Three Edicts of Economic Thought

Echoing this explanation by Arnold Kling on three schools of  economic thought, here are three statements that define (at least partially) three schools.

1. The leftists: "That what is is inefficient." Given the abundant examples of oversupply, undersupply, and information problems, (i.e., market disequilibrium), market inefficiencies abound.
2. The Chicago School: "That what is is efficient." There are no market inefficiencies given the perfectly informed and rational actions of individuals. Any oversupply or undersupply or information problems (i.e., market disequilibrium) are efficient responses to transaction costs.
3. The GMU School: "That what is is." The epistemological problem precludes us from ever knowing if there exists a preferred social outcome other than what is - what evolves naturally and spontaneously from individuals freely choosing their preferred outcomes. Seeming inefficiencies are unexploited profit opportunities for entrepreneurs.

Notice that the leftist (or what Dani Rodrik refers to as "second-best" economists) argues for government intervention everywhere since markets obviously fail to bring about some idealized preferred outcome. (Preferred by whom?) Opportunities should then be foreclosed to individuals in order to bring about some socially preferred outcomes.

The second argues that there can be no market failures, notwithstanding the oversupply of automobiles on dealers' lots, the potential lemons markets, etc., since these disturbances are simply rational responses to individuals facing transaction costs. The cost of ameliorating market frictions exceeds the gain to the relevant parties. These market imperfections cannot be resolved any more efficiently through government intervention.

The last says that even if there are inefficiencies or "failures," we can never know them since individuals with disparate tastes amid dispersed knowledge make decisions particular to themselves. The role of institutions, including and especially government, is to expand the opportunities available to individuals, providing them greater opportunities and allowing for entrepreneurs to resolve potentially unfavorable outcomes.

Update: Note that the GMU edict does not negate public goods and other externality problems, only that markets in most instances are more likely to bring about efficient remedies relative to government provision or regulations.

Comments

[True_liberal]

Well put. Government intervention has been shown, time and time again, to have unintended consequences, and while some of the population may benefit, others will suffer (and may not be able to understand why).

Case in point: The national minimum wage law has just gone into effect, and unemployment has just risen a bit (very few new jobs created last month). Do the media even hint there may be cause and effect?