The Myth of Market Failure



In the language of economics, a market failure is, as David Friedman writes, “a situation where each individual correctly chooses the action that best accomplishes his objectives, yet the result is worse, in terms of those same objectives, than if everyone had done something else.” As a rule, the pursuit of individual good in the market brings no such negative result. On the rare occasions when rational individual actions lead to regret by those same individuals, the result is labeled “market failure.”

When I say that market failure is a myth, I don’t mean to deny that such regrettable situations can occur. I only mean to deny that they are peculiar to the market. They can occur in all sorts of contexts, including the political context — hence we need a broader, more accurate term. I propose “group-rationality failure.” We might win some support for the free market if more people understood that this kind of failure is not unique to markets but rather is a feature of human action under certain special circumstances. Moreover, as we’ll see, this is less of a problem in the market than elsewhere. (For a discussion of various kinds of “market” failure, see Art Carden and Steve Horwitz’s “Is Market Failure a Sufficient Condition for Government Intervention?”)


Read more via TGIF: The Myth of Market Failure The Future of Freedom Foundation.

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