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This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free mar

by bcoates 12y ago

This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would (instead of just observing it). "It does take a mastermind to get close to any kind of optimal solution in many cases" isn't correct. Relaxing the optimality constraint doesn't actually make central planning any easier, difficulty is dominated by the worse-than-cubic scaling on the number of moving parts of the system (and look at how complex even pencil manufacturing is). Nations actually tried this, a whole lot of useful math for optimization problems was discovered, but economic optimization is still algorithmically intractable.

czr80 12y ago
>This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would I'm struggling to understand what you mean by this - Coase's theorem shows why externalities are often not addressed by market solutions, even when an apparent market solution exists (spoiler: transaction costs).
dragonwriter 12y ago
> This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would (instead of just observing it). Coase's theorem explains why externalities occur even if you make the idealized assumptions of rational choice theory (perfect knowledge and utility-optimizing behavior); it does directly state that (in those idealized assumptions) you wouldn't have externalities without transaction costs, because those who would otherwise suffer externalities would be motivated to buy off those who would inflict them. However, transaction costs are a very real thing, and are particularly significant in the case of externalities with diffuse impacts (whether that's harms or benefits that are diffuse.) Coase himself criticized misapplication of the theorem to claim that externalities were unlikely, since such applications necessarily discounted the real occurrence of transaction costs. Such misapplication essentially inverts the whole point of the theorem.

by bcoates 12y ago

czr80 12y ago

>This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would I'm struggling to understand what you mean by this - Coase's theorem shows why externalities are often not addressed by market solutions, even when an apparent market solution exists (spoiler: transaction costs).

dragonwriter 12y ago

> This essay was written in 1958, before the 'Invisible Hand' was replaced by the Coase theorem which actually explains why externalities don't happen in free markets as often as you would think they would (instead of just observing it). Coase's theorem explains why externalities occur even if you make the idealized assumptions of rational choice theory (perfect knowledge and utility-optimizing behavior); it does directly state that (in those idealized assumptions) you wouldn't have externalities without transaction costs, because those who would otherwise suffer externalities would be motivated to buy off those who would inflict them. However, transaction costs are a very real thing, and are particularly significant in the case of externalities with diffuse impacts (whether that's harms or benefits that are diffuse.) Coase himself criticized misapplication of the theorem to claim that externalities were unlikely, since such applications necessarily discounted the real occurrence of transaction costs. Such misapplication essentially inverts the whole point of the theorem.