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The mathematical functions that model agents in markets require transitivity of preference relations. Without such mathematical constraints, neoclassical economics cannot prove that markets create Pareto-optimal equilibriums.

Please see Arnsperger and Varoufakis, What is Neoclassical Economics?:

We label the second feature of neoclassical economics methodological instrumentalism: all behaviour is preference-driven or, more precisely, it is to be understood as a means for maximising preference-satisfaction.

And:

People could, and should, be modelled as if they possessed consistent preferences which guide their behaviour automatically.

Preferences are not consistent and often intransitive. Indeed, advertising actively seeks to make consumers' preferences intransitive and inconsistent, to prefer the worse product over the better. But the math required to prove markets find value most efficiently, and the predictions based on mathematical models that have constraints that all math is subject to (i.e., if 3 > 2 > 1, 1 cannot be greater than 2 or 3), prevent math from providing an adequate model for economic behavior.

That is why math economic models fail to predict accurately.

You won't get the US centric perspective that you get from the economist.

http://www.paecon.net/

Well, ignoring the obvious job security worries for mainstream economists stepping out of line, maybe the issue is more "religious" at this point?
http://www.theatlantic.com/magazine/archive/1999/03/the-market-as-god/6397/
"A few years ago a friend advised me that if I wanted to know what was going on in the real world, I should read the business pages. Although my lifelong interest has been in the study of religion, I am always willing to expand my horizons; so I took the advice, vaguely fearful that I would have to cope with a new and baffling vocabulary. Instead I was surprised to discover that most of the concepts I ran across were quite familiar.
Expecting a terra incognita, I found myself instead in the land of deja vu. The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine's City of God. Behind descriptions of market reforms, monetary policy, and the convolutions of the Dow, I gradually made out the pieces of a grand narrative about the inner meaning of human history, why things had gone wrong, and how to put them right. Theologians call these myths of origin, legends of the fall, and doctrines of sin and redemption. But here they were again, and in only thin disguise: chronicles about the creation of wealth, the seductive temptations of statism, captivity to faceless economic cycles, and, ultimately, salvation through the advent of free markets, with a small dose of ascetic belt tightening along the way, especially for the East Asian economies."

And:
http://www.nytimes.com/2010/07/04/business/economy/04econ.html?pagewanted=all
"But in the wake of the recent crisis, a few economists -- like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor -- have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record. "There is so much inbredness in this profession," says Ms. Reinhart. "They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.""

These are people who essentially deny that economic alternatives exists (or are viable, which is the same thing); contrast that with:
"The Dictionary of Alternatives: Utopianism and Organization" By Martin Parker, Valerie Fournier, Patrick Reedy
http://books.google.com/books/about/The_Dictionary_of_Alternatives.html?id=IKZVKMPEQCEC

How many millions of people have been harmed by the essentially "religious" market fundamentalism of so many mainstream economists, who turn a blind eye to externalities, systemic risks, and wealth concentration? (To be clear, it is also a weird sort of market fundamentalism in the USA mixed with protectionism for favored already "worthy" wealthy groups.)

See also:
http://www.paecon.net/PAEReview/issue21/Stanford21.htm
"I am an economist. It is seventeen days since I last uttered the phrase "supply and demand." But the demon still lurks untamed, within me. Economics is an addiction. Every other addiction has a Twelve Step program, laced with tough love and blunt self-honesty. Why not a Twelve Step program for economists? God knows, we have done enough damage with our arrogant, drunken prescriptions. Here's how each and every economist can face up to their inner demons, and make their own small contribution to setting things right.
Step 1: Admit you have a problem. Like they say at the AA meetings, this is half the solution

Wow, thanks for the fascinating and informative reply.

Related links:
http://www.paecon.net/PAEReview/issue21/Stanford21.htm
http://www.conceptualguerilla.com/?q=node/402
http://www.conceptualguerilla.com/?q=node/47

On Marxism, Joan Roelofs
http://mysite.verizon.net/joan.roelofs/index.htm
has suggested that Charles Fourier said anything good that Marx said decades before him:
http://en.wikipedia.org/wiki/Charles_Fourier
Bob Black wrote this essay inspired in part by Charles Fourier's ideas:
http://www.whywork.org/rethinking/whywork/abolition.html

My take on economics, inspired by cybernetics:
http://www.pdfernhout.net/post-scarcity-princeton.html
"""
In general, economists need to look at what are major sources of *real* cost as opposed to *fiat* cost in producing anything. Only then can one make a complete control system to manage resources within those real limits, perhaps using arbitrary fiat dollars as part of a rationing process to keep within the real limits and meet social objectives (or perhaps not, if the cost of enforcing rationing for some things like, say, home energy use or internet bandwidth exceeds the benefits).
Here is a sample meta-theoretical framework PU economists no doubt could vastly improve on if they turned their minds to it. Consider three levels of nested perspectives on the same economic reality -- physical items, decision makers, and emergent properties of decision maker interactions. (Three levels of being or consciousness is a common theme in philosophical writings, usually rock, plant, and animal, or plant, animal, and human.)
At a first level of perspective, the world we live in at any point in time can be considered to have physical content like land or tools or fusion reactors like the sun, energy flows like photons from the sun or electrons from lightning or in circuits, informational patterns like web page content or distributed language knowledge, and active regulating processes (including triggers, amplifiers, and feedback loops) built on the previous three types of things (physicality, energy flow, and informational patterns) embodied in living creatures, bi-metallic strip thermostats, or computer programs running on computer hardware.
One can think of a second perspective on the first comprehensive one by picking out only the decision makers like bi-metallic strips in thermostats, computer programs running on computers, and personalities embodied in people and maybe someday robots or supercomputers, and looking at their characteristics as individual decision makers.
One can then think of a third level of perspective on the second where decision makers may invent theories about how to control each other using various approaches like internet communication standards, ration unit tokens like fiat dollars, physical kanban tokens, narratives in emails, and so on. What the most useful theories are for controlling groups of decision makers is an interesting question, but I will not explore it in depth. But I will pointing out that complex system dynamics at this third level of perspective can emerge whether control involves fiat dollars, "kanban" tokens, centralized or distributed optimization based on perceived or predicted demand patterns, human-to-human discussions, something else entirely, or a diverse collection of all these things. And I will also point out that one should never confuse the reality of the physical system being controlled for the control signals (money, spo

I mean, if we get rid of drug patents, AIDS research isn't going to go away, but there's sure going to be a lot less of it.

While people are recommending books, I'll plug Kicking Away the Ladder.

  This book also addresses some of my sibling comments (essentially false) statements on the economic successes of East Asian economies, Japan, Korea, Taiwan, China and India.

I definitely agree on both informative and disturbing :) And on the state of political discourse on here.

Economics is slowly making progress beyond 19th century clockwork models, have a read of Critical Mass by Philip Ball or some of the stuff here. But certainly most of the current consensus is seriously lacking.

"This is just flat wrong. Some wealth is transferred"

A non sequitor if I ever read one. If wealth is being transfered IT IS BEING TRANSFERRED. You're taking my comment in an absolutist sense, not in a context dependent sense, their areCEILINGS that have limits do not expand in a universal fashion, and until that happens all you have is pure unadulterated wealth transfer in those areas. The argument would be too technical to get into here on slashdot.

The "wealth creation" argument is exceedingly vague concept and is not even well understood. So many economists with PHD's and more education then you went and banded together to do their own research on markets and economies in general. A whole slew of research and commentary can be found over @:

Post autistic economics -- http://www.paecon.net/

Next of course everyone who "knee jerked" ignored my link to soros post elaborating in detail many problems in 'the free market'. This is why you're not rated 'insightful'

"You capitalism haters are all the same. You'll go on and on bitching about capitalism, but you'll never propose anything better. It isn't perfect, but it beats the shit out of every other economic system that's been devised. "

"The power of accurate observation is commonly called cynicism by those who haven't got it." George Bernard Shaw

It's not about hating capitalism, it's about ANALYZING how 'capitalism' in the real world functions and preventing it from causing serious problems. Maybe if you had read what Mr. George soros, a man who's lived under and in many different economic systems, and is one of the wealthiest men on the planet hsa to say just maybe your opinion might mean something.

It's not about hating capitalism, since "capitalism" in many of its supporters heads is an idealogy without understanding. There is very little in their heads about observing how people and their institutions in the system function.

My statements are about observing how people and economies function in the real world and making accurate observations and coming up with solutions. I am not a 'capitalist hater', no one understands how markets or economies truly function.

Go have a read over @ http://www.paecon.net/

These people have PHD's in economics and they are far from 'capitalist haters'.

-FL

From http://www.paecon.net/PAEReview/issue32/Baker32.ht m:

A study commissioned by the PhRMA, the industry's lobbying group, found that on average, copycat drugs cost almost as much to develop as breakthrough drugs (see Ernst & Young LLP. 2001. Pharmaceutical Industry R&D Costs: Key Findings about the Public Citizen Report. Pharmaceutical Research and Manufacturers of America. [http://www.phrma.org/press/newsreleases/2001-08-1 1.277.pdf]).

The current system has a lot of hidden costs. Read this.

"The United States alone is projected to spend $210 billion this year on prescription drugs. (...) In fact, the $30 billion that the United States federal government pays each year to support bio-medical research at its National Institutes of Health (NIH) is approximately 20 percent larger than the $25 billion that its pharmaceutical industry claims to spend on research."
Dean Baker.

You may also want to look up the numbers in the annual reports of Big Pharma. Generally, around 15% of their total costs are associated with R&D, the rest is marketing, distribution, bribes for getting shit certified and production.

So why stop with one step? Take two. Read up on Big Pharma's annual reports and pay close attention to the R&D costs column. Most of them have a number there corresponding to around 15% of their total costs. Now check how much R&D is paid for by the federal government and how much of Big Pharma's sales is paid for by federal money (ie your tax money).

Here, I'll help you get started:

The basic numbers are very striking. If drug prices in the United States were to fall by 70 percent in the absence of patent protection, it would amount to savings of more than $140 billion a year, given 2005 spending levels. This is almost six times as much as the industry claims it is currently spending on research. Since half of this money may go to research copycat drugs of little social value, the savings from eliminating drug patents in the United States may be more than 10 times as large as the spending necessary to replace the useful research performed by the pharmaceutical industry.
Dean Baker

because they are guaranteed to not make a return on their investment.

You keep repeating that, as if repeating it makes it true. It does not. Again, check the facts and the numbers. That patents could in some magical way provide inventors with a income guarantee is a myth, not to mention that the proposition that patents somehow could be the only way to reap profits from an invention is a complete and total fabrication. It simply is not true. Patents are one of the most ineffective wealth distributors ever created, unless you're a patent lawyer or a patent troll. Please, don't be a troll.

Actually, the authors of many empirical studies point out that patents do not play anything like a dominant role among the various mechanisms by which returns from innovation are captured. Indeed, for most firms trade secrets, know-how, lead time to markets, continuing technological innovation, licensing, name recognition, service capabilities and the use of complementary marketing and manufacturing capabilities are often deemed more effective than patent protection. In the end, in virtually all branches of industry, the absence of patent protection would have had little or no impact on the innovative efforts of a majority of firms (Mazzoleni and Nelson, 1998; Cohen et al., 2000).
Pierre Desrochers

Exactly. We're looking at making copyrights inalienable. Artists/bands would not be able to sell their soul^H^H^H^Hcopyrights to Big Media, instead, Big Media would have to come crawling and offer the bands services like management, promotion, financing and tour planning. Competing on an open market where the artists suddenly are on a much more even footing with Big Media. Put that in yer pipe and smoke it, Sony!

However, there's no reason not to shorten the life of patents from the 14(20?) years they currently are, depending upon the application.

The problem with that is the length of time it takes to get a patent approved (when it's done properly, that is) and the length of time you can reasonably expect a time-to-market gap to close. In both cases, patents that expire in shorter time than around five to ten years (dependant on the industry and scope of the patent, of course) are irrelevant because you get the same kind of "natural protection" just from being first on the market with the new thing - you can plan marketing strategies, set up distribution channels, run ad campaigns, build a brand, whatever, looong before the copycats catch up. Just look at generic drugs - the originals almost always outsell the copycats, even though they typically are more expensive. Or look at all markets and industries that do not offer IP protection or products that are out of patent. They flourish.

Adding in the hidden transaction costs of patents; applications, cross-licensing and prior art searches among them, you wind up with having to have 10-15 years of patent protection to make economic sense even for the patent holder. This does NOT factor in the associated risks of patent litigation because they are too erratic, but judging by the kind of numbers bandied about, we're looking at maybe 20 additional years (since most patents just sit there, never pulling in any dough at all, very few patents have to earn the keep for all patents, making most of them a losing proposition and thus skewing ROI for all patents).

Add to THAT the costs to society where the competitors are barred from utilizing the patent and we're looking at nightmare, from a national-economical standpoint.

At this point in time, I shall cop out and direct you to a much smarter man than I; David Martin - The Deck-chairs speech. Because you NEED to read that. You all do. And when you've read that, read this.

The scary part is that it already is.

the $30 billion that the United States federal government pays each year to support bio-medical research at its National Institutes of Health (NIH) is approximately 20 percent larger than the $25 billion that its pharmaceutical industry claims to spend on research. While this research is primarily directed towards more basic science (in order not to interfere with the efforts of the drug industry), there are many instances of new drugs being developed almost entirely through NIH support. The basic numbers are very striking. If drug prices in the United States were to fall by 70 percent in the absence of patent protection, it would amount to savings of more than $140 billion a year, given 2005 spending levels. This is almost six times as much as the industry claims it is currently spending on research. Since half of this money may go to research copycat drugs of little social value, the savings from eliminating drug patents in the United States may be more than 10 times as large as the spending necessary to replace the useful research performed by the pharmaceutical industry.

No we don't, for the simple reason that it isn't true. Do the math yourself. Or, read up on some people who have:

Dean Baker
George Monbiot

In fact, our very own Ericsson was founded by copying a Siemens telephone design. History shows, repeatedly, that countries and/or markets with little or no IP protection flourish for the simple reason that time-to-market and true innovation are much stronger incentives for the making of new creations than the stale state-imposed monopolies of patent and copyright.

No country, Schiff notes, has ever contributed "as many basic inventions in this field as did Switzerland during her patentless period".

I agree that TiVo will fail, but I don't really think it has that much to do with their feature set. At the moment, the features people are clammoring for here (DVD burning, HD, etc) might have reduced the number of people who drop their subscription (churn), but it wouldn't have grown their user base to a point that they could compete as an independent device maker against the "almost good enough" DVRs of the cable cos.

It's all about vertical integration. Just as you can't just launch a product and get it on your supermarket shelves unless you're Proctor and Gamble or a few others, the media equipment market is in no way "open", because of the integration between programme owners and distributors. At the moment the Cable MSO's / aggregators hold all the cards, because they have the highest barriers to entry. They happen to have (for the most part) the same money that makes the programmes, so any MSO who backs Tivo (particularly a Tivo that is less "hobbled" as many here want) is going to be punished by the big programme owners.

I think they had an Internet business model in an old-media market environment. The Tivo of the future will be about IP television, where distribution isn't the bottleneck and there will be a raft of a la carte programming available. Microsoft (and to a lesser degree Apple) will slowly drive this - it will still be a niche market (you won't be getting "desperate housewives" or other event programming on it) but lower overheads will make it profitable enough. Unfortunately for TiVo, it's hard to see what they have (other than some very experienced people) that Microsoft or Apple would want to acquire. Both those companies can roll their own software pretty effectively. If Apple does acquire, I think they can afford to sit for a couple of months and drive the stock value down even further.

All this is a real shame for TiVo, and seeing as there have been some gratuitous political comments in this thread, I'll just note that this is a great case study on how the production of "faith in the market" to produce innovative goods and services in the most efficient way is the biggest con job in history, as economists increasingly realise. Not that the market is bad, it just can't deal with infrastructure as well as it can with products that use it.