Gather ’round children! We’re going to talk about markets. Anyone who’s actually had an introduction to microeconomics course can skip this part.
Hrm, I’ll take note that there are still a lot of self-professed libertarians in the room. I find that weird – given how much libertarians seem to think that the market will solve society’s ills, you’d think that they’d be experts on markets?
But of course, they aren’t.
Given our audience is now a bunch of libertarians who love to go on and on about how markets will solve everything, maybe we should focus on particular problems that markets solve terribly, why, and what the usual solutions are. Guess what? In all cases, the usual solution is BIG DIRTY GUB’MENT!
Market Failure Number 1: Public Goods
A public good is a kind of thing that when someone purchases it, “everyone” gets it, or at least part of it. Let’s get an example – street signs.
When I read a street sign, it gives me information about where I am and helps me decide where I should go. Unfortunately, there’s nothing I can do to prevent you from reading the same street sign. It’s non-excludable – I can’t keep you from reading it once I’ve put it up in a easily seen area.
Let’s let the market solve street signs – well, each one costs a lot. More than the value we each get from them in our one-off need. So the price of each sign is high, but the value is low. Based on pure price mechanisms alone, we wouldn’t buy that many – not nearly as many street signs as we have.
But because street signs aren’t consumed on use, their value to overall demand is immense. One street sign can serve all of society – the cumulative value of each individual’s need for that sign in the right place at the right time easily overcomes its individual cost. Alas, since we allowed the market to dictate how many street signs there’d be, we bought too few. The few that are up were bought by really rich folks for whom the marginal utility of the sign outpaced its marginal cost to them.
Why are you glassy-eyed when I used the terms marginal utility? Oh right, that’s because libertarians don’t go to economics classes and have no idea what I just said. Let’s just say there’d be fewer signs.
But wait, what if we all decided to band together, put just a tiny bit of money into a common pool (far less than the cost of a single street sign on a per capita basis) and put up hundreds if not thousands of street signs we could all share!
Suffice it to say, goods like street signs that cost too much for any one person to buy but can be used by everyone once bought are great goods for the government to buy. The government will buy just enough, while the markets will under purchase them and society as a whole will be worse off (less utility for all of us!)
Guess what’s another great example of a public good that free markets would under purchase? The National Fucking Defense. Y’all libertarians really need a government to pay for an army, otherwise Canada is going to waltz right in here and take over.
I know that Libertarians complain about “men with guns” coming and taking their “rightfully earned money” (more on that in a second), but at least they’re Americans with guns. It’s way worse when its Canadians with guns because you decided that the “market” would purchase the perfect amount of national defense.
Okay, one more – you know what else is an example of a public good?
MONEY. Look who’s picture is on that piece of paper you constantly claimed you rightfully earned with no help from BIG DIRTY GUB’MENT.
Sorry, that last sentence too me awhile to write as I kept laughing so hard, whiskey came out of my nose.
Market Failure Number 2: Negative Externalities
Markets are great at getting society to build just the right amount of X to help the most number of people for the lowest cost. This is because they use the price mechanism to represent all of this information.
You don’t need to interview millions of people, spend years planning delivery and logistics routes all to figure out the optimal amount of bread to bake. Just let people who want bread and people who can make bread decide on a price and you’re done.
But what if the price can’t reflect the total negatives and positives of a good? This happens frequently. Let’s talk about a coal-fired power plant.
The price of electricity is paid to the power plant. The power plant’s prices are largely dictated by how much coal costs, the capital costs of the plant (amortized of course), the salaries of the workers, plus any interest on loans that the owners of the plant took out to keep it running. The coal miners get paid, the employees get paid, the banks get paid, and the manufacturers of the equipment get paid. Huzzah! Markets in action.
Wait, where’s my pay check?
That’s right, we forgot to pay “the public at large” since we also bought their clean air for free and gave them back air with smog in it, which they didn’t want. But come on, that’s the price of progress baby!
Actually, no, that’s an underestimated price of progress. Since no one’s paying for the smog (except for the public at large), buyers of electricity will get electricity cheaper than what it actually “costs” for society to have it. This means electricity will be overconsumed.
How do we fix this? Well we can’t rely on markets – after all, the coal plant could just use some of its profits from the over-consumption of electricity to, say, fund some misinformation campaign about the dangers of smog. Now people are dying and they’re blaming themselves instead for not eating enough vegetables. Perfect!
So maybe in idealized markets, enough information about the dangers of smog comes out that a bunch of folks voluntarily stop buying coal and switch to cleaner fuels. But that’s still not the right amount of coal to burn. Coal runs hospitals, so it probably cures more cases of cancer than it causes. We just have to remember that it does cause some cancer. We need that amount to be reflected in the price mechanism, and then we’d naturally find the invisible hand buying the ‘right’ amount.
I know, what about men with guns who take our hard earned money? Other people just call these “taxes”, but it seems like if society at large is paying for smog in increased health issue rates, we just figure out an estimate on the cost of that and then tax the coal burners enough to pay for that. Now the equation is balanced – we don’t accidentally over consume coal and over produce pollution – we buy just the right amount.
Market Failure Number 3: Merit Goods or Positive Externalities
What if smog cured cancer? But we still didn’t put a price on it because we’re dumbass libertarians who don’t know how markets work and assume that “rational individual freedom” will figure everything out.
Well, then we’d be under producing smog.
A much more intuitive example might be vaccines. The value of a vaccine to you, and just you, you perfectly rational economic agent, you – it’s, say, $100. You don’t want to get the flu, you figure the flu is worth $100, so you get a shot to ensure you don’t get the flu.
If shots cost $100, you’d buy one. Your friend, who’s decided the flu is worth only $80 to him, decides not to get a shot. He’d rather risk getting the flu and keep his money.
But here’s the thing, when you buy a vaccine, you’ve lowered the risk of your friend getting the flu.
Did you charge him?
WHY NOT?! I THOUGHT YOU WERE A PERFECTLY RATIONAL ECONOMIC AGENT!
You should raise funds for your flu shot from all your friends, set at precisely the value they have for a slightly lowered risk of getting the flu.
You want to set up the LLC, or should I?
OR, and just hear me out here, OR – we could ask everyone at large to pay just a tiny bit, and then we use that money to lower the cost of flu shots for everyone. It’ll pay for itself many times over since we’ll make the vaccine cheap enough that a lot of people will get it, and we’ll have ‘herd immunity’, which is like, the best kind of immunity.
I’ll bet some people won’t turn over the money voluntarily – after all, they benefit whether they get the shot or not, since now all of their friends are immune. We might have to do some coaxing. I know some folks will do it out of their feelings of social contract – I, as an individual, get some benefit out of being in society, so I owe it back to society to chip in on things.
Or we can use the libertarian code for “social contract” and all rant and rave about men with guns coming to take our hard earned (government supplied) money.
Let’s talk about that for a bit more. Do you, as a moral person, not murder others because you’re afraid that men with guns will come and get you? No? That doesn’t make any sense. You should only act because men with guns force you too! Not out of the goodness of your heart!
Why is it that if you don’t murder people simply due to trying to avoid the consequences, that somehow paying taxes is different? That paying taxes you only do because of the threat of being locked up? I mean, let’s face it, the IRS isn’t that efficient (thanks libertarians). The likelihood of you actually getting locked up is low. Still, a lot of people try their best to pay their taxes.
Huh. I guess maybe it isn’t men with guns. Or maybe libertarians just think all tax payers are suckers.
Market Failure Number 4: Monopoly
Wait, wait, wait a second. A monopoly can’t be a market failure, it’s the point. The whole point of markets is for smart white men to compete with each other over who’s the smartestest, and when they win, they get all the gold and get to run things how they see fit.
I mean, some weiner economists might say that there are actually different types of markets, and that perfect market competition is great for both buyers and sellers equally and all this other theoretical bullshit. But we really know that markets should only be good for sellers, and buyers are all suckers.
Bro, do you even economics?
Monopolies tend to set prices too high. Given that other market forces can’t compete them down, the only real competition they have is from people just outright giving up the service. They extract all of the “market surplus” – this is the excess value to society gained from trade for those of you just realizing that people have studied markets for a lot longer than you have been alive – and so the demand side of the equation gets none of this ‘market surplus’. They’re only slightly better off than if they didn’t buy the product to begin with.
Meanwhile, the monopoly is WAAAAAY better off. Or at least its managers are, since monopolies can and often do use their market surplus to:
- Negotiate lower expected rates of return with lenders and investors
- Negotiate lower taxes and regulations (i.e., lobby) with the government
- Build a wider moat to discourage any future competition
None of that sounds like a very efficient way to use a surplus. Remember when suppliers of a good would often use their share of the market surplus to supply the good better? You know, innovate, use technology, create better products or more of them for the same cost? Remember when profits made us all better off?
Yeah, so do I! Only that happened in non-monopolistic markets!
What’s the solution here? Well, there’s two, and they both involve the BIG DIRTY GUB’MENT.
First, we can use government power to bust the trusts and break the monopolies. You know, men with guns and all that shit. Yeah!! Show those fat cats who’s boss!
This can return a monopolistic market to a more competitive market.
Alternatively, we can just say that a monopoly is okay, but to control the prices we should all become managers and shareholders of that monopoly. This ends up looking a lot like government, and is why the government builds the roads. Roads that compete with each other are really expensive and would over produce roads – instead there’s a ‘natural’ monopoly here. To prevent an actual predatorial monopoly from forming and charging as much as possible to use the roads (meanwhile not building any MORE roads. Also this works for telecom, wink wink nudge nudge), we say the government is in charge of building roads.
They build shitty government roads, but they’re free!
This isn’t even all the ways markets can fail. There are others. And often they have regulatory solutions like taxes or men with guns or rules, and we’re all better off because of it.
Because free markets optimally allocate goods. All the above market failures are situations where a truly free market needs a little help to get started. The government can and should provide the means to get these markets going since, as we all know, markets – when they work – are fantastic.
But markets are not the same as “every man for themselves.” It’s not “no government involvement”. Again, remember, the government obviously builds the roads, issues the currency, and raises the army. There are not many libertarian arguments that any of these things ought to be done by anyone else. But all of those things are required for markets to form.
Markets can’t form if you can’t get to them (no roads). They can’t form if there’s no trusted medium of exchange (money). And they can’t form if robbers are going to steal your shit on the way too and from the market (armies). The government already plays a very large role in ensuring markets function.
The best markets are free ones, and free markets need the government to be free.