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Argument Against Market Failures

David Friedman recently gave a talk about market failures which I heard about second hand. In the talk was the following story, which is a typical example of a public good problem:
Two armies face off. One has horses. The other has only spears. The men with spears can do two thinks: hold a line against the charge, or run away. Horses are faster than people, so if they all run away they will die. So the best outcome is that they face the charge. But the best outcome for an individual is that everyone else face the charge while he runs away. That is in his self interest. So everyone will individually decide to run away, and they will all die. So the question is: what can be done to make sure everyone holds the line? This is said to be an example of a market failure: the market cannot make everyone hold the line, but the Government can.
The public good is holding off the charge, but people can become free riders by running away (they get the benefits of the charge being held off even though they didn't participate). And the question is how to make sure everyone stands the line.

I think public good problems are a mirage, and the arguments for them are flawed in a variety of ways. Here I want to talk about one flaw in this story which I think is the worst one.

The situation has, as a premise, what the best outcome is. It treats "What should the people do?" as a given. Because the correct outcome is a premise, the scenario is fundamentally different than all real situations. In particular this approach makes the following question worthless: "What is the best thing to do?" Having the correct outcome be an unquestionable premise prevents all debate, discussion, argument, brainstorming, and criticism about what the people ought to do.

By contrast, in real life we never know what we should do with certainty, and such debate and discussion is critically important. Such thinking and discussing is how people come to learn, to agree, and to cooperate. It is the very mechanism which solves problems like market failures and public good problems. And it's exactly the area where the Government is at its weakest.

The Government's strength is forcing policies on everyone that it believes are best (whether they are mistakes or not), and its weakness is creating knowledge. That's why Government intervention always appeals to people who think they know the truth and that there is no need for further debate. And in seems appealing in situations where the best outcome is given as a premise. The market's strength is creating knowledge and its "weakness" is using force. Using a premise that obviates any need for knowledge creation, and hints that the correct outcome is so good that it's best even if force is used to bring it about, fundamentally distorts the scenario in a heavily Government-biased direction.

Elliot Temple on October 27, 2008

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