Economics

"Markets fail. That's why we need markets."

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Arnold Kling and Nick Schulz, authors of the important new book From Poverty to Prosperity, have a really sharp op-ed in the Christian Science Monitor:

Markets fail. That's why we need markets….

Given this dynamic, markets are unpredictable, prone to booms and busts, characterized by bouts of exuberance that are rational or irrational only in hindsight.

But markets are also the only reliable mechanism for sorting out this messy process quickly. In spite of the booms and busts, markets drive genuine long-run innovation and wealth creation.

Kling and Schulz take aim at people who think "markets can do no wrong," and the discuss how government takeovers of markets create far more problems than they solve.

Read the whole thing here.

Reason.tv interviewed the authors recently. Check it out below.

NEXT: Public Sector Drives Deep Into The Night

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  1. I don’t know anyone who thinks that “markets can do no wrong”. This is the strawman that the Lefturd imagines is the argument for the market.

    The point isn’t that they can do no wrong, the point is that they are better than a centrally planned economy which is the alternative. Always. 100% of the time.

    How could bureaucrats, who have no incentive other than to keep their jobs, judge risk better than the actual individuals taking the risks? Of course they can’t.

    Anyone who claims that support for Economic Liberty = belief that “markets can do no wrong” must also then believe that “central planning can do no wrong”. A premise for which tens of millions of corpses disagree.

    1. You’re totally turning my straw man into some kind of straw man.

    2. Unfortunately, I do know people who believe this very thing. I live surrounded by progressives.

    3. Central planning can do no wrong. I said it, you should believe it.

      1. You know who else thought that central planning mixed with judicious starvation could do no wrong? That’s right. Me.

    4. The point isn’t that they can do no wrong, the point is that they are better than a centrally planned economy which is the alternative. Always. 100% of the time.

      Here, you, too, offer a straw man.
      And you make a claim that may not be true, depending on your perspective, by which I mean if your primary concern is freedom from a coercive government, then yes, “always. 100% of the time,” the free market is better. If you are taking a pragmatic view and looking at efficient delivery of goods and services, I have heard arguments from people who have actually studied markets who point out that the free market can be deficient under certain circumstances. I can’t really explain it all any further, cuz I’m just a nincompoop who can only smile and nod when this gets explained to me.

      1. I could see a scenerio where maybe during a full scale war it might be better to have a central planner forcing tank & ordinance production. Other than that I can’t see where central planning would be better than markets.

        1. Just because you can’t see something doesn’t mean it’s not there.

          And, again, I see the fallacy that everything is a choice between this or that. The world is not black and white, nor is it that with shades of only grey.

        2. I could see a scenerio where maybe during a full scale war it might be better to have a central planner forcing tank & ordinance production. Other than that I can’t see where central planning would be better than markets.

          It depends on scale.

          A central planner can easily plan for sharing of resources among five people.

          Five million people, no way.

      2. There are a few broad areas where free markets do not efficiently deliver goods.

        1. Where a compeditive market does not exist naturally, ie gas utilities. There cant be 15 different gas companies placing lines to your house so there would be a natural tendency for monopoly. Similar to this is where you get collective action problems. Government regualtion or involvment therefore can create a more effeciant delivery of goods.

        2. Externalities are another. Pollution is the classic example, where the total cost of production is not imbedded in the price to the market produces an amount higher than the optimal efficient amount. You can posative externalities also. Flu shots are a good example. By me getting a shot i am not the only one receiving a benifit, but other people are too because I can now not give them disease and they are less liekly to get sick. So in this case a subsidy may be warrented.

        3. Nash equilibrium/ game theory situations. There are scenarios in which everyone would be better off if they all too a certain action, however, minus coordination, acting on their own they will take the less optimal decision.

        1. For some reason, these arguments about collective action always seem to assume that there are only two alternatives: “individuals acting in the absence of coordination” and “individuals coordinated at gunpoint”. And for some reason, the conclusion is always the second, with the arguer holding the gun.

        2. 1. Free markets work quite well in the utility industry. Look at phone or internet providers. You don’t have (12) lines running to your house for your phone, neither would you have multiple pipes for natural gas as stated in your example.

          2. You use pollution as an example of a situation the market cannot control. You fail to realize that if a company is polluting, and consumers find out, the conscientious ones will no longer support the company thus, hopefully, forcing the company to make a decision – pollute or close. The public utility company TVA’s ash spill in Tennessee is a good example of how government-controlled utilities are not a good thing. 5.4 million cubic yards of fly ash were spilled onto private property and into public waterways, but because TVA is a government agency, their doors remain open for business with little to no recourse for the consumers who depend on the electricity they provide.

          3. You are falling into the trap of assuming to know what is best for everyone else involved. By doing so you come dangerously close to making others’ choices for them.

          1. “1. Free markets work quite well in the utility industry. Look at phone or internet providers. You don’t have (12) lines running to your house for your phone, neither would you have multiple pipes for natural gas as stated in your example.”

            You only have “competition” because the government restricts the right of the people that own those lines from taking full advantage of their property rights through common carrier restrictions. You think they -want- to let you purchase phone or internet service from other providers?

            Electricity has similar restrictions — it is forbidden to use transmission rights, which are naturally monopolistic, to manipulate the generation market, which has many providers. The same can apply to natural gas lines, and if roads were private, the same would have to apply there as well (otherwise, the guy who owned all the roads in the city could essentially shut down any business he wanted by keeping their supplier out or crippling access to their sites).

            A regulated market, in this case, actually has more competition than a free market.

        3. Re: #2

          COASE COASE COASE COASE COASE COASE
          COASE COASE COASE COASE COASE COASE
          COASE COASE COASE COASE COASE COASE
          COASE COASE COASE COASE COASE COASE
          COASE COASE COASE COASE COASE COASE
          COASE COASE COASE COASE COASE COASE
          COASE COASE COASE COASE COASE COASE

          Hadnt dont that in a while.

          1. Not an option. It’s EITHER individuals flailing around blindly as if they were the only people in the world (“markets”) OR coordination by force (“benevolent overlordship”).

            As everyone knows, this is proved by the Prisoner’s Dilemma and quantum mechanics besides.

      3. I have heard arguments from people who have actually studied markets who point out that the free market can be deficient under certain circumstances.

        I should have said for the general population over time. Obviously Mao did pretty well. The current recipients of “bailouts” too.

        As is being pointed out below, market failure is a feature not a bug. Claiming that there are “circumstances” when central planning is more efficient ignores all of the negative effects of the same planning.

        Disaster relief is a perfect example. Thomas Sowell (who has a degree in economics) talks about how “price gouging” is really a reflection of the market reacting to demand. So while the central planning might force the price of plywood to be $10 a sheet, there isn’t any available and this “efficiency” is imaginary. At $30 a sheet the market is “deficient” except that you can actually buy some plywood.

        When these people claim to have studied markets and claim them “deficient” ask them if they included the costs of the inertia of bureaucracy? Central planners don’t just evaporate once the circumstances that might make them more efficient cease to exist.

        Actually, I can’t see how even the loss from just innovation could ever be made up for with central planning. It is hard to find a historical example of it ever happening on a governmental scale.

        1. Well, I didn’t realize that you had read Thomas Sowell and knew all the right questions to ask.

          Again, just cuz you can’t see something doesn’t mean it is isn’t there to be seen.

    5. The point isn’t that they can do no wrong, if you already have resources.

    6. Markets dont decide right and wrong, therefore they can do no wrong. They only do what two entities choose to do, and who are we to judge whether a choice someone else makes is right or wrong?

      Markets are inanimate, pretty much by definition they can do no wrong.

        1. “Markets are inanimate” but people are not.

          1. So the correct point is that people fail and markets are necessary for that failure to become evident and corrections made.

            Regarding government action; government does not allow failure, therefore corrections are not made.

            1. Do we need just a private market? Yes, in some cases. Why is it libertarians limit themselves to one choice? Free
              markets are not the only solution. There is more to the equation than just a chart. The use of private and public are sometimes necessary and healthcare is the classic example of the need for a combination of markets.

              1. Free markets arent only one solution. It is the concept of allowing people to make choices for themselves. That is 6 billion plus solutions. Each centrally planned for the individual for himself.

                1. Im not so much pro-market as pro-leaving-people-the-fuck-alone. If that leads to markets, okay. If you NA, want to form a cooperative and share wealth and buy insurance in a giant pool, Im okay with that too. You try to force my to participate and FUCK YOU!

                  1. For the record, I don’t care to make
                    u purchase anything.
                    can you purchase insurance in a free market?
                    knowing how insurance works,
                    you MAY not be able to buy a policy
                    other than public insurance
                    under private markets,
                    too may people will be left
                    out in the cold
                    otherwise known as the uninsurable.

                    1. Was that free verse?

                    2. Look at it again but not in only a free verse perspective.

                    3. Okay, at least your illegible free verse makes sense now.

                      Nice admission that you are wrong.

                    4. wrong?

                    5. Yeah wrong. Insults are proof of wrongness.

                    6. “proof of wrongness” Glass house theory applies here but cleverness as always excluded.

                    7. The uninsurable are not restricted from buying health care with their own money or accepting charity. Just because one is not sold an insurance policy doesn’t mean the market has failed. That person is only uninsurable because the government mandates a certain level of coverage for all at an equal price rather than the insurer being free to set an appropriate price for someone with pre-existing conditions.

                      Absent those restrictions, maybe the customer still isn’t willing to pay the high price of insurance to cover his conditions, but he can resort to paying out of pocket or accepting charity. The insurance market should not be expected to accept a risk without premium to match. That is how companies (and governments) go bankrupt.

                    8. Nick,”with their own money or accepting charity”. I am so tired of the lottery/Santa Claus libertarian solution for the uninsurable. “That person is only uninsurable because the government mandates…level of coverage…at an equal price rather than the insurer….set an appropriate price for someone with pre-existing conditions.” What do you think exclusion under the pre-existing clause is for?

                    9. Pre-existing clauses exist in ALL insurance. I cant get home owners after my house is on fire. Auto insurance wont fix dents I already have in my car.

                    10. “Pre-existing clauses exist” I agree and therefore we need government public insurance for those who will not qualify. You make this too easy.

                    11. Why is this a failure of the market? Markets provide goods and services. Insurance as a product is a promise to pay for covered claim, and the premium is based on risk. That is what insurance is.

                      The uninsurable’s problem may very well be a failure of people to be charitable. (I could argue less people help each other because government either taxes too greatly or people expect government to act instead of them or both.) Force or threat of force is not the answer to solve the problems of the less fortunate, but I suppose you are tired of that response as well.

                      Why don’t you just admit you are too greedy to help your fellow man so you want others to do it for you?

                    12. Nick, private insurance is a failure in the market because it will not meet the requirements of consumers who fundamentally need those goods and services. The risk premium is adverse to coverage of those who bid with issues and those who will become a greater profit loss. It is ridiculous to claim that charity can meet all the needs of people and if you were involved on ANY level you would have known that the economy is killing giving along with the extreme increase in demand. There is always a percentage of people who help because of religious/moral reasoning and always a percentage who feel the government should do it all. I don’t know how you think people are forced to help others with the exception of court mandated volunteer work. Paying your taxes is a responsibility that is part of your citizenship.

                    13. NO ONE FUNDAMENTALLY NEEDS INSURANCE. That is why cash exists. No one should be forced to help others, period. And, bullshit, on the citizenship bit, there are no responsibilities as part of citizenship. Citizenship is granted as a mere issue of location of birth (others get it other ways, so an argument can be made that they agreed to certain responsibilities).

                    14. robc, EVERYONE FUNDAMENTALLY NEEDS HEALTH CARE. “there are no responsibilities as part of citizenship”.
                      Citizen Responsibilities:

                      Obeying Laws
                      Paying Taxes
                      Jury Duty
                      Serve as a Witness
                      Register for the Draft

                    15. EVERYONE FUNDAMENTALLY NEEDS HEALTH CARE

                      Reading is fucking fundamental. I said INSURANCE not CARE. Buy it with fucking cash if its so fucking fundamental.

                      Your responsibility list is BS:
                      Obeying Laws – done to avoid going to jail (and I violate some anyway)
                      Paying Taxes – see above (also, I personally have a religious responsibility, but thats not important to this discussion)
                      Jury Duty – see above
                      Serve as a Witness – see above
                      Register for the Draft – fuck that shit (I did it for reason above, but if someone wants to avoid following a law, this is a good one to start with)

                      I have no responsibilities to the government.

                    16. robc, To add to your clever alliteration with the letter “f” : failing to follow facilitates a fucking felony. United States citizens do have responsibilities but perhaps you are confusing what is a mandatory vs. what is your duty. I really don’t care what we call health care but it it will never be in the interest of a private company to sell it to anyone who is a financial loss to them.

                    17. I agree, and they should charge a rate that prevents a loss.

                      Although, with any insurance, there are people who lead to losses, its the actuarial value that matters. So, to be technically correct, “it will never be in the interest of a private company to seel to anyone who actuarially leads to a financial loss”.

                      And thats okay, insurance isnt for health care, insurance is to cover catastrophic, unexpected events. It isnt meant to cover things you can plan for.

                      Also, Im not confusing anything, I have no responsibilities to the government.

                    18. robc,yes you do but you can choose to ignore your responsibilities. We agree that insurance companies are in business to make a profit and will act accordingly. What then will people do who do not qualify? I have never heard an intelligent response from a libertarian that addresses this problem unless otherwise one does not exist?

                    19. If answered in multiple times: Pay with cash.

                    20. robc,Are we playing semantic games? When the person does not have any means. What do they do?

    7. And what on God’s green earth is meant by “markets” – do they mean a free market which we have barely a semblance of for God knows how long. It could reasonably – certainly more reasonably than blaming “markets” – be argued that government intervention has been the cause of all significant booms and busts. I don’t believe that “markets” can “do no wrong”, but how would we possibly know that since there has never been time when the government was not meddling in (and colluding in harmful ways with certain big time actors)the market.

      Maybe if we actually experienced having a free market we would have some basis for having an opinion about whether or not the markets can “do no wrong”. Likewise, maybe if we ever actually had a libertarian society there would be some substance to the hysterical concerns about genuine liberty being the road to hell.

  2. Marshall makes a good point. Markets are just a very condensed Readers’ Digest of what’s going on in the world.

  3. As has been said here before, failure is a feature, not a bug. If the government were running technological development, say, we’d be driving 1940s style cars now.

    1. I agree, I even go farther and say that failure is a vital part of markets without which they could not exist. Governments on the other hand resist failure and end up subsidizing it. It becomes an excuse for more government

      Fail to build homes that people can afford, the government steps in and gives you subsidized loans and grants which keep home prices high while transferring the cost to others so they cannot afford homes.

      Fail to create a education system that students can afford, once again government steps in with policies that transfer the cost to others so that schools can keep overcharging

      Fail to provide health care that people can afford and the government steps to reward failure with policies that make it even more expensive.

      Etc, etc

    2. Without failure there can be no success.

  4. “If the government were running technological development, say, we’d be driving 1940s style cars now.”

    We’d have some pretty decent buggy whips.

    1. Yes, and I would have a glorious handlebar moustache to wax in-between bare-knuckle fights outside the gentlemens’ club!

    2. Well, of course, cars would have to have buggy drivers to placate the union.

      1. Sounds like a scam to me.

        1. I may have to make that my signature file. At work.

  5. If the government were running technological development, say, we’d be driving 1940s style cars now.

    Every major city would have one or two computers, each roughly the size of a house. On the other hand, my transatlantic passenger zeppelin line would be the envy of the skies.

    1. The Zeppelin is a good example of too big to succeed fueled by government money. Airships had to be large to carry enough to be worth their cost but large meant expensive and expensive meant that even governments could not afford many. With only relatively few built they could not take advantage of learning from failure. Airplanes were relatively cheap and plentiful so when one failed the next one built could learn from that and improve the design which made them evolve quickly. Airships being only few did not get that quick improvement cycle since even one major failure could put the whole program in jeopardy.

      The many failures in aircraft design, construction and use created the knowledge to greatly improve the succeeding generations of planes. The expensive limited government funded production airships never got the full benefits of that knowledge derived from failure

  6. If government were running the space program, there’d be no orbiting hotels, no moon bases, no asteroid mining.

    1. Where do you get such ridiculous ideas?

      Look, it’s not that government can’t do anything; it’s that government isn’t particularly efficient, and it almost always has too many motivations that are separate from completing the task at hand.

      For the conquest of space, is there any doubt that the private sector will lead the charge? The key–the key!–to the whole business is low-cost access to space. NASA isn’t even trying to do that.

      1. Is there such a thing as low-cost access to space? What’s the current free market charge for going, tens of billions?

        1. Like governments haven’t controlled access to space completely since we first started going? I suppose it’s debatable whether the private sector would’ve gotten us to orbit as quickly as the governments did, but I bet they’d have done it better and with more legs. Certainly, the vast preponderance of useful applications in space (i.e., satellites) are private.

          If the private sector, which has only just begun trying to get into space on its own, can develop low-cost access to orbit, everything else will fall into place fairly quickly. There are challenges to sending people across large distances in space, but get the Earth-to-orbit cost equation solved, and we’ll see an explosion of activity.

          There are some pretty serious opportunities in the solar system if we can get the costs of getting from here to various locations down to something sane. Tourism alone could be a gigantic industry. I wouldn’t mind going to the Moon.

        2. Who says the amount private organizations have spent isn’t far cheaper than what NASA spends? Even if it costs 10 billion dollars for a private spacecraft, it may cost 100 billion for a government one. Score: Private 1, Govt 0.

          1. I saw something Rand Simburg wrote about the many SpaceX’s that could’ve been started with the money spent on the Ares I test alone.

            1. Simberg–sorry.

      2. Where do you get such ridiculous ideas?

        You snarking my snark? The snarking is getting so deliciously subtle around here that I often don’t know for sure.

        1. It was metasnarking–busted again.

  7. cars would have to have buggy drivers to placate the union.

    I believe there is a famous quote (which I am too lazy to look up) from the infancy of the automobile which asserted that the size of the market for autos would inevitably be limited by the supply of chauffers.

  8. Its all relative in this imperfect world. The real question isn’t “which is perfect? The State or markets?” The real question is “Which is more likely to deliver prosperity over the long run?”

    The answer to that, I think, is pretty clear based on historical precedent.

    1. I don’t think that the real question because even if government could deliver prosperity over the long run, I still don’t think it’s their place to do so.

      1. Agreed. Im not a libertarian because it would lead to a better future (although I do think it would) but because its the right thing to do.

        1. I’m a libertarian for both the moral reasons and the utilitarian ones.

          1. Im a libertarian for the moral reasons but its nice to have the utilitarian ones on our side.

            1. What’s sad is that the utilitarian reasons should make us preeminent, especially in this country.

              1. I think it is our morality and integrity that prevents us from being preeminent in government. Those who desire control the most are willing to lie, cheat, steal, and kill for it. We, for the most part, are not. Ain’t that a bitch?

                1. Sounds like a scam to me.

                2. “I think it is our morality and integrity that prevents us from being preeminent in government.” or it could be that full bag of crazy.

        2. Me too.

          I have no doubt (considering some of the decisions I’ve made) that a government bureaucrat could run my life better than I have. I also have no doubt that I’d be miserable regardless.

          At least this way I can be a screw up on my own terms.

    2. Why concede (implicitly) the utilitarian argument when it is one that you can win so easily?

      1. Exactly. It’s our best card to play.

  9. Interplanetary sex tourism will revolutionize space travel.

    1. If they could grow poppy on the moon, the CIA would already have a base there.

      1. Nah, no base. Here’s how it would work:

        CIA Information Gatherer: There’s a poppy field on the Moon.

        CIA Operative: I say we take off and nuke the entire site from orbit. It’s the only way to be sure.

    2. Without a doubt. Porn/sex drives new technologies. Hence the Lunar Sex Prize.

  10. What I would like to know is what has Wall Street ever done for Main Street America? I mean really. Think about it.

    Jess
    http://www.invisibility-tools.pl.tc

  11. What makes you think they already don’t?

  12. Consider General Motors: this is a corporation which has destroyed wealth and misallocated resources unremittingly for decades. If any company deserves to fail, GM is that company.

    And yet, the government rescued it.

    I rest my case.

  13. I suppose it’s debatable whether the private sector would’ve gotten us to orbit as quickly as the governments did, but I bet they’d have done it better and with more legs.

    I think we can say, without fear of contradiction, that private space explorers would not have based their project on hugely expensive disposable technology.

    1. Precisely. Nor would it make decisions based on supporting certain industries or certain regions employment figures.

      It’s interesting that things like fuel depots and smaller boosters seem so anathema to the NASA mindset. Especially given that they are likely much cheaper options.

  14. Ironic that they’d use the exact words of a disgraced Fed Chairman in the same sentence as the “markets are prone to booms and busts” comment. Are they trying to provoke us Austrians?

    1. I don’t think so. If they wanted to provoke you Austrians, they’d say, “Hitler was an Austrian.”

      1. ProL–Only becasue I know you’ll care…I’m installing the Fallout 3 GOTY edition now. Looking forward….

        Did you ever find your disc, or did you just settle on getting a new kid?

        1. Yes, I did find it. My two-year old shoved it into her secret hiding place. I never thought the DVD would fit there, so I only looked a couple of months ago.

          Now we have the game, along with the Pitt, Operation Anchorage, and Point Lookout.

          1. Sweet! Tho’ you can make a princely sum on a healthy white toddler on the market…

            Supposedly the GOTY has all the add-ons. Hoping I won’t have all the glitches I’ve been reading about with running it on Win7 64-bit.

            1. Don’t know about that–I’m playing on the Xbox 360. One of the expansions was a download, and I learned that the game won’t work right if I go off of Xbox Live (which we just signed up for).

              1. :::sigh::: The latest patch broke it.

                Oh, bother.

                1. Ah, Windows Live client needed to be updated.

                  Google is your friend.

  15. Markets fail if you believe that businesses are entitled to make a profit.

    1. Sure, they’re entitled to make a profit; they’re just aren’t (and shouldn’t be) guaranteed to make a profit.

      There seems to be less of the former and more of the latter in this administration regarding particular markets. But not *too* much profit, mind you. Just enough to still be able to make tribute and spread some around to the workers too.

  16. I don’t know how you think people are forced to help others

    I think with comment I should assume NA Strawman is a sockpuppet.

  17. robc, what? Clearly the name means not a straw man.

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