1、TEXT A problem of market theory is that the theory uses only one logical approach. The theory starts from the assumptions and applies deductive reasoning to arrive at the conclusion. This application is not itself faulty, but there are other forms of reasoning that should be applied for the followin
2、g reasons: (1) it is well known that the assumptions are not strictly true; and (2) the argument implies that the assumptions and the result are going on simultaneously. They must occur together to maintain the equilibrium state, so as a matter of logical coherence, it is appropriate to see if they
3、are otherwise independent and internally consistent. Therefore, it is appropriate to see if any alternative and equally reasonable logic could lead to a different conclusion.,Unit Twenty Why the Logic Fails Roger Mann,In this case, several alternative and reasonable lines of thinking lead to the con
4、clusion that the assumptions may not be true. The assumptions should not be taken as givens because unbiased reasoning must lead to their re-examination. One general argument against market theory is that the assumptions are internally inconsistent. There are two different arguments of this type: Ar
5、gument 1 finds that the assumptions of perfect information, freedom of entry, and well-defined rights are not consistentthey cannot all be true. Argument 2 finds that maximization may conflict with all other assumptions.Argument 3 finds that the conventional line of reasoning is incomplete. The equi
6、librium result of downward sloping demand, stable equilibrium, and economic surplus is logically inconsistent with the maximization assumption. The static result of market equilibrium means that some economic players have the resources (economic surplus), the motive (profit maximization), and the in
7、centive (downward sloping demand, among other things) to escape or control markets.,Unit Twenty Why the Logic Fails Roger Mann,The deductive reasoning of market theory argues in this way: If A (maximization) and B (Assumptions 2 through 6), then C (equilibrium). Argument 1 finds that B is not a feas
8、ible set if creation, innovation, or production of new things are allowed. Argument 2 reasons that, given A, then not B and therefore not C. Argument 3 finds that, starting with C and allowing for any feasible alternative to B, then not B and therefore not C. All three arguments support each other.
9、If Argument 1 is true, all of the assumptions cannot be true. Argument 2 provides another reason why the assumptions may not be true. Argument 3 is supported by Arguments 1 and 2 because Argument 1 finds that there must be a feasible alternative to B, and Argument 2 finds that there may be.,Unit Twe
10、nty Why the Logic Fails Roger Mann,Argument 1. The assumptions of information, well-defined property rights, and freedom of entry are inconsistent. Well-defined property rights are necessary for efficient trade. It must be possible to exclude others from a good if it is to be sold to them. If there
11、are many sellers of the same good, as the assumptions of market theory require, then market trade and competition force price to cost. But sometimes one seller obtains property rights to a unique good or resource. Then, the property right of exclusion enables control of entry, and monopoly is possib
12、le. The property right of exclusion is only desirable when the assumptions of many sellers and same product also hold.The logical conflict arises when it is recognized that the creation of new things is a productive activity. Technical knowledge, for example, is produced at a cost and sold either di
13、rectly or as embodied in new types of goods. For this new information to be produced and sold efficiently, it must have well-defined property,Unit Twenty Why the Logic Fails Roger Mann,rights. Most importantly, it must be possible to exclude others from it. If new ideas cannot be private property, t
14、he incentive to create them is diminished because anyone can use the ideas for nothing. To have incentive to invest in creation, information creators must be able to withhold entry from others.But creationalmost as a matter of definitionresults in a unique good. For markets to function efficiently,
15、no player should be able to exclude others from the market by control of entry. Because unique ideas cannot be both withheld as private property and not withheld as perfect information, the assumptions of market competition are in conflict when creation is allowed as a productive activity. I refer t
16、o this conflict as the paradox of information. The practical implications of this problem are taken up in chapters 3 and 7.,Unit Twenty Why the Logic Fails Roger Mann,Note that I have inserted an additional assumptionthat new ideas are created at a costinto the argument. Market theory works only bec
17、ause it covers the allocation of existing goods only. The creation of new types of goods and new information is not covered by the theory.Argument 2. Maximization is inconsistent with the assumptions of freedom of entry, perfect information, same product, numerous players, and well-defined rights. M
18、aximization is potentially inconsistent with the other five assumptions. Profit maximization may provide incentive for players to restrict or control entry, to distort and control information, to make products dissimilar to other firms products, to reduce the number of competitors and increase contr
19、ol over price, and to control and change property rights. These actions are not economic aberrations; we can observe that they are part of the everyday reality of economic behavior.,Unit Twenty Why the Logic Fails Roger Mann,Freedom of entry refers to the ability of players and resources to move fre
20、ely between economic activities and enterprises. This assumption is required to obtain the result of static economic efficiency because players must be free to enter or exit markets to make deals in their own self-interest. If they were not free, they obviously could not make efficient choicesthose
21、that maximize satisfaction and profit.Freedom of entry is inconsistent with maximizing players because players may maximize by controlling resources or other players. The theory of monopoly explains why control of entry maximizes profit. In fact, we often observe that players do block entry. Critica
22、l information or technology is not available to potential entrants, existing players strategize against new entrants, or entry is discouraged by use of law.,Unit Twenty Why the Logic Fails Roger Mann,Slavery is perhaps the most extreme example of the real conflict between profit maximization and fre
23、edom of entry. Freedom to leave the work force is denied. Slavery is a recurring feature of free enterprise, and not just in the Third World. In a recent case, a suburban Los Angeles sweat shop was charged with holding seventy Thai immigrants against their will to make garments for the U.S. market.
24、Some of the clothes were sold in prominent retail outlets such as Sears, Macys, Montgomery Ward, and Neiman-Marcus.The assumption of perfect information is required to obtain the result of static economic efficiency because players must know what goods, resources, and technology are available and wh
25、at their prices are to make best use of them and realize the most efficient trades. Market theory presumes that the pertinent information is freely provided to all.,Unit Twenty Why the Logic Fails Roger Mann,Perfect information is inconsistent with maximizing players because some choose to withhold
26、or distort information in their own self-interest. The true perfect market, by definition, provides a high level of display of goods to buyers and other sellers, so it is difficult to hide or distort information. In fact, players can withhold or distort information because the pertinent information
27、is simply not revealed by the good, or it is not revealed until after the good is purchased (Chapter 3). “The essential role of this extreme assumption regarding knowledge, expectations, and certainty was successfully overlooked by the followers” of the logical method.The assumption of same product
28、is required to obtain the result of static economic efficiency because it ensures that there will be competition between sellers. However, the condition is inconsistent with maximizing players because maximization results in downward sloping demand, and this demand provides incentive,Unit Twenty Why
29、 the Logic Fails Roger Mann,to differentiate and develop unique products. Product differentiation is the process of making a product be or appear to be different from others products. Clearly, there is incentive in free enterprise for firms to differentiate their products and thereby obtain some con
30、trol over price to make profit.To the credit of economics, the roles of advertising and differentiation are sometimes noted in the classroom to explain why free enterprise provides such varied products to the benefit of its participants. Some differentiation is innovation, resulting in better produc
31、ts and more consumer satisfaction. The recognition of differentiation is a first step to understanding the reason for and results of innovation. Both involve players attempting to escape from competitive markets, but conventional theory seems incapable of divorcing the logical argument for static ec
32、onomic efficiency from a more general and comprehensive view of market escape and technical progress.,Unit Twenty Why the Logic Fails Roger Mann,The assumption of numerous players is also required to obtain the result of static economic efficiency. Competition is required to keep one or a few player
33、s from controlling markets and prices, either as buyers or sellers. All firms and consumers are price-takers, not price-makers, and efficiency in production is thereby ensured.However, the assumption is inconsistent with maximizing players because there is incentive to collude or eliminate competito
34、rs and reduce the number of players. In the conventional result of market theory, some players could be better off by colluding, restricting output, controlling prices, or otherwise acting like one seller or buyer, but they are constrained from doing so merely by assumption. In addition, problems of
35、 price expectations, investment, and uncoordinated planning result in additional incentives to reduce the number of players and control production or prices. The uncoordinated activities of numerous firms can lead to substantial static inefficiencies in investment and supply, and these inefficiencie
36、s have created incentives for market control.,Unit Twenty Why the Logic Fails Roger Mann,These facts are discussed in detail in Chapter 5. Control of others to reduce the effective number of competitors is a recurring feature of free enterprise.The assumption of well-defined rights is also inconsist
37、ent with maximizing players. Perfect goods have well-defined property rights, but self-maximizing players sometimes seek to change property rights completely outside of the market system. For most goods, the benefits of ownership can be obtained by physical control; therefore, we have theft. Physica
38、l control can also be obtained through the courts or government. Property rights to many types of information and businesses are uncertain. A substantial public and private industry sells the establishment, protection and enforcement of property rights.Argument 3. Maximization is inconsistent with e
39、conomic equilibrium. Consider the static market equilibrium. This situation implies a stable, unchanging situation where each player is unable to gain any additional economic surplus. However, they are unable,Unit Twenty Why the Logic Fails Roger Mann,to only because the assumptions force them to. E
40、quilibrium is taken as a final result of the logical argument, and the lack of additional deduction is part of the problem with the theory.This problem can be demonstrated with a simple allegory. Suppose a farmer has a bull which he wishes to keep in a small pasture. He decides that a small fence wi
41、ll be sufficient to keep the bull inside the pasture, so he builds the fence and leaves. The bull, however, sees things differently. The grass on the other side of the fence becomes relatively attractive as his pasture is depleted. He may see other opportunities on the outside. He sizes the fence up
42、 and tries to learn about it. Finally, he breaks through the fence and is free. In this story, our farmer is the economist, the bull is maximization and the fence is the assumptions of market theory. The farmers logic was faulty because he assumed that the fence was inviolate; he did not consider th
43、e bulls incentive to remove the fence or the relative strength of fence and bull.,Unit Twenty Why the Logic Fails Roger Mann,Market theory implies that static equilibrium and economic surplus will not change unless outside forces change demand or supply. But the driving force is maximization. Econom
44、ic players must, by assumption, seek means of escaping or improving on the market equilibrium. Static economic efficiency results in a condition where no one can be made better off without making someone else worse off, but self-maximizing players do not care if they make someone else worse off. If
45、stable equilibrium were defended in court, it would lose. The motive (maximization) and the weapon (economic surplus) are there, and stable equilibrium is only maintained because Assumptions 2 through 6 must hold and because new and unique things cannot be created. Markets can be escaped by divergin
46、g from the assumptions required for static efficiency or by creating new options for use of resources.,Unit Twenty Why the Logic Fails Roger Mann,The theory of production that drives price to average cost exemplifies the major problem of the theory. If firms accept the theory of supply with identica
47、l firms, they must expect to make no profit in the long run. Why would any firm passively accept this result? In fact, they do not, and the struggle to avoid or control the very process that leads to equilibrium and efficiency in supply begins. The story of economic history and dynamic change is one
48、 of economic players dissatisfied with the market forces that tend toward market equilibrium. Antimarket economics includes the study of how they act on this dissatisfaction.In another variant of production theory, some producers are better situated than others. In agriculture, for example, farms wi
49、th the best climate and soils can expect to make a profit in perfect competition. Market theory accounts for this profit through conventional upward sloping supply and producer surplus. The logic of market theory, however, ceases without accounting for,Unit Twenty Why the Logic Fails Roger Mann,how
50、the profit is spent. Producers still want more profit, and they may be able to invest the profit they have already made in advertising, market control, innovation, or lobbies. Of course, market theory largely rules out these types of activities by assumption.These problems of logic demonstrate that
51、market theory cannot be a tenable general theory of economic behavior in free enterprise. Assumptions 2 through 6 are not part of economic logic because they are general observations based on fact; rather, they were included in order to ensure the desired result of static equilibrium and economic efficiency. The modern economy is anything but static, and a better general theory must recognize that economic competition provides incentive to deviate from the results, the assumptions and even the scope of the market model.(excerpted from Antimarket Economics),
