…except for all the others that have been tried.
Among Arnold’s themes that I especially like is this one: “Markets fail. Use markets.” The idea is the vital one that the case for markets does not depend on markets being perfect—or to use economists’ terms, the case for markets doesn’t collapse simply because of the existence of some “market failures.”
First, the concept “market failure” is notoriously slippery. The absence, say, of more light-rail transportation in Little Rock might plausibly be seen by Jones as evidence of market failure but also might plausibly be seen by Smith as evidence of the prohibitively high cost of expanding such transportation in Little Rock. Social and economic reality being what it is, there are simply no tests available to settle this question with the sort of certainty that is often achieved by tests of physical matter.
Importantly, Jones’s assessment might be correct. Perhaps investors and entrepreneurs really are underestimating the demand for—or overestimating the costs of building and operating—more light-rail lines in Little Rock. Arnold wisely advises friends of free markets to recognize and to publicly concede that markets can and do fail, even though such failure might never be provable in the way that the earth’s elliptical rotation around the sun is provable.
To reject Arnold’s advice is inadvertently to strengthen the hand of those who insist that instances of market failure are sufficient justification for government intervention. It is (at least to appear) to concede that if and when markets should fail, government should intervene to correct the failure.
But in reality markets aren’t perfect. They’re just not. Markets do sometimes fail because of (bear with me as I parade before you a band of fancy economics terms) “asymmetric information,” “moral hazard,” “time inconsistency,” “free-rider problems,” “opportunism,” “strategic behavior,” “empty cores,” “lumpiness,” “transaction costs,” “bounded rationality,” and other features of reality that prevent markets from performing ideally.
These sources of market imperfections are themselves a second reason to take seriously Arnold’s advice to use markets even though markets sometimes fail. Too many people—including economists—remain stubbornly unaware that even the proven existence of a “market failure” is only a necessary condition to justify government intervention; market failure is not a sufficient condition.
Voters and government officials don’t become more godlike simply by acting in the domain of politics. So voters and government officials are at least as likely as are investors, consumers, and other private-market participants to be poorly informed, to let their emotions block their rational faculties, and to suffer each of the other decision-making quirks that can lead to market failure.
But this fact suggests only that political outcomes are likely to be as imperfect as market outcomes. It does not suggest that political outcomes are likely to be worse than market outcomes. So why the strong advice to “use markets”?
The answer is that market institutions are better than political institutions at minimizing the frequency, intensity, and ill consequences of uninformed, emotion-ridden, and otherwise fallible decision-making.
The competition among businesses for consumers’ dollars, being never-ending, is more continuous than is the intermittent competition among politicians for citizens’ votes.
Yet another feature of government that causes its outcomes to be less desirable than those of the market is “lumpiness.” When Congress and the president agree on an annual appropriation for the U.S. military, every American is party to that specific annual appropriation. I—a dove—don’t get to have a lower appropriation than does my neighbor the war hawk. Government’s provision of national defense comes in a largely indivisible lump.
Not so in markets. If I prefer wine to beer, I get to have more wine than beer while my neighbor with opposite preferences gets to have more beer than wine. And all the while the teetotaling couple down the block chooses—and receives—a third, alcohol-free bundle of consumption goods.
Arnold Kling endorses free markets not because they are foolproof or flawless. They aren’t. Arnold supports them because the alternative is generally much worse: an especially flawed institution that fosters unusual amounts of foolishness.