Friday, October 13, 2006

The absurdity of "market failure"

"Market failure" is another absurd concept being propagated by people who should know better. While I don't deny that such a concept may have some use, we have to examine it the way it is used by the statists. Underlying this statist code-word is the premise that the state must exist in order to correct the failures inherent to free markets.

This is quite an absurd premise, if we understand what the state is. The state is, economically speaking, a coercive agent of resource redistribution. All that it does economically is coercively redistribute resources and prevent other agents from doing the same. These same patterns can be achieved by people working together in a free market. So how can the state effect patterns that the free market cannot?

True, some outcomes are rather less likely- it is highly improbable that every single person in a society would willingly surrender half their income to a mindless coercive bureaucracy- but that's a good thing.

So the term "market failure" should rather be changed to "distributive limits". It is not a market phenomenon, but a phenomenon that affects the distribution of resources under any system.

Let's look at some common examples of "market failure" and how they are nothing more than statist rhetoric.

* Monopolies. I hope I don't even need to explain this one, but just in case: the only viable monopolies are those created by the state. There has never been a purely natural monopoly in the history of the markets. So this should be properly called a "state failure"- like the postal service, socialized health care, Amtrak, etc.

* Lack of information. Yes, it is absolutely true that a lack of adequate information in a market can lead buyers and sellers to make sub-optimal decisions- compared to a scenario of perfect information. But this example fails to include the fact that information is also a product. Once this fact is included, the whole premise of the example (that the lack of information is somehow different from a lack of any other product) disintegrate. This also applies in scenarios with asymmetrical information.

* "Price gouging". There is no such thing as "price gouging", only resources being sold at higher prices than usual due to higher demand. This is called "offer and demand" and is the basic principle behind all exchange of resources. If "price gouging" is a market failure then all such exchanges, whatever the system, are market failures.

It is a concept created by statists in order to justify more government intervention, same as "collusion". They rig the system so you can't win. If you sell your products lower than the competition, it's unfair competition. If you sell your products higher than the competition, it's price gouging. If you sell your products at the same price than the competition, it's collusion.

* Negative externalities, such as pollution. This is actually a similar scenario to that of lack of information, because it relies on ignoring one particular market in order to project the illusion of a "failure". The market, in this case, is justice. Agents who pollute should expect to be forced to redistribute some of their profits to the people affected by their pollution. But this is not what happened with industralization, thanks to a state which depends on big industry for its taxes and support. Now everyone knows how lax the state is regarding pollution. Why should we expect otherwise?

* "Public goods". This is another chimera used to justify the existence of the state. It is based on the idea that there are goods which are used by everyone but which, under a free market, most people would not pay for (free riders). The perennial example of such a good is lighthouses, which also provides us the perfect rebuttal because private lighthouses have existed in the past. They were financed by collecting toll on ships docking at nearby ports. Roads are another example usually given, but private roads already exist! If anything, these two examples prove that "public goods" are pure fantasy.

A more fundamental answer to this supposed problem would be that these "public goods" are still, even when controlled by the state, built, maintained and financed by individuals. As such, there is no reason why a market system cannot reproduce those same conditions.


"Market failure" is a concept used to justify government interference. As such, it is based on ignorance of the facts. Nothing can justify coercive redistribution of resources- which is to say, forcibly taking away from people's self-interested trades. To fight against self-interest is to fight against our common desire for prosperity and progress.

2 comments:

doinkicarus said...

The strongest argument for market failure, as such, is the public goods argument. But this inevitably leads the statists to label many things "public goods," which are not in any true sense, actually public goods. For instance, education - it is perfectly excludable; only the recipient of education reaps the full rewards. We might likewise classify any product as a "public good," although excludable, everybody benefits in some manner (though miniscule) from my acquisition of an automobile.

Ronald Coase demolished the "Lighthouse Problem" which was standard fare in Econ textbooks years ago, with a little bit of historical research.

Aaron Kinney said...

But this inevitably leads the statists to label many things "public goods," which are not in any true sense, actually public goods. For instance, education - it is perfectly excludable; only the recipient of education reaps the full rewards.

Excellent, Doinkicarus. I never thought of public goods that way before.