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Michael Shermer - The Mind of The Market
Posted: 18 April 2008 04:07 PM   [ Ignore ]
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Michael Shermer is the author of ten books, including the bestselling Why People Believe Weird Things and The Science of Good and Evil. An adjunct professor of economics at Claremont Graduate University, he is a columnist for Scientific American, the publisher of Skeptic magazine, and the founder and director of the international Skeptics Society. His latest book is The Mind of The Market: Compassionate Apes, Competitive Humans, and Other Tales From Evolutionary Economics.

In this discussion with D.J. Grothe, Michael Shermer discusses The Mind of the Market, and the new field of neuroeconomics. He explores the implications of Darwinian evolution for how people fare in market capitalism, including how we are naturally irrational when it comes to economics, due to our evolutionary heritage. He argues why market capitalism and liberal democracy are best suited to people’s needs, and discusses socialized medicine and other aspects of social welfare programs, contrasting the economy of the United States with those of northern Europe. He examines how free trade may lead to world peace. He also addresses the growing political and economic diversity when it comes to the skeptical and humanist movements.

http://www.pointofinquiry.org

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Posted: 20 April 2008 01:28 PM   [ Ignore ]   [ # 1 ]
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Concerning free-markets and Darwinian-style evolution

A common free-market/Libertarian argument goes something like this:
“The success of Darwinian-style evolution provides good reason to trust that an unregulated free market will similarly lead our economy and society to ever greater prosperity. We must allow an unfettered “invisible hand of the market” to guide us.”

For those who make that argument, here’s something to consider:

1) The “invisible hand of the market”, like Darwinian-style evolution, is blind to the future. It’s not forward looking. It wont take two steps backward in order to find a better path. It’s chosen path may well lead to a dead end.

2) To the extent that the “invisible hand of the market” is like Darwinian-style evolution, it is extremely inefficient. It uses a trial and error approach to design. The vast, vast majority of designs produced by evolution are shotty. Nature has discovered many non-obvious solutions to problems, but the number of crudely flawed designs are far greater.

3)  The “invisible hand of the market”, like Darwinian-style evolution, is indifferent to the happiness and suffering of its constituent parts (e.g. genes,  people, etc). Similarly it doesn’t care about justice or liberty

Just the opposite of supporting the Libertarian argument, the similarities between the “invisible hand of the market” and Darwinian-style evolution provide us every reason to restrict its use. It does not appear to be in our best interests to allow the “invisible hand of the market” to guide us. Use it, sure, like we might use a horse to pull a cart, but we should not allow it to steer the cart. Without some intelligent guidance to navigate, the market’s “invisible hand” is likely to lead us into a dead end, if not over a cliff.

In my opinion, we need to decide where we want to go as a society, and then work to design a system that will guide the “invisible hand of the market” to take us there without sacrificing the happiness and liberty of the living along the way.

Concerning the collapse of the housing market in the U.S.:
Shermer’s characterization of why the housing market collapse should not be any of his (or our) concern in misleadingly selective. I don’t know of anyone arguing the point that we should be especially concerned with bailing out housing speculators who bought three and four homes in an effort to make a large ROI, but who are now suffering a loss. The primary concern being expressed is for those people who need to buy a house to live in. Housing is not a luxury item. Housing is a living necessity.

This housing crash and mortgage crisis problem is devastating millions of people who had little or no desire to enter into a high risk housing purchase; most people buying homes just want a decent place to live and are now victims of this critical failure in the housing market (brought about by deregulated financial markets), for example:
Just three years ago my friend got married, had a child, and bought his first home in the Detroit/Ann Arbor area.  He’s a fiscally conservative guy and he bought a house with a 30 year fixed mortgage that was both well within his ability to make payments. It was also among the cheapest houses in his neighborhood. This year he lost his job and wants to move out of state to get a good job elsewhere ... BUT…  he now owes $50,000 more on his house than its estimated worth. So, he can’t move and he can’t get a mortgage on another house. He’s stuck. There are millions of people stuck in similar situations across the U.S.

So, why shouldn’t we re-examine the design of our housing and mortgage markets and make appropriate adjustments to balance the costs, benefits, and risks of these market systems? No doubt, there are many who in a panic are proposing new regulations that would be bad, and such proposals should be rejected, but the fact that there exists bad regulation proposals doesn’t mean that the very idea of regulations is bad. There is good design and bad design, of course.


Concerning Hurricane Katrina and the failed government response
Shermer argues that services provided by government institutions are not as effective/efficient/reliable as those provided by “private” institutions. He sites the American government’s response to Hurricane Katrina as an example to support his case, but he fails to be able to fit this single example into a pattern that would support a real argument to support his claim.  Yes, the poorly designed and run Bush Administration emergency response program was a failure. That single sample can’t be reasonably used to say much if anything about the ability of government-based institutions to effectively manage responses to large scale emergencies, in general or in theory.  One sample does not support an pattern. The Ford Edsel, for example,  was a famously mis-marketed automobile, and yet this failure does not in any way suggest that using “focus group” in marketing and product design is a bad approach in theory - in fact, despite that initial failure, “focus groups” are proven to work. 

If Shermer wants to make an argument that supports his position about the inherent inferiority of government-funded institutions,  then for starters, he needs to demonstrate a pattern of examples and compare those to the performance of “private” institutions such as: General Motors, General Electric, or the Catholic Church. But more importantly, to prove his case, he needs to give examples of the non-correctable government structures that prevent government-run institution from providing services as effectively and/or efficiently as General Motors,  General Electric, or the Catholic Church.

[ Edited: 20 April 2008 07:33 PM by Riley ]
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Posted: 20 April 2008 01:46 PM   [ Ignore ]   [ # 2 ]
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Dr. Shermer’s ideas on economic psychology and the evolutionary roots of human behavior are interesting, but on the issue of private vs. government sponsored aid efforts, I think he is wrong.  Ground zero for Katrina was right in my backyard, and I have been working in the recovery effort since two days after the storm.  Dr. Shermer states in this podcast that FEMA was totally inept and that the private, faith-based relief agencies did a wonderful job.  This is a perception that the media has reinforced.  It is wrong. We seem to have an ingrained tendency to criticize government but give faith a pass in this disaster.  I find this odd in a skeptical community. The governmental response to the disaster was indeed inept in many ways, and the faith-based groups have done many good things, but the government’s response was, from my point of view, and I could back this up in a longer forum, inept because of the people put in charge of federal disaster relief since 2001, not because government could not in theory do a good job in this type of situation.  The faith-based groups, on the other hand, have made many mistakes that have cost people down here dearly.  I will give a few examples, briefly, leaving longer elaboration for another time:

In one small MS coastal town, Americorps, a government project, effectively ran the town for months after the storm, providing aid, running a disaster shelter, and responding to emergencies efficiently.  The faith-based groups that came in did a lot of good work, but were unorganized and slipshod in their priorities.  They ran their operations with little or no local knowledge, did not interact with each other or with other recovery agencies, and their aid was random-they helped many people who could have helped themselves easily while others in real need were left without help.  A lot of homes they repaired or rebuilt after the storm now have to be torn down and done over completely because they did not deal with mold issues, replacing wiring that had been submerged in salt water, did not consider new elevation requirements or, indeed, any building codes.  While one cannot help but be impressed by faith-based volunteers’ willingness to come here and help out,  they rotate in and out, have few skills beyond a willingness to help, all of which makes the logistics of working with them to rebuild homes and communities harder than it should be.  That is why, 2 1/2 years after the storm, we have made less progress than we should have.  I also dispute the claim that non-faith-based groups have not been a presence down here.  They have.  Hands On USA has been a big presence.  Americorps also.  Many of the faith-based groups have benefited from federal funding, and so they really can be considered quasi-governmental groups.  Some of there use of federal disaster relief funding is really questionable, and is under review in Congress.

While I would agree with Dr. Shermer that we are a volunteer-based social safety-net culture, and we volunteer more than European societies with government run programs to take care of the needy, ours is not necessarily the better model.  I don’t think you have to have lived through Katrina to realize this.  I noticed that Dr. Shermer kind of hedged his argument in the area of public health.  I would say, if he were pressed, he would have to back off on a lot of other issues, too.

mims carter

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Posted: 20 April 2008 04:44 PM   [ Ignore ]   [ # 3 ]
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So it is repackaged social Darwinism not taking into account that technology has gotten more complicated over the last 100 years.

http://www.youtube.com/watch?v=zeEXDQNsJtU

We can’t make accounting mandatory in the schools so consumers might actually be more rational.  No we can’t have that.

Do economists have the brains to handle accounting?  And there is no Nobel Prize in economics.

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Posted: 20 April 2008 08:23 PM   [ Ignore ]   [ # 4 ]
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There are a host of assumptions about the magic of markets and the requisite need for a profit-motive that deserve more examination, especially by the overly zealous free-marketeers and libertarian-types.

A general claim made by those who bemoan government regulation of markets is that such government involvement in markets will necessarily make the markets less efficient. This is simply not the case. For example, the regulated market at a busy traffic intersection is more fair, more efficient, and safer than the free market of an intersection lacking regulation (like a traffic light).  In other words, not only does government involvement not necessarily lead to a less efficient market, in this case, government involvement increases market efficiency. Of course a poorly designed traffic-control system at an intersection could make that market less efficient, less fair, and less safe. As in all things, good design is essential.

[ Edited: 20 April 2008 08:25 PM by Riley ]
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Posted: 21 April 2008 02:35 AM   [ Ignore ]   [ # 5 ]
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Is economics a SCIENCE?

Isn’t observation of the phenomenon being studied standard operating procedure in SCIENCE?

So the entire economics profession has failed to observe the depreciation of automobiles and other durable consumer goods for the last 60 years.  GOOD TRICK!  LOL

Does the market depend on most of the minds being dumb and the economics profession helps keep them that way?

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Posted: 21 April 2008 04:46 PM   [ Ignore ]   [ # 6 ]
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Nice interview.

Thomas Donnelly - 18 April 2008 04:07 PM

  He also addresses the growing political and economic diversity when it comes to the skeptical and humanist movements.

One of the things which has bothered me about CFI-style “secular humanism” is its unskeptical support of left-wing causes, including an idealization of socialism.  Shermer argues for the value of a diversity of opinions and a reality-based approach.

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Posted: 21 April 2008 06:57 PM   [ Ignore ]   [ # 7 ]
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psikeyhackr - 20 April 2008 04:44 PM

So it is repackaged social Darwinism not taking into account that technology has gotten more complicated over the last 100 years.

http://www.youtube.com/watch?v=zeEXDQNsJtU

We can’t make accounting mandatory in the schools so consumers might actually be more rational.  No we can’t have that.

Do economists have the brains to handle accounting?  And there is no Nobel Prize in economics.

psik

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Posted: 22 April 2008 09:03 AM   [ Ignore ]   [ # 8 ]
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Jackson - 21 April 2008 04:46 PM

Nice interview.

Thomas Donnelly - 18 April 2008 04:07 PM

  He also addresses the growing political and economic diversity when it comes to the skeptical and humanist movements.

One of the things which has bothered me about CFI-style “secular humanism” is its unskeptical support of left-wing causes, including an idealization of socialism.  Shermer argues for the value of a diversity of opinions and a reality-based approach.

the problem is that market capitalism doesnt give diversity. in fact, market capitalism is deeply ideological. when margaret thatcher speaks in favor of market capitalism and says “there is no alternative” where is the diversity in that?

also, market capitalism is very anti-democratic. do people vote or participate directly in economic planning? hell no. its absurd to say that what is desirable are two contradictions where one exploits and stiffles the other.

choices and commodities are homogenized to meet the needs of profit, not fulfilling human needs or wants.

markets also divide people rather than bring them together. they pit people together.

im not saying we shouldnt be skeptical of left-wing causes, cause we most certainly should be and we should also be realistic about capitalism.

in 2002 the World Bank reported that Africa was a prime place to invest in because returns were high. It doesnt take much inspection to understand why. If the World Bank and the IMF gives aid with purse strings attached that say the must “liberalize” their economy by taking down trade barriers, labor protections, tarrifs and so on, and open them up to 100% foreign investment where multinationals have vastly more resources than indigenous businesses, farmers, etc then the domestic effects are what is so painfully obvious: deepened poverty while wealth is being extracted out and sent to foreign banks (ie high returns).

Argentina was considered a poster child for IMF policies and market capitalism in general. Look what happened. They went bankrupt and only overcame bankruptcy by dramatically undermining IMF policies.

The point here is that economies are about and involve more than just wealth and resources. I am talking about what economists call “externalities”: people, the enviornment. Now we can sidetrack into why people and the enviornment are considered externalities and not wealth and leizure but i think thats needless.

We have got to take into consideration the effects of economies on people, especially the poorest among us.  Those who are more adversley impacted by economic policies. Those at disadvantages and have less opportunities. We have got to take into consideration biodiversity as well.

Now as far people and the enviornment go I strongly disagree that market systems or capitalism in general are compatible with humanity or ecosystems. We have to many examples to draw from to see this.

We are a social species. We thrive on teamwork and cooperation. The basis of our existence centers around our social relations. There are reasons why anti-social and other social pathologies are looked at the way they do. I doubt many people on here, if any, will say they feel miserable when they act altruistically or do something nice for others. Likewise, I doubt many of us prefer to do things alone as opposed to cooperation (Bertrand Russell was correct when he said “the only thing that will redeem mankind is cooperation”).

So its a relatively simple matter of looking at what forms of social relations capitalism and markets produce and whether they are desirable. Is it desirable to be divided between buyers and sellers, haves and have nots; is it desirable to have our lives reduced to commodities? thatcher is wrong. There are alternatives. We can create new economic, social and political institutions by reanalyzing our social relations and modifying them or creating entirely new ones.

For example, fifty years ago most households were likely to be very nuclear and paternalistic. The man was the “man of the house.” He had undeserved authority simply based of his gender. This no longer flies for many. These relations have and are being challenged and more equal, cooperative relations are building up around them. In my relationship neither is dominant over the other. All sides are taken into consideration, amicable agreements are desired and to what extent one is effected more than the other than that more strongly determines final say. Market capitalism doesnt work this way, and dramatically so.

[ Edited: 22 April 2008 09:05 AM by truthaddict ]
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Posted: 22 April 2008 11:46 AM   [ Ignore ]   [ # 9 ]
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truthaddict - 22 April 2008 09:03 AM

markets also divide people rather than bring them together.

Markets in fact are entirely about bringing people together. In order for a human market to exist, people must come together to negotiate the exchange of limited resources (food, ideas, limited automobile space on a roadway). The design of how those interactions take place however will dictate the nature (the fairness, the efficiency, and the risk) of those exchanges, and that’s an area that doesn’t get enough attention.

Capitalism, by it’s nature, tends to lead to a hording of resources. The powers that dominate the market, over time, tend to act to stifle it in order to maintain dominance.  Monopolization of resources and authority will eventually undermine the healthy function of any market system. Those that criticize the existence of government regulation fail to recognize that, in the absence of government regulation, regulations, in effect, will be imposed on the market by dominant-enough companies and/or their industry associations - such defacto-style regulations are even less likely to be benefitial to the overall market and even less likely to serve the interests of people in general.

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Posted: 22 April 2008 02:02 PM   [ Ignore ]   [ # 10 ]
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Riley - 22 April 2008 11:46 AM
truthaddict - 22 April 2008 09:03 AM

markets also divide people rather than bring them together.

Markets in fact are entirely about bringing people together.

In theory according to Milton Friedman. But in reality things are very different. Look at Sub-Saharan Africa for details. It is no coincidence that the area where the highest returns are possible is also the most impoverished. In a much less severe example look at how Nintendo dominated the market in video games in the 1980s and how that kept Sega which had better games and more advanced console from entering for more than a decade.

But markets are about buyers and sellers. Each are out for themselves because the system is designed that way. The buyer is not lly thinking about the seller and vice versa. I personally think we should look at ways of removing markets and bringing producers and consumers together to particpate in managing their economic institutions

In order for a human market to exist, people must come together to negotiate the exchange of limited resources (food, ideas, limited automobile space on a roadway). The design of how those interactions take place however will dictate the nature (the fairness, the efficiency, and the risk) of those exchanges, and that’s an area that doesn’t get enough attention.

But why should they exist? Why do we need markets to negotiate and exchange? Can we not imagine alternatives and work to put them in place?

Capitalism, by it’s nature, tends to lead to a hording of resources. The powers that dominate the market, over time, tend to act to stifle it in order to maintain dominance.  Monopolization of resources and authority will eventually undermine the healthy function of any market system. Those that criticize the existence of government regulation fail to recognize that, in the absence of government regulation, regulations, in effect, will be imposed on the market by dominant-enough companies and/or their industry associations - such defacto-style regulations are even less likely to be benefitial to the overall market and even less likely to serve the interests of people in general.

Think about that and go back to my questions above. If something by its “nature” (there is nothing natural about economic institutions) can only be benign by constraint then why have it to begin with?

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Posted: 22 April 2008 03:16 PM   [ Ignore ]   [ # 11 ]
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regulations, in effect, will be imposed on the market by dominant-enough companies and/or their industry associations

Any regulations business imposes on itself seeks to benefit the businesses that can impose the regulations, not the consumer.

Monopolization of resources and authority will eventually undermine the healthy function of any market system.

A mantra of economists, but history has shown it to be entirely false.  Not only have monopolies operated perfectly well (and very profitably) for long stretches of time, but industries tend to band together to produce an illusion of competition while in fact engaging in a form of central planning.  Also, there are areas of economics where competition is just plain stupid - should you have competing municipal water supplies?  Competing police departments?

All this free-market, libertarian, neo-liberal economics stems from a belief that people are naturally greedy liars, and seeks to put in place systems that guarantee that people will have to be ever more greedy liars in order to compete within that greed and lie based system.

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Posted: 22 April 2008 03:45 PM   [ Ignore ]   [ # 12 ]
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truthaddict - 22 April 2008 02:02 PM
Riley - 22 April 2008 11:46 AM
truthaddict - 22 April 2008 09:03 AM

markets also divide people rather than bring them together.

Markets in fact are entirely about bringing people together.

In theory according to Milton Friedman.

Not in theory according to Milton Friedman, but by definition according to how we use the term “market”. It is impossible for there to be an exchange of anything without a coming together and exchange of different resources, and that coming together and exchange of resources is what we call a “market”.
. .

truthaddict - 22 April 2008 02:02 PM

But markets are about buyers and sellers. Each are out for themselves because the system is designed that way. The buyer is not really thinking about the seller and vice versa.

No, markets are about the exchange of resources, nothing more. Democracy, for example, is a market where your vote is used in a bid to elect a government official or pass a legislation. And the fairness, efficiency, and effectiveness of the democratic market place is dependent on the design of that market system. Democracy, like any market, does not by provide immunity against corruption, ineptitude, and exploitation—it needs to be designed and executed right.
. .

truthaddict - 22 April 2008 02:02 PM

I personally think we should look at ways of removing markets and bringing producers and consumers together to particpate in managing their economic institutions. [...] why should [markets] exist? Why do we need markets to negotiate and exchange? Can we not imagine alternatives and work to put them in place?

I’m open to hearing about alternative ways of deciding how resources should be distributed. But markets, if they are properly regulated, seem like the fairest and most democratic way to me.
. .

truthaddict - 22 April 2008 02:02 PM

Think about that and go back to my questions above. If something by its “nature” (there is nothing natural about economic institutions) can only be benign by constraint then why have it to begin with?

Yes, it’s part of the natural tendency of the Capitalistic market system to produce monopolies, so in order to correct for that tendency that system needs to be regulated. This is no different than the approach I would take to my garden. My garden, by its nature, is going to get overrun by weeds ... that fact doesn’t mean I scrap the idea of having a garden, it simply means that I’m going to have to do regular gardening.

[ Edited: 22 April 2008 04:04 PM by Riley ]
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Posted: 22 April 2008 03:55 PM   [ Ignore ]   [ # 13 ]
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rsonin - 22 April 2008 03:16 PM

regulations, in effect, will be imposed on the market by dominant-enough companies and/or their industry associations

Any regulations business imposes on itself seeks to benefit the businesses that can impose the regulations, not the consumer.

That was my point. A dominant industry association, will regulate the marketplace in their own interests and against the interests of potential competitors and consumers.

An “un-regulated” market is a transitory thing, eventually,  someone is going to dominate a market and impose their will: that someone is either going to be the government, or it’s going to be a dominant corporation or industry association.  In a government regulated market, hopefully you get an open set of rules and regulations that everyone understands and that are made and designed in the interest of promoting a healthy society. Left to themselves in a non-government regulated market, a sufficiently dominant corporation and/or industry association will impose it’s defacto-“regulations”. These regulations will more likely suit the limited interests of the corporation itself by creating barriers to competition and maximizing the price for their products (necessarily at the expense of the consumer). Most frequently, the industry will spread the costs associated with their product across the society as a whole (e.g. waste products, pollution, deforestation, etc), and benefit unfairly as a result.

[ Edited: 22 April 2008 08:41 PM by Riley ]
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Posted: 23 April 2008 02:15 PM   [ Ignore ]   [ # 14 ]
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I got my podcast on economics.  I had made a post in the forum calling for a podcast on economics.  I’m happy now!  I was also interested to find out that Michael Shermer was economically conservative/libertarian.  I was beginning to think that most atheists or skeptics were not.

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Posted: 23 April 2008 04:17 PM   [ Ignore ]   [ # 15 ]
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I think most skeptics are not libertarians because libertarianism makes no sense.

Listening to this again, I was surprised (and apalled) as Shermer’s comments on FEMA as opposed to religious groups providing aid.  That a government agency did a bad job is evidence that it was run by incompetents - like Brownie, and his boss, George - not that government-run organizations are inherently incompetent.  He seems to have bought the right-wing, neo-con, Republican line on small government - which is exactly what corporatios want, so that they can push government around as hey see fit.  If FEMA had gotten the attention it deserved, and had been run by people who cared the people they were supposed to help, rather than frat-boy political appointees, then FEMA would have been in a position to respond more efficiently.  As for church groups, let me know the next time a church group reestablishes telecommunications infrastructure, or comes up with a mass evacuation plan for city.

What is this mysterious property that makes anything connected to “government” turn inefficient?  What is this “invisible hand”—and why would someone who would normally debunk something with as much ontological grounding as pyramid power or leprechauns take these mysterious forces so seriously?  This is the kind of distortion that you get when you reduce all human striving to: money.

“Mind of the market” indeed - even the title is a contradiction.  A hundred years of sociology tells us that when people assemble in groups, of whatever kind, even not physically contiguous, you get irrational behaviour if you’re lucky, and mass violence unto genocide if you aren’t.  Free market capitalists are quick to condemn “too much” democracy as mob rule, but they feel fine leaving the economy to the mob; something good will come of the irrational choices of people in a market, but something bad will come of the irrational choices of people with meaningful political rights.

Also, I think there are two very different senses of “regulation” being used here.  There is a basic sense of applying rules to something, but two different purposes.  When the government regulates it tends to be out of a concern for justice, in the sense of fairness, equal opportunity, equal distribution of risks and benefits, protection of life and heath, protection of the physical environment and property, etc.  When business self-regulates it tends to begin in a rewriting of the rules for its own benefit, and ends with thick manuals full of acronyms and cancer clusters.

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