Market Failure

26Oct06

I am very concerned with the state of popular economics. I want to understand the economics of the commons, but I also want to defend and even extend the commons, and that task requires shaping the popular understanding of economics.

In my recent reading of popular economics texts I’ve repeatedly encountered the idea of “market failure.” It comes up everytime someone discovers, or thinks they’ve discovered, evidence of how the market doesn’t deliver optimal results for the economy. This idea of “market failure” is a pet peeve of mine which I’m going to share with you.

The problem with “market failure” is that this notion only really makes sense if you start from the position that market transactions should provide the optimal result in all situations. The idea of market failure smuggles a market-centric perspective into our thinking. The idea of “market failure” typically focuses attention on particular cases and special circumstances where the market doesn’t give us what we want, rather than emphasizing that the market has inherent limitations and particular characteristics that are present in all situations, whether we like the results or not.

The situation reminds me of the era of geocentric astronomy. Our understanding of both the Earth and the heavens was crippled by our efforts to interpret what we saw in the sky from the perspective that the Earth was the center of the universe. Real understanding could only begin when we changed perspective and started considering the Earth as simply one among many heavenly bodies.

The ancient astronomers slowly compiled a list of problems with the geocentric view of the universe, and economic theory has likewise compiled its list of “market failures” with the theories of public goods, network externalities and multiple equilibria, asymmetric information, and transaction costs. But our task is to weave all of these separate issues together into a new paradigm; a new perspective that gives a better foundation both for economic theory and for popular understanding. One step along the path to that paradigm is to stop talking about “market failure.”

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