Deregulation and market failure

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The older I get, the more cynical I become about government intervention in the economy.

That statement might appear to be either a recantation of everything I’ve ever argued, or a sign of the usual tale of left-wingers moving to the right, and right-wingers to the left, as life experience tempers youthful exuberance. It’s neither (well, okay, maybe it’s a bit of the latter), because my developing position reflects the complexities of a mixed economy.

The latest real world experience that has pushed me further into cynicism about government is a very personal one: an attempt by the Australian government to increase competition in education via deregulation is the direct cause of the proposal to terminate the economics program at my university. The policy change will actually reduce competition in the education marketplace in Australia: the market was more competitive with the preceding regulations in place.

An update though: UWS has now decided to at least preserve a major (8 units) in Economics within the Bachelor of Business. This is progress, and UWS is to be commended for responding sensibly to the enormous negative feedback that the original proposal received. But this is still short of the Bachelor of Economics we currently have, so some influence from the public to persuade UWS to maintain this unique degree would be very valuable.

Also, a reader on Business Spectator pointed out that I got my maths wrong in the example of ice-cream vendors on the beach: the optimal positions for the customers with 2 vendors on the beach is the 25% and 75% location. Put the poor initial maths down to … well, I expect you can guess what.

For more of this post, click here.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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18 Responses to Deregulation and market failure

  1. ken says:

    This change is probably just coincidental with the changes to student numbers. What is happening is that universities seem to feel that cross-subsidisation within departments is no longer appropriate. Under the old system a department with a lot of service teaching could support a lot of uneconomic courses. Under the new model that universities use, the money is used to subsidise academics in areas where there is a large amount of research money available, such as physics. It is also very “safe” research, in that it can guarantee a stream of papers, so it looks productive.

  2. Geoff Davies says:

    The funny thing about competition is – it eliminates competitors!

    Yes, the excellent ANU School of Music was recently trashed because it allegedly wasn’t paying its way.

    The problem is the same old mercenary mentality of neoliberalism/managerialism, introduced by Keating, Dawkins et al (the ANU Chancellor is Gareth Evans, and guess what, they want to expand “policy studies” or some such rubbish). An institution that merely follows the money is not a university.

  3. Jono says:

    “The older I get, the more cynical I become about government intervention in the economy.”

    Steve Keen a libertarian ? We’ll make you one of us eventually !

    Just about everybody else who predicted the financial crisis and understands the unwanted consequences of government interventions in money and banking is a libertarian.

    It isn’t really about left versus right, thats a false paradigm. It really is about government control versus freedom and individualism.

  4. Bhaskara II says:

    Vandals partially retreat!

    ” ‘Vandals’ dump core uni subjects of economics, languages “*

    “ProfSteveKeen .@YSIBerlin UWS will keep a Major in Economics in Business Degree (8 units). We want to keep our Bachelor of Economics too (12-16 Units) 6 hours ago · reply · retweet · favorite ”

    Impressive. Push on!

    In the schools explanations there has been no mention on the schools responsibilities to provide the education promised to the current crop of students! The paying customers offered degree programs in xyz. The school has taken money from the students. The school is responsible to them to deliver their end of the contract. No student goes to a school expecting that their degree program would be cut off before their graduation.

    The school has the obligation to see the present students through their whole education! That should give every one some more breathing room, or end this stupidity right now.


  5. Ales Praprotnik says:

    @Jono: I agree that it is about freedom and individualism, but this also brings responsibility. We cannot expect social responsibility from totally deregulated financial sector. As Michael Hudson stresses in his latest book The Bubble and beyond: the markets are always centrally planned: either by government or by the private sector. In the case of financial sector, the banks would do the central planning in the case of absent government regulation – and we now know where this is leading.

  6. herman kuper says:

    Your head is in the clouds Keen, instead of looking at macro this and alpha delta that look at the real world. Houses are selling the same they always have, prices are not moving, a 0.XX % change in different areas means nothing. You have been talking of the housing price crash for years and nothing has changed. Anyway im off to buy, c yallllll

  7. Bankster says:

    Steve, I think it IS about a leftie moving to the right, you just don’t want to admit it to yourself (it happened to me a while ago, but I am pushing 70 now). When I see the fantastic education my grandchildren are receiving in a private school and compare to the hopeless government schools my own children attended, I feel very guilty indeed.

  8. Steve Hummel says:


    What is more fundamental to monitor money (double entry bookkeeping) or cost? (cost accounting) It’s the latter of course. Factor in that velocity theory is fallacious, and that exporting is not only not a solution to the tyranny of cost accounting’s scarce monetary effects because it remains inside of commerce and is also just a can kicking mechanism that invites over production and waste, and it becomes even more clear that a monetary policy of Grace, the free gift coupled with technological efficiency and sustainability is the answer.

  9. SeanS says:

    Universities do not exist to offer cushy and largely taxpayer funded employment to academics and others. They are supposed to fill a demanding need for advanced quality education for the benefit of the community and nation. From what I have witnessed they do not do this very efficiently. They certainly do not make efficient use of human resources or the enormously expensive infrastructure, both of which is unused for lengthy periods of the year. But then high levels of efficiency were never applicable to anything that is largely Government run in this country.

    You mentioned in your article:

    “Now that open slather is permitted, students have responded by applying for courses only at the top-ranked universities. So now, as the current academic year ends, the projected intake into UWS’s economics program is catastrophically low. In previous years we had well over 100 applicants for our first year intake at this point. This year, we have just 19.”

    Students are well aware of how particular universities are perceived and how various courses within these institutions are regarded. Word gets around very quickly. The fact that out of thousands of NSW potential entrants you could only dredge up a couple of handfuls of applicants should tell you something about how the UWS and the course is perceived.

    I have an economics degree from a Tier One University and frankly I would not be interested in doing a course at a second tier institution. It seems many others have a similar view and are voting with their feet so to speak.

    As for selecting students solely on their HSC performance – it’s somewhat of a joke. I have seen many high graded students bomb out in their first year at university. Any intelligent average student with the appropriate basics behind them for the course can get through a university degree. I have seen quite a few so called ordinary students scoring honours results in most of their subjects on courses completed. It is just a matter of having decent teachers (and some of them are totally sub standard quality) good personal organization, hard work, correct focus and application to your work.

    You mentioned:

    “….to the introduction of HECS (the “Higher Education Contribution Scheme”) – which was supposed to make students contribute to the cost of their education, and has instead resulted in a student body more focused on earning money to pay fees than studying and learning (there: I’ve now earned my grumpy old man badge).”

    Ho hum. Good on those who get off their backsides, get some valuable work experience and earn some cash – as well as study. It’s far better than playing pool and drinking down the pub. By the way employers are far more interested in people with documented work experience than someone who has gone straight from school to university and has little clue about how business operates or the disciplines of holding down and performing well in an employment role.

    Economics degrees and many other degrees are largely about learning stuff out of textbooks. It is necessary grounding but the real world mostly does not run that way.
    As a young lawyer graduate from Melbourne Uni frequently used to say to me, “I did not appreciate how little I really knew about the law until I started working in it.” I could add more but won’t bore people.

    You are obviously not happy with things as they are developing. Well Universities are not Gulags that imprison academic staff.

    You and anyone else that is not happy is free to leave and seek alternative employment.

    So throw yourself on the job market and see how you go. I am sure there are corporates out there that would be happy to have a look at you. Then you can enjoy working 50-60 plus hours a week (with 4 weeks annual leave) like the rest of us. Unfortunately, at the end of the day and week you will be so tired I doubt you will have much energy to run your extensive blog or to engage in many extra curricular activities.

    Anyhow good luck with it.

  10. Andrew Rabbitt says:

    Despite the bad maths, Steve’s icecream vendor analogy is filled with bad assumptions and using it to call for marketplace regulation to improve efficiency is a furphy.

    In a real competitive market place, the vendors would use all of their available resources to improve their sales volume, including developing sophisticated ambulation technology that would allow mobile vending along the entire beach.

    Also, it’s ironic that the guy who rails against the economic theory of equilibrium complains bitterly when a little bit of disequilibrium arrives in his personal marketplace…

  11. Luke Davis says:

    Forgive my ignorance but how does a market fail. To my mind either there is a market (things are being bought/sold, regardless of wether the value is for a fair price or not someone thinks it is or they wouldn’t buy) or there is no market (no one wants your goods)

    There can certainly be rigged markets, overpriced markets, monopoly markets. But how does a market actually fail. If I try and sell steam engines for cars I am not likely to make a sale. The market didn’t fail, it just told me my steam engines couldn’t be sold at the price I was asking.

  12. Steve Hummel says:

    Markets would be fine. We’ve just never actually had one. And no I’m not your friendly neighborhood Austrian cultist and market worshiper. Markets CAN”T work, not because of government, although government is also often a problem, but because the REAL cause of our financial and economic instability has not been acknowledged and then the proper corrective mechanisms utilized to make sure we have the conditions for a true market to actually exist… perpetuity.

  13. Interesting situation. Reminds me of competition in the evolution of hominids. There were many different species but after competition only humans remained, the best overall in leaving offspring. If everyone wants to do courses at just a few uni’s they will become wealthier and increase their capacity in terms of more Lecture theaters, hiring more economics professors, etc.. Perhaps more diversity from within the new larger departments. Otherwise Steve, start your own thinktank and consultancy. If things keep going this way there will only be a few huge uni’s or a few smaller ones with a few specialty departments only. The way the FIRE sector seems to run the world the only courses worth doing will be finance or structured finance, they make a mockery of all other professions and occupations!

  14. Jan Milch says:

    Robert Lucas gobsmacking stupidities on debt- Professor Lars Pålsson Syll Malmö University
    20 November, 2012 at 18:08

    Interviewed in a Swedish Television documen-tary on the the economic crisis (aired yesterday on SvT), Nobel laureate Robert Lucas answered a question (wind to 19:40 in the programme here ) if the level of debt was a problem, by telling us that the high level of debt is not an interesting problem, since, for a country as a whole, debt and credit always “cancel out.” Unbelievable stupidity even to come from a Chicago economist. Fortunately Dirk Bezemer and Steve Keen were also interviewed and could sort things out and give a more sensible view on the increasing indebtedness of modern economies.

    Debt-deflation and austerity-Professor Lars Pålsson Syll-Malmö University
    20 November, 2012 at 21:24
    Some of my readers have asked me if there really is any difference between solving the liquidity trap by lowering real wages via inflation or by lowering nominal wages. Are they not equivalent measures?

    No, they are not!
    As John Maynard Keynes wrote in General Theory (1936):

    The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage-unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former … If a sagging rate of interest has to be brought about by a sagging wage-level … there is … a double reason for putting off investment and thus postponing recovery.

    Or as Irving Fisher – the originator of the debt-deflation theory – wrote in Debt-Deflation Theory of Great Depressions (Econometrica, 1933):

    In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.

    Austerity policies will only bring our economies deep into the kind of debt-deflationary depressions that Fisher and Keynes warned us of in the 1930s.

  15. Derek R says:

    Yes, I watched that program earlier today. English subtitles for the Swedish parts would help but even without them the program flow and the camera work makes the Swedish parts reasonably obvious plus nearly all the interviews are in English. So it was excellent even for a non-Swedish speaker like me.

  16. Ed Beaugard says:

    Hi Steve,

    “…an attempt by the Australian government to increase competition in education via deregulation is the direct cause of the proposal to terminate the economics program at my university…”

    I don’t understand.
    How is this an argument against government regulation of markets? It’s exactly because the government de-regulated parts of higher ed that the university is proposing to eliminate the economics department, not that somehow too much regulation caused the USW to consider these changes.

    Baffled in Belchertown(Massachusetts),
    Ed Beaugard

  17. Philip Martin says:

    Totally off-topic but I heard Steve mention on Capital Account (I think) the five or six university economics depts that still offer a significantly heterodox approach to economics. Obviously the UWS is one, the University of Missouri-Kansas City another…what would the others be? Anyone know? Are any in the UK where I’m from?
    Any help greatly appreciated from regular readers (I just registered today).

  18. PT says:

    The joy of a uni education is that the lecturers have nothing better to do than to teach you everything you need to know to get a thorough understanding of the subject at hand.

    The tyranny of privatised learning, (e.g. apprenticeship, learning on the job) is that you are taught the absolute bare minimum in order to turn a profit as soon as possible. Understanding is given a secondary role.

    When universities are driven to maximize profits instead of maximizing understanding, the unis lose relevance in the world. Profit-wise, they will never compete with on-the-job training. If they sacrifice teaching, learning, understanding, then as an institution they are finished.

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