Ideal Type

[Geoff332]

I think it might be useful to pop up some of the basics of social and philosophical thinking -- partly for my own purposes and partly because it makes things a lot easier to debate when you have some common ground to work from.

The first one I'm going to try out is the notion of an ideal type. An ideal type is an analtical tool from history and sociology. I learnt it from Weber's works on social structures (my first training was as an organisational theorist, and this is one of the most important historical works). The first thing to point out is that the 'ideal' part of the term does not in any moral or instrumental value to the type being described. It is ideal in the sense of being an idealised description of a certain abstract ideas. For example, a 'perfect market' from economic theory can be used as an ideal type. So what is an ideal type?

An ideal type is a set of specific characteristics associated with a particular framework or model. 'Perfect competition' is the 'ideal type' of free market competition. It takes the idea and derives a set of concrete (usually empirical) characteristics that are associated with that idea. So for perfect competition, we see a market consisting of large numbers of buyers and sellers; both buyers and sellers are acting from self-interest; all parties in the market have complete information regarding the transations; and the buyer's offerings are completely substitutable (there may be one or two others I have missed, but these are the main ones). It is important to note that an ideal type is a set of concrete characteristics, not the abstract idea that derived them (although it is inseperable from the idea).

Naturally, one does not expect to actually see an ideal type in reality. Finding a market that is in fact perfectly competitive is very rare. So what is the purpose of an ideal type? As an analytical tool, there are two major purposes.

Firstly, it can be used to connect abstract concepts to empirical reality. While it might not be possible to see 'perfect competition', one can see markets that come close to perfect competition (eg exchange markets) and markets that are a long way from it (eg health services). This gives us a classification framework to assess the appropriateness of the concept associated with the ideal type and it's applicability in describing the empirical situation. As with any calssification framework, they serve to simplify the complexity of reality to a point where we can process and meaningfully analyse it.

Secondly, it can be used to compare two empirical situations -- for example, the two markets I described. The ideal type provides some clear dimensions and criteria where one can look for similarity and difference between situations. One dimenstion of perfect competition is the requirement for complete information regarding the transaction. We can then compare markets in terms of the information availability to buyers and sellers and any costs associated with this information. We can see that in some markets, there is limited information available to anyone -- giving us uncertainty (most risk analysis frameworks are based on this notion of uncertainty). In another class of markets, we have information asymetry -- where the buyers know a lot more than the sellers (eg health care -- the doctor generally knows a lot more than the patient). A third, a very large, school of thought focuses on the costs of gathering information for a transaction -- giving us transaction cost economics.

An ideal type is a methodological tool used to describe the characteristics of a concept. It is used to classify and simplify complex reality and to provide the basis for analytical extention of these ideas.

[RebelWithanAK]

The exchange markets that can be considered close to "perfect," in your opinion, are exclusive affairs pertaining to the owners of industries and the financial sector - in other words, the people who can afford to subscribe to and subsequently thrive on financial news would've gotten ahead regardless, as it is a self-serving system.

However, even in the inevitable events of information imbalance, there cannot be a bias of information towards the buyer. If the buyers know more than the sellers, the sellers die from lack of profits. However, if the sellers know more than the buyers (eg: HMOs), then they can run a racket scheme for all eternity because the buyers can never pull out of the system - they can never simply die. You'll never have $50 computers, but you will have $500 doctors' visits.

So, whenever the former happens, the system is self-correcting. Whenever the latter happens, as is often, the system stagnates. Even in theory, capitalism is flawed.

Now we must apply a patch on the flawed system, and that patch is called the labor strike. And it is ugly, violent, and fought with as much vigor and viciousness as the market itself. Someday this will come to a head.

[Geoff332]

I think you missed the basic point. The key factor that makes an exchange market close to perfect is the substitutability of the 'product'. A US dollar is a US dollar, no matter who you buy it from. Other similar markets are commodity markets -- one key factor is variation in product quality (as an ideal type analysis quickly reveals, variations in quality led to variations in substitutability and to problems with information availability).

Health care is pretty close to the other end of the scale. The ideal type of perfect competition indicates that a freely competitive market structure is inappropriate for healthcare (and no-one in the world actually operates one). You need to introduce corrective measures to shift things back towards an pareto optimal position (there is another argument, regarding the inapproriateness of pareto optimality at the extremes in healthcare, but we can skip that for now). This can be achieved through external regulation (eg legal), the civil legal system (malpractice suits), self-regulation (codes of practice) and a few other techniques. I tend to explain all of these factors in an insitutional framework.

The labour strike is very rarely a general corrective device for the evils of capitalism: it is simply the withdrawl of labour. In most cases, it is about a specific (and, perfectly legitimate within a capitalist system) means of negotiating within the labour market. There are exceptions -- general stikes. These can be more ideological, focusing on the the power balance between the labour and the employer. But these rarely, if ever, happen. The ideological objection of capitalism to labour unions is not the withdrawl of labour, but the collective organisation of labour. This (the opponents argue) eliminates the exercise of individual (egotistical) desire. For Marx, they were a way for labour to gain access to the surplus value generated by the labour process. But this is rarely the ideology behind their use today.

[RebelWithanAK]

It is, methinks, silly to try to argue about "ideal" capitalism when "ideal" capitalism is a very unstable system - it lacks self-correction, and can only survive in what amounts to a trillion dollar test tube.

I'm not saying that commodity markets aren't a refined version of capitalism, I'm saying that they have little benefit to the outer world, because they are simply bastions of nigh-universal information supported by huge amounts of investor dollars and the finance industry - something that the vast majority of the population does not have stake in.

Besides, you yourself proved my point - capitalism is not a self-correcting system; it needs outside regulation in order to continue. Of course, labor strikes are part of this outside regulation, because they are an attempt to impose - as you say - codes of conduct; not to mention that they attempt to fulfill (however haphazardly) the second part of the act of commercial self-interest: the self-interest of the consumer.

[Geoff332]

I explained the purpose behind an ideal type -- I'm not sure if you actually read and/or understood what I wrote. Very few sociologists would suggest that you ever get a pure ideal type in reality. You will never get pure capitalism; but neither can you every expect to see pure communism, socialism or anything else. Types are analytical devices -- and this applies to capitalism as much as it does to communism.

You're wrong that the vast majority of the population does not have a stake in the financial markets. Between pension funds, private shareholdings, and a few other investment devices, participation in the financial markets is a lot higher than most people seem to think. I also included commodity markets there -- and that includes things like oil (which is not a perfectly competitive market) and grain -- which are far more invasive in their impact on people's lives.

In the sense you seem to mean, no system is self-correcting. The ideal-type of capitalism is, in fact, self-correcting, but it will never exist. The ideal type of communism is also self-correcting (although much less so that I suspect you believe), but, once again, it can never actually exist. I agree that capitalism is flawed in theory; but I also would argue that communism is flawed in theory. All theoretically defined social systems are imperfect. All practical social systems are imperfect reflections of social theories. But if we don't use them, then we end up with a complex point-wise comparison between specific cases -- and that's simply too complex for any form of analysis (or, more precisely, if you preserve the full complexity, you are not performing analysis).

[RebelWithanAK]

I'm connecting an abstract concept to empirical reality right now, because I saw that I disagreed with you on the fundamental concept of capitalism and its inherent (in)feasibility. I read your posts, I just changed the subject ever so slightly because I disagreed with your examples.

Most people do not benefit from the market. Unless you're an investor of a company, or a stockbroker, you don't have much to gain from the market. Most people's only connections to the market are either through stockbrokers or through banks - both of which work the same way in keeping the exclusive policies of said market. They take your money, and put it in the market. If you win, they take more out of the winnings than you. After all, that's how they make money. If you lose, it's your money lost, not theirs. The government saved most people from the banks via FDIC, because otherwise quite a lot of people would be starving everytime a bank died in the natural attrition rate of the market. The stockbrokers just carry a "you do this at your own risk" policy.

Not to mention that most people's money are usually tied up in mundane tasks like feeding, clothing and housing themselves. Investing is an expensive business, it has a bar of personal weath one must pass before it is feasible to even attempt such a risk. Not to mention that you either need to spend all your time following the market or you must pay someone else to.

[Geoff332]

Oh, that explains it then. I thought we were debating an issue -- but you seem to have made your mind up. No methodology will over-come something that you've already decided on.

Unfortunately, I see little point in continuing the debate. Since you are not willing to see anything good in capitalism, using it to explain the methodology is pointless and will reveal very little to either of us.

For the record, I would (and do) tak the same position with people who see no good in communism or in any other political philosophy for that matter. Given that Marx himself recognised caqpitalism as a progressive step in socio-political development, it's hard to see that it can be all bad.

[GreatWyrm of Babylon]

I can see the point of both of you, and why you object to the counter-point.
I would like to see rebel actually listen to a contradicting opinion, and geoff to mention something more practical that what would happen if the imaginary form existed, but that is life...

[Geoff332]

Well, this experiment clearly failed. Either I explained the technique very badly, or there is no interest in analysis (I have my suspiscions on which is the answer). The net result is going to be a bunch of endless "my political philosophy's bigger than yours" arguments that will never get anywhere. But hopfully I will have the good sense to keep my head out of them.

For the record, ideal types are practical, because they allow us to analyse (break down), categorise and compare social pheneomena. Without being able to perform those basic functions, then these phenomena are not ameable to our reason. Typing is one of the most common and most important methods by which we do that. When we refer to the US as a capitalist state (or a democratic state, or a copratists state, or anything else like that), we are referring to it's possession of certain characteristics of the capitalist ideal type. When we are referring to it as imperfect capitalism, we are referring to the differences between the reality of the US and the concept.

[RebelWithanAK]

An ideal is a theory, researched but not experimented on; its use is in it malleability, when placed into practice. Its use is in researching its divergence from reality, yes. But that is only half the story. As a theory, it's supposed to be changed when new things are found out - that's what experiments are for. Your example, pure market capitalism, has been run, and much learned from it, but nothing should be written in stone. We have our working model. Let's run some more experiments.

[G. Adams]

Wasn't this original post simply meant to be a clarification of what we mean when we say 'ideal', rather than being a rant in itself? In which case I don't see what objections are being raised...

[Geoff332]

An ideal type, as I explained, is a construct that we apply aginst empirical reality to aid interpretation, understanding, analysis and critique. As I said in my original post, it does not imply anything about this is the way things should be (my exact words were to exclude: "any moral or instrumental value". It says this is the way the theory described the phenomena in question -- the ideal type allows you to compare it to reality. Libtertarian economics is the school of thought that applies pure market concepts to the real world as being the best way to operate. An ideal type analysis would reveal very quickly the problems that this approach is going to encounter (by highlighting the areas where real markets are different from perfect competition). Most schools of modern economics focus on how to model markets where the assumptions of perfect competition do not apply. It was also the basis upon which Marx developed his critique of capitalism and developed the concepts of Marxism.

[RebelWithanAK]

Well then... yeah.

[GreatWyrm of Babylon]

Geoff

Well, this experiment clearly failed. Either I explained the technique very badly, or there is no interest in analysis (I have my suspiscions on which is the answer).

Introducing a theory that the rest of us are morons simply because we do not agree with you simply costs you credibility and impresses nobody. Yes, you appoach an idea totally from theoretical veiwpoints and I approach them from practical viewpoints, but this makes neither of us morons...

BTW: It is interesting that you made this observation in the same post where you observed that you did not want that very thing to happen.

But hopfully I will have the good sense to keep my head out of them.

[Geoff332]

you appoach an idea totally from theoretical veiwpoints

That is, in my opinion, pretty much completely untrue (and serves to confirm my suspiscions). As I said, this was a failed experiment.

[GreatWyrm of Babylon]

***makes cryptic remark, that in my mind justifies myself, in imitation of Geoff***