Market Failure vs. Government Failure

Nobel-laureate economist Gary Becker provides a useful reminder that the existence of widespread “market failures,” such as those that contributed to the financial collapse and subsequent recession, does not by itself justify government intervention. However bad markets may be at times, there’s no guarantee that government will be better. Here’s an excerpt from Becker’s op-ed.

The traditional case for private competitive markets goes back to Adam Smith (and even earlier writers). It is mainly based on abundant evidence that most of the time competitive markets work quite well, usually much better than government alternatives. The main reason is not that individuals in the private sector are intrinsically better than government bureaucrats and politicians, but rather that competitive pressures discipline market behavior much more effectively than government actions.

The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article “Competition and Democracy” published more than 50 years ago, I said “monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market.” . . .

Government regulations and laws are obviously essential to any well-functioning economy. Still, when the performance of markets is compared systematically to government alternatives, markets usually come out looking pretty darn good.

At one level this argument is self-evident — no set of institutional arrangements operates as well in practice as in theory — but it is regularly forgotten in policy debates. As Becker observes:

The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.

Indeed, when many policymakers see a potential market failure, they almost inevitably call for government intervention to restrain market excesses. Yet when government fails, interestingly enough, the proposed policy solution is often the same: more government intervention. The point here is not that government intervention is never justified — Becker himself believes some government regulations are “essential” — but that it must be justified with serious comparative analysis considers the possibility government may fail as well.