29.12.11

POTTED POLITICAL ECONOMY.

Steven Horwitz offers a Trenchant Observation for all time, and particularly for political economy.
One of the most commonly deployed arguments against free markets is that they are plagued by “market failure.”  Critics point to particular cases where some problematic outcome has occurred and then argue that markets either did not or cannot possibly address those situations.

The market-failure criticism has two problems, both related to the fact that the critics rarely understand the meaning of term has in economics.  First, the meaning itself is problematic from a Austrian understanding of the market process.  Second, saying that markets have failed does not mean that government intervention can improve on the outcome.
Lynne Kiesling elaborates.
But if market processes in realistic contexts have imperfections, don’t government intervention and regulation have imperfections too? The relevant comparison is between the results of market institutions and government institutions in realistic contexts, not in simplified blackboard theory.

I would add a third point to this analysis. Often when I encounter the “market failure” argument I make a quick riposte of “markets don’t fail, they fail to exist”, which is the Coase/transactions cost response. Transactions costs interfere with the ability of parties to find mutually beneficial trades, thus impeding optimal resource allocation and the creation of maximum gains from trade. Transactions costs lead to missing markets, as in the case of environmental pollution and other common-pool resource situations.
Combine knowledge problems with cognitive hubris and there may be a case for the failure of technocracy that can't be so easily dismissed as Special Pleading For The Rich.

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