When Markets 'Fail,' Am I To Blame?

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I'm sorry. Mea culpa. I didn't mean to mess up the market with my personal decisions. But economists of the statist persuasion tell me that I have. And so have you. We're responsible for "market failure."

You see, a "market" is the interaction of individuals, buying and selling. A market trade is distinguished from seizing goods by force. In the supermarket, I trade my dollars for the items I take from the shelf. That's, as the name says, a market. If I just grabbed stuff from the shelves and ran out the door with it, hoping to evade capture, that would not be "the market" operating but theft. Pretty much like when the government seizes in taxes part of the money you earned on the market.

A market transaction is a free, consensual trade. What, then, is "market failure"? The failure of free trade. What constitutes the failure? It's not losing money. Losses, like profits, represent the proper, successful operation of a free market: a business succeeds or fails, and its scale of operations expands or contracts accordingly.

No, market failure is a failure of freedom. The idea is that I, you, and others are buying and selling according to our choices, but Something Bad results. Bad--to whom? Well, you know, to the economy as a whole. To society. Like inflation. Or recession. Or a liquidity crisis.

So I get the whole picture now. When people like me are left free to make our own decisions, we screw up. We create chaos. We can't be trusted with freedom. That's when the government has to come in to clean up the mess.

They have to send in the regulators, the bailer-outers, the liquidity-suppliers, and the whole apparatus of state coercion to stop us from buying and selling as we did when we were free.

Maybe you're wondering how these government officials know better. That's easy: they are elected. By whom? Well, by the society. It's just one of those paradoxes: the same people who can't be trusted to act on their own judgment of what mortgage to take out are competent to elect the right leaders, who will then stop them from getting the wrong mortgage. I know it sounds crazy, but philosophers tell us that one man's crazy is another man's wisdom. And we know they are right, because they are, well, philosophers.

I, for one, am owning up to my guilt here. I must have had my part in market failure, to the extent I was allowed by our leaders to try to act on my own. Turns out, that was a big mistake.

Our leaders have been very patient up to now. Obama, Harry Reid, and the rest of the gang tried allowing me a little more freedom of action than, say, Hugo Chavez allowed his flock. But that was over-generous. We individuals had our chance at freedom, but we failed. Freedom just doesn't work. We can see that by comparing the freer with the less free countries--like America vs. the old Soviet Union, or the former West Berlin vs. East Berlin.

Market failure was unknown in the communist countries, because there was almost no market. And we see the beneficent results.

Some unreconstructed individuals try to blame things like inflation, recession, and liquidity crises on (of all things) the government! They say that merely because the government prints and controls the money, it is somehow to blame when things go awry. This merely shows how defended they are against admitting that market failure is their failure.

But I'm willing to face facts. I see now the danger of economic freedom. For God's sake, regulators, planners, somebody . . . stop me before I buy or sell again!

Okay, enough with the parody. Let me say it straight.

The notion of "market failure" is a contradiction in terms. The "market" is an abstraction. The concrete reality is individuals freely trading goods and services. What would it mean for such free trade to "fail"? By what standard? In whose judgment? "Failure"--for whom? These are the unasked questions. They can't be asked, because the answers would be the refutation of the doctrine of "market failure."

Let's begin with "for whom?" If my trade with you is satisfactory for you and for me, how can we take the standpoint of some third party in whose judgment it is a "failure"? It's none of anyone else's business. Maybe a third party would have liked to make the trade with you that I did. Too bad. I beat him to it. I benefited instead of him, so he's disgruntled. That's not "market failure," that's *his* failure.

Or maybe I overpaid. That's too bad for me--but good for you. Again, not "market failure." No matter how you slice it, a free trade between two individuals, even if one of them is dissatisfied with the results, is not a "market failure." At worst, it's a bad deal for one of them.

Now let's ask, "In whose judgment is a free trade a failure?" If it is in the judgment of one of the parties to a trade, that has to be an after-the-fact perspective. Both parties wanted the trade at the time it was made, because they freely chose to engage in it. Maybe one or both of them were irrational. If so, the results are what they deserve. Reality teaches them to be more prudent in the future. That's what markets should do; that's market success, not failure. No onlooker has the right to say, "I know they are about to make an irrational trade, so I'm not going to allow it."

Bear in mind that the real onlooker here is the government, with its gun at the ready.

Governmental force cannot make trades rational. That's up to the moral character of the individuals involved. Even if some government official does "know better" (a situation of which history provides no example), the initiation of governmental force is neither a practical nor a moral remedy. It is not rational decision-making that flows from the barrel of a gun.

Economists take "market failure" to occur when the market is "inefficient." The standard of "efficiency" here is what is called "Pareto optimality": "there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off" (Wikipedia).

Fine. But the right term for that is not "market failure" but "profit opportunity." Profit can be made whenever someone discovers that he can arrange a trade that will benefit all concerned. Brokerage is just one example. The free market is a constant, profit-fueled process of seeking out and benefiting from locating and arbitraging such "Pareto sub-optimalities."

In the end, the doctrine of "market failure" is only an obfuscation, a stealth weapon in the anti-capitalist arsenal. In statists' endless quest to control our lives, announcing that "markets have failed" saves them from
naming their actual meaning: "freedom has failed." Don't let them get away with it.


Harry Binswanger is an Objectivist philosopher, and was a close associate of Ayn Rand. He blogs at www.hbletter.com.  

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