Friday, June 21, 2013

The Ubiquity Of Market Failure

Mark Thoma on keeping the public sector involved in markets (excerpt):

7 Important Examples of How Markets Can Fail
By MARK THOMA, The Fiscal Times

Many people on the political right believe that free markets are the solution to most any problem. For example, Senator Pat Roberts (R-KS) introduced yet another attempt to repeal Obamacare with a call to “start over … with true, market based reforms.”

​Free, unregulated markets are not always the answer, however. It’s true that competitive markets have desirable properties, but very special conditions must be present for competitive markets to emerge. When these conditions are not met, as is often the case in the real world, free markets can perform very poorly. In these cases – as illustrated in the following examples – government intervention that eliminates troublesome “market freedoms” can often be used to move these markets closer to the competitive ideal...

He’s absolutely right, in principle anyway. Some of the examples quoted won’t have any meaning to Malaysians, but the idea that government regulation are an evil necessity doesn’t always hold true – sometimes, it is only government intervention that makes having a “market” possible in the first place.

In fact, at least one source I have read claims that government procurement in ancient times resulted in the first organised markets, perhaps a precursor of how government debt today forms the foundation of private debt capital markets.

Nevertheless, agree or disagree, Prof Thoma’s thoughts are always worth a read, and the comment debate on his blog is an education in itself.


  1. Still struggling with what Government's see as 'Too big to fail' for Mark's no.5 and no.7.

    Do you judge by employment (American car industry?), technological competitiveness (what would happen if Google or Apple were to fail? or if patents from Lockheed suddenly wind up in the hands of the North Koreans) or just the size of the systemic economic risk (banks with overly large assets - Malaysia's banking assets are more than GDP I don't particularly view them as an immediate TBTF risk either). Nevermind, I don't take that much of an issue with these points actually. I wish I knew how to break up TBTF but I don't :(

    Anyway, I'm surprised unionizing labour is Mark's immediate solution to labour market inefficiencies. Maybe i'm being too dogmatic in my textbook belief in market-based wages. Always thought that if people were perfectly mobile (maybe a reduction in transport and immigration costs?) and had perfect access to information of labour market (something a Government can/should do) then everything would sort itself out.

    I guess I shouldn't view labour resources as perfectly mobile (definitely not in the same league as capital), but there's no reason why Governments shouldn't fix information flows before resorting to unions.

    I know, i know it's my same old argument but thought I should continue my refrain since you can go on and on about Malaysia's fiscal commentary with surprising stamina :P

    1. Jason,

      Even assuming perfect information, the labour market is far from perfectly competitive. While reducing friction via greater information dispersion would certainly help bring labour supply and demand better in line with each other, I don't think that alone will sort out all the distortions in the labour market.