The Myth of Market Failures

Although the idea is widely taught in undergraduate and graduate economics courses, there is very little to it, when you look closely. Market failures are either trivial conditions no one can be justly upset about or they simply do not exist at all.

Two kinds of market failures are usually mentioned in the literature, especially ones critical of free market capitalism. The first kind of alleged market failure is supposed to occur when a bit of coercive interference is taken to advance efficiency over what the free market provides. This is the kind famously associated with John Stuart Mill who believed that so called public utilities need to be made into state enterprises because leaving their provision to the free market would produce waste. Thus, for example, water lines would be unnecessarily duplicated if the provision of water were made a matter of the free, competitive market. Ditto for electricity, natural gas and, of course, the roads, we may presume.

The second kind of alleged market failure is when free markets do not make available goods or services deemed to be important, vital. John Kenneth Galbraith mentions public libraries, schools, and the like (in his The Affluent Society). Here the idea is that when the free market lacks these vital provisions, some sort of failure is in evidence.

The first case of alleged market failure is no such thing because it assumes that some alternative method for providing the goods or services could be more efficient. Yet, as public choice theory has shown, what occurs instead is that political failures replace the so called market failures, ones that are far more severe and lasting than the supposed wasteful duplications of free markets. Mill was wrong, also, because he failed to notice that nearly all competitive production can be faulted for producing supposedly wasteful duplication'-ten competing shoe manufacturers all need to have the equipment, overhead, and delivery systems to get their shoes to market, so why not fuss about that duplication? (Indeed, it is Karl Marx who regarded the market anarchic and irrational for, among other things, just such duplications.) But Mill also failed to appreciate that once one places the provision of anything whatever into the purview of coercive government, all the ills of politics will beset the process. Graft, special interest favoritism, pork and similar 'inefficiencies,' not to mention violations of justice, will make for a far greater mess than a little duplication ever would.

But lets turn now to Galbraith's beef. So, markets do not always guarantee the production of everything we might want. I, personally, really wish there were many more pairs of orange socks for sale but, alas, I need to hunt these down at considerable expense to my patience and frustration in what is surely a free market in socks. Most of the time the hunt is fruitless. Or, perhaps more compellingly, I want to be able to eat a certain kind of bread that's near and dear my heart from my having had it available in Switzerland when I lived there. Alas, this kind of bread is extremely difficult and costly to get a hold of'-at one time I actually shipped it via UPS from Oceanside, NY, to Auburn, Alabama.

When people want to read books that aren't easily obtainable, well, they just have to go that extra mile to get them. Nowadays, of course, this is a cinch, via the Internet, but even in the old days there were plenty of specialty book sellers advertised in all kinds of magazines from which the book one wanted could be bought.

But that isn't really the main problem ' if some things aren't produced in a free market, very likely it is difficult if not impossible to make a decent living from producing and selling them. So, then those wanting these things badly need to go without or enter the fray themselves and make the wanted items so they can have them after all.

There is no market failure in sight with any of this in evidence; all we have is some dissatisfaction, just as some of us are dissatisfied with the fact that no one matches our romantic aspirations, no one will play tennis with us or be our dance partner. Is that a failure of some sort of a free society, one in which one is forbidden to kidnap people so they might become one's convenient associate?

Indeed, the beef about market failures is with life itself'-not everything one would like to have is there for one to get. Is this a reason to shut down the free market and transform it into the far more inefficient, let alone unjust, statist system Galbraith and Co. desire?

Not by a long shot.

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Tibor R. Machan's picture
Columns on STR: 70

Tibor Machan is a professor of business ethics and Western Civilization at Chapman University in Orange, Calif., and recent author of Neither Left Nor Right: Selected Columns (Hoover Institution Press, 2004).  He is a research fellow at the Hoover Institution, Stanford University.