Thursday, March 31, 2011

No Market Failures

There is no such thing as market failures; there are only market solutions.

The problem with mainstream economics, as Steve Horwitz points out, is that they start with the assumption of perfect allocation. When that does not occur -- because it cannot occur -- a market failure is proclaimed. But if one starts with the question of how anything gets allocated at all, of how one can get any kind of coordination at all, then one comes to the realization that markets do a great job. It's idealism vs. realism. Where do you begin? If you begin with an idea situation -- of perfect allocation, perfect knowledge, and perfectly self-interested rational actors (who of course have perfect knowledge) -- then you will always end up terribly disappointed with the real-world system. And you will look to other "solutions" to solve the problem. Of course, if one starts with reality in the first place, realizing that perfection is not possible, then what is interesting is that order and coordination comes about at all. One cannot presume order -- one has to explain it. Mainstream economics, presuming what should be demonstrated, cannot. Austrian economics can. And does.
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