Markets Fail. . .And Libertarianism Still Works, 10/16
The Straw-Man Argument for Technocracy
Jason Furman recently gave a talk in which he described how he teaches economics. He says that early in the course, he describes perfect competition. This is when the free market is most likely to be optimal. Then, over the course of the semester, the students learn all of the preconditions that must be assumed in order to have perfect competition. Since these preconditions are almost surely not satisfied, market failures will occur, and students learn how government intervention can produce better outcomes. (His talk began four hours into the conference, and the remarks that I am paraphrasing are at about the 4:15 mark.)
Furman comes close to making what I call the straw-man argument against libertarianism and for technocracy. That argument goes:
Libertarianism relies on markets.
Markets are optimal only under conditions of perfect competition.
The conditions for perfect competition are rarely satisfied.
There are many instances of market failure.
Therefore, libertarianism does not work.
This argument constantly emanates from economists of Harvard and MIT and their disciples. Students and journalists, who are inclined to resent markets and despise libertarians, feel vindicated when they hear this argument. They come away believing that markets are never any good, even when professors who teach this way, like Jason Furman, are less dogmatically anti-market.
What is wrong with the argument? Step (2) is a swindle. It sneaks in the assumption that markets have to be optimal in order to be preferable to government intervention.
Instead, long ago I offered the aphorism “Markets fail. Use markets.” That is, I readily concede that the market economy is not at some theoretical optimum. The question is what will lead to improvement. I believe that government intervention will often make things worse. Meanwhile, entrepreneurial innovation and creative destruction tends to solve economic problems, including market failures.
Suppose you see conditions in a current market (say, the market for electric cars) and think “society deserves something better.” To advocate government intervention is to assume that the intervention will achieve your goal.
Instead of thinking in terms of a one-time intervention relative to current conditions, libertarian economists look at markets and government intervention as processes for changing economic performance. We compare one process to another, not one set of market conditions to some theoretical outcome.
As a process, markets tend toward improvement, because business profits ultimately depend on satisfying consumers. As a process, government intervention is unreliable, for many reasons. The interests of government officials often diverge from the interests of voters. The disciplinary forces of competition and the profit-and-loss system are absent. The internal processes of bureaucracy tend to reward conformity and repression of innovation.
If “market fundamentalism” is the belief that markets are perfect, then I do not know anyone on the libertarian side who is a market fundamentalist. Economics professors do not have to spend a whole semester arguing against this straw man. I wish that they would spend more time discussing “government fundamentalism,” which is what you are guilty of when you assume that government intervention consists of wise, technocratic solutions.
At the conference where I heard Furman talk, the last speaker, Douglas Holtz-Eakin, gave an impassioned argument against government intrusion into economic decisions. He argues that intervention leads to corruption and polarization. His talk begins about the 7:40 mark. Recommended.
Let's flip Arnold's line of reasoning around to examine the merits of government action.
1. Government action relies on government actors behaving in the public interest.
2. Governments are optimal only under conditions of perfect altruism of government actors.
3. The conditions for perfect government are rarely satisfied.
4. There are many instances of government failure.
5. Therefore, government does not work.
There are many examples of market failure that cannot be overcome by libertarian market processes, and I believe libertarians would agree with at least some of them. They usually involve "public goods" where competitive actors would be duplicative and inefficient. Thus, a system of laws, the justice system, national defense, public safety (police, fire firefighters), airline safety, and numerous other examples are more efficiently handled through the polity rather than markets.
To take the last example, one might argue that markets could handle airline safety *over time* as airlines or monitors of airlines develop reputations for optimal safety management. An anology might be the automobile industry where Toyota, Volvo, and the erstwhile Saab have (or had) reputations for building the safest cars. But lapses in car safety result mainly in fender benders. Airline safety is a more complicated and fraught endeavor. Few people - maybe test pilots - would want to be the guinea pigs testing a new airline before it develops a good reputation. Moreover, there are vast economies of scale to verifying airline safety. If, say, the FAA (or a private corporation paid for by public monies) verifies that American Airlines and Boeing aircraft are safe, then passengers don't need to pay for another verification service - a classic public good. If we had to rely on the market to verify an airline's safety, who would pay for the service? Airlines paying for the "good housekeeping seal" would not result in credible safety ratings. If some passengers paid for such a service then other passengers could free ride; there would be a suboptimal amount of verification.
Another argument against government is that politicians and bureaucrats are self-motivated and so don't act (optimally) in the public interest; thus, bureaucracies are inefficient. But corporate bureaucracies also can be inefficient and faulty because of similar principal/agent problems. For example, corporations designed and manufactured the Ford Edsel, the Chevy Corvair, new Coca Cola, the Boeing 787 Max, complex, opaque financial instruments, and numerous other failing goods and services. That government at times produces faulty outcomes is not in itself a reason to preclude using government in situations where it has a comparative advantage - for the provision of public goods.
The relentless push for technocracy is a transparent attempt to preserve the current oligopoly.
Rising populism will put an end to this. If you thought Trump was bad, then you should do everything you can to put him back in power, because what will come instead of him will make him look like Cyrus the Great.