Don Boudreaux on the market's unsung successes

“It's become an article of faith among lots of people that recent events prove (or at least suggest) that markets don't work very well.

Let's assume -- contrary to what my assessment of the evidence tells me -- that the housing bubble and its crash, along with the current ills suffered by Detroit and other sectors, are exclusively the fault of the market.

How much skepticism of markets would this fact generate relative to the amount of skepticism that is justified? I think way too much. The reason is that market successes go unnoticed and, hence, unappreciated.

The vast majority of market exchanges and relationships work smoothly and to the advantage of all participants. Indeed, the market works so well and so consistently that it creates ever-higher expectations among the broad populace. When these expectations are dashed, if only for a handful of persons and if only rarely, the market is deemed to have failed.”

Don Boudreaux, “The Unsung Successes of the Market”, Café Hayek Blog (2 March 2009).

http://cafehayek.typepad.com/hayek/


Donald J. Boudreaux is chairman of the department and professor of economics at George Mason University. He blogs at Café Hayek with Russell Roberts.

The point that Professor Boudreaux makes is a simple one. We must look at both the successes and failures of free markets and consider things both seen and unseen before we judge whether a market is on balance operating to the benefit of society.

Moreover, when we consider regulating markets we must also understand that if we interfere with the normal operation of a market it generates windfall gains and losses to market participates in ways that can to some degree be predicted by some participants. Because the effects of government controls can be foreseen, special interests attempt to shape regulation in their favor and benefit from any actions the government takes, usually at the expense of many others. Almost everyone changes their behavior in the face of the changed circumstances brought about by regulation. For this reason, in economic terms regulation inevitably introduces a net loss to the economy as a whole to the extent that many transactions that would have taken place without regulation do not take place once government controls are introduced, because the set of mutually acceptable possibilities has been reduced.

Granted at times free markets fail and take far too long to adjust and adapt to new trends and circumstances. And all too often they are uncertain in their operation and their implications for participants. But before we reject free markets in favor of government direction and control, we must consider the market’s unsung successes and all those transactions that wouldn’t take place if we adopted regulations and controls.