Sometimes It's Hard to Explain Market Failures

Lots of economic policy debates end up going like this: First, one economist or policy wonk will propose a government intervention -- a minimum wage increase, a tax on sugar or subsidies for solar electricity. Another person, usually someone of a more free-market bent, will demand to know exactly which market failure justifies the intervention. A market failure, in the parlance of economics, means a situation in which free markets produce wasteful outcomes. If the advocate can’t produce a theory justifying the policy, the critic claims triumph. If the advocate can find a theory that seems to support the intervention, the critic will typically then criticize the assumptions of the theory. Since most econ theories are highly stylized and have questionable ability to fit the facts, this means that free marketers claim victory quite a lot.

The demand to demonstrate a market failure isn’t fair, because it puts too much burden of proof on advocates of intervention. But it’s often rhetorically effective, because of two sociological quirks. First, many people assumes that free markets are the natural state of things. The flow and bustle of the business world seems much like a jungle, while government action feels forced and artificial. Government interventions can seem a lot like medical procedures. And of course it makes sense for doctors to diagnose an ailment before they start prescribing treatments. The medical rule of first, do no harm is a good one because nature has had millions of years to turn human bodies into self-correcting systems. That principle also makes sense for human societies tampering with natural environments.