Readers are cordially invited to guess why I no longer (or what good reasons one may have not to) subscribe to the main propositions expressed in the below post.
Every age has its momentous prepossessions. A prejudice formative to our epoch is the idea that we are constantly threatened by (the failure of) markets.
Hence there is a vast assortment of popular as well as more formal accounts reflecting this image of markets.
When erroneous theories are shared by a sufficient number of people, they can become a form of communication – almost a jargon, a spoken or written social glue – whereby the mere exchange of common convictions operates as if being by itself capable of evidencing truth.
Also, there are “scientific” theories that purport to establish the failure of entire ranges of social life, especially the economy, while at the same time regarding the state as being intrinsically and in principle qualified to remedy the defects or to cancel the inimical repercussions.
The fallacious allegations of failure are rooted in the same origin as the unwarranted expectation that the state is naturally capable of providing superior alternatives: the inability to think in ecological terms, that is: in a way capable of taking account of the working of self-generating order, and the corresponding predilection to argue in terms of simplistic, anthropomorphic categories, according to which order can only prevail if it has been established according to the will of intelligent beings.
However, this is an issue to be dealt with more fully in separate posts.
Back to market failure:
There is no such thing as market failure, only the failure to soberly acknowledge that markets cannot bring about results that are outside of the range of possibilities that accord with their mode of operation.
If the market is incapable of ensuring that the neighbour’s daughter falls wildly in love with Mr. Miller, this is not tantamount to market failure, but rather a case of functional incompetence – i.e. it is quite simply not the market’s job.
The allegation of market failure tends to come in three flavours, or a mixture of them:
(1) The first variant compares real markets with the exceedingly stylised model of “perfect markets” that equilibrium economics sets up to include assumptions such as perfect information on the part of market participants and the non-existence of time and space. The unsurprisingly notable differences between perfect markets and real markets are then simply held to be evidence of market failure.
(2) The second variant looks at economic crises as representing evidence for market failure, while disregarding the fact that such crises do not originate in the logic of an exchange economy but are caused by innumerable political interventions in the economy.
(3) The third variant, frequently compounding the other two variants, proposes a political ideal (e.g. equal levels of prosperity between the richest countries and those of the Third World) and declares deviations from the postulate to be owing to market failure.
The recent housing crisis in the United States started to gather when politicians declared a (tiny, highly localised, and in itself politically induced) problem that did not exist (across the country) to be an urgent challenge for the nation: affordable housing. Henceforth, over the course of decades massive political distortions were applied to the economy, ranging from a politically correct prohibition of credit checks for applicants of doubtful creditworthiness to (what was effectively) state insurance for financial intermediaries originating shaky loans on a large-scale. When finally the politically orchestrated housing bubble burst, at once everyone knew the culprit: market failure.
Markets rely on processes that are inaccessible to the flighty and superficial way of thinking about society that one acquires by reading magazines. Therefore, the demand for arguments attesting to market failure is overwhelming, self-propelling, and inexhaustible.
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