There was a time that the role of economic theory was to promote market outcomes, to understand and explain how they worked and why they are beneficial to us all. Now economists see their role as explaining why markets cannot be expected to work and why their operation can be expected to cause harm to the majority of the population. And not just some of the time but all of the time. I have been reading Joe Stiglitz’s The Price of Inequality (2012 – see how up-to-date I am) which is a quite sobering experience. There is no form of interference with the operation of the market that he would not endorse on the road to greater “equality”. He and Krugman are the Marx and Engels of American economic theory. This more or less sets it out:
Private rewards and social returns are not well aligned when competition is imperfect; when there are externalities (where one party’s actions can have large negative or positive effects on others for which he does not pay or reap the benefit); when there exists imperfections or asymmetries of information (where someone else knows something relevant to a market trade that someone else doesn’t know); or where risk markets or other markets are absent (one can’t, for instance, buy insurance against many of the most important risks one faces). Since one or more of these conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential for governments to correct these market failures. (p34)
Enormous and never ending. Compare the above with a second bit of analysis, again from a Nobel Prize winner, this time the 1977 winner, James Meade. If there’s a dime’s worth of difference between the two, I haven’t run across it yet. The following is from Meade’s The Intelligent Radical’s Guide to Economic Policy (1975) which I have been reading at the same time as I have been ploughing through Stiglitz.
On the foundation of this market mechanism there must be built a superstructure of of governmental interventions and controls. Some of these interventions are needed simply to set a background of conditions in which free competition can work effectively; others are needed to replace entirely the mechanism of competitive markets, where the mechanism cannot be expected to operate effectively; others have an intermediate purpose, namely to modify without replacing the operation of a market price mechanism.
If you want to understand our economic problems, there’s nowhere better than to look at the advice from the economics profession itself. Everything needs fixing by governments. Virtually nothing can be left to run itself. If there is anything left of the free market after this, I am not sure where it is.