Who Says Markets Work Perfectly?

David Henderson writes,

I know of no Econ 101 course or its equivalent that talks just about “a world where free markets work perfectly and government intervention is always bad.” Zero, none, nada.

I can confirm that the AP economics curriculum, which is based on freshman economics, does not contain either the phrase or the implication that markets work perfectly and government intervention is always bad. On the contrary, it includes a major section on market failure and on government’s (presumably perfectly executed) role in correcting it.

When I see the phrase “markets work perfectly,” I know that I am going to see a straw-man argument against conservative economists. I know of no instance in which someone who is berated for believing that markets work perfectly has actually claimed to hold that belief. Zero, none, nada.

If you want to pass an ideological Turing test, then drop the phrase “markets work perfectly” from your vocabulary. What conservative economists do believe is that government has a propensity to fail that often exceeds the propensity of markets to fail.

9 thoughts on “Who Says Markets Work Perfectly?

  1. Great post, but I think you should drop the “(presumably perfectly executed)”. You’re teetering on committing exactly what you accuse your opponents of doing. Stay charitable, Arnold!

    • That’s not uncharitable: it’s accurate.

      Econ 101 says “these are potential market failures” and “these are what government can do to correct them.” Econ 101 does not say “government might not do those things well” or “government might take market failure as an excuse to do more than correct the market failure” or “government bodies tasked with correcting market failures might not be dissolved once technology renders particular market failures moot.”

      I.e., Econ 101 presumes government executes the corrections perfectly.

  2. I don’t think that’s what Noah was saying at all. I think David misread the whole piece as an attack on right-leaning economists when it was really more about the changes wrought in the profession by Big Data.

  3. Liberal economists don’t assume governments act perfectly but often believe market failures drive government failures by either under or over reacting, and that no action can be as bad as over reaction.

  4. Jeff R – based on the excerpts provided by Dr. Henderson, what Smith said is that Econ 101 *used to* presume perfect markets and extol greed, prior to the 1970s, but now are far more realistic because they include all kinds of ways that markets fail.

    As I understand it, by the way, this is the opposite of the truth. I think that until the 1970s, it was common wisdom among economists that markets are deeply flawed and government control of the economy produces better results (e.g., Samuelson’s textbooks of the post-war era), but since then economics has become, on the whole, more skeptical of government interventions.

  5. “. . . markets work perfectly and *government* intervention is always bad. On the contrary, it includes a major section on market failure and on *government’s* (presumably perfectly executed) role in correcting it.” [*s supplied]

    “Econ 101” AP or other, misses the mark (as do the bulk of commentators). It is not “Government” that intervenes. The mechanisms of government are used to intervene for economic and social objectives determined by political means; essentially, determinations of (usually limitations on) the freedom of actions of some by others.

    “Governments” don’t do anything; people use the mechanisms of governments to do things. People have motivations and objectives which are demonstrated in the uses made of government mechanisms to intervene in the human interactions that constitute “the market.”

    “Markets” don’t fail. Interventions don’t fail. Human efforts at objectives fail. The causes for those failures of human efforts are multifold.

  6. “What conservative econoimsts do believe is that government has a propensity to fail that often exceeds the propensity of markets to fail.”

    That doesn’t seem like the correct way to frame the issue. I think a better way to frame the issue is in terms of feedback mechanisms. Is a given function in society better served by market or regulatory feedback? How can we find the right interaction of market and regulatory feedback for a given function? Framing the issue this way makes it less adversarial and hopefully more objective.

  7. Who decides “perfect”?

    In politics you do hear something close to markets will work it out, but that gets us back to Arnold’s 3 languages. Liberals seem to desire a specific outcome, but the desired outcome of others is to leave the process of discovery alone to determine the current optimum.

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