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Sunday, December 29, 2013

'Mixed Thinking about Markets'

John Quiggin:

Mixed thinking about markets: ... Chris Berg ... wants to argue that all the good things that have happened in the last two centuries are the product of the “market economy”, and that we should therefore scrap our existing social arrangements in favor of radical reforms in which market forces are given free rein.
In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.
All of this reflects the fact that a pure market economy doesn’t work well. Rather than list all the problems which have led modern societies to constrain the role of markets (environmental pollution, inequality and so on), I’ll focus on the one discussed by Berg, that of technological innovation. Information is what economists call a public good... And while it’s possible to keep useful information secret for a while, it gets harder and harder over time. So, a pure market system often doesn’t provide much of a reward to people who come up with new ideas.
All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. ...
Berg’s argument is an example of a characteristic fallacy among advocates of market liberalism. Beginning with the fact that all modern societies are, in some sense, capitalist, they point to the successes of modern society to argue in favor of a particular version of capitalism (free markets, on the US model but taken even further) and against others that have been more successful in terms of human welfare (various forms of social democracy) or that might exist in the future. ...

    Posted by on Sunday, December 29, 2013 at 07:39 AM in Economics, Market Failure | Permalink  Comments (13)

          


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