Sunday, October 11, 2015

Free Market Ideology And Other Nonsense

According to economic ideology we would have the best of all possible worlds if we had a perfectly competitive market and governments made few efforts to regulate the market.  This ideal world view assumes that consumers make rational decisions that maximize their utility.  Efforts to regulate markets would prevent consumers from maximizing their utility.  The first welfare "theorem" in economics tells us an unregulated market would be Pareto Optimal.  Everyone would maximize their utility and nobody could be better off without making someone else worse off.  Pareto, an Italian economist, objected to this misuse of his idea but it is part of the catechism in all introductory economics textbooks.  Advertising and marketing play an important role in maximizing consumer utility by providing important information about the choices that we make; they are not intentionally deceptive. Robert Shiller, a Noble Laureate in economics,  disputes this idealization of the real world by describing the critical role that deception plays in shaping consumer decisions.  We are not very good at maximizing our utility.

Most of us understand why consumers would be better off with intelligent government regulation of many markets.  The problem is that governments do not always do good job of regulating markets.  It is not easy to develop good regulations and some markets are made less competitive when producers are successful in influencing the regulations. In large part, this is because our political leaders are dependent upon campaign contributions to run for office.  Almost half of the seed money used by political hopefuls in the current election cycle came from only 158 families.  Most of them come from the energy and finance industries and 138 of the them are supporting Republican candidates who they expect to keep their taxes low and limit government regulation of their industries.  They live in a very different world than the ideal world imagined by economists.  For them it is Pareto Optimal.

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