Book Review: The Politically Incorrect Guide to Economics

Posted by freedomforall 1 year, 3 months ago to Books
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"Like Ludwig von Mises and Murray Rothbard, Tom DiLorenzo is an economist with an extraordinary knowledge of history, and this shows to great advantage in his brilliant new book. In it, he stresses that economists who fail to grasp how the free market works often devise elaborate theories to show “market failures,” but when examined in the light of historical evidence, these theories fall to the ground.

As a prime example of this, Paul Samuelson in his Economics, for decades the most influential university textbook, indicted the market for its failure to conform to the welfare ideal of “perfect competition.” Concerning this, DiLorenzo says:

That never-to-be-realized-anywhere-on-earth state of perfect competition is one where all products in every industry are identical; they are produced by “many” business firms; everyone charges the same price; everyone has perfect information … and there is free or costless entry into every industry and every exit out of it. Several other equally unrealistic assumptions were added over the years, but these were always the main ones. This pipe dream became the new understanding of what constituted “competition,” at least among academic economists. (pp. 30–31)

Supporters of this view used the perfect competition model to demand that large firms be broken up. Couldn’t “monopolists” engage in “predatory pricing” to secure their position against competitors? DiLorenzo finds no historical evidence that such a thing has ever taken place.

In fact, to this day there is no record of any business achieving a monopoly through predatory pricing! There have nevertheless been hundreds of antitrust lawsuits based on this theory, most of them private lawsuits with one company suing a competitor for lowering its prices. Think about that: in the name of protecting the consumer, antitrust regulation allows businesses to sue to “protect” customers from their competitors’ lower prices. (p. 38)

Unfortunately, perfect competition is far from the only case of an alleged “market failure.” Critics charge that “public goods,” goods that are both nonrival and nonexcludable, cannot be adequately supplied in the free market. As an example, a guided-missile defense system protects everyone within a territory, not just customers willing to pay for it; and, given the large numbers of consumers of this good, people could in a free market “free ride,” imagining that others would bear the burden. General awareness of this phenomenon will make everyone reluctant to pay, since even those who want the good would rather not pay for it.

“Away with this flimsy theory!” says DiLorenzo: it too lacks historical support."

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