Mises Daily Articles
The Market Failure Myth
The term "market failure" came into frequent use by economists during the 20th century. During the 1930s, economists like
By focusing on efficiency in the use of scarce resources and failures in markets to do so, interventionist-minded economists try to show that their concerns are utilitarian and scientific. There is nothing inherently wrong with having such concerns.
The debate over market failure is vast, but a few exchanges stand out as important. Economists
In the late '60s,
Now, a vast literature exists on the imperfections of government in allocating resources. Yet, many economists still recommend government intervention to correct market failures, often without also considering the possibility of government failure. Why is this so? We can better understand this reluctance to make reasonable comparisons between markets and government if we examine what a leading economist has to say about these matters.
Stiglitz arrived at the conclusion that government can improve upon welfare even when it faces serious informational constraints, because its incentives and other constraints are better than in markets. At the time that Stiglitz made this claim, we could easily have afforded him some reasonable doubts concerning his knowledge of how government works. Academics often lack real-world experience, and this was largely true in Stiglitz's case. However, Stiglitz did make a foray into the public sector.
Stiglitz notes5 that, upon embarking on his venture into the public sector, some friends of his suggested that he might return from
Stiglitz now admits that government does suffer from imperfections. Thus, he now has the knowledge of how governments use information--knowledge that he lacked years ago. How does Stiglitz interpret the lessons he learned from his
"Making government processes more open, transparent, democratic and more participation and effort at consensus building is likely to result not only in a process that is fairer, but one with outcomes that are more likely to be in accord with the general interests. Perhaps we can bring [efficiency] to government" ("Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions," Journal of Economic Perspective 12, no. 2. [Spring 1998]: 3-22).
So he hopes that we can make government more efficient. But why should we make this effort? If government has serious failings that prevent its efficient operation, should we not at least consider free-market capitalism as an alternative? Or are we for some reason obligated to bend over backward to make government work efficiently?
One might expect that, after seeing government failure first hand,
After all, objective scholars, concerned only with economic efficiency, should simply accept the facts as they are. Instead, however, Stiglitz holds out hope that we can improve upon the efficiency of government. The fact that he never held out such hopes about free markets further illustrates his bias. Objective scholars arrive at conclusions based on sound reasoning and valid evidence rather than on wishful thinking.
Given that Professor Stiglitz is apparently immune to all arguments and evidence for markets and against government, we must conclude that he is not at all concerned with value-free economic analysis aimed toward finding the most efficient means toward given ends. Instead, he sees the expansion of government as the end that we should pursue.
Stiglitz is by no means alone in his passion for government. Indeed, he owes his prominence in the profession to the admiration of his work by many of his peers. It is therefore reasonable to suspect like-minded economists of ideological bias as well.
Such persons hide their biases behind a veil of technical jargon as they pursue their ideologically driven goals. The failings of big government during the 20th century matter not to their goals because the expansion of government is their goal. They are not concerned with what system works best, but with how best to promote the system that they want to see work.
There is nothing inherently wrong with attempts to establish ends for us to aim at in economic matters. Those who desire more government simply for its own sake, however, should at least be honest about their intentions. Instead of pretending to be concerned with efficiency,
If their ideological convictions for government have merit, then they should be anxious to explain them. If their beliefs lack merit, then they should accept this graciously. In either case, it is clear that all too many economists are not interested in an open and honest debate over these issues. Instead, they use deceptive rhetoric about market failure to hide their true agenda: the expansion and empowerment of the state.
- 1. For example, see "The Concept Monopoly and the Measurement of Monopoly Power," Review of Economic Studies (June 1934): 157-175.
- 2. Kenneth Arrow Economic Welfare and the Allocation of Resources for Invention in The Rate and Direction of Investment Activity p 609-625 (1962)
- 3. See Information and Efficiency, Another Viewpoint in The Journal of Law and Economics p 1-21 (1969)
- 4. See Sanford Grossman and Joseph Stiglitz- Information and Competitive Price Systems in The American Economic Review May 1976
- 5. Stiglitz, Joseph: Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions The Journal of Economic Perspectives, Vol. 12, No. 2. (Spring, 1998), pp. 3-22.