Some market failures cannot be corrected

Currently reading Nicholas Stern’s Blueprint for a Safer Planet, and I find – as I usually do when reading authors for whom the market is some kind of shibboleth – that he really doesn’t understand how secondary the market is to strictly political decisions – or the absence of decisions – about how we want our economy to work.

Markets are rather like games: how well they work and what their consequences are depend very much on how you set up the rules and referee individual games. Without that there is no game, so to appeal to ‘the game’ as a solution to problems with the game itself makes very little sense. In the case of markets, to imagine that ‘the market’ can solve social, environmental or even economic problems on its own is irrational, to say the least.

In the present context, we know that markets will not, in their current incarnations, solve environmental problems of the size and kind we now face. Stern himself lists a very large number of market failures and rightly insists that markets need to be regulated in very deliberate ways if they are to contribute to environmental solutions. But what he does not seem to recognise three fundamental problems with the entire model.

1. Firstly, many of these problems – asymmetric information, externalities, imbalances of economic power – are direct products of the market economy.
2. Secondly, especially in markets with relatively few major producers (which is currently most markets of any global significance), these same ‘market failures’ are quite consciously wielded by all major players in the markets to ensure that markets do not in fact operate as their apologies imagine.
3. Finally, markets have failure built into them in a more important and enduring sense. Whatever ‘correction’ they may be subjected to, unless that correction is perfect the market will continue blindly on, unable to envision or anticipate the next disastrous shortcoming. The only signal markets respond to, once all the regulations are in place, is price. Since price is inherently indifferent to anything but the current rules of the market, it cannot ‘see’ that there is something else wrong. So another round of intervention becomes necessary, which disrupts the markets again, and in fact will probably only be introduced because a new crisis is upon us. Which is exactly what, in a warming, degrading and ever more crowded world, we cannot afford to wait for.

In summary, ‘market failure’ is actively created by markets, is deliberately perpetuated by participants in that market, and is in fact an inescapable fact until markets can no longer operate solely in terms of prices – which is an unlikely state of affairs without very substantial political intervention.