Home > Academia, Government intervention, Hayek, Public Choice, Socialism > Market Failure vs Government Failure

Market Failure vs Government Failure

I’ve been going back and forth with Prof. Hutchinson at Dissenting Justice on the Progressive blogging thread I wrote about earlier. It’s nice to have a civil discussion on a liberal blog again.

It got on the subject of market failures and Prof. Hutchinson makes some good points. I think that he, being a liberal, plays down the anti-capitalistic views on the Left. Then talks about how Government intervention rests on “market principles.”

As far as the rest of your post, I am somehwere in the middle on these things like regulation. Many liberal economists are as well. I would not say that everyone on the Left (or even most persons on the Left) favor government over markets. That just is simply untrue — at least when you think of liberal economists (i.e., people who know something about economics).

I strongly believe in the concept of a market failure. Sometimes, correcting a market failure requires government intervention, but usually, this intervention rests on market principles. So, for example, the polluter does not internalize the costs to society of pollution. The market intervention should force the company to take these costs into consideration. This is a simplistic example, but it shows collaboration between market and private among the Left.

I think his view is indicitive of the Left. Yet, he makes no mention of Government failure, which is also indicitive of the Left. Why do liberals only talk about Government failure when the other team is in charge? (Bush and Katrina, Iraq, Global Warming, etc ad nauseum)

Here’s my response.

I see your point. I just think it’s indicative of more than just his double standard.

I agree markets do fail. But how they fail and to what extent is largely subjective. We probably will agree on the margin but not on average, on what constitutes a market failure. For example, you may or may not think the financial crisis was a market failure, while I see it as a government/regulation failure. I think a lot of the cause of it was due to past government actions, institutional moral hazard (ie Too Big to Fail, Russ Roberts has a good essay on it)

I think the big place we might differ is on solutions to market failures. I think the predominant though among the Left is that Government needs to step in. I disagree, due to Public Choice concerns. I see government action as being the worse of any possible solutions in a lot, but not all cases.

I think another place we differ is on your assertion that “intervention rests on market principles.” I take the Hayekian view that markets are a very dynamic and random phenomena. We can’t predict what 1000 people are going to do tomorrow, yet the market is explicitly dependent on what those 1000 people do. The incentives for each actor might be exactly the same, but each of those 1000 might do totally different things, that might be perceived by an outside observer to be totally random or worse, go against “market principles.” (I’m assuming that when you say market principles your talking about rational choice theory)
When your say that Government intervention rests on market principles, I see that as an oxymoron. The Market is decentralized, and by imposing top down centralized rules, your not going to get the results you want. I liken it to a mad scientists working in a lab, saying that evolution isn’t working fast enough, so he is going to help it along. How does he know which path evolution was going to take? Same with intervention resting on market principles. How does the central planner know what the market was going to do?

While you say the government will force the company to internalize externalizes, I say buy doing that your distorting what the market was going to do. How do we know the market wasn’t going to bankrupt that company from the get go?

Think about the BP spill. If it wasn’t for Government rules and regs that restrict entry into the drilling business, who’s to say Transocean, Halliburton, or BP wouldn’t go bankrupt over their actions? Or what about Goldman Sachs. Government intervention, bailouts, kept Goldman in business. The market would have bankrupted all those Wall Street firms that had a part in crisis, but it was government interaction that keeps them in business now, against market principles.

I could go on, but I’ll stop. I think it’s enough to say we will probably never agree, but I don’t see that as a bad thing.

Oh one last thing. Re: “I would not say that everyone on the Left (or even most persons on the Left) favor government over markets.”

That’s your opinion and I respect that, but we don’t have any hard data on that. At least I couldn’t find a poll that explicitly asks “Do you favor Government over Markets?” The best we can do for data is use a proxy. The Public option is a good proxy, I think. We can probably bicker on the percentages of Liberals that want a public option, depending on the pollster, but I think we can both agree that it the majority. Right?
Also there is this old Rasmussen poll (Which liberals usually don’t like, I don’t know your take on Rasmussen) that says 30% of Democrats prefer socialism to capitalism (39%). Either way Capitalism aka markets are in the minority.


We’ll see what the response will be. It’s nice to be able to have a good conversation and not be called any ad hominems. Kudos to Prof. Hutchinson, I wish liberals were more like him.

  1. Seth
    June 11, 2010 at 20:24

    Nice job ZH.
    Hutchinson’s first paragraph, starting with the word “Many” is speculation, your Honor.

    Nice point about how government failure goes unnoticed. I asked a few days ago on my blog re: the oil spill, why isn’t anybody mad at the government?

    Too often liberals confuse market failures and the market doing what it should. Pollution may be a market failure. A company going bankrupt for being stupid is the market working.

    • June 13, 2010 at 16:45

      I think it’s because if they do, they know they’ll invalidate 90% of their arguments.

  2. yttik
    June 14, 2010 at 09:11

    This article was kind of funny;

    Are You Smarter Than a Fifth Grader?
    Self-identified liberals and Democrats do badly on questions of basic economics.


    • June 14, 2010 at 12:43

      linked to the complete paper on the More Market Doom thread.
      Not really much to say. I mean it’s one of those, Duh! type of papers. It’s funny watching Liberals try to talk their ways out of that one though.

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