5 thoughts on “Do markets fail?”

  1. Posted 15/05/2014 at 19:19 | Permalink

    From the opening paragraphs, it is curious to reflect upon the notion of ‘perfect markets’ which, at least according to one school of economics, should be considered an oxymoron: for according to the dynamic nature of markets — with ever-constant change with respect to consumer demand, the supply of differing (and new) goods and services, subjective needs and desires, and entrepreneurial and informational flux — a market can, by definition, never be perfect. At most, it can be a really good marketplace, with a wide variety of goods and services on tap (with various price levels and corresponding levels of labour competency), or a really bad marketplace.

    A ‘perfect’ marketplace, where all demands are satisfied, with nothing left to sell and nothing left to buy, ceases to be a marketplace at all.

    Market failure, then, is less an absolute category of damnation than a (hopeful) process of development; whereas government failure, with exceptions, has the reserve effect: little room for improvement, with the flaws built into the system —unless privatisation were an option. As Arthur Seldon wrote in The Dilemma of Democracy:

    The historians persistently overlook three self-defeating tendencies of government that claims to be armed with the cures for market imperfection. First, their remedies are begun too soon. Second, they are endemically operated too far. Third, they are continued too long. The total effect is that governments cannot be adjusted to the advancing superiorities of the market. Crucially, their measures cannot be withdrawn when the market makes them superfluous.

  2. Posted 16/05/2014 at 19:46 | Permalink

    Thankyou very muh for covering this! Economics at A level is terrible. It is supposed to be Keynesian but its even worse!

  3. Posted 17/05/2014 at 17:02 | Permalink

    This is something I’ve thought about before but my own analogy was with an alarm clock. Since markets do not have as their purpose many of the things they are accused of failing to do, it seems very odd to say that they have failed in not doing these things – when I get woken by my alarm in the morning I do not protest at my regular experience of ‘alarm clock failure’ when it ‘fails’ to make me a cup of coffee as well!

  4. Posted 19/05/2014 at 19:20 | Permalink

    Maybe governments cannot ‘perfect’ markets, but surely they can still fail? Suppose a government sets out to maintain the purchasing power of money, but instead the value of money (as best as can be measured) falls by more than 90 per cent in a fairly short period. Isn’t that a ‘failure’? Suppose a government undertakes to put on an Olympic Games for £2 1/2 billion, but in the event it costs about £10 billion. Isn’t that a ‘failure’? Suppose a government sets out to establish a system of schooling that will provide an adequate education for children, but even after many years the state schooling system turns out about 20 per cent of children at the end of their 12 or so years in the system who are essentially illiterate. Isn’t that a ‘failure’?

  5. Posted 15/06/2014 at 09:08 | Permalink

    Market collapse as a concept is neither good nor bad. It may just represent the decline of the market for that service or good. In my simple world, I see a failure to value the small, independent and resilient virtues that many markets have – as they are hung out to dry on the quest towards globalisation through efficiency of scale and scope.

    So, consider the market for electricity. I am somewhat impressed that during the second world war, reports suggest that despite massive bombing, the lights, in general, stayed on. Since that period, we have built national grids and made ever larger centralised production facilities. The results of small failures now can have far reaching effects. When New York lost power to the whole city made great news. The root cause turned out to be a failure of a fuse in Canada.

    Markets do need to search for perfect efficiency, but measuring efficiency needs also to take on some kind of valuation of risk and cost of failure. Markets when they fail have the opportunity to do so gracefully. Financial crises each have their own personality. The most notable quality of the 2008 credit crisis was not perhaps the magnitude of the trigger event, but the resulting contagion.

    This is the art we must aim for – designing in capacity to fail. I personally would like to see a critical 3 market approach for every systemically sensitive market. This would allow one party to fail and the others to pick up the slack. The role of the regulator would be to start another player after the collapse by skewing the rules in their favour to diminish the now incumbent duopoly. The knowledge that the players could fail would encourage markets to self regulate with a focus of survival.

    This may not shave the last 10% of price off the goods for consumers in the short term, but it may go some way to preventing massive systemic losses, provide mutual regulation and oversight within industries and so on. Digital markets and infrastructures are now cheap and the costs are not that high. Where a national or global market is the right choice, then the role of the regulator must be to stress test regularly whether or not the underlying market infrastructures are resilient. Whether this be electric wires, sewers, silt in rivers, or more exotic derivatives.

    There just has to be a better way.

    Regards, Cliff.

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