Honors | Economics Myths & Market Failures (LAMP)
L416 | 17863 | Robert Becker


John Maynard Keynes concluded The General Theory of Employment,
Interest, and Money with a warning that economists' ideas can have a
lasting and powerful influence, even when those ideas are wrong. For
example, public goods, such as lighthouses, must be publicly provided
because markets will not do so. We are stuck typing proposals and
other word processed documents on an inefficient QWERTY keyboard when
there is a superior alternative keyboard, the DVORAK, available.
QWERTY dominates us simply because it was available first, not
because it's better. Irrational exuberance overtakes financial market
participants and leads to a trading frenzy followed by a depression
when the inflated underlying asset prices collapse. Internet stock
speculators bid up prices to irrational, unsustainable levels before
the March 2000 market crash. Their mania's irrationality was similar
to the breakdown of rational markets that overtook seventeenth
century Dutch tulip bulb traders and gave birth to the
term "Tulipmania."


These stories frequently serve as the foundation for discussions of
market failure in economics classes. The market did not work in the
way Adam Smith's famous unseen hand was assumed to do so. Students
are told about these (and many other) examples. They are taught each
example's market failure implies the government must remedy the
situation. Public policies are proposed --- changes in financial
markets regulations, changes in property rights, antitrust policies,
new environmental laws, and even government industrial policy are all
put into discussion.


Yet, what is not discussed in class is the truth or historical basis
for the alleged market failures. It turns out that many of these
examples are either outright false, or there is much that is left
unsaid in the simplistic versions that reach students.


The purpose of my LAMP Seminar will be to investigate several of the
most famous economic myths and fables. Students will read and discuss
cases that connect to public economics, welfare economics, financial
economics, and industrial policy (with particular reference to the
ongoing information revolution). For each fable, its background and
relevant theory will be developed. Students will be asked to explore
the myth's veracity as well as to discuss why it has taken a hold in
the economics literature. The policy and management implications of
debunking the myths or supporting them will also be analyzed.
Readings will be drawn from the following texts (but not limited to
these materials).

Ronald H. Coase, The Firm, The Market, and The Law, The University of
Chicago Press, 1988.
Peter M. Garber, Famous First Bubbles: The Fundamentals of Early
Manias, The MIT Press, 2000.
Stan J. Liebowitz and Stephen E. Margolis, Winners, Losers &
Microsoft: Competition and Antitrust in High Technology, Revised
Edition, The Independent Institute, Oakland, CA, 2001.
Daniel F. Spulber, Editor, Famous Fables of Economics: Myths of
Market Failures, Basil Blackwell Publishing, 2002.