David Friedman on Market Failure: An Argument Both For and Against Government

The second of David Friedman’s recent lectures in London was called ‘Market Failure: An Argument Both For and Against Government‘ and was held at the Institute of Economic Affairs on Tuesday the 15th January.

David started by clarifying what he believed was a market failure, as in his view many commonly held examples are incorrect.

Again, as with the previous lecture, Friedman described how resorting to using the state in certain market failure circumstances would be the best course of action if the state was a ‘perfectly wise and benevolent regulator’. As he points out there is however a shortage of perfectly wise and benevolent regulators. He then elaborated on this point with his hypothesis, and supporting evidence for it, that the state itself is a form of market failure. The one thing that protects from market failures, he said, is property rights.

David stated that politicians have insecure political ‘property rights’ as their tenure is limited by the next election. They therefore always care about short-term effects, that is changes that can be effected before the next election; anything beyond that is significantly less important as it may not be their responsibility. To win the next election they have to appeal to people now, on current delivery, not with promises of wealth in the future (note this ‘time value’ of political delivery is the same effect as used in calculating interest-based decisions, such as return-on-investment and pricing of options).

Friedman also covered his view that tariffs transfer wealth from disperse to concentrated groups. He saw that this transfer in wealth via government tariffs and other taxes is an endemic market failure of the political market. He reiterated his view (and his father’s) that on balance government causes more problems than it solve, even with extreme examples such as poverty. To support this claim he mentioned a few example mechanisms that make overall poverty worse: minimum wage laws, immigration controls and other barriers to entry (e.g. licences).

At this point David mentioned the old protectionists favourite metric: the balance of payments deficit. As he pointed out “you can build cars in Detroit or grow them in Iowa: send wheat off on ship into pacific and it comes back with Honda cars on them”.

As with all three of David Friedman’s London talks during his visit it was interesting and informative; in addition David’s love of classic mythology and historical examples of successful libertarian societies are used to illustrate his talks.

For more information on David Friedman’s views on market failure and how this can be dealt with without a government there is an interesting paper of his here.

I will put the link to the video live once it appears on the IEA’s website.