The Market Fails
1. Any government intervention means the market has failed. Listening to right-wing and left-wing discussions about small versus big government, one can get the impression that either the free market represents the natural world and government is some sort of parasite, or government (in the form of society) represents the natural world and the capitalist market is some sort of parasite.
Above is a picture of a fire insurance medallion (or “firemark”). This is from a time when public fire brigades were either non-existent or completely inadequate and people who were worried about fires had to purchase fire protection from the private sector. They would put these medallions on the front of their buildings so that the private firemen could identify them as a customer. The fire protection the private sector provided was good for the time, but the free market ultimately failed to provide the kind of fire protection that we have now come to expect in this society. This failure was not because the government somehow stood in the way of the free market. It was that there was no reason why the private sector should be able to meet the need of universal fire protection for both those who could buy it privately and those who could not. The police be organized in a similar manner and the military also used to exist in this way at the time in Western history when national armies were made up entirely of mercenaries. I point this out to remind us that the government has always intervened when the market fails and if it looks like some “small government” functions like police, fire, and military protection seen “natural”, it’s because the government has been intervening in them for so long that we have forgotten why the government intervened in the first place. The market has always failed whenever resources were needed by those who can’t enter the market or when capital costs were too high for private holders of capital to combine themselves. The distinction between a free market on one hand and the government on the other is a false one.
2. The definition of “market failure” is always a moral one. Government intervention in any form, from the building of an army to corporate welfare, always involves the movement of resources from one group to another by the government in a way that the market cannot. This always involves the question of desserts. Do those with the resources deserve to lose them and those without deserve to get them? It is the definition of market failure that changes over time, as society comes to decide that the market will not provide a service in the form that society needs it. Health care in America is a case in point. The health care market provides very well for a few, well for some, and hardly at all for others. In these terms, since the people who get healthcare get it to the degree they can pay for it, the market does what it does well. On the other hand, the free market cannot provide insurance benefits for everyone, and since the universal provision of these benefits has become a social value, the market has been deemed a failure and the government now has to intervene. The same market had the same situation with the masses of uninsured in the past. It’s just that in the past we did not see this as a market failure in the way that we do now. The definition of market failure, whether it refers to a need to have a standing army, a public provision of police and fire protection, Social Security, Medicare, sugar and ethanol subsidies, or universal health insurance is always a social construct around a moral debate.
3. The government always intervenes as an entrepreneur. From a capitalist point of view, the reason that the government can intervene in the market in the first place is because it has access to capital resources that are not available to the private sector. Some people claim that the private sector does things well and the public sector does things poorly and that there is some sort of intrinsic reason for this. This is a strange argument to make. The public sector only gets involved in the first place when the private sector has already failed. When the government gets involved to rectify this, it too can fail or it can succeed like any entrepreneur. Sometimes, like an entrepreneur, it succeeds at first and then later fails as it fails to adapt to changing circumstances. But the government always enters the market as an entrepreneur when private entrepreneurs have failed.
The point of all of this is that the right-wing “market good – government bad” and the left-wing “government good – market bad” positions are not really arguments at all. They are a-priori assertions that when used causes discussion to stop. When we talk about things like cutting military spending, Medicare, Social Security, public services, etc. we are talking about cases where the market already failed in the past and we are talking about the definition of this market failure in each case, which is a moral discussion.
The market will always provide some level of service. Always. But the free market is not itself a source of social or moral values. It does well what we decide it does well and fails where we decide it fails.
Have a happy Independence Day.