The Myth of 'Market Failures'

Most economists believe in a phenomenon called a ‘market failure’, defined as “...the economic situation defined by an inefficient distribution of goods and services in the free market”. It is alleged that “in market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group” (Chappelow). According to most economists, ‘market failure’ is a natural consequence of an unregulated market, almost always requiring some form of government intervention to solve. This essay will show why all allegations of ‘market failure’, if existent at all, are the consequence of government intervention into the economy, or the inadequate protection of individual rights from the state itself. Additionally, this essay will show how many economists disastrously misapply the concept of “the market”.

When evaluating whether or not a market has succeeded, it is first necessary to articulate what purpose the market exists to fulfill. The purpose of a market is to maximize the selfish value of every individual from the perspective of every other individual. Markets allow a person to gain massively from those he or she interacts with, in the form of mutually beneficial relationships such as trade, employment, and investment. To the extent that a government protects individual rights, it aligns the interests of those individuals within its jurisdiction.

When economists allege that a market has failed when a family of four owns five televisions instead of one, they are dropping the context of “a failure to whom?” and “a failure for what?”. If the family of four was rationally self-interested in their purchase of these five televisions, then there must be some objectively valuable purpose to their economic activity. If not, then this can only be evaluated as an individual failure, which is possible under any economic system. This family’s decision does not harm their neighbors, nor the television manufacturer which they dealt with. Under a free market, the only person that an individual is capable of harming is oneself.

There are a vast number of reasons why a family may need five televisions, such as if they have a security room, or if they need electronic components. Economists are completely ignorant of all of these reasons for purchasing five televisions, and under a free market it is impossible for companies to force consumers to buy their products. Yet economists speak as if they know what’s best for everyone, regardless of even the most rudimentary factors of an individual’s daily life, let alone an entire society. Economists demand that we endorse the state’s initiatory use of physical force on their behalf, and that we accept, on faith, that such force will be used to benefit everyone. Economists demand that we accept this even given the fact that physical force is subjugation of an individual to one’s own will, and thus cannot be used to benefit everyone. Goods and services do not flow from the barrel of a gun, only destruction.

A market is a radically decentralized system of economic appropriation, production, distribution, and trade. Markets can only exist to the extent that rights are protected, including property rights. Thus, markets require a government which manages four essential services: police, military, courts, and prisons, such that the government can sufficiently wield retaliatory force in order to protect political conditions of free association. All allegations of ‘market failures’ in these four services are fallacious by their nature as they commit the stolen concept fallacy. It is illogical to evaluate the market’s application to the preconditions of there being a market. The market has a definite political context in which rights are protected. It cannot exist under anarchy.

Some economists claim that negative externalities represent market failures, such as pollution and resource depletion. However, the cause of these negative externalities is the state’s failure to fully apply and protect property rights. Pollution is destructive when it harms an individual’s health, damages one’s possessions, or reduces the market value of one’s property. It is appropriate for the state to take legal action against such polluters if and only if they have been proven to harm others. If it can be demonstrated that such pollution cannot be conducted without violating individual rights, then it is justifiable for a legislature to create a more generalized rule about it. But these rules must always be contextual; they shouldn’t apply to remote areas where no damage to human beings is possible.

Likewise, resource depletion only exists because of the insufficient application of private property. The public nature of many lakes, rivers, and forests creates the destructive incentive for companies to loot and pillage these resources as quickly as possible. If these places were placed under private ownership, it would create an incentive for companies to cultivate them in a sustainable way. The tragedy of the commons is not a consequence of a free market, but a system of universal ownership. In both of these cases, it becomes apparent that when sufficient protection of rights is applied, these so-called ‘market failures’ are eliminated.

Equally absurd is the claim that an unregulated market leads to ‘natural monopolies’. There is absolutely no historical evidence to support such a claim, as no ‘natural monopoly’ has ever existed. John D. Rockefeller’s Standard Oil was accused of being a ‘natural monopoly’ in its time, yet as his share of the petroleum market continuously increased, the price of natural gas decreased and the quality increased. His business became successful because it was able to provide consumers with an affordable, quality product. In fact, it was the government’s intervention into the petroleum market that created government-protected monopolies. (Weinberger).

Likewise, even industries alleged to be inevitably centralized, such as electric utility companies, are not so. When electric utilities are privatized, competition flourishes, and consumers benefit substantially. Natural monopoly theory fails “on every count” as “competition exists, price wars are not "serious," there is better consumer service and lower prices with competition, competition persists for very long periods of time, and consumers themselves prefer competition to regulated monopoly” (Dilorenzo).

The unparalleled efficiency of a free market economy is inescapable. When and where rights are protected, human reason is allowed to flourish to its greatest possible extent. This leads to a broader scale of production, heightened innovation, heightened social trust, as well as many other benefits. Allegations of ‘market failures’ are unclear and misrepresentative, as their proponents fail to grasp key concepts and distinctions needed to understand the actual functioning of a free market. If you are an advocate of human flourishing on earth, you ought to reject the term ‘market failure’ and advocate for a completely free market economic system.

Works Cited:

Chappelow, Jim. “Market Failure. Investopedia. Online.

https://www.investopedia.com/terms/m/marketfailure.asp

Weinberger, David. “The Myth That Standard Oil Was a “Predatory Monopoly”. FEE. Online.

https://fee.org/articles/the-myth-that-standard-oil-was-a-predatory-monopoly/

Dilorenzo, Thomas J. “The Myth of Natural Monopoly”. Mises Institute. Online.

https://mises.org/library/myth-natural-monopoly