What's the Matter With Markets

Via Mike Huben's ever useful Critiques of Libertarianism Website I stumbled across this post by Mark Thorma which does a great job of explaining the limitations of markets - particularly unregulated ones.

In order for markets to work their magic, there can be no externalities, no public goods, no false market signals, no moral hazard, no principle agent problems, and, importantly, property rights must be well-defined (and I probably missed a few). In general, the incentives that the market provides must be consistent with perfect competition, or nearly so in practical applications. When the incentives present in the marketplace are inconsistent with a competitive outcome, there is no reason to expect the private sector to be efficient.

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There is nothing special about markets that guarantees that managers or owners of companies will have an incentive to use public funds in a way that maximizes the public rather than their own personal interests. It is only when market incentives direct choices to coincide with the public interest that the two sets of interests are aligned.

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There is nothing inherent in markets that guarantees a desirable outcome. A market can be a monopoly, a market can be perfectly competitive, a market can be lots of things. Markets with bad incentives produce bad outcomes, markets with good incentives do better.

I believe in markets as much as anyone. But the expression free markets is often misinterpreted to mean that unregulated markets are all that is required for markets to work their wonders and achieve efficient outcomes. But unregulated is not enough, there are many, many other conditions that must be present. Deregulation or privatization may even move the outcome further from the ideal competitive benchmark rather than closer to it, it depends upon the characteristics of the market in question.

It's a good summary - read the whole thing - but I also think it misses the number one argument against laissez faire. This is simply that markets do not guarantee provision. Under a pure market based system the only guarantee of obtaining a certain good is to have the resources to purchase it. This is fine with hamburgers (in New Zealand at present), for example, because (a) they are generally affordable and (b) it's not the end of the world if you can't purchase them. This is not the case with health care on the other hand - treatment is costly and absence of treatment can be, well, deadly. Nor is it the case, in many developing countries (and even New Zealand in a recession), with regards to basic nutritional requirements. Under markets alone - there's no guarantee you can afford to eat and, if you can't, you're dead.

If this strikes you as a bad thing then you are going to want to live under a system governed by more than markets alone.