Flash: Markets aren’t perfect

Posted by Marc Hodak on October 4, 2007 under Economics | 4 Comments to Read

A Wharton professor, Joel Waldfogel, has just published a book called “Tyranny of the Market,” a play on Mill’s notion of the tyranny of the majority. Waldfogel’s thesis is this:

– Everyone think markets provide what everyone wants in the right amounts
– Everyone thinks that governments are grossly inefficient at providing what people want
– Markets, in fact, sometime leave minorities behind because their preferences cannot be profitably met for high fixed-cost products or services
– It may be efficient to not always let the market decide what or how much to produce

I think Waldfogel is making a thoughtful argument, here, but I don’t like it on several grounds:

– Far from everyone, including most economists, thinks that markets are all that great, let alone perfect
– Far from everyone, especially those dealing with voters, considers government to be grossly inefficient
– The idea that high fixed-cost products don’t permeate as easily into minority populations makes sense in theory, but is vastly overstated
– Many economics professors, including those with a high profile, continuously and exhaustively make the claim that market inefficiency provides some rationale for government intervention

Although a lot of good stuff has been written about that last point, none of those writings, including Waldfogel’s, provides a decent explanation, or even convincing examples in the real world, of how government imperfections can be sufficiently overcome to make their remedy of market imperfections an efficient solution.

In fact, history speaks with one voice when it comes to comparing government remedies for market imperfections versus market evolution around those imperfections. Government interventions, even if they seem to work for a little while, almost invariably become a story of waste, fraud, or astronomical costs–and often all three. Most things that people historically said the market couldn’t do have been done, including private mail, private toll roads, an explosion of products and services accessible to minorities of all types, even the poor (still not “perfect,” but a generation ago non-existent, like cell phones and mortgages).

In fact, government intervention is a powerful reason that minorities and the poor don’t have more choices. Nearly every business is subject to regulatory costs that are a huge source of the overall fixed costs that Waldfogel properly laments. How much of our uninsured are that way because well-intentioned minimal coverage regulations make health insurance unaffordable for so many people?