Interesting stuff, I wish this gentlemen would post links to the papers used. Without those, its hard to tell what is fact or believe.

Crap! Another totally awesome year of Burning Man without having had tickets.

The narrator is indeed strongly biased, but the pieces are nicely divided on all sides. You mention there are bigger names in economics. Which ones? Id be interested in reading them.

In reply to this comment by renatojj:
Interesting article, I wouldn't call it a good summary, but a biased assortment of opinions. Economics has, unfortunately, become a very convoluted subject permeated by politically motivated rationalizations and borrowed thinking. Not all of it is lost, though.

Is there anything in particular that stood out for you that you wanted to show me, was it the alleged defender of free markets' expert opinion on its impracticality? : There are bigger names in economics that have stated the exact opposite, it doesn't mean anything. If you have doubts about free markets, bring them forward, try to understand at a basic level why they wouldn't (or would) work. I assure you it'd be more a fruitful exercise in understanding economics than to rely on foregone conclusions.In reply to this comment by rbar:
http://www.wa
shingtonpost.com/opinions/can-we-save-american-capitalism/2012/08/31/800de6be-f04e-11e1-ba17-c7bb037a1d5b_story.html

Nice summary of some current thoughts on free markets ;-)

http://www.washingtonpost.com/opinions/can-we-save-american-capitalism/2012/08/31/800de6be-f04e-11e1-ba17-c7bb037a1d5b_story.html

Nice summary of some current thoughts on free markets ;-)

@renatojj Apologies for the late reply, have been running for work and it doesnt look like that will stop

True that some countries may have less cooperation, though is that dependent on the economic system used or something else? For instance, East Germany had 100% employment and a very active economy, more so then west Germany in some regards. It was ofc run top down with little choice and politically biased, but I am not sure if that lessons the amount of economic transactions, ie cooperation. I guess it comes down to what you define as cooperation.

BTW "those criticisms of the depletion of finite natural resources consists of the economic Law of Diminishing Returns, opportunity cost, and scarcity in economics" -- I never understood what they mean with that. Even if the resource cost goes up strongly due to scarcity it doesnt mean that that resource can be replaced by something else, or that the higher cost (than the original cost of the scarce resource) of the replacement can be born by its consumers.

Now you say something very interesting: I agree with you that capitalism isnt always about ever-increasing competitiveness, in practice. In cases where you have competition, you get ever-increasing competitiveness. (This is in theory what all capitalism strives for) In cases where you do not have competition you dont. That is exactly what we are talking about. Free market philosophy assumes there is always near perfect competition right? How else would the market balance itself if there is no competition? Would you agree that free markets only work where there is competition?

Lets see when we have competition:

"competition is proportional to the difference between supply and demand" That doesnt sound right. If there is large demand and little supply (the difference is big), there is little competition as all suppliers will overcharge like hell as they will be able to sell anything they can manufacturer anyway. If there is large supply and little demand there can be competition, though usually this results in companies leaving the market until you have: If the supply and demand are about equal, you SOMETIMES have competition that keeps things in balance. Or you can have a monopoly for whatever reason and that market has again little to no competition. In other words, in no single scenario is competition guaranteed. Actually, there is good reason to assume markets move to monopolies naturally in all cases. In a market that is turning from early adopters to mass market, there is always focus on economies of scale. Companies need to get bigger to make sure they have the lowest cost price (best competitive edge) and to keep their shareholders happy as they demand growth to make their investments worth more. Bigger companies means fewer companies on the long run, as the market is always limited. This means companies will take over other companies until only a handful remain. Voila. Actually, if it werent for (anti-free market) anti-monopoly rules lots of markets would only have 1 company left. That company would be so big it would be impossible for a new entry to push them out of the market or even get a foothold unless the market itself crumbles because a newer range of products exist that make the old one obsolete. Again, without rules governing economies, things just go bust.

Which was what happened in the derivatives market. It was a completely deregulated market that was exploding itself as there were no rules governing it. When it did explode (ie when the free market failed) there were 2 options left: Let all banks fail or bail them out. Think of the consequences of following your recommendation: If 1 bank fails, it will pull the others down with it as they are all strongly interconnected. As banks are key in the economical world, the entire system would collapse. The amount of devastation would be huge, would probably kill the entire system. Now, you can argue that would be good for us, as we could build a fully new system. But before we would get there, there would be years if not decades of nightmares.
I agree with you that the fall of the derivatives market should never have happened in the first place which is exactly the reason to not follow free markets.

Above clarifies a bit my way of thinking: for many of these markets (be it banks or utilities or employment) the consequences of letting that market fail are just too big. If you have the guts to follow free markets to the end, it might work (isnt proven though) but you come to a point where you destabilize your country in such a manner that things like revolts and all kind of nastiness are highly possible and even likely. That is not progress, that is barbarianism.

You mention yourself that there are practically no free markets anywhere. You say that is because they havent been tried. I say that they have been tried again and again but never last.

@renatojj Ah, its nice to be called a socialist for once. Where I come from, they call me a right wing capitalist
Any economic system is as cooperative as the next. That is the definition of an economic system, a system where economic transactions take place, ie cooperation. So capitalism is NOT more (or less) cooperative than other isms. (And mercantilism and corporate capitalism (corporatism right?) are forms of capitalism ;-) http://en.wikipedia.org/wiki/Capitalism)

Definition of capitalism:
"an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state" - oxford dictionary
Emphasis is on "for profit". So yes, all capitalist are per definition profit seeking. Relentless is something that follows Darwin. Those who are more relentless get higher profits and have more money to grow, invest, invent, etc. They eventually push out less relentless profit seekers so the relentless ones are the only ones left.
And remember you said them first, not me. I just said that capitalism tries to achieve profit and as competition drives prices down one way to do so is to minimize cost, ie become more efficient. So there is always a drive for efficiency in capitalism.
I am not against profit seeking, I believe that capitalism is the system that pushes the most growth in most regions, be it economic growth, technological progress, etc. That also makes it a rat race, where you continually need to go faster to keep up. As I am getting older I see that running is not the only game in town. And in most cases it detracts from happiness more then other methods in the long run (though it brings more wealth). Given also the finite resource problem and it is a good discussion to have if capitalism is the best and only economic system we should have on this planet. Like I said, for another time.

"The Libor and derivatives markets scandals, are not examples of free markets at all, they're abuses where the bad behavior was encouraged by policy"

What? What policy? The entire idea of over-the-counter (OTT, the largest amount by far) derivatives was that they are traded without any supervision or visibility. Complete free market! That and the inability to value and understand the risk per unit made for instance the Credit Default Swaps so dangerous. These were perfectly legal, and are still in most cases. The market is still unregulated today. You can argue that in the end it wasnt a free market because they got bailed out. Bullshit. They got bailed out because the other option was to let the entire economic system collapse. Letting the system collapse is not free markets, its stupid. The damage would have been catastrophic. The markets wouldnt repair that, they wouldnt exist anymore. That is why people call the derivatives market an example of a free market that should have been more regulated, because they had the power to destroy everything and the incentive to take the risk (for profit).
The way the bailout happened (and is still happening) is total and utter crap, but that is a different story all together.

Which leads again to the same question: if not the (IMHO obvious) derivatives market, name me an example of a free market?

@renatojj So you are saying you cant be threatened economically? Off course you can be. Damage can be economical or mental too. There is no reason to exclude those. Far from it, you can argue these are in the end physical too.
Force is not required to be physical in this process.
What you need is leverage, ie something that the other needs. If you are the giver of a job that that other person needs and it is difficult for him to find it elsewhere, you are in a position of power without any other need of force. If you own a well in a desert you are the most powerful man without any force. And you can coerce people to do your bidding for them to receive water. No force required, just threat.

On right to have a job. The thousands of philosophers, lawyers, human rights activists, politicians, etc that worked on the UDHR just believe that without the job, people will starve, ie will die, ie will get a right offended. Hence, they need a job. And thats is were coercion comes in. The NEED (not the right) to have a job to survive (or at least live on a "decent" level in your society) Coercion isnt about having or not having a job. Its about the threat of not getting it / losing it and accepting things you would otherwise not. Discussing whether or not someone is suitable for a job is besides the point, as we are all unsuitable for the job we have in some form or other. So unskilled, incompetent, dispensable, these are all point of view based. In a world of geniuses you and me would be unsuitable for anything. But are we really? Off course not, just like every tree, flower, bacteria and animal has a role, so does every person.

On coercion: by a child's psychological manipulation? For sure. (Check with any parent and they will readily agree ) What about a person you're in love with? Yes off course. What about a guy who is more qualified for a job than you are, is he coercing you out of that position? No. He nor you has the job to give. The coercion comes when your boss says to work 12 hours a day and get paid for 8 because someone else might be better and he might give that person the job.

On justifying anything government does: you make assumptions I dont follow. Punish coercion -> using force -> more social injustice.
If it is coercion and we define coercion is something bad, isnt it justified to do something against it? You can do something against it with or without force, but even if it is done with force (meaning someone somewhere gets his freedoms lessened) again, isnt that justified to stop him or her being able to coerce someone as that is bad? Its like saying government cant stop someone from shooting someone because that would lessen the freedom of the shooter. I would define social injustice not as the max rights of that individual but of the max rights of the whole population. So not "using force" would lead to social injustice.

On laziness: You are right. If you are not careful, setting up rules that protect the weak can make them complacent. Its a balancing act. If you set no rules, ie free market, you open them up to abuse. If you set too many rules, they can become less eager to be the best they can be. BTW I dont call that lazy. There is a larger argument to make here, about the goals of capitalism (More and more efficiency, ever growing and ever improving) or about more soft lifestyles that would not be as efficient but might in the end bring more happiness. A topic for another time.

On the UDHR: I guess we want to achieve the same, we just disagree on the way to get there. I structurally dont believe free markets will get us there, as in every real case free markets have proven to be unreliable because people will abuse their powers and create too much inequality. There are so many examples (LIBOR, the entire financial derivatives markets, basically all unregulated markets) that I can ask this:
can you give me 1 example of a market that is run truly free that worked for a longer period of time?

@renatojj

Whether or not everyone is entitled to a job or money is a question I never thought about. The universal declaration for human rights (UDHR) states it as follows:
"The UDHR included both economic, social and cultural rights and civil and political rights because it was based on the principle that the different rights could only successfully exist in combination" -- http://en.wikipedia.org/wiki/Human_rights (parts classification and indivisibility)

Its really interesting to read the declarations 22 to 28 of the UDHR. (http://en.wikipedia.org/wiki/Universal_Declaration_of_Human_Rights#Article_22)

For instance:
Article 23
(1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. (2) Everyone, without any discrimination, has the right to equal pay for equal work. (3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. (4) Everyone has the right to form and to join trade unions for the protection of his interests.

I havent thought this through, but all of the above seem to me to not be inline with free market policies as free market policies dictate against the above rules favoring the natural motion of the market to guide the market along. Natural motion meaning that if there are moments of superfluous workers (large unemployment like today), they dont have a job and dont get paid, which forces them to either start working for themselves or die out which in both cases balance the market again.

A question inline with this: I just dont understand what your ideal is. Is there some country that comes close to your ideal or can you describe what you want to achieve?

Just having less government IMHO isnt a goal, its a means. Is your goal to maximize individual freedom (Ayn Rand style)? Though she has some ideas I fully agree to (rationalism as the only mean to knowledge vs faith for instance) her objectivism has never had much success with academia and for good reason.

Someone much more eloquent then me explained it this way (though he was talking about libertarian-ism, a close relative):
http://videosift.com/video/Noam-Chomsky-on-Ron-Paul-Hes-a-nice-guy-but

One reason democracy and capitalism have done so well for so long is because they keep each other in balance. Democracy is the rights of the majority over the minority. Capitalism (of which free market policy is a part) is the right of the individual, ie the minority over the majority. Both in and off themselves are disastrous. The balance is just where its at. Free market policies push in the direction of capitalism and away from balance. IMHO not what we want.

@renatojj dont worry, I too am enjoying our conversation. Back to the topic at hand

My definition of coercion: http://oxforddictionaries.com/definition/english/coerce
"persuade (an unwilling person) to do something by using force or threats"

That means in any situation where one has a higher degree of power then the other person, there is risk of coercion. Especially in cases of employment there is a large discrepancy between the power of the employee vs the power of the employer. Employers can coerce in numerous ways, by saying you will get fired if you dont, you will not get a raise, you will not be promoted, you will be demoted, and so on.

What can the employee do? He or she can stop working there. Unless there is a shortage of workers (which country in the last 50 years has had that?) that will not overly upset the employer, so the employees negotiation power is limited.

So what is coercion in practical sense? Working 14 hours for 8 hours of pay or get fired? Working 14 hours for 8 hours of pay to get a promotion? If you look at the definition both are coercion as the employee does something he would otherwise be unwilling to do (work unpaid hours) because of (the unspoken) threats. Threat to lose the job or threat to not get the promotion.

So what do I mean with powerful? Exactly that, the ones with more power in any situation. They can be rich, but they dont have to be. Off course, where power reside, usually riches follow or vice versa.

Laziness is part of the human condition. Everyone is lazy, and everyone is not. I have seen toilet ladies work 14 hours shift 6 days a week and I have seen CEOs spend most of their time on golf courses and vice versa. Laziness is dependent on your motivation and on what you can get away with. Nobody will do work they dont have to if they dont like it. And everyone will work their butt of if they really like and want to do it. If the other option is starvation, trust me, no one is lazy.

Employees actually are entitled to something. Employment is a contract between one giving his free hours and the other giving goods (or money) in return. Charity is not. Coercion can follow as many things are not clarified in the contract, or are clarified but later are demanded or not given anyway. In charity there is no contract, hence no agreement on what should be given or received hence no coercion as there is no base of power. You can argue that as the receiver needs the money, it is possible to coerce him or her by offering and asking something he doesnt want to give in return, ie persuading him to do something he would otherwise not have done. That is not charity, that is employment ;-)

@renatojj I am curious to see how your ideal world would look like. Say we have 4 products and 10 companies. How would you see the prices in those markets evolve and how would you implement free market in them?

@renatojj The distinction between no and bad choice or even good choice depends on the point of view and in that regard I agree with you, it is arbitrary in both directions. I argue that 0 or 1 choice (good or bad) = no choice. I argue that sometimes even more choices are no choice. Would the ability to vote for 3 presidential candidates be no choice, a choice or multiple choices if all 3 are extreme right and there is no other option? I argue that 3 x extreme right = same choice = 1 choice = no choice. Without any good choices, if all options are bad, there really isnt any choice, even if there are many bad choices. If employers were to offer 1 euro per hour in Spain to those unemployed, that is below the minimum required to live. You can say that is a good choice in economical terms as it is more than 0, but I doubt the employees would agree. It is the same as not offering salary so again not an option. Now the question is which viewpoint should you take? I would say the idea is to protect the less powerful against the more powerful and maximize the total amount of choices for the total group.

There is something interesting to note here: Where government makes laws protecting employees from certain hardships (against unfair dismissal, discrimination, too low pay etc) arguable limiting the choices of employers, it also makes laws that limit the employees (for instance setting higher pension ages.)

"When will that someone or a group ever be satisfied with their choices if we give them the choice of removing the choices of others forcefully? "
Exactly! In a world where the powerful can set their own rules with no one there to stop them, what incentive have they to do the right thing? That is exactly what we have seen go wrong time and again in fully free markets. There are so many examples of this. You believe government is the one removing choice? Look at monopoly markets and see what happens to prices there.
You believe government only sets rules one way, always against a group. That is not the case. The idea is that policy makers try to find a middle ground between the freedom of one group vs the freedom of another group. That is a fine line to walk and continually needs to be adjusted but it is a much more ethical line than simply giving a group with power full control in the hope that they will do well because of "the market".

"If you mess with the incentives for people to get out of their own undesirable situations, people end up imposing their costs on those who instead made an effort of having more choices, thus establishing a moral hazard (good being punished, evil being rewarded)."

Do you have an example? Maybe I am missing your point. In my mind, its not about the incentives as all people always want to improve themselves. Its about the amount of choices they can have. If you leave it to a part of the people who have reason to take control and coerce another group, they will.

"It's easy to see any economic problem being directly solved with laws, but not so easy to see the consequences. Even worse, the moral hazard leads to people misbehaving, and that ends up being invariably blamed on the concept of a free market, specially where there is no actual free market to speak of, like when you talk about Spain."

Spain is not a free market? In what way?

About the charity: No I dont think charity is pointless You cant compare charity to employment because in employment there is an exchange, hours work for pay, which creates mutual dependence and a relationship. In the case of charity there is none. Though the person in the unfortunate situation may depend on charity, he or she is not giving anything in return. Without this exchange, there is no relationship between giver and taker, which means no power over anything as there is no economic reason to give. If the giver demanded something for it, it is pay and not charity and a true mutual dependence with possible coercion would appear.

Below is the parable of the ox: (http://www.johnkay.com/2012/07/25/the-parable-of-the-ox)

Though it is about our economies in general, it also says something between the lines about markets without guidance. Namely that in ANY market, given enough time, you will get people who "abuse" the lack of rules and change the game in their favor. (Libor, credit default swaps, monopolies, etc etc) As free market policies work only when there is plenty of competition, as soon as some one cheats or in another form effectively removes competition the entire thing will collapse. Free market policies can be optimal during a time, however, that time is limited as before (just started market, monopoly or wild west) and after (mature market, few or 1 large competitors ruling the market, monopoly) you need guidance to make sure all the stakeholders are protected, not just those with power.

(BTW though there are rules setup to make sure the system works, you can see those are reactionary because otherwise the system doesnt work at all. They make sure there are good options for everyone, not just maximum options for those with power, aka in this case the cheaters)

25 July 2012, Financial Times

In 1906, the great statistician Francis Galton observed a competition to guess the weight of an ox at a country fair. Eight hundred people entered. Galton, being the kind of man he was, ran statistical tests on the numbers. He discovered that the average guess (1,197lb) was extremely close to the actual weight (1,198lb) of the ox. This story was told by James Surowiecki, in his entertaining book The Wisdom of Crowds.

Not many people know the events that followed. A few years later, the scales seemed to become less and less reliable. Repairs were expensive; but the fair organiser had a brilliant idea. Since attendees were so good at guessing the weight of an ox, it was unnecessary to repair the scales. The organiser would simply ask everyone to guess the weight, and take the average of their estimates.

A new problem emerged, however. Once weight-guessing competitions became the rage, some participants tried to cheat. They even sought privileged information from the farmer who had bred the ox. It was feared that if some people had an edge, others would be reluctant to enter the weight-guessing competition. With only a few entrants, you could not rely on the wisdom of the crowd. The process of weight discovery would be damaged.

Strict regulatory rules were introduced. The farmer was asked to prepare three monthly bulletins on the development of his ox. These bulletins were posted on the door of the market for everyone to read. If the farmer gave his friends any other information about the beast, that was also to be posted on the market door. Anyone who entered the competition with knowledge concerning the ox that was not available to the world at large would be expelled from the market. In this way, the integrity of the weight-guessing process would be maintained.

Professional analysts scrutinised the contents of these regulatory announcements and advised their clients on their implications. They wined and dined farmers; once the farmers were required to be careful about the information they disclosed, however, these lunches became less fruitful.

Some brighter analysts realised that understanding the nutrition and health of the ox was not that useful anyway. What mattered were the guesses of the bystanders. Since the beast was no longer being weighed, the key to success lay not in correctly assessing its weight, but rather in correctly assessing what other people would guess. Or what others would guess others would guess. And so on.

Some, such as old Farmer Buffett, claimed that the results of this process were more and more divorced from the realities of ox-rearing. He was ignored, however. True, Farmer Buffett’s beasts did appear healthy and well fed, and his finances were ever more prosperous: but, it was agreed, he was a simple countryman who did not really understand how markets work.

International bodies were established to define the rules for assessing the weight of the ox. There were two competing standards – generally accepted ox-weighing principles and international ox-weighing standards. However, both agreed on one fundamental principle, which followed from the need to eliminate the role of subjective assessment by any individual. The weight of the ox was officially defined as the average of everyone’s guesses.

One difficulty was that sometimes there were few, or even no, guesses of the oxen’s weight. But that problem was soon overcome. Mathematicians from the University of Chicago developed models from which it was possible to estimate what, if there had actually been many guesses as to the weight of the animal, the average of these guesses would have been. No knowledge of animal husbandry was required, only a powerful computer.

By this time, there was a large industry of professional weight guessers, organisers of weight- guessing competitions and advisers helping people to refine their guesses. Some people suggested that it might be cheaper to repair the scales, but they were derided: why go back to relying on the judgment of a single auctioneer when you could benefit from the aggregated wisdom of so many clever people?

And then the ox died. Among all this activity, no one had remembered to feed it.

@renatojj making a distinction between bad and no choice is a very fine line to walk on. It will always be arbitrary, as what for one is only bad, for another is no choice. An example: our Spanish friends have the option to work for a shitty fee (the bad choice) or not work at all (and possibly starve, arguably no choice). As there is only 1 choice (work for a shitty fee) is that a choice? Even if that choice was good, 1 choice means there is no choice. And in most cases, due to the same principles as apply to free markets, if there is only 1 choice (or less) that choice will be bad. Is this a case of free markets or should we have done something about the lack of choice? You can argue that policy makers did not do anything in Spain, and you are right. But again, they had their chance (and have a chance every day) to do the right thing. Having an opportunity to make things better is better than knowing 100% that things will go wrong in the end (total free market) even if in some cases human stupidity still F$^&& up the chances.

BTW, in your examples on Uganda and the homeless man, both are not situations of power. As in the giver has no power (or relation) over the receiver or vice versa. It is charity. There is no real economic reason to do it. An employer however does have power over a worker in various ways. You cant compare those examples. Coercion only happens in cases where there is an imbalance of power. Student to teacher, employee to employer, citizen to police. Those are exactly the moments when you need to make sure the ones with more power are scrutinized and can be stopped.

I agree that a free market wants to reduce "the choice remover" aka rules. The rules are however making sure there is balance and that the ones in power cannot remove all the choice from the ones without power. Creating good options for one side in free markets, can lead to bad options in the other, again, no choice. Rules can do the same, however the entire idea of the rules is to balance it and make sure the amount of good options for everyone is maximized.

I just read a great parable. Ill copy it in the next post as it says a lot about free market policies.

@renatojj I think we are getting to the bottom of this. You and I have a vastly different idea of what a choice is. Let me ask you, how many choices does the person in the next example have? (Apologies for the graphical nature, its is not meant personal just a vivid example)

If I were to ask a person to shoot themselves or jump of a building because if they dont I will kill their family, how many choices does this person have? I am betting you will say at least 2. Maybe in a creative moment even more (escape, fight back etc) In reality this person his no choice. In all options either he or his family dies, ie he loses. He cant win. The end result is always the same. Hence, there is no choice he can take that has a different effect, hence there is no choice.

So trying to maximize the amount of choices, good and bad, is counting false positives. The bad choices are no choices. They are just another form of coercion by whomever has power.

So whether the bad choices come from economic problems, or from any of the other reasons (monopolies, geographical limitations, mobility sluggishness etc) it doesnt matter. Bad choices are always a form of coercion. Free markets only work in situations where you have none of the above problems and as such have a natural amount of good choices, which is rare. This is exactly why you need policy makers to create and protect good options. Maybe that decreases the total amount of choices, good and bad. But it increases the amount of good choices, which are the only ones that matter.