Failure to Launch
What is a market failure?
A market failure in economics happens when goods and services aren’t allocated appropriately—when people don’t get what they pay for, or when someone gets a free-ride. It’s like slip-streaming on the highway: if I follow a truck closely, I can benefit from the turbulence behind the trailer. But I can only do that if I follow so close that I can’t see hazards in the road ahead. There’s no free lunch.
Market failures can come from asymmetric information, like when you buy a used car—the seller knows more about it than you do. Or they can come from externalities, like various types of pollution. Polluters often aren’t charged enough to clean up their messes, and the rest of society pay the price—through health effects, contaminated food, or other problems. Or market failures may come from non-competitive markets, where there is only one seller or one buyer of a good or service. If there’s just one employer in a distinct region, they may not have to pay competitive wages.
There are various responses to market failures. Sometimes industries form self-governing bodies to address their problems. Sometimes new laws and regulations are called for. But folks have to be careful when they suggest a new rule or market intervention. The flow and bustle of the business world is a lot like a diverse ecosystem, with primary producers, secondary consumers, predatory behavior, and bottom-feeders. Adaptive systems have their own logic.
We need to remember Chesterton’s fence: G.K. Chesterton once commented that a reformer might say, “I don’t see the use of this fence; let us clear it away.” To which a more intelligent reformer might answer, “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think.”
Photo: Evelyn Simak. Source: Wikipedia
Doctors have the motto, “First, do no harm.” As we enter a new political season with prospects for regulatory reform and tax reform and initiatives regarding health care and banking and energy and other areas, folks would do well to remember that government failure can be just as pernicious as market failure. We need to be sure we don’t just replace one problem with another.
After all, as Mark Twain once wrote, our concerted action may just amount to raiding each other’s clothes-lines. And that won’t make anyone better off.
Douglas R. Tengdin, CFA
Chief Investment Officer