“Markets fail; let’s use markets”

That’s a capsule summary of the George Mason University economics department (HT: Brian Hollar):

Adjunct professor Arnold Kling offered a terser précis of the GMU way. “My simple way of describing it is that at Chicago they say, ‘Markets work; let’s use markets.’ At Harvard and MIT they say, ‘Markets fail; let’s use government.’ And at George Mason, we say, ‘Markets fail; let’s use markets.’” This seeming paradox means, that GMU sees plenty of deviations from the “perfect neoclassical paradigm,” which requires “perfect information, perfect competition,” but that unlike Harvard or MIT, they do not automatically “ring a bell and say, ‘We need more government.’ Markets come up with solutions to problems of information.”

Though the slogan sounds peculiar, it makes sense, not only because markets themselves solve problems of information, but also because government too faces serious problems of information, as John Stuart Mill, Friedrich Hayek, and others have stressed. In fact, it faces much more serious problems. Markets can incorporate vastly larger amounts of information than government agencies can.

Markets can fail from lack of information; they can also fail from collective action problems—prisoners’ dilemmas, tragedies of the commons, etc. Government faces these sorts of difficulties as well. Earmarks illustrate the problem perfectly. It makes sense for each individual representative to seek benefits for his/her own district, given the behavior of everyone else. But, if everyone does so, everyone, representatives and represented alike, can end up worse off. I call this “the tragedy of the Congress.” Just as shepherds tend to overgraze the commons, so representatives tend to overuse the federal budget—in fact, government authority in general, whether exercised in spending, regulatory activity, oversight, or some other form—leading to everyone’s being worse off.

A simple way to put the point: Markets fail; before resorting to government, however, we should verify that government is more likely in the relevant circumstances to outperform the market. In a slogan: Markets fail; governments do even worse.

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