Thursday, 29 October 2009
Market Failure - What market failure?
The market is a mechanism, with price as one of its major tools, in order to ‘clear’ or allocate scarce resources.
In centrally planned economies a political elite fulfill the role that price would in order to determine the allocation of the resources.
In a market lead economy price fulfils this role.
The problem is that price (or value) is not always a perfect measure or instrument to send a signal to the participants to ‘clear’ or allocate all the resources effectively and efficiently.
In certain circumstances the market is therefore seen to or perceived to fail, however this is an error in logic, it is not the market that fails, but individual participants within that market that fail. They fail because of the fact that information asymmetry prevails and not every participant has access to capital and resources at the right time in order to set or take the most efficient clearing price. The problem is that is not necessarily the market that fails, but individual behaviours of participants in that market that puts a strain on the market and therefore forces it towards a new equilibrium point.
This is what we recently and so spectacularly experienced as another deep recession.
The focus should be on developing better and more sophisticated tools (other than price alone) to grease and ease the wheels of the market allocation system.
Some would call these tools better regulation, however true libertarians believe in these two maxims of efficiency and effectiveness:
(1) Spontaneous Order
(2) Creative Destruction (Schumpeter)