Reuters released a story today about Professor Eric Maskin, one of three American economists to receive the Nobel prize for economics. In it Maskin is quoted as saying that he “to some extent” takes issue with free-market orthodoxy.
This is not news. Maskin is just repeating a chapter that everyone reads in any microeconomics text book about public goods. Sure, the market MAY not be able to efficiently provide a military, courts, or other public goods because of the free rider problem. Although there is evidence to the contrary about certain public goods, such as Coase’s famous lighthouse example, Medieval Icelandic law, and private enforcement of criminal bails, but public goods theory and the free rider problem are still convincing and pervasive throughout the economics profession.
Market imperfections are not news to anyone who has studied economics, but this winner’s statement is flawed in some ways. As Tyler Cowen, professor and blogger at marginalrevolution pointed out, his style of economics is fading. This Nobel winner looked at the market as static rather than dynamic. It’s easy to look at a time slice of any dynamic process and come to the conclusion that it is failing. What takes real economic genius and insight is to look at an unfinished and dynamic market process and understand why it is working. That’s one insight that this Nobel winner seems to lack.
But maybe this story reveals more about Reuters’ anti-market bias. As Bryan Caplan points out in his book The Myth of the Rational Voter, many people think that economists are free market fundamentalists. The truth is that the average economist is a moderate Democrat who believes that free trade and outsourcing are good for the economy. Economists are not free market fundamentalists. In fact, every theory of market failure developed has come from economists.
I don’t want to sound too critical of Maskin. His and his colleague’s work on mechanism design has greatly aided in making auctions more efficient, minimizing agency costs, and aligning incentives with wealth maximizing ends. His work has impacted business and government handling of certain affairs is surely deserving of recognition.
In case Maskin or the other Nobel laureates have been too consumed with their work to pick up a new micro book in the last twenty years, many texts now have sections devoted to government failure. Since government is often posited as a solution to supposed market failures, it’s good to know how often and how completely governments fail in handling their basic tasks.
Market failure is a real phenomenon. But market failure works better than government failure.