Econ 101: Market Failure.

Econ 101: Market Failure

On a radio talk show this morning (June 14, 2020), I heard a guest use the phrase "The market didn't work as it should".

Where, pray tell, is it written that the market should work in any particular way? It's quite obvious to me that the market simply works as it works. There is no "should" about it. Unless you adhere to Neo-liberal economics, which has more than a whiff of elitist arrogance about it, and with its indifference to human psychology clearly implies that if only people behaved rationally, the world would unfold as it should, rewarding the right people with riches, and punishing the wrong ones with poverty.

And how does the market actually work? It aggregates human choices, is all. Left to itself, "the market" demonstrates that human desires, whims, greed, ignorance, powerlust, etc drive buying decisions far more often than rational self-interested understanding of the long-, medium-, or even short-term consequences of those decisions. When the unpleasant consequences appear, the Chicago School refers to "market failure".

"Market failure" is in fact the Chicago School's failure to account for reality.

The market never fails. It shows us what we believe is important. Important enough to spend money on, anyhow. Too often, those beliefs are mistaken. And that's a polite way to say it.