Wednesday, June 26, 2013

"Market Failures"

When someone is asked to list the reasons for having a government, then he'll call you names, but after that (if you can get a response) the reasons for having a government include protection from monopolies and protection from "market failures."

Earlier I posted why I don't think monopolies exist, unless the government is operating it.

I'm very convinced that that is the case.  For example:
"In his masterpiece, Antitrust and Monopoly: Anatomy of a Policy Failure, Dominick Armentano carefully examined fifty-five of the most famous antitrust cases in U.S. history and concluded that in every single case, the accused firms were dropping prices, expanding production, innovating, and generally benefiting consumers."
Whenever a monopoly exists it is the government that is the monopolist or the government creating rules and regulations so that a favored company can exist as a monopoly.

No government: 1
Government: 0

If you hear about economics from people who favor large government, sooner or later you will hear about market failures.  The free market has faults, you see.

Wikipedia has a page on market failures.

Opening line:
Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient.
That page goes through several different types of market failures, and generally has an example for each.

The first failure looked at is "The Nature of the Market."  And the failure example is monopolies.  Since we've already dispensed with that, let's move onto failure number two.

Failure two, "Non-excludability":
Some markets can fail due to the nature of the goods being exchanged. For instance, goods can display the attributes of public goods or common goods,....
Does anyone else find it odd that this "market failure" consists of public goods?  Looking at public goods as a market failure is silly becasue where public goods exist the market is controlled by the government, and therefore not "free" and cannot be a "free market failure".

Something that is controlled by the government and owned by the government is, by definition, the opposite of a free market. 

Blaming the market for something over which it has no control makes no sense at all.  And so, of course, those who oppose the free market do this all the time.  For example, those who oppose the free market blame our current economy on the free market despite the government deciding who can set up businesses, determining how much they can pay their employees, controlling the money supply, and so on.

The third type of market failure is called "externalities."
A good or service could also have significant externalities,where gains or losses associated with the product are borne by people who did not sell or purchase the product. In this case, the price mechanism fails to properly account for the true social cost because it differs from the private cost. These externalities can be innate to the methods of production or other conditions important to the market. For example, when a firm is producing steel, it absorbs labor, capital and other inputs, it must pay for these in the appropriate markets, and these costs will be reflected in the market price for steel.   If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society.
This idea doesn't seem to understand how the world works.

There is billions of dollars of gold, diamonds, rubies, emeralds, etc. buried in the earth.  How much is any of that worth to you?  To put it another way, how much have you lost when some guy in India uncovers a ruby?  How much worse off are you?

If we wanted that Indian guy to pay "society" for his discovery, to whom would he pay?  How much would he pay?  If no one has had their limbs broken, or stuff stolen, as a result of his discovery, then why should he pay anything?

Once again we have a "market failure" which is only considered so when you count all of the world's natural resources as public goods.   And when they are public goods, how is the free market at fault?

Another externality example mentioned is that of traffic congestion:
Traffic congestion is an example of market failure that incorporates both of these forms of inefficiency. Public roads are common resources that are available for the entire population's use, ...
How can someone claim that too many cars, who's designs must meet government regulations, that must be built according to government regulations, which can only be driven by those who meet the government regulations, and can only be driven when abiding by other government regulations which are enforced by government enforcement officers, and which are driven on public roads is an example of a free market failure?

How could any example of the "free market" be any more the opposite of such?  Maybe if the government owned the companies who make the cars instead of merely owning a huge percentage of their profits?  ...oh wait.

Let's try an opposite example: by the logic that traffic congestion is a market failure we can conclude that the fact that we are not forced to buy the specific car the government demands is an example of socialist failure; in other words, there's almost no socialism here, therefore its an example of socialist failure.

By the the logic that concludes that traffic congestion is a market failure, we must conclude that up is down, down is up, right is left, and Eat, Pray Love is the greatest book of all time.

The fourth type of "market failure: is called "The Nature of the Exchange."

Rather than go through all of the points in this type, one part is called "principal-agent problem"
Common examples of this relationship include corporate management (agent) and shareholders (principal), or politicians (agent) and voters (principal).  For another example, consider a dental patient (the principal) wondering whether his dentist (the agent) is recommending expensive treatment because it is truly necessary for the patient's dental health, or because it will generate income for the dentist. In fact the problem potentially arises in almost any context where one party is being paid by another to do something, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs.
 If you don't trust your dentist, then find another.

The people who came up with this market failures don't seem to understand how the free market works.  They don't understand it and then they criticize the flaws they perceive it to have, even though it doesn't have them.

(Incidentally, one of the Nobel Prize winning economists mentioned in this part of the Wikipedia page is Joesph Stiglitz.  He also wrote a book called "The Price of Inequality."  I pointed out that his thoughts on the subject are stupid.  No doubt his thoughts on market failures are stupid too. )

These enemies of free markets don't realize that this situation is corrected by the free market.  If your dentist persuades everyone to get the most expensive option all the time, then anyone who gets a second opinion will discover this and avoid the unscrupulous dentist.  When enough patients discover this, he'll lose all his customers or he'll be forced to stop the unsavory recommendations.  Get a second opinion and there is no "principal-agent problem."

Rather than go through the rest of the Wikipedia page's points, let's end an already long post.


In conclusion, there is no such thing as a "free market failure."  All the examples of these failures are actually failures of the government or public failures.  These failures come from the exact opposite of the free market, but are, nonetheless, used to criticize it.

The fact that "market failures" are generally accepted as being real things shows how much those who oppose the free market have dictated the thinking of the the general public.

There are no free market failures, there are only government failures which are called "free market failures."

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