Category Archives: Market Failure

Science and democracy have always been twins.

A simple statement with a magnitude of implications.  From an essay in today’s NYT by Dennis Overby:

It is no coincidence that these are the same qualities that make for democracy and that they arose as a collective behavior about the same time that parliamentary democracies were appearing. If there is anything democracy requires and thrives on, it is the willingness to embrace debate and respect one another and the freedom to shun received wisdom. Science and democracy have always been twins.

Then, in the Post, an article concerning Wayne Clough’s vision to make the holdings of the Smithsonian available to all using the internet.  The curators of the Smithsonian are having some difficulty understanding what their role will be if everything is available for anyone to see.  The gatekeepers ask, “Who will guarantee the quality of knowledge?”  To which, Chris Anderson, editor in chief of Wired, replies:

“Is it our job to be smart and be the best? Or is it our job to share knowledge?” Anderson asked.

Sharing knowledge, sharing information — that’s what makes democracy work.  And, sharing information makes markets more efficient.  I think the philosophers and economists can agree on that point.

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Cyber Policy – Safety and the Internet

Post reports Berkman study challenging assertions that the internet makes children more likely to be abused than real life circumstances:

“The risks minors face online are complex and multifaceted and are in most cases not significantly different than those they face offline.”

There are opposing views from law enforcement and other advocacy groups:

Jeffrey Chester, executive director of the Center for Digital Democracy, a District-based consumer advocacy group, has been critical of the report because its expenses were underwritten by interested parties such as MySpace, Google and Microsoft. “Surprise, surprise,” he said. “They pay for a study, and it says there’s no problem. It was kind of a brilliant PR move.”

However, note that Chester doesn’t provide data to oppose the report, he attackes the source of funding for the report.  The lack of data is actually a concern, for both sides of the argument do not have enough data from which legislators and policy makers can make competent choices:

One online safety advocate, named as a member of the report’s task force, said she is embarrassed by the report because it highlights the fact that there isn’t enough good data on the subject and it doesn’t give lawmakers a clear to-do list. Parents’ concerns about Internet predators are sometimes overblown, said Parry Aftab of WiredSafety.org, but it’s nearly impossible to tell how overblown they are; when quizzed about online activity, kids don’t usually tell the truth if their parents are around, she said.

Market failure occurs, among other reasons, for lack of sufficent information for the market to behave efficient and effectively.  Public failure occurs for the same reason.

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Madoff – Public Value Failure and Market Failure

Markets depend upon information to be efficient.  This NYT story on Madoff indicates that information was in short supply, and a disaster ensured.

The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust.

So, where were the government regulators, those charged with ensuring that the market provide the necessary disclosures so that investors can rationally make their “risk” decisions?  Absent, according to a Washington Post op/ed:

Those who support regulation also say that hedge funds should disclose more of what they do. Well, Madoff did make some disclosures; it’s just that they weren’t true. As SEC Chairman Chris Cox has all but admitted, the scandal doesn’t show that his agency lacked the power to regulate; it shows that it failed to exercise it. Responding to this scandal with more regulation would be like thrusting more pills on a patient who refuses medication.

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Just because you model it wrong, doesn’t mean it failed

Do markets really fail, if the failure is really in the fact that the financial system had the wrong belief?  In other words, the market does note suffer a failure simply because the model you use to predict market performance is wrong.

Interesting essay in the NYT magazine today, which leads with:

Among the most astonishing statements to be made by any policymaker in recent years was Alan Greenspan’s admission this autumn that the regime of deregulation he oversaw as chairman of the Federal Reserve was based on a “flaw”: he had overestimated the ability of a free market to self-correct and had missed the self-destructive power of deregulated mortgage lending. The “whole intellectual edifice,” he said, “collapsed in the summer of last year.”

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Market Failure, Public Value Failure

When the two failures occur simulatanously, you have a serious problem.  See What you don’t know about a drug can hurt you in the WSJ.

“What’s happening in oncology is happening in all other fields of medicine,” says study co-author health economist Scott Ramsey at the Fred Hutchinson Cancer Research Center in Seattle, who checked more than 2,000 chemotherapy trials recorded in the federal registry. “You may not get a full picture of whether a drug is effective or not. With the stakes being what they are in terms of money and human lives, this is a big problem in my view.”

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Cybersecurity – Market Failure or Public Values Failure or both?

The Center for Strategic and International Studies is delivering a report, “Securing CyberSpace for the 44th President,” which notes, among other things, :

“We believe that cyberspace cannot be secured without regulation,”

The report, which offers guidance to the Obama administration, is a strong indictment of government and private industry efforts to secure cyberspace to date. “The laissez-faire approach to cyber-security has failed,” Mr. Kellermann said.

So, the commission concludes the market has failed to secure cyberspace.  And, it has also concluded that current government policy has failed to secure cyberspace.

In the intro, the report reads:

We advocate a new approach to regulature that avoids both prescriptive mandates, which could add unnecessary costs and stifle innovation, and overreliance on market forces, which are ill-equipped to meet public safety and national security requirements.

So, we have reasons why the market fails with regards to cybersecurity.

Not surprisingly, DHS is defending itself against the Commissions’ criticism of how cybersecurity has been managed.

“To be fair, we are undertaking something not unlike the Manhattan Project,” Keehner said. “Billions of dollars are going into this effort. We’re the first to admit there is more work to be done, but the progress that we have made should not be discounted.”

For further reading — see presentations made at CSIS event called

Improving Cybersecurity : Recommendations from Private Sector Experts

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Information Asymmetry – the Disease

Or more of what you don’t know will hurt you.

Seems we will have even less science journalism:

CNN is eliminating its seven-person unit covering science, the environment, and technology, saying its “Planet in Peril” programs do the trick. Curtis Brainard, who assesses environmental coverage for the Columbia Journalism Review online, in a comprehensive piece on the move, said: “[T]he decision to eliminate the positions seems particularly misguided at a time when world events would seem to warrant expanding science and environmental staff.

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