Debunking Economic Myths: Why Market Failure Fables Spread and How to Counter Them

  Ariel Rubinstein, a master of game theory and a famous economist, believes that economics Models in science are equivalent to fables in daily context; he once said frankly, “I do think that we economists are just people who tell fables.” Fables are of great significance in economics.
  The book “Famous Fables of Economics: The Myth of Market Failure” includes a group of papers written by Ronald Coase, Zhang Wuchang, Daniel Spurber and others, examining lighthouses, Dutch tulip bubbles, bees and orchards, The sharecropper system, the path dependence of the keyboard and video recorder system, the General Motors acquisition of Fisher Auto Body, the American Standard Oil monopoly case, and many other fables that emphasize “market failure”.
  Economists continue to reuse these fables to justify public intervention such as the government’s provision of public goods and implementation of industrial regulation. As a result, these fables have had a wide impact not only in many fields of economics, but also in the field of public policy. . But the authors of the essays included in this volume discovered that these fables were largely myths that had been passed down from generation to generation.
Why are fables widely circulated in economics?

  Daniel Spurber, editor of “Famous Fables of Economics: The Myth of Market Failure,” said that a misleading and incorrect story can become very popular and become a fable, and after economists continue to After repetition, it affects many researchers and students, and then affects public policy.
  He was also surprised to find that the stories remained popular even as scholars published articles correcting their errors and clarifying the history on which they were based. Why? One reason for the appeal of fables, Spurber said, is that everyone loves a good story.
  The economic fables are short and sophisticated, interesting to tell and easy to understand. By telling fables, a lively and interesting method, teachers can easily explain some economic concepts that are otherwise difficult to understand; at the same time, by repeating a well-known story, economists seem to find factual basis for the theory. Moreover, sharing stories is a traditional way to strengthen social relationships. If the stories themselves are interesting, there seems to be no need to find out whether they are true. The problem with these untrue stories, however, is that they have a powerful influence on public policy.
  The reasons mentioned by Spurber coincide with the research conclusions of narrative economics, an emerging field of behavioral economics. In narrative economics, “narrative” can refer to a story or an accessible explanation of a phenomenon that is deep and difficult to understand without narrative form. Thus, narratives need not reflect all the facts; indeed, narratives often (certainly not always) provide only an inaccurate explanation of an event or phenomenon. Narratives can take the form of legends, myths, urban legends, jokes, poems, personal anecdotes, family traditions, etc. Fables are an important form of narrative. The important thing, of course, is that a narrative that spreads contagiously can have a significant impact. The same goes for fables in economics.
  Regardless of their form, to be widely circulated, narratives must contain a core that makes them particularly suitable for dissemination. This core must feel compelling enough to be worth repeating to others. So, what might be the components of this core? Shiller cites two different accounts in his book Narrative Economics.
  The first statement comes from Tobias Wolfe, who believes that all novels have only 20 main plots: “Pursuit, adventure, chase, rescue, escape, revenge, puzzle, hostility, downfall, temptation, transformation, Transformation, growth, love, incest, sacrifice, self-discovery, tragic indulgence, rise and fall.” The
  second theory comes from Christopher Booker, who believes that there are only seven basic plots in any movie : “Defeat monsters, start from scratch, voyage, return, comedy, tragedy and rebirth.” For a fable to be widely circulated in economics, what plots must it contain at its core? Careful readers may be able to summarize it from the book “Famous Fables of Economics: The Myth of Market Failure”.
Why are there so many fables emphasizing market failure in economics?

  In our real world, individuals often need to face the challenge of uncertainty, but their cognitive abilities are usually limited; in fact, even the most basic task of deeply understanding the complex environment in which we live cannot be achieved. May not possess the required cognitive abilities.
  On the other hand, however, it is inherent in being human that people are always motivated to try to understand the world they belong to.
  Since the real world is often difficult to fully understand and people’s cognitive resources are scarce and limited, it is understandable and not uncommon to create interpretations of events (stories or fables) that are easily retold and disseminated; and this is not uncommon. Narratives may actually become a useful (but potentially harmful) tool for people to make judgments and decisions.
  In economics, fables about market failure seem to be particularly numerous. The reason can of course be compared to Leo Tolstoy’s famous saying, “Happy families are all alike, but every unhappy family is unhappy in its own way.” But the deeper reason is that market failure itself is a rather vague concept, and the fable about market failure may provide a heuristic for judging and solving problems under uncertainty.
  What professional economists call market failure actually refers to a specific set of economic phenomena. Each chapter of the book “Famous Fables of Economics: The Myth of Market Failure” discusses these economic phenomena respectively. They include: due to lack of ownership Tragedy of the commons caused by clarity, insufficient supply of public goods caused by the free-rider problem, inefficiency caused by externalities, low-level equilibrium (or path dependence) caused by network effects, and problems caused by unilateral asset specificity. Contract hold-up caused by information asymmetry, lemon market or agency inefficiency due to information asymmetry, natural monopoly due to predatory pricing, network effects or first-mover advantages, price bubbles caused by irrational behavior, etc.
  The reason why all these phenomena are grouped together in economics is that they all deviate from Pareto optimality, or more precisely, the market itself fails to bring optimal results to society, so there is room for improvement (and often implies improvement through government intervention).
  When economists speak of market failure, what they mean is usually clear. Although what many economists call market failure is not really a market failure, the entire book “Famous Fables of Economics: The Myth of Market Failure” emphasizes this point. The problem is that the meaning of the term market failure is often not clear to people who are new to economics or ordinary people, because they often mean it from the perspective that the “market” fails to achieve the function it is supposed to be able to achieve, that is, The market is supposed to have a range of functions, but these functions are not being represented or are performing poorly. There is a great deal of ambiguity in this statement.
  The ambiguity of judging market failure from the degree of realization of market functions can be explained by the “sorites paradox” discussed by American economist Barton Lippmann and others. For example, what kind of person is “tall”? A person with a height of 1.9 meters is recognized as a “tall” person. Suppose you see a person who is 1.89 meters tall, you will probably say that he is a tall man. Then, you may also consider people with heights of 1.88 meters, 1.87 meters, and 1.86 meters to be tall. But if you continue this chain of reasoning, will you conclude that people who are 1.5 meters, 1.4 meters or even 1 meter are all tall?
  Ultimately, of course, this ambiguity stems from the ambiguity of how people view our world. This ambiguity also exists with regard to market failures. Because the market that people observe in real life is never the market in the ideal state described in economic theory, or in other words, compared to the ideal market described in economic theory, people can always only observe ” market is malfunctioning. Only an ideal market can be given a truly accurate description, while the description of a “failed market” is always ambiguous.
  Therefore, the popularity of market failure fables in economics can, to a certain extent, be attributed to the limitations of cognitive abilities and the ambiguity of conceptual expressions. Market failure is also a type of uncertainty that people face, and they may find it difficult to “accurately calculate” the extent of the market failure.
  In this case, they might recall a story, such as a fable about a certain type of market failure, and choose from the fable to play a role or accept an order (say, to ask the government to impose a corrective sex tax).
  Of course, the representativeness heuristic and availability heuristic described in behavioral economics may play an important role in choosing which fable. That is, people may consider a fable to be representative when observing a phenomenon and use it to make inferences in the face of real uncertainty.
  Since many important decisions are made under conditions of real uncertainty, limited cognitive abilities, and limited attention spans, it may be useful for individuals to employ fables as a heuristic. The key is what kind of fables we can create.
What economic fables do we need?

  The power of fables can be very powerful, and their influence is not easily undone. In my opinion, one way to eliminate the influence of these fables that emphasize market failure theory, besides “probing, probing, probing”, is to introduce fables that can “compete” with these fables.
  In that sense, it’s probably a good thing that new famous fables will pop up. As mentioned before, fables in economics are not without reason, and fables also play a certain role in people’s decision-making.
  In this way, the question becomes, what kind of economic fable do we need?
  As mentioned earlier, it is more difficult to create a fable that can illustrate that “the market never fails” (leaving aside the question of whether the market really “never fails”) than to create a fable that can illustrate that “the market may fail.” (Although, as chapters in this book illustrate, such fables are often specious).
  Perhaps we can expect that Daniel Spurber, the editor of “Economics’ Famous Fables: The Myth of Market Failure”, or other economists, will provide us with a sequel to this book?

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