We spoke briefly about this after class. My concern was that Dorn is over-stating the free markets ability to allocate resources efficiently and certainly over-stating it’s ability to allocate resource equitably. I’m not arguing that central-planning is anything close to a better alternative, but I am arguing that it is impossible to remove government intervention entirely if we seek to have a maximally optimal market.

Price-theory, even in its mathematical framework only allocates resources efficiently (to say nothing of equity) in the hypothetical framework of perfect competition and complete information. In auction theory, it’s easy to see how asymmetric information or incomplete information can manipulate the price signal in a way that creates inefficient equilibriums. Further, real life markets are often far from the theoretical models of perfect competition and result in systems which allow for strategic game play and non-incentive compatible systems.

For example, the Illinois smoking ban in 2008 was hotly debated using all sorts of pseudo-economic arguments positing statements like, “if people really want to go to a smoke-free bar, the demand will create a market for it. It’s a personal choice to come in or go somewhere else. It’s basic economics.” This logic is fallacious and doesn’t account for the fact that even if all the bars privately wanted to go smoke-free without the government policy, they face local competition (not perfect) and there’s a “coordination problem”, to use game theory talk. Not to mention, the interplay between the game the bars, casinos and restaurants are playing and the game the groups of individuals that are deciding where to party for the night are playing (just imagine a group of non-smokers and smokers). It’s not basic economics in the least! However, because government intervened in the form of policy, all the bars now face the same boundary conditions and the larger market is better off.

Finally, the fact that the price signal in a free-market system is reflective of consumer preference should raise flags as well. Granted, I can’t think of any better variable to base the price signal on, the fact that people aren’t even aware of their own preferences makes the equilibrium suspect to externalities. To clarify, people face incomplete information so that when they go to form their preferences, they don’t really know what they prefer because they don’t know all the options or consequences of their choices (pollution, cancer-risks, opportunity costs in general). When we spoke, we used the sign-up sheet to purchase books as an example of consumers expressing preferences (1 book for $13 dollars). But the reality is, many of us don’t know if the book is really $9 dollars or $20 dollars or if another book would have been better. We face incomplete information so the list as evidence of “preference” that the students value this book at $13 is dubious. Like so many other personal preferences, and therefore market prices, they have been manipulated by external signals like marketing and advertising, peer-consumption, or the requirements of economics professors.

For all these reasons, Dorn seems to be going from one extreme, central-planning, to the other extreme of theoretical ideology that the invisible hand fixes everything. Surely, the maximally efficient allocation of scarce resources would be somewhere in the middle.

I apologize for such a long post!