Steve Keen is a fellow contributor here at Forbes so this isn’t a declaration of all out jihad upon his ideas. Rather, it’s to show that one of his contentions about economics and the economy might still be true but it isn’t as important as he tends to make out. That contention of his being that since no part of the market is a truly free market then we shouldn’t be using the standard neoclassical models that assume the existence of and model free markets. That there isn’t that truly free market is, at the sort of level of exquisite detail that Keen insists upon, probably true. But that doesn’t mean that the assumption is imperfect: and it most certainly doesn’t mean that we should be having a great deal more government intervention as Keen thinks we should to deal with oligopolistic markets.
Keen’s essential contention is that we don’t in fact have those completely free markets of the neoclassical models. No one is ever truly a price taker: there’s not an infinite number of people in the world, there’s not an infinite number of producers of anything, so therefore say a wheat farmer does, however infinitesimally, change the global wheat price by the decision to plant or not. That contention is undoubtedly true.
But we’re interested in something else really, which is the assumption that large parts of the economy act pretty much as free market theory would predict correct? In other words, how many producers and consumers do we need interacting to say that the free market model is good enough, and certainly more accurate than the various models of oligopolistic competition? If we only need three players for the free market model to fit the evidence better then that’s obviously different if we need a few million. At either extreme we’d find that different models fit the real world economy. And if it is millions then perhaps Keen’s idea would be right.
Which brings us to the Federal Reserve and their recent note on Bitcoin:
Our estimate of the aggregate daily profit of bitcoin miners dropped below zero for several days in mid-January 2015. The average hash rate over the two-week period following the realization of negative profit was noticeably lower than the average hash rate over the preceding two-week period. It appears that diminished profit may have prompted some miners to exit the market or to reduce their mining efforts. This lower average hash rate caused the network difficulty level to adjust downward at the next retarget, and the relative increase in the ease of mining attracted additional hashing power to the network.
This is to look at the problem through the other end of the telescope. Instead of counting the number of players and seeing whether it’s enough, look for behavior that would indicate that there’s enough players as theory would predict. So, if Bitcoin producers stop mining when prices fall below their ability to profit from mining, then that’s evidence that Bitcoin miners are acting as price takers. They’re not got market power over the price of their output. Now no, I do not know the number of Bitcoin miners out there. But in terms of miners of any size it’s not a large number. With the existence of pools and so on it would surprise me if the number were up in the hundreds in fact. And yet we do very obviously see that in aggregate the producers are price takers. Thus some hundreds of producers is enough for the standard free market models to be useful descriptors of the world we inhabit.
And thus Keen’s point, that we don’t have perfectly competitive markets is right at the level of detail he insists upon. However, it’s not important: because we don’t need to have all that many producers in a market for it all to behave as that free market model would and does predict.
There’s many things in economics which are like this: correct but not important. And this idea that it’s not a pure free market out there is one of them. It’s close enough that the free market model is the correct one to be using most of the time.