On the libertarian (ish) moment (part iii prelude) – Economic Frameworks

Recap: I’m doing a series on the libertarian (ish) moment looking at why it feels like its happening, and thinking about if we can expect it to continue. Last post I checked my assumptions about the internet increasing awareness of corruption and came to inconclusive but negative leaning results.

For this post, I’m going to lay some ground work for part iii talking about economic frameworks and what situations should make us think we should shift our frameworks.

Economics does a pretty good job of describing how certain idealized actors behave in certain idealized situations and what the consequences will be in perturbing those specific situations in specific ways.

In situations of pure competition, with perfect information, and no externalities, the default outcome is provably the most efficient and any intervention will make things worse.

In situations of pure monopoly without price discrimination, the default situation is provably inefficient and price controls will probably lead to better results with higher output, lower costs, and greater total surplus.

In situations with externalities, a tax or a subsidy will make the situation better depending on the direction of the externality.

In situations with information asymmetries, the dynamics are more complicated than in the above cases, but usually some regulatory action exists that is an improvement.

The reason I run through all these scenarios (and there are more that I skipped) is that people sometimes naively say “economics tells us that…”, when in fact economics tells us wildly different things (in some cases directly opposite things) depending on the situation. Getting the economics right often amounts, in practice, to correctly diagnosing the situation and picking the right framework.

The relevance of the above, is that if a situation has changed materially, it is almost always going to be the case that the economically prescribed regulatory environment has also changed. Suppose, you like a particular regulatory regime and feel it is well tailored and effective. If the world changes in such a way as to add or remove a significant externality, add or remove a significant information asymmetry, or to substantially increase or decrease the level of competition or market diversity then you should have a strong presumption that the regulatory regime is no longer appropriate. If a regime still seems appropriate after a big change, rather than believing it is still appropriate, we should consider that we might have missed something, or succumbed to status quo bias, or may have a sentimental attachment to things past.