One of my favorite passages in The Myth of the Rational Voter argues that economists should often support markets even when they aren’t working very well. Why? Because in the real world, government habitually make genuine market failures worse in order to pander to the public’s irrationality:
Before we emphasize the benefits of government intervention, let us
distinguish intervention designed by a well-intentioned economist from
intervention that appeals to noneconomists, and reflect that the latter
predominate. You do not have to be dogmatic to take a staunchly
promarket position. You just have to notice that the “sophisticated”
emphasis on the benefits of intervention mistakes theoretical
possibility for empirical likelihood.
A recent Roper-AP poll inspires leading health economist Victor Fuchs to bluntly make my case for me:
Despite all the media coverage (or maybe because of it), most of the
public has a very limited understanding of the health care system and
health policy. They think the insurance companies are the main problem.
They think an employer mandate is a good idea because employers pay for
care. They want to control cost, but oppose every policy that might do
that except for thinking that drug company and insurance company
profits are too high. They say they want everyone to have access to
care but only one in four favors an individual mandate.
I think that market failures in health care are vastly overrated. But suppose I’m wrong. Imagine that economists could easily design regulations to vastly improve market performance. I would still say: “So what?” Politicians aren’t trying to please a handful of economists. They’re trying to please normal people. And unfortunately, as Fuchs observes, these normal people are not only economically illiterate, but childish.
HT: Alex
READER COMMENTS
Les
Dec 15 2009 at 7:21am
Bryan, quoting Fuchs, says: “these normal people are not only economically illiterate, but childish.”
I think its even worse than that. Virtually all people I meet would never dream of discussing brain surgery, rocket science or biophysics. Yet they make economic pronouncements with the complete confidence of a dog devouring a steak.
Somehow they believe that economics is as intuitively obvious as brain surgery, or rocket science or biophysics is complex.
Thomas DeMeo
Dec 15 2009 at 9:54am
What is really childish is the ridiculous notion that consumers should reconcile all their preferences about costs and benefits so they present themselves as a balanced, rational assessment of the market. Is it crazy to prefer low costs, convenience and excellent quality at the same time?
There is absolutely no valid reason for consumers to reconcile what they want. It is the job of the suppliers to find the balance that makes the most money for them. Consumers are supposed to want more for their money than they can really get.
Granite26
Dec 15 2009 at 10:35am
I may be beating a dead idealogical horse, but can someone explain what obscure definition of access is being used so frequently?
ryan yin
Dec 15 2009 at 12:27pm
Thomas DeMeo,
No one is saying individuals shouldn’t have unlimited wants; scarcity is the fundamental idea of economics. What Caplan & Fuchs are pointing to is when voters are saying, in effect, that they would rather have A than B but also rather have B than A. (Analogously, it’s perfectly rational to prefer a free Holodeck to a $1000 LCD or to no TV at all, but it’s not rational to say that because you’d rather have something that doesn’t exist to anything that does exist, you’re not going to decide whether you’d like an LCD or not, or even learn what the price is.)
David J. Balan
Dec 15 2009 at 1:04pm
And yet there are many examples, both here and abroad, where the government really does take market falure correcting actions of the sorts that many economists favor. The thing that the post suggests can’t happen in fact happens all the time. Not as much as we might like, but it happens plenty. The trick is to figure out when this works and when it doesn’t and to make it work better.
Marty
Dec 15 2009 at 3:24pm
Thomas DeMeo–you’re right. The thing is, what happens when those kinds of decisions and balances are moved out of the market where they express consumer preferences, and into politics where they drive all sides of every issue? Not much good.
I offer that in many cases what politicians call market failure is really that they don’t like the outcomes. And in such cases, the cure should do as little as possible to interfere with the market, generally either with a demand-side subsidy or a parallel supply side that does not distort the inner workings of the main supply arrangements.
e.g. for health care, after some obvious market-improving things like purchase insurance in a nationwide market and equalizing tax treatment, one could provide vouchers for those too poor, and/or a public health system of last resort for the destitute. But DON’T use a hammer to do brain surgery on the main health care system.
Walt French
Dec 15 2009 at 10:32pm
“… government habitually make genuine market failures worse …”
First, let’s dismiss the canard that we don’t care about regulation of markets that are functioning well. If you ignore all the successes of regulation, you have a very lopsided view of the effect of government.
Second, since the bald assertion above would be more convincing with some data, let’s look at some. I follow the US equity markets, especially important and visible to capitalists, so it should be a good example.
I’ll start at the creation of the SEC in 1933 — a clear example of government response to a failed market, given that capital formation essentially stopped in response to the Crash.
How have the equity markets performed since they got functional again? Low commissions (frictional costs), transparency and integrity were all important in creating what is today a marvelously robust and vibrant marketplace — incredibly more functional as a result, and the SEC gets credit for many initiatives (or, at least, did not stop them):
* Mutual funds, and later deregulated commissions, opened the market to a much broader swath of society. By encouraging individuals, we released a surge of new companies and technological innovations that greatly increased US wealth. Funds were responses to the appearance of unfair treatment for the “little guy.” May Day transformed $175 fixed commissions (1975 dollars!) into $9.99 trades, which make smaller transactions practical.
* A slew of other innovations enhance transparency and low cost of participation. Index funds and ETFs come to mind. Investor protection is not just the SEC’s primary mission; it is also key to lowering the cost of capital.
* Favorable tax treatments for IRAs and DB pensions have made investing almost a given for most working Americans.
* Despite some hard-core Libertarians’ efforts to prevent requirements of accurate, timely, meaningful and consistent accounting, the SEC’s child, FASB, endeavors to keep insiders from hijacking investors’ rights. Many significant requirements grew out of market failures such as Enron, abusive options accounting and SPVs. (The latter response is still a work-in-progress.)
* Circuit breakers installed in response to the 1987 Black Monday seemingly restored investors’ confidence in the ability to get trades on a non-discriminatory basis.
The SEC regulation (govt intervention!) above has been to repair, strengthen and innovate. It has NOT been flawless, but one can argue that recent laissez-faire non-regulation, failed more. Sometimes in response to market failures and sometimes simply to promote the public weal, the history that I know is inconsistent with the notion that regulation harms markets.
So given these examples, the above insult to regulation is at best incomplete and at worst, unthinking and harmful to society.
Comments are closed.