Your core argument is ironic: "The world is really complex, so we can't effectively model it. Therefore we should just use the simply model where there only one approach to solving problems."
One clear example of positive government regulation are rules against mercury pollution. The EPA did a clear cost analysis calculation and found that the lost IQ of children is worth more than the benefit that the company get for polluting the enviroment with mercury.
Lead poisiong is another example. Rules to cut it back might even have reduced crime by a large margin.
It's very hard to argue that allowing companies to pollute as much as their wish leads to optimal results.
Fellow libertarian here, addressing your fundamental question as best I can: As a general rule of thumb, a good place to look for market failures are places where the market ends.
It's important to remember that, as our society is structured, the market is -defined by the government-. Capitalism, in our society, is in fact a form of regulation.
Quoting from my blog:
"Suppose we lived in a society in which land couldn't be owned, and you want to start a farm. However, every time you grow a crop, somebody else comes along and picks and eats it. How can the free market solve this problem?
...well, supposing a government does in fact exist, it can't. It would be illegal to punish somebody for picking crops. How utterly silly of you to even suggest such a thing.
The free market never gets to act on the problem, because the problem isn't part of its domain. Crop ownership? What? When somebody picks a fruit, it is theirs, that's the law. They can pick mushrooms and sell them, they just can't sprinkle mushroom spores around and claim the future produce as their own. And it would be criminal to sit over a field and bully people who try to pick vegetables and fruit that are theirs ...
My go to examples of "characteristic behaviors of markets that are undesirable in some sense, and can be corrected by the application of an external law" are markets that would naturally become monopolies. E.g. water and electricity. I'm not an economist and haven't done much/any research on this, but I imagine that without regulation, you'd get big private monopolies, which would then be able to charge way more than would be socially efficient. The free market fails here because the barriers to entry are way higher than in other markets.
Generally economists recommend pricing these externalities into the system - I think the american proposal was called "cap and trade" (it died). The EU has a similar system running. If these are properly implemented, you get a more efficient market than you had before, because the externalities now carry a price, and consumers and producers can react to the price accordingly.
If that's impossible (because of difficulties in getting international binding targets, for instance), then subsidies, rather than regulations, seem the most efficient way. I'd personally prefer to subsidise solar rather than nuclear, but this is mainly because I believe that solar power follows a Moore's law and that the long-term costs (including decommissioning) of nuclear are unclear and probably underestimated (I'm open to being persuaded on both counts).
It seems reasonably clear to me that, from a computational perspective, functional central planning is not practically possible.
For a great deal on this topic, inspired (as maybe nigerweiss's remark was too?) by Francis Spufford's novel Red Plenty, see this article by Cosma Shalizi.
He doesn't happen to say anything about externalities as such. But anyone who finds this interesting might enjoy reading Shalizi's piece.
Many interventions in the economy have a positive expected benefit. (I should note that libertarians can concede this point, yet argue against interventions because they infringe people's rights etc) One great example that you point out is resolving coordination problems. Another is protecting the competitive market itself: anti-trust law, laws against false advertising, corruption laws. Others protect individuals from an unregulated market: medical licenses, tort law, health and safety regulation.
Your mention of wanting to "preclude blackmail, theft,...
It always seemed to me "externality" was just a euphemism to cover up the fact that capitalist enterprise requires massive--not a hand out here or there--state support (and planning) to functional at all. The US is really kind of the odd ball in that we pretend this isn't the case, dressing up subsidy as defense spending or whatever. In Japan, e.g., they just take your money and give it strait to Toyota without all the pretense. At any rate anyone who opposes central planing and "big government" also opposes capitalism in it's extant form.
Something to keep in mind is that different people use the word "capitalism" to mean different things. Many libertarians and Objectivists say "capitalism" to mean a free-market economy with dramatically less regulation and taxation than we have today. However, many socialists and anarchists use "capitalism" to mean the sort of economy that we do have today, dominated by big businesses and finance capital. Others use expressions such as "mixed economy" and "crony capitalism" to imply various combinations of competitive free enterprise, regulation, and favoritism for the politically well-connected.
So some readers will take your comment as meaning that free enterprise requires state support; while others will take your comment as meaning that today's mixed economy requires state support.
always seemed to me "externality" was just a euphemism to cover up the fact that capitalist enterprise requires massive--not a hand out here or there--state support (and planning) to functional at all.
Externalities pre-date the modern capitalist system. For example, in England, well before modern capitalism, restrictions on smelting and similar industries existed to prevent them from polluting surrounding neighborhoods. These concerns are even older than that. The Talmud discusses the legality of farming flowers that make for bad tasting honey when bees use them to make honey, and when one can plant such flowers near the property of someone who owns beehives. Similar issues with water rights also date to the early Middle Ages in some respects. There's nothing inherent about "capitalism" here, merely economic activity as a whole.
The Talmud discusses the legality of farming flowers that make for bad tasting honey when bees use them to make honey, and when one can plant such flowers near the property of someone who owns beehives.
I know it's a little off topic, but it's interesting to point out when you can almost reconstruct the situation that was patched by a specific rule by looking at the rule.
It seems reasonably clear to me that, from a computational perspective, functional central planning is not practically possible.
If we have enough power to do functional distributed planning, we have enough computational power to do functional central planning. Distributing it makes it harder.
The problem with central planning is that it isn't resilient. If the central planners are incompetent or corrupt, the whole economy crumbles. With a market economy, if one person messes up, one person pays the price. The cost of this is vastly, vastly increased computational expenditure. We are performing the same calculations over and over again hundreds of millions of times.
(Commenting twice to allow seperate voting/commenting)
At some points you seem to be hinting at questions of what a post-singularity economy would look like. This is a fascinating topic, if we remember the caveat that seeing past the singularity is very hard/uncertain. Nevertheless people like Robin Hanson have written some interesting things about what it might look like.
One thing to bear in mind is that economics has always been premised on the assumption of scarce resources ('how should they be distributed?' is arguably the question of economics).The mos...
The most interesting question for me is what do we do if, as seems likely, automation and technological development produces an abundance of goods and leisure time.
I expect quite a lot of this within ten years.
For instance, there are about 3.5 million truck drivers in the United States, and there is a shortage of new drivers. Self-driving cars will probably launch in a few years. Self-driving trucks are sure to follow. That puts the truckers out of work.
Other goods-handling jobs are already being automated; for instance, there are fully-automated warehouses using automated storage & retrieval systems. If Amazon and FedEx aren't working on universalizing this, they're fools — and they're not fools.
Meanwhile in San Francisco, hackers are delivering burritos by drone. And delivery robots have been used in closed environments such as hospitals for years and years.
There's synergy here: automated warehouses + self-driving trucks + delivery robots → the Internet of physical goods. Stick a barcode on an arbitrary object and fill out a web form, and a robot comes and gets that object delivered anywhere accessible by road anywhere in the free world. Awesome for customers, manufacturer...
Politics ahead! Read at your own risk, mind killers, etc. Let all caveats be well and thoroughly emptored.
It seems reasonably clear to me that, from a computational perspective, functional central planning is not practically possible. Resource allocation among many agents looks an awful lot like an exponential time problem, and the world market is quite an efficient approximation. In the real world, markets, regulated to preclude blackmail, theft, and slavery, will tend to provide a better approximation of "correct" resource allocation between free agents than a central resource allocation algorithm could plausibly achieve without a tremendous, invasive amount of information about the desires of every market participant, and quite a lot of computing power (within a few orders of magnitude of the combined computational budget of the human species).
It would be naive to say that we'd need exactly the computational power of the human species in order to achieve it: we can imagine how we might optimize the resource allocation scheme by quite a lot. Populations are (at least somewhat) compressible, in that there are a number of groups of individual people who optimize for similar things, allowing you to save on simulating all of them. Additionally, a decent chunk of human neurological and intellectual activity is not dedicated to economic optimization of any kind, which saves you some computing time there as well. And, of course, humans are not rational, and the homunculi representing them in the optimized market simulation could be, giving them substantially more bang for their cognitive buck - we can imagine, for instance, that this market simulation would not sink billions of dollars into lotteries each year! It may also be that the behavior of the market itself, on some level, is lawful, and a sufficiently intelligent agent could find general-case solutions that are less expensive than market simulation.
Still, though, the amount of information and raw processing power needed to pull off central planning competitive with the market approximation seems to be out of our reach for the time being. As a result of this, and a few other factors, my own politics tend to lean Libertarian / minarchist, and I'm aware that there is some of this sentiment in circulation on this site, though generally not explicitly. I'm trying to refine my beliefs surrounding some of the sticky issues in Libertarian philosophy (mostly related to children and extreme policy cases), and I thought I'd ask LW what they thought about one issue in particular.
I have been wondering whether or not there are any interventions in the economy that can have a positive expected benefit. I honestly don't know if this is the case: put another way, the question is really asking if there are any characteristic behaviors of markets that are undesirable in some sense, and can be corrected by the application of an external law. Furthermore, such things cannot be profitable to correct for any participant or plausibly-sized collection of participants in the market, but must be good for the market as a whole, or must be something that requires regulatory power to fix.
An obvious example of this sort of thing is the tragedy of the commons and negative externalities. The most pressing case study would be climate change: the science suggests, fairly firmly, that human CO2 emissions are causing long-term shifts in global climate. How disastrous these shifts will actually be is less well settled, but there is at least a reasonable probability that it will be fairly unpleasant, in the long term. Personally, I feel that we are likely to run into much bigger problems much sooner than the 50-200 year timescales these disasters seem to expected on. However, were this not the case, I find that I'm not quite sure how my ideal government, run by a few thousand much smarter and better informed copies of me, ought to respond to the issue. I don't know what I think the ideal policy for dealing with these sorts of externalities is, and I thought I'd ask for LessWrong's thoughts on the matter.
In my own mind, I think that as light a touch as possible is probably desirable. Law is a very blunt instrument, and crude legislation like a carbon tax could easily have its own serious negative implications (driving industry to countries that simply don't care about CO2 emissions, for example). However, actions like subsidizing and partially deregulating nuclear power plants could help a lot by making coal-fired power plants noncompetitive. We could also declare a policy of slowly withdrawing any government involvement in overseas oil acquisition, which would drive up the price of petroleum products and make electric cars a more appealing alternative. However, I don't know if there would be horrifying consequences to any of these actions: this is the underlying problem - I am not as smart as the market, and guessing its moods is not something that I, or any human is going to be very good at. However, it seems clear that some intervention is necessary in this sort of case. Rock, hard place, you are here.
Thoughts?