To take your insider trading example, I’m confused as to what it is in the L&E approach as you see it that requires ignoring the potential costs of allowing insider trading in terms of market exit? I was going to come up with a clever analogy to tie this to the Diner example, but … let’s just move on. Maybe we’ve just read a different literature on insider trading?

The bottom line: I don’t think the L&E approach suffers from would-be fatal methodological flaw that you suggest here. In fact, I’m sure of it. Let me assure you that economists are very much concerned with the trade-offs of costs versus benefits. Even those that occur in the future. Now, this does not mean that we don’t have to think about how to weigh these effects intertemporally. If I had the same view of L&E methods as you, I would get off the bus as well. But I don’t. Maybe (and this time it is me not trying to terrorize you) you should have stayed on the bus longer? There are still lots of seats.

Insider trading comes to mind – it seems that some folks think that insider trading is fine, b/c it least to more efficient markets, which is good, in the short term. But what of the notion that some investors won’t stay in the market if there is a perception of unfairness – if the game is stacked, why bother investing (despite the fact that investors should know enough to know that they are in the market for the long haul, blah, blah, blah)? Perhaps the knee-jerk response is that the market will take care of that issue – the market will penalize the issuers who engage in insider trading to a degree that investors find unfair, as those investors will sell, and the issuer with the many insider traders will reform until it hits some equalibrium.

Well, that SOUNDS good, but I think that that is unrealistic. I think a perception that the stock market is littered with insider trading such that the little guy is always getting the short end of the stick will lead to a withdrawl from the market as a general matter, in addition to some issuer-specific withdrawl.

Think about it: If you read in the newspaper that Nowicki Diner served contaminated rice pudding last week that made five people vomit, and you read a few days later that Nowicki Diner served pork one night and THAT was contaminated, and you read later still that it is suspected that the Nowicki Diner’s meatloaf was tainted, are you *really* going to say to yourself “well, I have not yet seen an article about Nowicki Diner’s baked chicken breast, so why don’t I go to Nowicki’s for dinner and get the chicken breast?” NO, you are not going to say that. You are going to say “I have other options on where to eat, so I will go elsewhere.” One could imagine that perhaps that is how the long-term perception of rampant insider trading might impact the market. Investors might say “I can buy government securities, I can invest in real estate, I can buy CDs, I can invest in a small partnership as a silent partner, etc.” No? (I’m not trying to terrorize you, Josh. I am just trying to glean information from you. (I suppose I am also trying to explain why I stopped riding the L&E bus.))

As a fairly regularly TOTM blogger, I would just state for the record that I am not an L&E person. I tried to be, bless my heart; I think taking economics (qua antitrust) with George Hay planted the L&E seed. (I am not saying that George is an L&E wonk, by the way.) But, at some point, I realized that L&E theory does not often play out in practice the way we would have anticipated. And I realized that sometimes the long-term sensible option is not necessarily the most “efficient” in terms of costs and benefits that we can measure today. So, though I still consider things from both the positive and normative L&E positions for purposes of informing my analysis, I have instead become a radical shareholder primacist.

Josh, should we all know what you mean as a technical matter, as a matter of measurement, when you say “maximize social welfare?” That is to say, can you reduce that to one descriptive sentence with which Thom and Don would likely accord?

To the extent that the policy discussion involves a choice of maximand, one could certainly adopt the view that the social welfare function adopted by economists should be modified to “give priority” to the poor. However, even if one were to adopt this position, it is difficult to see how such a view contradicts the notion that economic analysis provides us useful tools for figuring out what the consequences of prospective policy choices will be.

Just some thoughts:

If the “overpowering zeal and certitude� of L& E folks, according to Peter, refers to their underlying moral view that the right policy/law is always the one that maximizes economic efficiency, then your response seems off the mark to me. The view you attribute to Hayek, and endorse, is that we cannot be certain as to what means of resource allocation would maximize social welfare, and thus the modest position to take is not to have government try to find the right means, but to let people act on their own preferences on the free market. But, at least on the way you’ve characterized Hayek here, the view already assumes that the proper goal is maximizing good consequences. The uncertainty to which you refer is about the means to the goal; but the “overpowering zeal� to which Peter (either correctly or incorrectly) refers seems to regard the choice of goal to begin with.

Now maybe I’m placing too much on your characterization of Hayek (and certainly, I realize this is a blog, not an article). Maybe Hayek’s view (which I cannot recall) is that we cannot be certain about the proper ends of morality – about the proper ends of law – and therefore the maximally modest view is to let the unregulated market settle all issues. If that’s the view you’re endorsing then I see that it does address Peter’s remark. But then again, if that’s the view, I have to read more Hayek and hear more since I don’t see how the conclusion follows from the premise. One might think that it is very hard to see what the very best policy decision is in any particular case, and so the default shouldn’t be the market, but rather that consideration for the lives of the worst off in society should be given some kind of priority in deliberations about the proper policy.

And finally … I’m sure we’ll be talking more about this … but my guess is that your view is not merely that “all things being equalâ€? you’d choose the efficient policy over the inefficient one. That view, of course, is consistent with deontological views. So I’m guessing that economic efficiency should have some privileged status in normative assessment, on your view.