Acton Institute Powerblog

Markets fail, which is why we need markets

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There are generally two views of markets. The first is that markets can do no wrong. The other is that markets fail—and fail often—which is why we need government intervention. But as Nick Schulz and Arnold Kling note, there is a third way that can be summarized as “Markets fail. That’s why we need markets.”

Over the past two generations, a different view of markets and government has begun to emerge, one whose moment may have arrived. It is a view that believes both traditional camps have overlooked some important aspects of markets.

What’s more, it is a view that, if embraced, helps reinterpret market gyrations and government interventions in a way that better reflects reality. The view is subtle, but it has a profound influence on how the public and policymakers should think of markets and, ultimately, the role of government in the economy.

This view can be summarized as “Markets fail. That’s why we need markets.”

This seemingly paradoxical view is based on several overlapping strands of research in economics as it pertains to development, history, technology, business expansion, and new-firm formation. According to this view, entrepreneurs at work in the economy–in finance, high tech, manufacturing, services, and beyond–are constantly experimenting, creating new business models, techniques, and technologies that upend the established order of things.

Some new technologies and innovations are genuine improvements and are long-lasting welfare enhancers. But others are the basketball equivalent of pump fakes–they look like the real deal and prompt market actors to leap hastily into action, only to realize later that their bets were wrong.

Given this dynamic, markets are unpredictable, prone to booms and busts, characterized by bouts of exuberance that are rational or irrational only in hindsight.

But markets are also the only reliable mechanism for sorting out this messy process quickly. In spite of the booms and busts, markets drive genuine long-run innovation and wealth creation.

When governments attempt to impose order on this chaotic and inherently risky process, they immediately run up against two serious dangers.

Read more . . .

Defending the Free Market: The Moral Case for a Free Economy

Defending the Free Market: The Moral Case for a Free Economy

Father Sirico argues that a free economy actually promotes charity, selflessness, and kindness, and why free-market capitalism is not only the best way to ensure individual success and national prosperity but is also the surest route to a moral and socially-just society.

Visit the official website at www.defendingthefreemarket.com

Joe Carter Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).

Comments

  • It’s not possible for markets to fail because markets exist only to bring willing buyers and sellers together. Markets have no other purpose. Economists began to talk about market failure only after fabricating the mythical “perfect competition” model and comparing reality with fiction.

    • Joe Carter

      Sure, markets can fail because they can bring about negative externalities (such as pollution) that were unseen or unintended by the buyer or seller.

      • But such externalities are not the market’s job. They belong to the state. If pollution damages the property or health of others then those damaged have recourse through the courts. The state’s job is to protect the life, liberty and property of the people from externalities, especially over those areas in which private property rights are difficult to assign, such as water and air pollution. If the producer of the pollution and those harmed by it can’t come to an arrangement, the state must step in and enforce property rights. Anyway, the positive externalities of free markets far outweigh the negative ones or the West would not be 30 times richer than it was three centuries ago.