Market Failure

This article by Arnold Kling should be mandatory reading. His definition of market failure in the first paragraph says it all. To use a southern term that people understand, it is the "good old boy system." This comment of King, "If incumbents have a self-reinforcing system that keeps out innovators, then we have market failure" is exactly what we see in many places where the "good old boy" system is not interested in new ideas but want to retain the status quo and power.

In all the articles we have read from the "experts" on the economy, this explains what is happening better then any of them. We have often wondered how someone in academia can be considered an "expert" on what business owners are facing when they have no practical experience.

Another term that makes no sense is "too big to fail." If a business is so bad that it needs to fail, let it fail and quit propping it up as they continue down the same path that led to failure. Chrysler should have failed years ago, and we wouldn't have had to bail them out for the 2nd time. Someone will always come along and pick up the slack and create more jobs from a failure.

We have always thought that everything works better with new and innovative ideas but liberals for the most part are for the status quo and instead want everything to remain the same with one exception -- they want to take over large chunks of the economy to consolidate their power. What liberals in this Country cannot seem to fathom is that is not what the vast majority of American people want from the Federal Government. They want smaller and less intrusive Government which is foreign to the so-called "experts" being touted by this Administration.

This country is known for entrepreneurship over the years and why we have been able to have the latest technology in many areas. Their reward from liberals is to be taxed even more on their money so they (liberals) can redistribute the money to those "less fortunate" who are Democrat voters. Why would anyone want to make more money when they will be taxed at a much higher rate by the current administration? The liberal democrats in power seem to have never met a tax hike they didn't like unless it is affects their union voters.

Raising taxes stiffles the economy while lowering taxes makes the economy grow which in turn creates more jobs. It is a huge difference between the liberal and conservative philosophy and why an article like this is so important.

Market Failure
Arnold Kling
Jan 14, 2010

I want to propose a new definition of market failure. For me, market failure exists to the extent that innovation is blocked by incumbents. If innovators can succeed by out-competing incumbents, then the market is working. If incumbents have a self-reinforcing system that keeps out innovators, then we have market failure.

This post ties together a couple of recent bitter themes. It is not intended in any way to persuade people who disagree with me (if you disagree with me, you may just want to skip the post). It is simply a grand unified theory of my bitterness.

First, why am I bitter about Jonathan Gruber? I am bitter because in my view he has received funding and accolades far out of proportion to his skills. He is being treated as a supreme authority. In theory, that is because his skills are exceptional. Instead, I suspect that, on the contrary, his success has less to do with how he uses his critical thinking functions than how well he has repressed them. In short, he is paid to tell progressives and politicians what they want to hear.

Suppose that we have a group that wants enormous political power. The group rewards people who justify its power by calling them "experts." It punishes those who question its power by dismissing them as "hacks." If you want money and status, you want to be labeled as an expert. In order to be labeled as an expert, you produce analysis that justifies concentrated political power for the elite group.

This process is self-reinforcing. It is like the Harvard-Goldman filter. That filter says that only "reliable" people are allowed to be bank CEO's or policymakers. A requirement for being "reliable" is sharing the views of other "reliable" people as to what constitutes reliability.

It is like the tenure system in academia. Who gets tenure? Above all, it is people who support the existing tenure system.

Incidentally, that is my explanation for why the Internet has failed to alter the academic journal system. People who go through the tenure process have an enormous stake in not changing the process. The process is self-reinforcing.

Of course, incumbents never want to change the process, but markets can force change. So far, all the phenomena that I have been talking about represent market failures, by my definition. There is a market failure in health care. Instead of innovation, what gets rewarded are ideas and policies that entrench the existing system. There is a market failure in finance. Bad firms and bad policies are not weeded out. Instead, what gets rewarded are bank CEO's and policy makers who promise to make the system "too regulated to fail" and who bail out their friends when that promise breaks down.

Excerpt: Read More at Library of Economics and Liberty