Paul: I've learned a lot about the interfering factors in general equilibrium.
McCloskey: I see no reason to abandon my faith in markets. Real markets may not resemble a Walrasian general equilibrium system but they come pretty close.
Paul: In spite of the information problems and uncertainties?
McCloskey: As we saw, the market system deals pretty well with all these problems. For example, markets pop up to take care of the problem of imperfect information and unwanted risk. And the uncertainties invite entrepreneurship. It's all in the game, I'd say.
Klamer: That's too easy. The problems are serious. Markets alone do not suffice. We economists do well paying attention to the most varied institutions that people have to get around markets and reduce the uncertainties. An economy without the right moral sentiments would be a disaster. That's what your biggest hero, Adam Smith, already foresaw. The decline in trust may be good for lawyers but imposes a serious cost for everybody else.
McCloskey: I agree with you on this one. The right virtues will do wonders for any economy. But more crucial is resistance against the temptation to intervene in the market process. Laissez-faire is my maxim for the day.
Ziliak: If only such faith in markets were warranted . . . How wonderful that would be. But that is not the case. Markets do not work very well not only because of imperfect information and the uncertainties, but also because some people do better than others, by chance or by privilege, and are able to establish power in the markets. The existence of power is not only responsible for inefficiencies but is also unfair. It's not right that some people do not know what to do with their wealth while many others do not know where to get food for tonight's dinner. Such injustice justifies intervention, or so I believe.
McCloskey: And I'd say, let markets take care of things.
Maria: So whom should I believe?
Ziliak: We can't answer that question. Only you can. But don't worry too much about it now. Try to understand the arguments first. See the possibility of objections, and then the spaces for finding common ground. Economics is an ongoing argument. Discussions like the one we are having force us to improve the arguments and thus to advance the science of economics. If you stay actively engaged in your learning, a reasoned belief in one kind of system over the others eventually comes.
1. A system of perfect markets is ideal in many ways. It is most efficient, producing the best possible deals; no additional deals are possible without making someone worse off (the first welfare theorem). Furthermore, perfectly competitive markets are consistent with any conceivable income distribution (the second welfare theorem).
2. Earlier chapters discussed imperfections due to imperfect competition (monopolies, oligopolies, monopolistic competition). Ill-defined and undetermined property rights are another imperfection. Externalities occur due to this imperfection.
3. According to Coase's first theorem efficiency is guaranteed with any assignment of property rights as long as markets work well and deals are easily made. When the latter proviso does not apply (high transaction costs) research is needed to know which assignment of property rights is most efficient.
4. Markets function as advanced information systems with the price as its signal.
5. Information can be imperfect, however, as when it is asymmetric. Imperfect information is responsible for the risk of economic life or, in case of incalculable risk, uncertainty.
6. Insurance and futures markets offer deals to reduce uncertainty.
7. Institutions, such as norms, conventions, and laws help people cope with the uncertainties.
8. Entrepreneurs take up the challenge of fundamental uncertainties.
9. To which verdict all arguments add up, remains a question for discussion and further research.