In defense of markets.
In the August 2007 issue of Prospect, the economist John Kay writes a wonderful essay entitled “The Failure of Market Failure” in which he deconstructs the all-too-often conventional wisdom of how ‘market failure’ means many goods and services are better delivered via central (state) planning rather than via free market mechanisms. (Unfortunately the article is behind a paywall on the web, but I highly recommend you buy the issue and read the entire essay; furthermore their are great articles on the future of the music industry (pre-Radiohead/Madonna I might add) and taxing the super rich in the same issue.) Here is a taste:
Yet the most serious weakness of the market failure doctrine is that its model provides not just an inadequate account of how markets fail, but also of how they succeed. …But the endemic deficits and surpluses of a planned economy which is unable to co-ordinate large quantities of information in a rapidly changing environment are only part of the explanation for the failure of central planning…The main failing of planned economies was that they could not accommodate the flexibility needed to cope with an uncertain future. This issue is not one the market failure doctrine can easily recognise, since the underlying model does not recognise innovation and uncertainty, except in trivial ways.
If the partial genius of market economies lies in their capacity to achieve co-ordination without a co-ordinator, the greater genius lies in their ability to innovate and adapt in an environment of uncertainty and change. The sustained achievement of market economies comes from their pace of innovation – in products, technology and organisation – derived from the ability of market systems to undertake small-scale experiment, to watch the results, to mimic what works and discard what doesn’t.
…The trick that disciplined pluralism – decentralised choices with accountability – achieves is to replicate that combination of free choice and co-ordinated outcome throughout the economic system.
…The reason for promoting competition between providers is not that conflict is better than co-operation, but that recognising success and failure is indispensable to innovation and imitation. Incentives matter; but it is not only individual incentives which matter, and the failure to recognise this has given us both corrupt corporate bosses and demoralised public sector workers. So long as market organisation is equated with individual greed and jingling cash registers, the limits to markets will in practise be set by the determination of the public to keep them away from those areas of human activity – like health and education – that matter most to them. And that would, indeed, be a market failure.
I’ve put his book – The Truth About Markets – on my wishlist.
