
I have been following with interest the developments on the Elon Musk vs Twitter
management and shareholders saga. I am glad that so far it is proving that
market-based solutions always outperform government intrusions.

First, a couple of disclaimers. I am not a big fan of Elon Musk. I sometimes
appreciate what he does and what he says, but I also have some concerns about
him. In addition, I don't regard Twitter as a useful medium for the exchange of
ideas. Rather, the opposite. For that reason, I have not used it in the past and
I doubt I will use it in the future.

With that out of the way, I like very much the idea that if you don't like how a
business operates, and you can afford to buy it, you just do it. I believe that
this is the main reason that explains why the world is now better than anytime
in the past.

Twitter has never been a good business. Maybe because most people are like me
and don't have a use for it, or because its current business model is not sound.
But it provides whoever controls it with much influence, probably undeserved.
This has always made it very vulnerable, and Musk is just the first that has
detected this vulnerability and had the means to correct the problem.

Contrary to what the conservative side has been saying in the past, and what the
progressive side is saying now that Musk is going to take control. Twitter is,
and has always been, a privately owned firm. And a private organization may
conduct its business as it sees fit.

If the owners or managers of Twitter wanted to censor certain views from their
platform, they had the right to do so. If that decision turned out not to be a
good business practice, they had to bear with its consequences, namely that it
was susceptible to be acquired by someone with a different view.

If Elon Musk is right and a no-censorship approach makes more sense from a
business point of view, Twitter will enhance its profitability and will make it
much more difficult for its current shareholders and management to use the cash
they make with the sale of their shares to rebuild a new Twitter that continues
censoring some views and promoting others.

If not, then their point will be vindicated, and Elon Musk will have provided
them with the resources to build a better Twitter, while the original fades into
oblivion. What a nice revenge! Using the money provided by your competitor to
crush him.

That is the beauty of the capitalist way.

All the talk about Twitter being a public forum for the fair exchange of ideas
is just bullshit. Twitter is a business, not a charity endeavor. If Twitter
provides a valuable service, it will find a way to charge for its service. If it
doesn't, because the public does not appreciate it. It will fail and will be
replaced by a service that better serves its customers.

I believe that the current consternation felt by many left leaning hypocrites is
that they have suddenly realized that the public did not really appreciate their
precious little toy that allowed them to propagate their petty ideas. They
thought they represented the People, but they have discovered that they only
represent themselves. I feel sorry for them. It must hurt.

I am also sure that this power move by Elon Musk will have momentous
repercussions. The progressive front had the sensation that they were invincible
and had already conquered the Internet and public debate. This is the first sign
that they might have called victory too soon. I am sure that the Twitter
takeover will produce a serious realignment inside and outside of the cyberspace
as other players experience the effects of their vulnerable positions.



## What is the Market

The concept of market used by economists is not the same as the popular notion
of market used in normal conversation. A market for economists is not a place,
nor an institution. **The market is a process**. The process of people that have
things exchanging the ownership over these things with other people that wants
them<Tip>To simplify, I use things, known in economics as _"goods"_ as the
object of exchange, but of course there are also markets of services. Also, a
complete change of ownership is not necessary. Very often markets involve only
an exchange of the right to use a thing for a defined period, without gaining
complete ownership over it.</Tip>.

From the above paragraph, it is evident that the very existence of a market
presuposes the concept of ownership. Only when there is private property is
possible to talk about a proper market.

We call **transaction** to every individual exchange of the ownership over a
pair of things. You give me bread, I give you money in exchange. Or I give you
another thing in exchange. Money is not necessary for a market to exist. It is
just convenient.

When using money as the _medium of exchange_ it is customary to call the party
of the transaction that gives the ownership or use rights over the thing the
"seller", and the party that pays using money the "buyer".

This distinction between buyers and sellers is important because, contrary to
popular belief, usually the buyer has a little advantage over the seller in any
particular transaction. The buyer has money, which is accepted by everyone, and
can usually compare and choose what kind of good he wishes to buy with his money
and whom to buy from, or completely abstain from making a purchase. On the other
hand the seller has only a limited set of goods to sell and these goods are not
necessarily wanted by everybody. As we shall see on this blog, overcoming this
intrinsic disadvantage by some sellers that have problems attracting buyers is
the cause of most market distortions.

In an economy, the combination of the different markets for all the goods
produced in the econmy is called the Market, with a capital M. Since there are a
myriad of different goods and many possible interactions between them, the
Market is extremely complex and for all practical purposes impossible to
organize, much less optimize, from above.

## What about the free market

Most economists would agree in principle with the description of the Market
provided above, even if it is very simplistic. In contrast any proposed
definition of the free market is likely to provoke a heated discussion,
resulting in many competing (and uncompatible) definitions of free market. Many
of these definitions are carefully designed to suggest the impossibility of the
existence of a Free Market in the real world, by imposing conditions that are
not possible.

One of these impossible conditions that is frequently used is to demand perfect
knowledge on the part of sellers or buyers. It is said that a market cannot be
free unless all parties involved have perfect knowledge in order to prevent that
those that have better knowledge<Tip>It is usually assumed that sellers have
more information than buyers, although this is usually not the case. Sellers are
always guessing wrong what buyers really want</Tip> take advantage over those
less knowledgeable.

Since perfect knowledge is never attainable in practice, free markets are
impossible, thus the government should organize markets. _Quod erat
demonstrandum_.

Another popular demand is perfect competition. It is alleged that a market
cannot be free unless there are enough competing firms offering a particular
good<Tip>The good that interests whoever is promoting the particular
intervention</Tip>. This is a very misleading concept. What level of competition
is _enough_? How do we establish what goods (or companies) compete with a given
one? Usually there are no objective answers. Goods (or companies) that compete
with each other under some circumstances might cease to compete under different
circumstances (or vice versa).

As we shall soon see, the important issue is not the number of competitors that
are present in the Market, but whether some potential competitors are prevented
to enter the Market (or existing competitors are for ced to exit it) by force.

Impossing conditions that are impossible to attain in a _real-world_ free
market, or that are too vague to be useful, only create confusion. They only
prove that a perfectly free market is impossible, but we already knew that.
Nothing made by humans is perfect.

In other words, there are markets precisely because there are differences
between what people _have_ and what people _want_ and there is no perfect
knowledge to solve these differences in an optimal way. The free market is the
best way to distribute limited resources in an equitable way in a world that is
not perfect.

Almost all the economic problems that exist in a particular time and place can
be reduced, not by regulating the Market more tightly, but rather by making it
freer<Tip>Unfortunately there are no market solutions for non-economic
problems</Tip>. But before trying to demonstrate why that is so, it is necessary
to have first a working definition of the Free Market.

## So, what makes a market free

The answer is surprinsingly simple. There are only two simple conditions that
result in a free market:

- That transactions are voluntary, and
- That there is free entry to the market (both for sellers and buyers)

That's all that is required!

Voluntary transactions eliminate most of the problems that are frequently used
to justify a government intervention.

- If transactions are voluntary, it is guaranteed that **both parties are better
  off** after finalizing any transaction. Otherwise it would not have taken
  place.
- Conversely, transactions that take place only because there is some coercion
  involved imply that at least one of the parties (usually both), is **worse
  after the transaction**. Otherwise, the coercion would not be required.

I accept that it is theoretically possible to obtain a better general outcome
using non-voluntary transactions, if those that benefit from the imposition gain
more than those that are harmed. But even if that were the case (and I have
serious doubts that in the real world these theoretical cases exist), it is
difficult to justify on moral grounds why some people has to be penalized for
the greater good. It is even more difficult (maybe it is impossible) to
establish mechanisms to prevent abuses<Tip>Those that benefit from a imposition
have a strong incentive to promote the imposition if they have good access to
power</Tip>.

But having voluntary transactions is only a **necessary condition** that is not
sufficient.

If a seller cannot enter the market, buyers are not really free to voluntarily
choose the best possible deal for them and will have to settle for a deal that
is probably more advantageus to the existing sellers<Tip>Who probably are behind
the barriers that prevented the entrance of the new seller in the first
place</Tip>.

Altough it is generally less of a problem nowadays, it was widespread in the
past to impose barriers to buyers. If certain buyers are not allowed to buy
certain good, the remaining buyers have an unfair advantage, while the sellers
of the good are harmed.

While the condition of voluntary transactions is relatively easy to understand
and to apply, the liberty of entry to the market is conceptually much more
difficult to understand and even more to implement.

It is usually straight forward to see if a transaction is voluntary or not. If
the parties participate in the transaction without any external coercion, the
transaction is voluntary. Otherwise it is not. Besides, voluntary transactions
are almost always right<Tip>Of course, there are some situations in which a
person cannot make a free decision. When the person is deceived or incapable of
making good decisions</Tip>.

In the case of the liberty of entry to the market, the situation is more
difficult to assess because some _barriers to entry_ are acceptable (even
desirable), while others are not. And sometimes is very difficult to assess
whether certain barriers are acceptable or not.

Obviously to become a seller it is at least required that you own the good that
you are intending to sell. If producing the good is expensive, or requires a
particuler skill, or takes some time or a prior investment, then you might not
be able to enter the market but there is nobody to blame. It is just the nature
of the world.

Similarly, to become a buyer of a good, you are at least required to know that
the good exists and have the means to acquire it. Not being able to afford a
particular good someone wants might be deplorable for that person, but it is not
a market failure. It is just the consequence of the fact that economic goods, by
definition, are scarce.

Unfortunately, it is certainly possible to create conditions that limit entry to
the market that are neither necessary nor reasonable. These conditions have to
be prevented to ensure that a market is free.

The purpose of this post is just to define the conditions required for the Free
Market to emerge. Even if the formulation of these conditions is much simpler
than what is usually used to caracterize the Free Market, there are still some
nuances that have to be carefully considered to prevent abuses. These will be
the subject of future posts.



## The search for discriminatory practices

There are some social science intellectuals that devote a large portion of their
time to torture economic or socioeconomic datasets with the intention to prove
that the market creates opportunities to some segment of society to take unfair
advantage of another segment.

Their indefatigable search for proof is helped a great deal by the fact that
they already _know_ that these unfair advantages do exist, according to their
particular _ideology du-jour_. All they have to do is to carefully comb the data
until they find a spurious correlation.

As it was the case with inefficiencies, there is some truth on their claims. I
absolutely believe that at any particular moment there are **too many
opportunities** for some **parasitic groups to take advantage of other groups**,
possibly more industrious, but surely less organized.

Unfortunately using ideology rather than reality usually results in two problems
with their analysis:

- Their discoveries are **almost always false**. This is very depressing,
  because knowing that there is real injustice in the world it is very sad that
  resources are wasted trying to _'solve'_ fake injustices.
- Even in the rare cases in which they correctly spot a real discriminating
  practice, **their proposed solution is always wrong**.

I think the most appropriate way to understand the first problems is to use an
all favorite example; discrimination to women on the marketplace.

The second problem will be the subject of the next post on this series.

## A fictional example of a discriminatory practice

An economist from a prestigiuous University on the West coast called Bob has
detected that **women are being paid less than men for the same job**.

Bob has found a dataset of salaries paid to men and women that provide
consultancy services in his State. He has _controlled_ for various obvious
factors that might skew the data, such as relative seniority and monthly working
hours for men and women. After carefully correcting the data to eliminate these
factors, the difference persists.

Furthermore, Bob has also conducted an extensive investigation and determined
that the pay difference is not a consequence of an ill-devised regulation or
some other imposition on the market, sanctioned or mandated by the government,
like trade unions<Tip><b>Spoiler alert</b>: Usually market deficiencies turn out
to be government deficiencies</Tip>. Bob is a thorough scholar and understands
that if the problem was caused by a regulation or other kind of government
involvement on the market it would be better to first repel the regulation or
eliminate the imposition and then take another look to see if the unfair
advantage for men still occurs.

After all his hard work, Bob has wrotten a paper describing his findings and
demanding that the government promptly step in to correct the situation. The
paper does not state it, but it hints that Bob would be willing to advise the
government to correct the situation, should he be asked to.

Bob sends the paper to a first-rate economics journal. Since it is not a paper
about a novel coronavirus, the peer review process is expected to take a couple
of months. Meanwhile, he dines with a good friend of him, George who is visiting
the city. George attended the same economics undergrad course as Bob did, but
decided to do business after graduation rather than continue to study it.

_George has made much more money than Bob. Bob says that he is not at all
resented by this fact, even though Bob knows that he is smarter than George and
that his work is far more important for society (Ater all George owns a chain of
Sports Bars while Bob is a full proffessor.)_

The reaction of George is not what Bob would have imagined. He was expecting
that George would be as horrified as he is and demand immediate action. Rather,
George offers Bob to finance him to create a consulting company to compete with
the existing firms. The new company would hire exclusively women, offering them
better conditions than those offered to them.

The result would be to attract the best female consultants in the State while
still maintaining a lower cost structure than other competing firms that would
continue paying more to men, possibly even less talented men. The consultancy
firm would be a success and would teach a lesson to all those misogynist
entrepreneurs.

Bob can see how that could be an important competitive advantage. Yet, he
politely declines the offer.

On his way home he is outraged. He is a scholar. He has devoted his life to
better the world and he will continue to do so from his academic post. The mere
thought of becoming a for-hire consultant ... It is ludicrous.

George is not at all surprised by the reaction of his friend. In fact his whole
offer was a joke.

When George returns to his hotel reads carefully the pre-print Bob gave him. He
is skeptical of the whole discrimination issue, but still ...

It takes half an hour for George to spot the smoking gun. It is on plain sight
on Table VII of the Supplemental Material. As it turns out, the average pay in
the financial and technology consulting markets are 5 and 3 times the average
pay for all markets. And men outnumber women by 2 and 3 times respectively on
these high-paying segments. Since Bob only found a 15% difference on the whole
market, these two facts would more than explain the whole difference. _Could it
be that women are in fact better paid than men in comparable jobs?_ That is what
the data seems to imply.

George ponders whether to tell Bob what he has found, but he quickly dismisses
the thought. He knows Bob will not be happy with it, specially after his little
joke. After all, he likes Bob. They used to have such a great time together 10
years ago. Besides, the risk that the peer review process will spot the problem
is so small that Bob will not get embarrased by his paper being rejected. And
the paper will surely help with Bob's finally getting his tenure.

Sure enough, George sees that the paper of his friend gets published and even
gets a little traction on the media. "Good for Bob," thinks George as he sends
his friend an email to congratulate him.

<Dots />

_Note: Although this is a completely fictional story, it is based on a real
phenomenon called the
[Simpson's Paradox](https://pubmed.ncbi.nlm.nih.gov/29484824/)._



At my Catholic school I had a teacher that never gave a perfect score because
perfection was only attanaible by God. Even if I found it a little bit _cheesy_
at the time, I have to concede that he was right since nothing done by humans is
perfect.

It follows that **the market**, being a human institution, **is not perfect**.

Therefore, it is not only possible but inevitable that carefully looking at any
market will reveal imperfections: resources will be misallocated, efficiencies
will not be exactly 100%, there will be net winners and losers, and so on ...

All of that is true. But, **is it bad?**. And more importantly, **what should be
done about it?**

For a particular breed of intellectual, the answers are clear.

- It is **unacceptable**, and
- It has to be **corrected by the government**

Well, I am sorry about it, but they are wrong in both accounts. And the reason
why they are wrong is that they don't understand how the market works<Tip>Of
course, it is also possible that they know very well how markets work, but I am
trying to be nice.</Tip>.

On this post I will explore alleged market failures with respect to
inefficiencies that _"don't use resources in the best possible way for society"_
and thus _"would be better managed by the government through an industrial
policy"_.

The first consideration I want to make is that optimizing a process is only
possible, or even desirable, if the operating conditions are stable. If they
are, then you can work out a precise arrangement that produces the maximum known
output using the minimum level of resources.

Of course, to ensure the optimal output, it is necessary to eliminate as much as
possible the flexibility of the process, because **the optimal solution is, by
definition, unique** (if it wasn't, it wouldn't be optimal).

It follows that, when conditions change the solution will cease to be optimal.

At the heart of any economic analysis we will always find this dichotomy:

- If we optimize for a particular condition, we will lose the flexibility to
  adapt to changing conditions.
- But if we maintain flexible arrangements, we will lose efficiency because
  flexibility carries a cost.

Perhaps the best example that illustrates this point is the famous Hery Ford
phrase
['Any customer can have a car painted any colour that he wants so long as it is black'](http://oplaunch.com/blog/2015/04/30/the-truth-about-any-color-so-long-as-it-is-black/).

Being that so, at any particular moment, companies that have their productive
processes more aligned to the current conditions have an advantage over those
that don't, and will have a tendeny to further optimize their processes to the
current known conditions, rather than adjust them to unkown future conditions.

Those that are less optimized will have an incentive to change their processes.
Since the change will take some time, they will try to forecast the conditions
in the future and work towards them. If they succeed in their predictions, they
will become more profitable in the future.

Contrary to the case of a stable situation, there is not a single solution to
optimize a process under unknown varying conditions (in fact, there is **no
solution**). For that reason, different companies (or more precisely, _different
entrepreneurs_) have to make educated guesses about the future and plan
accordingly a mix of optimization and flexibility.

At any particular moment, the companies that planned better in the past are in a
better situation, using resources more efficiently and having better results. In
a future moment the situation might change and it is impossible to know if the
companies that are currently more efficient will retain their position or will
be displaced by others than have been compelled to adapt.

Therefore any observed inefficiencies are the consequence of the varying
conditions of a dinamic society and not the consequence of any inherent
limitation of the market process. A planned economy would not eliminate them.

Furthermore, it can be argued that a planned economy would be necessarily less
efficient. But that will the the subject of another post.


Posts about the economy

Some thoughts on the takeover of Twitter by Elon Musk

What makes a market free

The elusive market failure II

The elusive market failure I