Saturday, May 28, 2011

The Market Failure Challenge

Based on a challenge I started at the Caracas Chronicles blog post about the Road to Serfdom, I thought I would introduce a fun challenge to this blog. Point out a potential market failure, and I will respond to the claim. My contention is that there is no such thing as market failures, and so this is an open invitation for anyone to try to point out a supposed market and show that I am wrong.

Let's see what comes of it.


  1. the market for horses has gotten tenuous-
    hay has gone from $12-$14 to now $18 a bale in just a year's time-
    people are turning their horses out into the CA desert areas because they cannot afford to fees them (a bit cruel - in my opinion)
    I know-horses are not a 'market' but-I could not resist the challenge :-)

  2. BTW-I added you to my roll-thought I had done that before-don't know where it went!

  3. Why Carol, thank you very much for the softball. The answer is simple: monetary inflation. With more bills printed, the average values of goods goes up. Sellers do this so as to secure the highest profit possible and to not run out of supplies. Furthermore, monetary inflation drives investors to commodities to preserve their wealth since with time having your wealth in currency would tend to decrease wealth. So inflation creates a commodities markets which drives up prices based purely on speculation about monetary inflation. That is not useful, but it only exists because of the monetary inflation that is going on. This will drive up prices for no reason whereas in a free market speculation would only be about future shortages and future rises in demand. That's not the sort of speculation we have been seeing.

    Hope that explains it. :) Who's next?

  4. Tony, That was me with the anon test. I tried sending some liberals I know over here but they chickened out, claiming they couldn't leave a comment.

  5. As far as I know everyone should be able to leave a comment. How long ago did you tell them to visit, because I've had one emailing me for a while who is totally off his rocker.

  6. That was probably one of them. I don't want to mention his name, but he is kinda out there.

  7. Well he never mentioned his name. I thought it was pretty indicative of his confidence.

  8. So, you believe that if the government prints more money, or as you say, "The answer is simple: monetary inflation. With more bills printed, the average values of goods goes up." then prices for goods and services goes up? So in the one example you have gotten from your challenge, the price of hay is directly related to the amount of money outstanding in circulation?

    Then you claim that the investor has a choice of leaving their money in coin or investing in commodities? Are those the only two choices they have? Is it either or?

    Then you claim, "So inflation creates a commodities markets which drives up prices based purely on speculation about monetary inflation. That is not useful, but it only exists because of the monetary inflation that is going on.."

    Thus their is no other cause of inflation except what you refer to as, "monetary inflation?"

    Then, would you care to define a "market failure?'

  9. There can be price inflation or deflation without monetary inflation, but in this case it is clearly due to monetary inflation. And with all goods, the price is at least in some part related to the amount of bills in circulation.

    And I never said that the investor can only choose bills or commodities. However, if you know that the value of your bills is going to go down with time, then commodities become that much more valuable.

    Market failure is an area in the economy where goods are not efficiently allocated by the free market. My contention is that this does not exist in as much as there is no better alternative than the free market solution.

  10. Hey, Tony. So how is the challenge going? I'm a long time follower of the Caracas Chronicles. A lot of good people there and smart too. But they are all Latin Americans and mostly Venezuelans. It's very difficult to discuss politics (Conservative vs.liberal) because they are all left of center. I realize your surname is Hispanic but I doubt you are from Latin American culture. I've spent a lot of my life in Latin American countries. Especially Venezuela. Here every political party is left of center and always has been since the fall of Perez-Jimenez. I've never heard anyone in all my years here talk about free markets. Here it is Social Democrats vs. Communist.

    Any way good luck with your challenge.


  11. Hey Jim. I've enjoyed my time on the website. Yes, I've found it to be invested with socialists, but they have a good debate and it's very engaging.

    As for my background, I was born in the United States. However, my dad is a Cuban immigrant so I guess you could say I have secondary exposure to Latin America (though I have been to Cuba myself). I feel what has happened to these countries to be apalling and the lack of faith in free markets and voluntary exchange troubling. I don't understand what has caused the socialism fetish, but it has surely been destructive. I don't know what it's going to take, but I hope my posting on the Caracas Chronicles is at least helpful in some way.

  12. Forget to mention this, but the challenge has been going well. I'm still waiting for some Communists to come around to try to take me down, but I'm sure they'll come eventually. Maybe I need to make the challenge more enticing in some way.

  13. So, based upon the example how did you determine that the increase in the price of a bale of hay was due to monetary inflation?

    Here is where you claimed that an investor had a choice between currency and or commodities:

    "Furthermore, monetary inflation drives investors to commodities to preserve their wealth since with time having your wealth in currency would tend to decrease wealth."

  14. I determined it theoretically. If a currency is being devalued with excess printing, then you would look elsewhere to preserve your wealth. That's where commodities come in. They act as a store of value since the value of the currency is decreasing. There is no argument that the Fed increased the monetary base at the onset of the recession, so people hedged against inflation by investing in commodities.

  15. In the bale of hay example, where exactly would the devaluation of currency occur when the farmer who grows the hay is located in the same state as the rancher who buys the hay?

    It is one thing to talk about commodities such as oil and or metals but you are talking about commodities that are grown regularly on a cycle; the ability to store value is rather limited in crops.

    The run up in commodity pricing occurred well before the recent recession and actually can be traced to the establishment of funds and ETF's that allow investors to invest in commodities.

    Then inregards to commodities such as corn, cotton, and wheat (hay is not an investable commodity)besides the bubble caused by funds/ETF's you also have the fact that weather is putting a downward pressure on supply (droughts in Pakistan and India and wet springs in China along with the storms and flooding in the USA are causing dramatic price increases in cotton) then when you add to the fact that due to rising living standards in China and India you have a dramatic increase in demand.

    If you grow corn, wheat, or cotton in the United States you are enjoying a very profitable couple of years; but that would involve complicating your theory because you have to think, grower/supplier, investor, and consumer. When you can only grow so many acres of a crop the only way you can increase your income is via increasing yields per acre or by increasing the price of the commodities sold.

    Theoretically, your theory may be correct in some commodities but not all....and definitely not inregards to hay...

  16. There is no such thing as a futures market in hay? And we can't act as if monetary inflation is only something that is applicable to post 2008. It has been going on since the creation of the Fed and was going on big time before the recession started.

    And sure, increased demand is responsible in some part for rising prices, but monetary inflation has had a big effect.

    So, where exactly is the market failure in this regard, Mr. Anonymous?

  17. Furthermore, oil is an "investible" commodity, and all the concepts I have been talking about easily apply to it. And the price of oil has a direct effect on the price of hay, doesn't it?

  18. First off, I never said oil was NOT an investable commodity...I said Hay want to make a blanket assertion about commodities using an example of hay....and hay does NOT fit. But that is why you are not a theorist as much as an ideologue...

    Does the price of oil effect the price of hay? Using the example at hand how much oil does it take to grow hay? Does oil make up over 50% of the cost of hay? Since the price of hay has risen $6 that represents a 50% increase in the price of hay....

    Do you want to claim that monetary inflation is the one and only reason that the price of hay has jumped 50% in price? Of course not! But it is the only reason you have given..

    Remember, economists always qualify their theories with, "if all other things are equal..." and never are all other things equal.

    Thus, your monetary theory is just one of numerous is by far not the only one.

  19. ANON: Tony never said it was the only cause. You are a pyromaniac in a field of strawmen.

    He asked you to posit a market failure and as usual, you go off on weird tangents.

    I'd love to see you stick to a line of argumentation for a change.

  20. Yes, are definitely a strawman....

    I am trying to figure out exactly what "a Market" is; because without a precise definition and an agreement there can be no discussion of what a "failure" is.

    Using the example of bales of hay is a fine example....Tony has a theory that he applies to everything....and then when questioned he backs off, slowly but surely to the point that his theory is pointless...

    You are blinded by your ideology so of course anything that does not lead you from point A to point B as you perceive it is then considered a 'weird tangent" which basically means that reality is a weird tangent to you....

  21. What did I back off of? Monetary inflation is responsible for a lot of the rise in the price of hay, both directly through devaluation of the currency, and indirectly with increased investment in commodities. I never said that inflation was solely responsible for the rise, but it is a major contributor.

    But besides, where exactly is the failure? Prices rose in response to increased demand and a lower supply (due to increased investment). How exactly did the market fail in this regard?

    And if you're still hung up on terminology, go to Wikipedia. They have a pretty popular definition of the term "market failure."

  22. In classical economics "the market" involves supply and demand. You have those that produce a good and those that consume a good. In the one pathetic example of a bale of hay, that would be the farmer and the rancher. Now, you have gotten all involved in defending the concept of "monetary inflation" without realizing that you are using terms like "investors" "futures market" and one word that you hint at but never speak, "speculators". Speculators are neither supply nor demand and whenever they enter a market they cause market failure. Classical capitalistic markets do not fail and that is the beauty of supply and demand, but with the deregulation of the financial industry you have had one bubble after another form and then burst and that is because banks no longer serve the function in the economic system that they used to and they are now part of the Wall Street speculators who cause markets to operate inefficiently, and the general ideals of capitalism as espoused by Adam Smith no longer apply because the market is no longer about the orderly and most efficient allocation of scarse resources but rather about wealth accumulation.

    Since the repeal of Glass-Seagall our markets are as inefficent and dysfunctional as anything the Communists could ever dream of.

    In your desire to prove yourself a staunch capitalist you have failed to examine the current economic system to determine if it is in reality a capitalistic isn't and yes, government is partially to blame but Wall Street and the concentration of wealth in the hands of day traders and speculators who in turn have the funds to lobby government to get policies enacted that benefit them are more so to blame.

    Supply Side Economics is just as vile and economic logic as is communism.

  23. So speculators are just extraneous to the market and serve no purpose? That's nonsense. Speculators make prices less volatile. The predict shortages and rises in demand and vice versa so that we end up with steady prices (for the most part). They do not cause the market to fail, they make the market more reliable. The problem we have now is not with speculators but the fact that speculators have to predict changes in the monetary base and we would be better off without that currency devaluation.

    But I do agree that the rich buying off politicians is a problem.

    And I'm not a supply side economist, by the way, that's part of the Chicago School. I follow Austrian economics.

  24. Yes, speculators serve no purpose....

    On one hand you claim that investors, in an attempt to ensure the value of their money seek out commodities in periods of rising inflation...the only way they can get an outsized return on their investment is if they can somehow corner the market by removing enough supply of a commodity from the market to ensure the price rises sufficiently enough to reward them.

    Now, you want to claim that they actually attempt to take supply off the market and hold it until their is a shortage....then they benevolently sell their stash and make a profit all in a desire to make sure that there is a constant supply.

    Whew! You have no idea whatsoever about how the market works do you? Especially commodities...

    I didn't realize that you were glad that George Soros speculates in currency....I am glad to find out that he tried to corner the market in British Sterling in an attempt to regulate the supply of British currency. I am glad to know that the Hunt Brothers attempted to buy up all the silver back many years ago so that they could ensure a steady supply of the metal in the future.

    Speculators don't give a damn about "making the market more reliable" there only goal is to find a situation where they can get in the market and make a quick killing...

    I didn't buy gold back in 2001 because I worried about their being a shortage in the future...I bought it because I knew that after 9/11 and the neocon desire to do battle with anyone and everyone that the price of gold would go through the roof...just like the election of GWB was a definite signal to buy oil....

    It was all done for be damned.

    Don't romanticize economic activity. George Soros didn't care that he almost brought down the English economy....there is a big difference between theory and reality....

  25. Speculators serve no purpose. That's nonsense. When you buy food, do you eat it all right away, or do you save some for later? Guess what, that's speculation! And say you have an apple tree. Do you pick them all right away or only pick some and wait for the others to ripen? That's speculation as well! Obviously these provide positive benefits, just like investors do. They maximize the amount of supply and make sure that we never run out. That's an invaluable service.

    Now, I never claimed that investors do this out of benevolence. I claimed that they do this by making a profit, and that profit ensures that we have a steady supply and not crazy volatility.

    I am not happy that there is speculation in commodities, but I am not going to blame them for that. They are playing a market that should not even exist. Get rid of currency manipulation and the market would disappear over night. I'm not going to get mad at investors for trying to protect themselves from currency devaluations, I'm going to get mad at the people who are devaluing the currency.

    I am not saying that the investors are being benevolent to us. They are all doing it to make a profit and benefiting us as a result. I'm sorry if that idea is too complicated for you to understand.

  26. That is the most pathetic attempt at rationalization I have ever compare eating food with speculation and or harvesting apples and speculation.

    You make speculation sound like rationing and central planning. Then you say one thing in one part of your post and then totally contradict yourself a paragraph later.

    Thats not a logical explanation but rather a feeble attempt to continue to argue a point that you cannot argue....nor do you really even believe your own argument...

    So save the absurdity of " complicated for you to understand..." because I understand full well; you bit off more than you can chew and now you are having trouble swallowing.

    Speculators do not hoard and they do not provide for the smooth operations of the market; they are disruptive to the market.....even your Gods at the Austrian School would agree to that....if supply is high and demand is low then the price falls, if supply is low and demand is high then the price increases...that the market at its best...speculators enter markets where they see an opportunity to disrupt the orderly nature of the market to enrich themselves by creating an event that benefits them or a one time capitalization on certain circumstances.

  27. Tony, you are arguing with a pedantic pinhead. There are generally accepted definitions of a market, but he wants to play games over it.

    Getting involved with him is a descent into madness. Mao's China is his ideal model. He and Tom Friedman would make a good pair.

  28. Anonymous, I hate to call someone ignorant, but you are completely ignorant. Austrians totally accept and support the actions of speculators.

    But I doubt you would even look at those articles and blog posts since you seem to not even attempt to understand what I am explaining.

  29. Kurt, it's very clear that this guy does not want to listen to opposing viewpoints, he merely wants to stir up, well, anger, to put it nicely. You should have seen the self-righteous message he sent to me on that other blog. What a load. This guy is so full of himself.

  30. Interesting theory. And I see it played out almost daily with lumber and manufactured materials pricing in my business. For one example, take OSB, a manufactured building material - during the fall and winter, you can buy it for practically nothing, five or six bucks a sheet, but in the Spring and Summer, especially if there have been a lot of destructive storms, the price triples or quadruples. As a builder, I've speculated on building materials when I knew I could sell them as part of a bid on a project, usually saving the client some money, plus making a small profit at a later date. We did that one year with OSB, buying it at eight bucks a sheet, 800 sheets worth, when we knew the price was going to go up due to the upcoming hurricane season. That year, we had bid jobs on the basis of OSB costing twelve bucks per sheet and the price had gone up to over fifteen bucks a sheet. So if we hadn't had a little foresight and speculated on the price of an essential building material, we would have lost money instead of making money.

    All that to say...yes, we're in business to make a profit.

    Mike G.

  31. This is exactly how it works, despite Anonymous's willful ignorance. And yes, you do it for a profit even though it helps everyone. That's usually how profits work. Glad to see you found a pretty large inefficiency which you can use to make a nice profit. I would do the same if I had the money to pay those storage fees. Maybe one day though, but good luck with business.

  32. That scenario played out a few years back when building was hot and heavy. Lately, not so much- I'm in the business of building vacation homes - there's not too much of that going on lately.

    I'm glad I could provide an example for your wayward readers.

    Mike G.