The theory of market failure is a reproach to the free-market economy, but, Bryan Caplan notes, it’s also a reproach to every existing government:
How so? Because market failure theory recommends specific government policies — and actually-existing governments rarely adopt anything like them.
What do I have in mind?
1. When markets produce too much of something, market failure theory tells governments to impose corrective taxes that correspond to the severity of the excess — then let people do as they please. In the real world, in contrast, governments normally pass a phone book’s worth of regulations. They rarely consider the cost of the regulations, and almost never just let people bypass regulations by paying a high fee. Thus, you can’t buy your way out of an Environmental Impact Statement or heroin prohibition — and if the theory of market failure is right, this rigidity is deeply dysfunctional.
2. When markets produce too little of something, market failure theory tells governments to provide corrective subsidies that correspond to the severity of the shortfall — then let people do as they please. In the real world, in contrast, governments tend to directly run industries with alleged positive externalities. Public education and health care are the obvious example, but the same goes for national parks, government lands, etc. Furthermore, government firms routinely offer even non-rival products for gratis or next-to-gratis — even when the products have clear negative externalities such as road congestion and subsidized energy.
3. While the theory of market failure abhors monopoly, actually-existing governments do much to stifle competition. This is most grotesque for real estate and immigration, which most governments view with dire suspicion, but perhaps most blatant for occupational licensing. Again, if negative externalities were the real rationale for these restrictions, governments would just impose taxes — then let everyone build, move, and work as they please.
Caplan continues to project a degree of globalization of mentality that I can’t follow him to. But I guess if I assumed there is a world, there are humans, and there are goods, services and money, and nothing else is really real or legitimate, or at least not as primary, then I’d be almost there. Add the idea that nations and peoples are universally fungible and governments are, at least ideally, territorial administrators and service providers that should have a roughly uniform character, and I guess I’d hit it.
At present, I still struggle with a worldview in which nationhood and citizenship, and the rights that come with the latter as membership in the former, are just a kind of legislated artificial monopoly.
Did Caplan ever express views on that WSJ columnist a couple of years ago [name forgotten] who suggested treating US nationality as a kind of game of generational survivor- if your offspring fail to measure up economically, they’re out and new people will take their place? Brett something?
If I were in a room with those two guys, urban theorist Richard Florida, and similar advocates whose theories lead to related conclusions, I might have a cranial explosion from the sheer alienness of the discourse.
Funny thing- I once had an argument with a pretty good friend about an issue on the periphery of this. It’s interesting to me how my own and others’ attitudes can shift over time, or given a change in scale or overall context.
I grew up in a large city to which I then harboured only the attachment that comes with familiarity. I lived there 27 years. I moved away and then for the past 22 years I have lived in a smaller city, to which I came only for work. I do like it better, and my native city elicits in me only mild nostalgia for it as it existed in a particular time, and otherwise detached contempt, for a variety of personal and public reasons that need not be aired on the internet. But, even though I am far from a natural nomad, it seemed utterly normal to me to move for a job to a new if not especially far city where I had no family. I also have a very small family, to most of whom I was not that attached. My local ‘community’ meant little.
My friend was from a traditionally depressed region that for generations has exported people around the country, and for which a variety of private a public economic schemes have brought mixed results. Although he too had done what I had done, he found my cavalier attitude that people should move where the jobs are, and my dismissal of the concerns of family, community, tradition, and multigenerational habitation and connections, extremely annoying.
I am more sympathetic to his perspective now than I was then, but I’m also conscious that even then my assumption was that this mobility was largely going to take place within our own, rather large, country. As a low-attachment city kid, that didn’t strike me as exactly a leap into the alien for anyone. Immigration to another country, even a fairly similar one, struck me as another thing entirely, a difference that was rightly reflected in sovereignty and laws. Even though my parents had done it and I contemplated it once.
So I suppose I have been caught in the middle between my friend’s view 20 years ago [probably still- he plans to retire back 'at home'; I will retire anywhere besides the city I came from] and the kind of attitude Caplan has.
Wait a minute….. Yay! Once again I’m a centrist!
Of course, if one’s scope for political, social and economic possibilities encompasses the entirety of what has been thought and tried in human history, one has a spectrum on which it’s easy for a 20th century kid to fall near the centre.
It would be interesting if governments were held accountable for results, as opposed to what we have now.
Markets work, but the fundamental reason isn’t some economic bullsh*t. It’s because the market ensures accountability and eschews wishful thinking. If you had a Marxist system that actually possessed functional and effective feedback mechanisms, instead of human folly and wishful thinking, that Marxist system would, wonder of wonders, work.
In other words, the essential thing about a traditional market economy isn’t the market, at all. It’s that the market ensures immediate and effective feedback; you can’t lie to yourself about the number of widgets you need, the way a Soviet factory manager could. Either your widget sells, or it doesn’t: You can’t force it into distribution, and claim economic benefit for doing so, the way it was possible under Soviet administration.
So, yeah… The market is a wonderful thing. But, don’t make the mistake of thinking that there is some virtue to buying and selling things with money; there isn’t: The objective reality is that what’s important is the signal that those mechanisms allow to be communicated and acted upon.
You could do an economy without markets, if you had perfect and honest communication, as well as an enforcement mechanism for making poor choices and decisions. Without those functional components, however, you’re pretty much just going to get an ever-increasing set of inefficiencies and contradictions based on people’s fantasies and wishful thinking.
Markets allow reality to penetrate the economy; that’s all that’s really important. All else is extraneous BS that interests only philosophers.
Governments don’t do markets well, because the market isn’t just about commerce. It is essentially a trading of ideas and concepts. The market is often assumed to be physical objects, but the free market is also equally about the exchange of abstract ideas, and the back-and-forth of thoughts, opinions and even ideals.
What we have always known about the function of government is their need to have (ostensibly) a policy and pursue that alone. This is often akin to selling only bananas in a market place full of people who may want apples, oranges and grapes, and then trying to insist bananas represent the only saleable (and therefore, acceptable) offering. These bananas may be subsidised or regulated or measured, but they are still yellow, curved and have a skin one cannot digest. The government will promote the good qualities of their banana-like policy in their market place and reject anything not corresponding.
Analogy aside, you can find many governments do not like the exchange of free thought, and encourage their agencies to find ways seek to inhibit it. For the free market to succeed it must have the equally unrestricted choices of goods and ideas.
David Friedman makes a better argument:
https://daviddfriedman.blogspot.com/2012/11/market-failure-and-definition-of-terms.html
Market Failure happens in both – ordinary private markets and political markets. Except it is an exception in the former case, and a rule in the latter.
It is incontrovertibly true that without markets, the industrial society would not function.
It is equally incontrovertibly true that markets do much more than fulfill demand — they also create demand. And the creation of this demand is not an innocuous process. It involves the invention, perpetuation, and propagation of the most sophisticated psychomanipulative apparatus in the history of man.
This stuff is no joke. Just as drone tech is now finding its way back home from the Sand Box in a kind of sardonically twisted technological Homeward Bound, the social re-engineering technologies developed originally by the Anglo-American State to wage the World Wars were applied to the promotion of commercial products in the ensuing peace.
Today, of course, the Great Silicon Valley Bonanza is driven almost entirely by AdTech, the Singularity’s penultimate pinnacle of this seventy-year-long technosocietally-driven evolutionary process.
I find this sentence, in particular, fascinating:
It’s remarkable what people can come up with when every externality is measured in dollars and dollars only.