.

Professor Michael Hudson writes some great articles about free markets, here’s a good one from 2009

http://www.globalresearch.ca/index.php?context=va&aid=12418

Jacob,

Interesting link. Particularly that in the midst of all this house of cards crashing down banks still found the money to pay lobbyists. In what sense would citizens have been worse off if the government had merely insured citizens that their bank deposits were secure but otherwise have allowed all banks to fail? It strikes me that it may well have been a cheaper option. Given that banks are, generally, massively geared, exploitative bastards?

This question is brought to you by the ‘banks are evil’ tendency.

In what sense would citizens have been worse off if the government had merely insured citizens that their bank deposits were secure but otherwise have allowed all banks to fail?

There is no doubt in my mind that if they had allowed Northern Rock, RBS and HBOS to fail (paying customers up to the £50K they had guaranteed) both the banking sector and the economy would now be in a much better state.

Brown saw a chance for re-election and shafted us big time.

19
I’ve only perused the link, but from what I’ve picked-up from the article it does ring true. It’s ashame that the faux science of economics and the false messages of politicians who use those ‘ideal models’ aren’t chopped-up and fed to the cattle.
Equilibrium my arse.

“It’s ashame that the faux science of economics and the false messages of politicians who use those ‘ideal models’ aren’t chopped-up and fed to the cattle.
Equilibrium my arse.”

Equilibrium is a concept in macroeconomics, you know, that Keynesian stuff?

Markers and competition are microeconomics, where that concept really isn’t used: for we’re interested in describing changes, that is, where equlibrium doesn’t hold.

It’s a shame that the faux science of economics and the false messages of politicians who use those ‘ideal models’ aren’t chopped-up and fed to the cattle.
Equilibrium my arse.

there are a lot of people who appear to think that economists take an absurdly simplistic view of the world, whereas they possess a subtle and “reality based” view of the world. But the truth is closer to them merely having an absurdly simplistic idea about how economists think.

take the idea that prices adjust to clear markets.

you can use:
1. a simplified model of the standard text book sort
2. a complicated computable autonomous agent model, with no “Walrasian auctioneer”, in which buyers and sellers meet and trade in some non-coordinated fashion and have limited information, limited rationality etc.

what you usually find with 2 is that the market clearing price acts as a “strange attractor” and around which prices wander, and that the market mostly clears over time. 1. is a perfectly sensible summary of 2. so long as you understand that’s what it is, which actual economists do understand but their critics image they do not – a phenomenon that can only be explained by a tendency to speak on subjects about which they know nowt

you don’t like the concept of equilibrium? You think there is nothing on a macroeconomic level that can be usefully thought of as a trend where the system would return to if left undisturbed? So, what do you think is the probability of UK GDP halving or doubling next year, compared to the probability of what economist think of a staying near some concept of trend output? Bearing in mind that no economist thinks equilibria are static or that the economy ever stays undisturbed. (There is a long-standing debate in mainstream economics about multiple equilibria, disequilibrium dynamics etc.)

here’s a highly unrealistic model: the Lotka Volterra predator prey model. Do you want to tell biologists they should chop that up and feed it to the cattle because it’s woefully unrealistic? Or do you think they should continue using it as a useful way of explaining population dynamics (which it is).

If one bothers to learn what mainstream economics says about the questions raised in the OP, one would find mountains of work trying to understand when markets work well and when they do not, and plenty to back up your instinct that markets in healthcare might not work terribly well (although that doesn’t mean you cannot quite successfully pay a private company to develop drugs or drive donated blood from A to B).

the statement “markets for valuable goods will always fail, whether it be by sinister means or just because some companies will be better than others, and because demand is rarely high enough to sustain more than a handful of suppliers in the long run.” is incoherent.

this post reads like the author skipped the lectures on the proper use of models, sat through a couple in which models of perfect competition were presented, and the left thinking that unless the set up of the model was literally embodied in reality, “markets fail”. What one observes, in reality, is the converse: markets operating successfully in many settings where the textbook simplifications do not hold.

23,24
Well I didn’t really expect you to ignore my posting, I have a great respect for Joseph Schumpeter.
TBH if I was a producer in 1789 I am sure I would be able to second guess the needs of my customers to the last pin.
The fact is you cannot second guess mass production without ring-fencing conditions, copyright ect. – planning
Equilibrium ignores (in whatever model) the wastage and exeternality cost of production and as it cannot record unmet need, that never is taken into account, but still we hear about how efficient this is for predicting outcome, in fact, is there a condition in ecomonics where any outcome isn;t described as such?

25. steveb

“Well I didn’t really expect you to ignore my posting, I have a great respect for Joseph Schumpeter. ”

Schumpeter is best known for ‘ creative destruction ‘ his description of new firms replacing the old. All my life I have listened to people resisting creative destruction. No firm or factory should ever close down and if that mindset had got their way we would still be making horse drawn buggies.

” TBH if I was a producer in 1789 I am sure I would be able to second guess the needs of my customers to the last pin.

The fact is you cannot second guess mass production without ring-fencing conditions, copyright ect. – planning ”

That is just nonsense. Modern firms are a million miles in front of where firms were in 1789 in terms of knowing their customers. Have you never heard of just-in-time production?
http://en.wikipedia.org/wiki/Just-in-time_%28business%29

We have this thing called the price mechanism so there is no need to second guess. One could almost call it an ‘ invisible Hand.’
http://tutor2u.net/economics/revision-notes/as-markets-price-mechanism.html

Copyright and patents are to do with property rights. Some people do not believe in copyright and others say it is essential for research and development. Goods would still be produced in the absence of copyright and patents.

“Equilibrium ignores (in whatever model) the wastage and exeternality cost of production and as it cannot record unmet need, that never is taken into account, but still we hear about how efficient this is for predicting outcome, in fact, is there a condition in ecomonics where any outcome isn;t described as such? ”

Firms are punished by losing profit if they are wasteful. Hence, they do not want wastage. Pollution externalities are dealt with or should be through Pigovian Taxes. Petrol has a high embedded Pigovian tax because it pollutes the atmosphere for everyone else not just the driver. The point is not just to raise revenue but to reduce consumption. The mechanism for dealing with externalities is known and it is simply not true to say they are ignored. Moreover, when externalities are not dealt with it is invariably because the government are too spineless to confront vested interest groups.
http://en.wikipedia.org/wiki/Pigovian_tax

“ …. as it cannot record unmet need, that never is taken into account”

I’m not sure what you think you are claiming there. Demand curves show us what demand would be at different prices, and are part of the “equilibrium” system. If there are individuals who are too poor to buy something important (an “unmet need”?) that is accounted for in welfare analysis (utility function of the individuals will reflect the unmet need) so it’s easy to take unmet needs into account. Do you mean firms (producers) don’t account for unmet needs? They do take into account their demand curve. If you mean they will not meet needs they do not find it profitable to meet, you are correct, and that’s an argument for redistribution, intervention, whatever as you like, but it’s not a deficiency of models that have equilibria

“But is it ever going to be feasible to create the conditions of perfect competition?”

No – but some markets are highly competitive to the extent where the outputs of individual suppliers have little influence on the going market price – or spread of prices. The important market characteristic of “perfect competition” is that suppliers are price takers, not price makers.

Economists have long recognised the pervasive presence of “imperfect competition” and market imperfections for many decades – try: Cabral: Introduction to Industrial Organization (MIT Press, 2000) and for advanced stuff: Thisse + Norman (eds): The economics of product differentiation (Edward Elgar, 1994).

The crucial policy issue is what kinds of interventions by government are most appropriate for dealing with market imperfections to improve social well-being? Acknowledging the extent of government and regulatory failures, it’s not patently self-evident that that state control or ownership or public spending are the best available means. Governments have recognised this by creating the independent Office of Fair Trading:
http://www.oft.gov.uk/

The banking commission chaired by Sir John Vickers is to shortly produce an interim report:
http://www.hm-treasury.gov.uk/press_11_10.htm

On whether stock market prices reflect fundamentals, the classic paper is Robert Shiller: Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends
http://www.macroeconomics.tu-berlin.de/uploads/media/shiller.pdf

For a pick of the best papers from the American Economic Review, try: Canon of economics:
http://www.economist.com/node/18227134?story_id=18227134

To Bob (28),

You’ve made a good point, but I think it’s important to remember that the only markets that remain competitive in the long run are the ones with little value. For a good that has high value, the industry will attract high quality employees that will drive their firm to be better than everyone else, soon they’ll rise above their rivals and increase their market share. This is market failure.

There’s nothing inherently “wrong” with this, because if we’re not trying to make the best of ourselves then how can the human race ever progress? It’s also important to note that this successful firm will have surpluses to invest in R&D that countless small firms selling at marginal cost won’t have.

The point is that this is fine in industries like electronic consumer goods, vehicles, stuff that is nice and good to have, but not absolutely crucial to our health and wellbeing. The market, regardless of whether it’s efficient or fails “benevolently” if you like will underproduce a socially optimal level of this vital public service – I don’t think I ever said public goods.

Challenging economics papers on demand curves:

Harvey Leibenstein: Bandwagon, Snob and Veblin Effects in the Theory of Consumers’ Demand (QJE 1950):
http://areadocenti.eco.unicas.it/mbianchi/LEIBENSTEIN.50.QJE.pdf

Gary Becker: A Note on Resturant Pricing and Other Examples of Social Influence on Price (JPE 1991):
http://research.chicagogsb.edu/economy/research/articles/67.pdf

But compare this google lecture by Barry Schwartz: The paradox of choice (2006):
http://video.google.co.uk/videoplay?docid=6127548813950043200#

Sadly, much of the criticism directed here at mainstream economics really amounts to claims about having just reinvented the wheel.

@29: “The market, regardless of whether it’s efficient or fails ‘benevolently’ if you like will underproduce a socially optimal level of this vital public service [healthcare services] – I don’t think I ever said public goods.”

The “imperfections” of healthcare markets are widely recognised, which perhaps helps to explain the extent of state interventions in healthcare markets across west European countries, starting with Bismarrck in 1883 – see @15. But note, these interventions have typically taken the form of state managed social insurance schemes to cover personal healthcare costs, not the creation of a vast verging-on state monopoly employing c. 1.3 million staff to provide healthcare services free at the point of delivery.

The latest official data I can find on Health expenditure as a share of GDP in OECD countries is for 2008:
http://www.oecd.org/dataoecd/45/55/38979836.pdf

The UK comes close to the average for OECD countries.

Note this recent report of the National Audit Office:

“Hospital productivity has fallen over the last ten years. There have been significant increases in funding and hospitals have used this to deliver against national priorities, but they need to provide more leadership, management and clinical engagement to optimise the use of additional resources and deliver value for money.”
http://www.nao.org.uk/publications/1011/nhs_hospital_productivity.aspx

A recurring difficulty with the notion of “public goods” is that economists mean something very specific by this concept (goods or services which are non-rivalrous in consumption and – crucially – where it is impractical to exclude those who don’t pay when buying the good or service). Public broadcasting used to be a good example until conditional access technology came along – perhaps street lighting is the best everyday example.

In popular use, public goods are often taken to be a wide range of what are regarded as socially essential good and services, such as housing, which is not a public good according to the definition of concept as used by economists.

26
You are just regurgitating Smith, equilibrium never really exists because the model is so selective with what is uses it is impossible for it to fail, it’s a self-fulfilling prophecy. When firms fail the taxpayer picks-up the cost in unemployment and possibly the ongoing effects to other businesses. Where does all the money invested in failed businesses fit into the model or all unemployment benefits, where do all the unmet needs and wants become reflected? I’m afraid mate I still don’t see the Emperor’s new clothes, perhaps they’re hung on the invisible hand
What I see is millions of unwanted items in land-fill sites and thousands of people unable to afford a decent meal. No wonder the earth is warming from the day after day production of items that have no instrinsic value but still there is the pursuit for more. I saw people all around me demanding an i-pod and just like magic the item appeared.
Btw, I don’t think that you got my point when I said that in 1879 I could second guess my custormer’s needs, a bit of social history and a look at the demographics might give you a clue.
27 Exactly what data does demand curves use?
30.31
I never said that my criticisms of economic models and theory were novel I’d say they’ve been going the rounds for decades but no-one appears to be able to address those criticisms.

“production of items that have no instrinsic value”

And now it’s you regurgitating Smith and the classical economists.

They thought there was such a thing as intrinsic value. They were wrong. There is no such thing as intrinsic value. Only the value people put on thatitem at that time. Exchange value if you like, or perceived value.

Bit odd to use one of he known errors of the classical economists in support of your denunciation of classical economics…..

Saadaab

You appear to be very confused.

For a good that has high value, the industry will attract high quality employees that will drive their firm to be better than everyone else, soon they’ll rise above their rivals and increase their market share. This is market failure.

no, the problem with markets+public services is not that this would happen, but that it wouldn’t. If privatizing public services resulted in the best providers attracting the best employees and increasing their market share, that would be a market success. A market hasn’t failed when the firm providing the best quality at the best price wins. The true problem has more to do with there being too little scope for consumers to “spend” their money with the “best providers” and for those good providers to become dominant, when it comes to public services, not too much.

The market, regardless of whether it’s efficient or fails “benevolently” if you like will underproduce a socially optimal level of this vital public service – I don’t think I ever said public goods.

If you basic argument is that public services involve externalities etc. then you have merely made a case for some government intervention to correct for that and ensure the quantity supplied is increased. This is trivially true. Obviously you can’t have privatized social services in the same sense as you have private bakers – abusive parents aren’t going to go and pay somebody to take their child away from them, or whatever. Nobody is suggesting complete and utter privatization of public services with zero government intervention, all we are talking about is private fulfillment combined with public funded, free and point of use services, or a mix.

The real debate is over the extent to which delivery of various public services can be contracted out to private providers, and the extent to which pure private (like Bupa, private schools) ought to be allowed to co-exist with state funded. As I have already, there are plenty of mainstream arguments from the “abstract neoclassical world” which suggest that state provision may be superior in many cases. You can explain why with first-year microeconomics.

steveb

demand curves are hypothetical – data is observed prices and quantities. To get some idea of a demand curve, a firm could experiment with different prices and see how much it sold. If you are really interested, estimating demand curves is one of the oldest econometric problems there is.

but the point is that you seem to be muddling up some idea about unobserved unmet demand with a critique of economic models that work in terms of market equilibrium. The two questions are separate. It’s quite possible to have a market equilibrium in which lots of people have “unmet needs”. This is why first-year microeconomics students are taught the second welfare theorem which uses a highly simplified mathematical model to get across the idea that if you don’t like the equilibrium you’ve got, you can redistribute income to those with “unmet needs” so that they will then be able to have those needs met.

I don’t know why more left-wingers don’t know that mainstream textbook economics involves welfare theorems featuring redistribution.

Oh great, Tim Worstall and Luis fucking Enrqiue on the same thread. Christmas must have come early.

35
I appreciate your attempt to address my questions, however, answering them in terms of a hyporthetical model does not really do, models representing any part of the world are only relevant if, and only if, it somehow captures some kind of reality. Equilibrium does not because it discounts a whole load of quite important items and by doing so is almost next to useless except in terms of an academic debate. Unmet needs or wants occur when people cannot acquire something they demand even when they are able to purchase it if it was available. as I keep; saying a non-event is never registered, neither is the wastage when companys go bust.
Tim W. In a society which demands that its members have a certain level of education in order to survive in the job market, I would suggest that education is an intrinsic need, but the market does not supply this for the masses..
Mass markets look as if they work because the state ( taxpayer) steps in to wipe-up the problems

steveb,

hypothetical demand is about reality: if I charge 50p for my iced buns, I’d sell this many, if I charged £1 I’d sell that many. In reality. But you can only observe one at once – you can’t simultaneously charge both prices.

I’m not sure whether you are objecting in general to using abstractions to think about reality – if so, I might ask whether concepts like socialism are any less founded in abstractions. I’m wouldn’t push the idea economics is a science, but all analysis deals in abstractions.

you say the “nonevent” of “unmet demand” is “never registered” – registered where? It’s certainly registered in abstract economic theory which says things like “in this equilibrium, these people are going without enough to eat” and welfare analysis might suggest doing something about that.

Do you mean that in a pure market system, if the market equilibrium involves some people not having enough to eat, then nobody is going to do anything about that? If so, you’re right – that’s why all advanced market economies involve safety nets of various sorts. Another question is: under which system are people more likely to go hungry? Might I suggest that market economies are they way to go if you want to minimize hunger too? The weight of evidence – comparing market with non-market economies – is on that side. This is not to say there is no role for governments in food security etc.

While I find the economic arguments very interesting there are other relevant factors. I am sure that most people would be happy for public bodies to use private contractors to provide some services if they can do it well and at a better cost than public provision. These transactions should be as open and transparent as possible.

Over the years I have become hugely frustrated when private provision has been used and its costs kept secret due to, “Commercial confidentiality.” After time it became reasonable to suspect that this excuse was being used to cover up oversight failures and excessive costs.

As it stands the NHS and other public bodies are covered by FOIA. They may be imperfect but the law is there. It will not apply to private suppliers. We will simply not know or be allowed to find out about how they operate our health service.

cherub

yes i don’t know why there isn’t more use of open book accounting

“left not liberal” clearly can’t handle two bright people simultaneously
(though I suspect s/he can’t handle one)

@ 41 cjcjc

Oh, come on! Left not Liberal made an excellent contribution, summarised as “swearing at two people for no given reason, then storming off”. We need more people like Left not Liberal in government.

38
You are arguing in circles. if something is not registered it is registered nowhere so asking me where it is not registered is nonsense. I am not talking about welfare in particular and I’m certainly not against abstractions, but eventually even those who favour market economies have to admit that the market does not do what theory states.
In the end the state intervenes greatly, the banking crisis is just the tip of the iceberg, so why are we looking at privatization of services?.

@40 Luis

With respect, if tht’s all you can say then you’re missing a significant point. I see no legislation on the horizon to deal with it, so one has to ask what the implications might be for our currently public services if they are privatised. We hardly have a shining record of improving things by privatising them in the UK, after all.

“We hardly have a shining record of improving things by privatising them in the UK, after all.”

Rilly?

Phone service certainly improved after privatisation (yes, I am old enough to remember it before), water quality went up after privatisation, carbon emissions declined after privatisation of the CEGB.

Which of these do you think are not improvements?

@45 Tim

I remember GPO phones and did work once for the CEGB. The GPO were quite innovative and had an excellent R&D department.

As usual you are being disingenuous. To imagine that privatisation alone is responsible for improvements is to assume that they would not have happened otherwise. With carbon footprint your suggestion that privatisation led to its reduction is so simplistic it’s laughable.

Most people would say that the railways improved in some ways under privatisation but that on the whole they are less good today in price, complexity, cost to the taxpayer and service provision.

Water infra-structure is crumbling, engineers are reduced to leaving equipment until it fails and then treating the problem as an emergency.

As regards the user, for many it’s too difficult to evaluate the claims of private suppliers for energy, telephone etc so there is not a proper market at work. Regulation is barely adequate.

I might be happy to agree that your beloved markets work if fewer public goods were monetised and the markets worked. For me we have lost a lot more than we gained.

“Water infra-structure is crumbling, engineers are reduced to leaving equipment until it fails and then treating the problem as an emergency.”

Snigger.

You do know why water was privatised, don’t you? Because the nationalised companies weren’t investing enough in the network? For politicians were not willing to either raise charges or raise taxes sufficiently to pay for the necessary investments?

Investment in the networks rose hugely right after privatisation: as was the very aim of privatisation.

Do also note that there were, after it went through, four different systems. For Enlgand, private but regulated regional monopolies. For Wales, a mutually owned for profit. In Scotland, a government owned company. In NI direct government provision through the local councils.

A decade after privatisation The Economist gave us the score sheet. From best to worst was the same order as above, England, Wales, Scotland, NI. Cleaner water at lower prices with less environmental damage.

Private, for profit (regulated) ownership: pretty good thing, eh?

46: Did you miss the recent problems over the New Year with the only very recently no longer directly state run Northern Ireland water having loads of burst pipes cutting off thousands of people for days because it had been underinvesting for decades whilst there were proportionately fewer problems and they were fixed quicker in private funded and run English water companies who had similar weatehr conditions?

Phone service is cheaper that it was under the GPO. I actually can choose more than three types of telephone to have installed, which is nice.

@47 Tim

Chuckle.

Water privatisation has not fixed the same problems that led to its privatisation, and you think it’s an improvement.

D’uh!