It seems that Economists have been in love with a core delusion that buttressed supply side, trickle down and the overall of the invisible hand and all the other fevered beliefs that allegedly help understand the best way to maximize wealth and prosperity... as trumpeted by cheerleaders like Ronald Reagan, Margaret Thatcher, Milton Freedman and all the others.
And the core delusion behind all of it is the theory of the Perfect Market. I just read about it at on New Scientist.com
"Falling out of love with market myths", 25 July 2009 by Terence Kealey.... The economists' most bizarre theory is that of "perfect markets". It is also their most important theory: the authoritative New Palgrave Dictionary of Economics states that "no set of ideas is so widely and successfully used by economists as is the logic of perfectly competitive markets".
The article explores how supply side and it's supporting theories of "rational expectations" and "efficient markets" and also, research think-tanks who use a false model of "market failure"
...these assume that traders do not make systematic errors when predicting the future, and that the prices of financial products such as shares, bonds and property accurately reflect all relevant information.
Yet traders do make systematic errors of prediction, and the prices of financial products can actually reflect misinformation. The real function of these economic theories was manifestly to help the rich justify the methods by which they grew even richer.
The perfect market malarkey is explored in some detail and basically the magic of the marketplace depends on a completely impossible set of perfect everything to function with infinite awareness and perfect understanding at all times... which paradoxically would lead to no profits since competition would be perfect and all supply links would be instantaneous... That obviously never happens and that is never explained by the boosters of the "free marketplace".
Kealey explains that real world limitations of physics and human fallibility not to mention greed, totally invalidates anything based on the perfect market loco weed. It really boils down to extreme wishful thinking on the one side (the economists) and total buy in by the already rich and the wanna be rich on the other. And with the first group acting as the theologians of this Novo-Mammon religion of wealth, it allows the stampede in the last few decades to overcompensate those at the top of any business enterprise but especially the really big ones.
And a companion mistaken notion to the perfect market and its corollaries is the idea that research should be paid for by the government and that helps wealth more than private R&D... but according to
scholars such as the late Edwin Mansfield of the University of Pennsylvania tried to show, the assumptions of the "perfect market" are false when it comes to the spread of knowledge about innovations. The copying of innovations is actually very expensive because it requires the acquisition of the relevant tacit knowledge - the sort of knowledge that cannot be transferred as a neat unit. The direct costs of copying an innovation are, on average, some two-thirds of the cost of creating it from scratch
So while companies imagine that if they can get government to pay for R&D they can privatize the profits on products that result they end up spending almost as much incorporating it into their products. This is a bit hard to follow... but the perfect market theory seems to say:
Because of this, the economists claim that knowledge and science suffer from market failure: no private company will pay for research when its benefits go to others. From this it follows that science is a public good because only governments will fund it.
The idea that some companies will just sit back and siphon ideas and innovations from companies that actually pay for research is mistaken in fact the more Science and R&D is done by major corporations (he mentioned Microsoft and GlaxoKlineSmith) the better they do AND the better the economy does and the only real trickle over going on is the sharing and pooling of ideas in the marketplace of ideas and that actually spreads ideas more efficiently and more companies benefit..... but as far as I can see this does not invalidate Government pure science research and that it is not an either/or proposition as to what is researched and by who. Instead the optimum is a constantly re-balancing dynamic with info spreading faster than if everyone waits for government research OR relies on excessive secrecy and over-reliance on proprietary approaches or corporate spying and reverse engineering.
And according to other research he mentions, the more research that is done privately seems to correlate well with how well a county's economy is doing up to a point. The bottom line seems to be the more knowledge is shared the less wasteful duplication of effort and resources there is. That seems to be where wall street and economists have got it wrong. They focused on outsourcing as a way to be efficient... but what works better is spreading and sharing ideas so things get developed faster, get to market faster and if that can be coupled to not rewarding sending jobs somewhere else and ridiculous incentives structures for those at the top the economy would not be in the tank the way it is.
There is no perfect market... but the area that needs to be most unfettered is just the marketplace of ideas... The other nuts and bolts market of transactions and adding value has to be set up with rules to help protect us from its imperfections and the fallible human beings who operate in it.