PhilGoetz comments on Market Failure: Sugar-free Tums - Less Wrong

3 Post author: PhilGoetz 30 June 2016 12:12AM

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Comment author: Lumifer 30 June 2016 02:39:18PM *  6 points [-]

I'm theorizing that the VCs believed that the fact that the big companies did not make any such product proved there was no profitable demand for it, because the market worked.

That doesn't look like a viable hypothesis because if it were true, such people would not be VCs at all.

Generally speaking, you seem to expect perfection in business agents. Clearly, this is not so in reality. "The market" is not each individual agent, it is the sum of them all. Moreover, the market works by self-correcting which implies that there are a LOT OF MISTAKES being made all the time. The market is successful because it provides negative feedback to those who make mistakes, so on the average it does what it does quite well, but it would be an error to think that each individual decision is optimal.

The market failure is that competition has not driven the cost down close to the cost of production.

Nope. Reality is primary, theories are secondary. In real life the markets drive the price down to the cost of production only occasionally. If your theory says they should, it's the theory that needs to be adjusted.

Comment author: PhilGoetz 25 July 2016 12:54:08AM 0 points [-]

That doesn't look like a viable hypothesis because if it were true, such people would not be VCs at all.

That statement makes no sense and has no support. What, you're imagining that I said that VCs think all profitable things are already being done? That is not what I said. What I said, which is true, is that VCs don't jump into established markets that already have huge dominant players.

In real life the markets drive the price down to the cost of production only occasionally.

"Close to", not "to". The difference is enormous--it's the difference between free market theory and Marxism.

The theory of the free market is that markets do so; failure to do so is called a failure of the market. It is a theoretical term, so saying "theories are secondary" is nonsense.

Restated:

In real life the markets drive the price down close to the cost of production only occasionally.

Citation needed.

Comment author: Lumifer 25 July 2016 04:01:52PM 0 points [-]

What I said, which is true, is that VCs don't jump into established markets that already have huge dominant players.

Unfortunately for you, what you actually said is easily visible a bit upthread. Let me refresh your memory:

I'm theorizing that the VCs believed that the fact that the big companies did not make any such product proved there was no profitable demand for it, because the market worked.

The cost of production is basically an asymptotic limit in the long term. Whether it's "close to" or "to" is irrelevant, you are not going to get there anyway.

It is a theoretical term, so saying "theories are secondary" is nonsense.

Oh, dear. Let us consider phlogiston. It is a theoretical term, isn't it?

The problem is that theories are useful only insofar they reflect reality. You can make your theory contort in various ways, but unless these contortions match the reality, they shouldn't be entertained.

To repeat myself, if your theory predicts something that does not happen (regardless of whether it uses "theoretical terms" or not), you need a better theory.

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