Whenever I hear or read someone proclaim that “the market doesn’t work,” I try (if the situation permits) to ask him or her how is it that an ordinary pencil exists. Its production requires the cooperation of literally millions of people from around the world. Not one in one-thousand of these people know each other. Many of them, were they to meet, would positively hate each other. And yet, pencils exist in appropriate abundance, and can be acquired almost free of charge. (If you’re in the United States, go up to strangers on the street, in shopping malls, or at your school or workplace and ask for a pencil. You’ll not wait long before someone gives you one without expecting it to be returned. I do this experiment frequently; it works.)
It’s an amazing fact. An impersonal process directed largely by prices, with each step along the way created and operated by entrepreneurs and producers seeking chiefly their own betterment, results in incredibly complex coordination that very well satisfies consumer demands — and at a cost to consumers astonishingly low, when you consider the complexity of the process and the millions of persons whose creativity and efforts are necessary to make it a reality.
This, of course, is Leonard Read’s account of “I, Pencil.”
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Friedman, the great.
http://www.youtube.com/watch?v=R5Gppi-O3a8
But, but you need a government person to supervise the transaction.
So first we must pass laws, and then create the departments of pencils.
Then when someone's pencil tip breaks, they will call their senator and demand government do something about breaking pencil tips. A new set of regulations will appear, with the promise that this time it will fix the problem.
The cost of pencils go up, sales go down, and the pencil lobby descends on Washington to add pens to the regulations.
The department of pencils gets bigger, but pencil tips keep breaking and wearing out.
I will let someone else finish the story, as it never ends.
Awesome article, Don. It's absolutely incredible that after the failure of every single attempt to discredit markets there are still those out there who will do it.
I think we're hearing less "the end of capitalisms" now than we did in the Depression – partly of course because it's not quite as bad in the U.S., but partly because we learned how stupid the fear was and how robust the market is. For all the thoughtless reaction to the current crisis, it's not nearly as bad as it was or could be.
It is facinating to me that the whole point of markets is not only lost to some people, but that they can twist it completely around.
And these types are runing our government.
Priesthoods always proclaim their own necessity.
Sam -
Have we switched tracks from the success of the market to the necessity of government?
I only ask because it's a bigger leap than a lot of people realize – which I think is why you have people making outrageous claims about the market not working in the first place.
This point is much older than Mr. Read's essay. Adam Smith made almost exactly the same argument in "The Wealth of Nations", using a common wool coat as an example rather than a pencil.
Yet though this idea has been around for a very long time, the number of people who seem to really appreciate it's implications are relatively few, from what I can tell.
Call it the invisible hand, or spontaneous order, or whatever else you like, but the price system is a fact of life. It's still amazing to me how many people treat the price system as though it were optional, as something which can be overridden at any time without ill effect.
(Small personal victory: a buddy of mine was on R & R leave from Iraq a while back. After he came back he mentioned something about seeing gas prices go up over a holiday weekend, and for the first time ever it didn't make him angry. He attributed that to hanging around with me too much.)
"So Thwaites has been traveling around the world to acquire iron, nickel, copper, and oil from which he planned to make refined petroleum for the appliance's plastic moldings."
– From the Reason article
Is he walking?
If he didn't build from raw materials the vehicle he's traveling the world with, including the tools with which to build the vehicle and if he didn't also make the tools from scratch, he's cheating.
To continue my previous post…
What we should do is drop him naked in a remote, unpopulated region of the Amazon rain forest and see if he can build a toaster.
I could never remember the url for "I, Pencil."
So I bookmarked it with popular link shorteners.
http://snurl.com/ipencil
http://bit.ly/ipencil
http://tinyurl.com/ipencil
http://tr.im/ipencil
Just my little service to the community.
Could the Beatles have made a record?
DK, I was appending to dave smith's comment.
The market works admirably, yet those who find it lacking insist that they can improve it's functioning even though they do not understand why/how the market functions so admirably. Beneath their claims is a desire to command resources for their own benefit.
There are many would-be kings.
Awesome. The universities have created 4 generations of idiots.
It's amazing how many pathologies of society can be traced to the universities — bad art, bad literature, bad philosophy, bad political economy, bad environmentalism, and on and on.
This guy is clearly the victim of a university education.
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Meh. It reminds of when Libertarians says "governments don't work". Surez they do! We have roads, post offices, space research, prisons, schools, etc. Libertarians can argue otherwise till the cows come home but governments do work per se.
Let's look at one and then apply that to the rest. Post offices. People are flocking to Fed Ex, UPS, emails and many other modes of communication. Absent the government subsidy and it would be out of business. Schools. I guess absent the $15,000 per kid paid by the massive property taxes don't keep them in business. Science research. Private scientific discovery throughout history disproves that canard. Roads. Read Rothbard on the whole private trunpikes of our country's early period. No need for government to necessarily handle that one. Even prisons need not be government buildings.
My neighbors 20 year old pickup still works too….it just requires significant repair money almost every month. It was given to him by his dad – who also incurs all the repair costs – so he thinks it is free.
Gil -
I agree, but that shouldn't be taken as a refutation of Don's post any more than Don's post should be taken as a refutation of government.
Markets do work – and the article did a great job at silencing the naive and often ideologically-driven naysayers. Government does work too. The question is, what jobs do both do best.
Gil -
I think there is a more fundamental question that you are overlooking here. The question is not if governments work "per se." The questions is whether governments work efficiently. In each of those examples you listed, it would be trivially easy to list private entities which provide much better services at much lower costs than government services. Ettubloge, for example, pointed out FedEx and UPS. These two companies have become mulit-billion dollar enterprises precisely because the government does so poorly with the mail service.
Jack of Spades -
Sure, but we don't have a public post office because the founders carefully thought through whether that would be a legitimate market failure or not in the 21st century. We have the post office for more historically specific reasons.
But the other areas Gil mentioned – roads, education, basic research – are not areas that the market always does poorly in, but they are areas where it is "trivially easy" (to use your words) to identify market failures.
But this is besides the point. The post office doesn't prove anything about overall government efficiency – it's just a politically useful anecdote. It is evidence that there are some things the government can't do.
The pencil example that Don raises doesn't prove anything about overall market efficiency – but it's a hugely suggestive example that does put to rest the idea that the market somehow doesn't work – which despite the fact that we've been enjoying it's fruits for so long, some people still actually believe.
Daniel Kuehn,
I'm not so sure about easy examples of market failure in those areas. Private roads, for example, are not extensive, but in the areas they have been allowed to operate they have been successful. As far as I know, private enterprise in each of these areas has been more efficient where it has been allowed to work than has government services in the same. I'm sure there have been unsuccessful venues here and there, but that's not the same as a general "market failure." But I agree that it's somewhat off the topic of this post.
I'm not an anarcho-capitalist, despite my best efforts. I really want to be, but the arguments of David Friedman and Murray Rothbard have stopped short of being convincing. (Then again, I do tend to make an effort to be more critical of ideas I find inherently attractive to try to offset my own biases. Perhaps I overcompensated in this case? I'm always open to convincing.) So I do believe there are legitimate roles for government to play.
(Here in Iraq, all the Marines around me are debating if Michael Jackson or Elvis Presley is the greater musical icon. Ugh.)
Daniel Kuehn,
To be more clear about what I mean about market failure, I am referring to a broad and systemic failure of, say, private schools, not just a particular school which failed. In all the areas Gil listed, I'm not familiar with any real market failures, where the potential market has not already been suppressed with prohibitive legislation. Any pointers?
Jack of Spades -
I knew you weren't meaning specific failures. That's part of life – private and public sector. I am thinking more general failures too.
But I'm using the term to mean a persistent sub-optimal investment or market for something. Basic research is a very good example. It is done very well in the private sector – and should be done in the private sector as well. But there is a lot of evidence that has been collected over the years that suggests that because it is so hard for firms to internalize the returns to basic reasearch, the market chronically sub-optimally invests in it. Ergo, there's very strong justification for the government to fund some basic research, and perhaps even perform some itself.
So when I say "market failure", I'm not saying that "markets don't work" in the sense that the guy who's making a toaster from scratch suggests they do. I'm just using terminology that is used in the field – but more accurately means "markets chronically sub-optimally invest".
Basic research is a classic example. School is too – at least primary education (think of the different incentives… for minors parents would be making decisions based on returns to education that their children will enjoy… not to mention positive externalities associated with education – markets underinvest when there are strong positive externalities, and overinvest when there are strong negative externalities). Infrastructure is another common example – although I think there are many more venues for private infrastructure than some like to admit.
And the point isn't that the government will always succeed where there are known market failures (education is a case in point) – but this line of work does strongly suggests that there are areas where government intervention is quite justified – if still imperfect.
but it's a hugely suggestive example that does put to rest the idea that the market somehow doesn't work
More to Don's point, the market is a symphony that functions without a conductor, a central authority, to make them work.
But I'm using the term to mean a persistent sub-optimal investment or market for something.
Who gets to decide?
And what about the hazards of having an absolute authority to extort entitlement to resources from people to make such investments?
What about the "side effects" of such activity (rent seeking)?
Daniel Kuehn –
Well stated. But there are a few quibbles which come to mind.
First, I've always been iffy on phrases like "sub optimal investment," because that seems like such an imprecise and shifting target.
Secondly, quite a lot of what is called market failure isn't truly market failure. Quite a lot is what Steven Landsburg called "market absence", when lack of property rights (or other conditions necessary for the market to function) do not exist. Other instances what is called market failure seem to be entirely subjective; there seems to be no reason to call it market failure other than the fact that person X or group Y isn't satisfied with the result.
But more to the point, you said that where market's fail, government is not always destined to succeed. I agree, wholeheartedly. Many advocates of government intervention tend to compare the actual market with how government intervention would work on paper; comparing actual vs ideal, rather than actual vs actual. You seemed to acknowledge that government intervention in education is sub-par. (Unless I misunderstood something.) So I agree that while the various areas you mentioned would benifit from government investment on paper, the track record of actual government intervention has been so far below projections, the results so different from the projections and the cost (and resulting loss of overall efficency) so much higher than projected, that it's generally not worth it.
Public choice has done an excellent job of explaining why "ideal government" never matches "actual government," and that the reasons for these shortcomings are systemic and therefore essentially inevitable.
We certainly cannot allow people to decide these things for themselves! They might underinvest!
It's funny to see the education-is-market-failure canard pop up again. The education market has been actively suppressed for generations, and yet it still dramatically outperforms government schools. No government failure is so bad that it cannot be used as a reason for more spending.
OK, funny's the wrong word. Maybe pitiful is a better choice…
yet another Dave -
RE: "The education market has been actively suppressed for generations, and yet it still dramatically outperforms government schools."
This is completely besides the point. The question isn't "do the people who learn in private schools get better educated than those in public schools" – the question is "can the private market optimally provide education for the entire potential market". I'm a huge supporter of breaking the teachers unions and introducing competition into schools to improve things. But you're addressing a fundamentally different question by bringing the laudable performance of private schools into a discussion about whether the market for education would be optimal or not.
Jack of Spades and Sam -
I agree completely on the reservations of doing something about market failures… in fact I think I raised that point myself in my post when I said that just because a market will be sub-optimal, that's no guarantee that the government can do that job at all. So I wholeheartedly agree on that caution.
yet another Dave -
To clarify – that example is like saying "the labor market clears because this particular group of workers is very happy with their employment situation".
The satisfaction of a portion of market participants is a good thing to keep track of, but it says absolutely nothing about whether there is excess demand, excess supply, dead weight loss, etc. in the market.
Daniel Keuhn –
I didn't miss the your reservations about attempts to improve market performance. To the contrary, I was agreeing with and following up on your point. Most of the ramblings in my post were various reasons why I reached that conclusion. People can reach the same conclusions for different reasons, after all. Murray Rothbard and David Friedman are both anarchists, but Rothbard reached that conclusion from a natural right perspective and Friedman from a utilitarian perspective. This difference in epistemology also made them view each other as opponents rather than allies.
And there I go again on another tangent.
Bottom line; my last post was meant to express agreement rather than the opposite. Sorry if I was unclear.
I agree completely on the reservations of doing something about market failures… in fact I think I raised that point myself in my post when I said that just because a market will be sub-optimal, that's no guarantee that the government can do that job at all. So I wholeheartedly agree on that caution.
I raise that caution closer to the level of red than would you.
Creating rent seeking interests is an activity government should be prohibited from engaging in lest the fire escape the fireplace.
"Creating rent seeking interests is an activity government should be prohibited from engaging in lest the fire escape the fireplace." – Sam Grove.
Who is the prohibiting agency then?
Who is the prohibiting agency then?
The only thing that can do this is the sensibility of the people.
Tim Harford over at the FT has a good piece on why rich economies are more complex than poorer ones. Reminiscent of I, Pencil
http://timharford.com/2009/07/why-getting-complicated-increases-the-wealth-of-nations/
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