Last week I had a discussion with Professor Azzi about the classic piece, “Market contestability in the presence of sunk (entry) costs,” where Vernon Smith and his colleagues examine the dynamics of market structure. They find that even with the same initial conditions, an industry sometimes winds up competitive and sometimes winds up characterized by market power, a finding that we may well flesh out in IO this fall.
With that in mind, I was pleased to see a link to a ReasonTV.com video interview with Smith making the rounds on the econ blogosphere. In the interview Smith — the pioneer of “experimental” economics — talks about how asset bubbles show up in the lab whether you want them to or not, and his assessment of the government’s bailout of many homeowners:
Forgiving debt is not a good idea, but you have to realize that we don’t face any good options. If it hadn’t been done, the banking system would likely have collapsed.
Aside from that note, Smith also touches upon the marginal revolution, The Theory of Moral Sentiments, and growing up through the Great Depression. An interesting half hour all around.
I recall seeing him speak about the troubled state of electricity regulation a few years back, where he said something to the effect of: “the regulators’ solution is to set average revenues equal to average costs, and it’s this sort of average thinking that got us into this mess.”