"What, then, is a reality-based person to do? Many people appear to believe that the best they can do under the circumstances is to hedge and qualify, at the margins. That is, they can aver that the market may be imperfect, that under certain conditions it may fail, that it might function better given the aid of fuller information or certain constraints on behavior. And this position, deeply rooted in academic economics and therefore at least somewhat defensible on the public stage, has become the 'liberal' position in debates over markets, linked to the slogan 'making markets work.'I'm not sure that Galbraith contains much of that spontaneous wit that his father generally put in in about the fifth draft.
The problem with this compromise is that it depends on a misreading of the academic economics on which it is based. The underlying idea appears to be that markets exist but sometimes have problems: a bit of monopoly power, some kinks in the flow of information, a few side effects, maybe a little difficulty predicting the future. But in fact, the modern currents of academic economics are far more devastating than that. Each of the problems just mentioned is not incidental; rather they are pervasive. Taken together, they raise serious doubts about the idea that markets can work at all. To state that again: taken together, they form an overwhelming critique of the very concept of the market.
In the purest version of the theory that underlies the conservative version of the perfect market, economic man is a machine to whom whimsy and evolution are unknown. In practice, man is inconsistent; changeable; sometimes, though not consistently, irrational; his judgments biased and distorted and influenced by his peers. Modern behavioral economics has begun - but only begun - to notice this, seeking by experimental methods to show whether the actual behavior of presumptively competent people corresponds to the predictions of the rationalist theory. The findings, associated with the Nobel Prize-winning work of the Princeton psychologist Daniel Kahneman, are that they are not. Ordinary, intelligent people appear consistently unwilling, or unable, to calculate the consequences of their decisions in a manner predicted by the view that they are responding purely to the market. Instead, they act as social beings, concerned about their standing with their peers, about the fairness of the deal they are being offered, and other matters quite irrelevant to the utility of the object or money on offer. These are remarkably subversive findings, for they suggest that even if there were no monopoly, no externalities, perfect information, and perfect foresight, markets composed of real people would still not perform as the conservative vision requires.
But of course there are easier ways to reach the same conclusions, and behavioral economics is of interest mainly because it speaks to market-obsessed academics from within all the mind-boggling restrictions that they habitually impose on their analyses in order to make the problems appear capable of solution. The real world is a different place altogether." -- James K. Galbraith, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, Free Press (2008): pp. 21 -22
7 months ago