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.

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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.….in 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–11-del-2-av-3 ) 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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