… is from page 107 of Harold Demsetz’s important April 1969 article in the Journal of Law & Economics, “Information and Efficiency: Another Viewpoint,” as this article is reprinted in the 2002 collection, edited by Tyler Cowen and Eric Crampton, Market Failure or Success: The New Debate (original emphasis):
The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement. This nirvana approach differs considerably from the comparative institution approach in which the relevant choice is between alternative real institutional arrangements. In practice, those who adopt the nirvana viewpoint seek to discover discrepancies between the ideal and the real and if discrepancies are found, they deduce that the real is inefficient. Users of the comparative institution approach attempt to assess which institutional arrangement seems best able to cope with the economic problem….
Demsetz’s famous article is now nearly a half-century old, yet the scientific and policy counsel that it offers continues to be ignored by far too many economists and public-policy pundits. (It’s also ignored by politicians, but that is to be expected. If politicians were to begin to generally follow Demsetz’s advice, that event would be more momentous than the emergence of hippopotami who fly by flapping their hooves.)
It is distressing that so many economists and intellectuals continue to condemn market arrangements and outcomes simply because these arrangements and outcomes fail to live up to imagined ideals. And it is both distressing and dangerous that the conclusion drawn from the completely unremarkable fact that reality isn’t ‘ideal’ in this sense is that the state should be empowered to “correct” these “failures.” Those who draw this conclusion persist – typically without bothering to offer a justification – in assuming that state officials, at least in democratic societies, somehow, by some miracle, overcome the many obstacles to ideal human action that are understood or believed to make human action in the private sector a source of mischief, mayhem, and misallocation.
Despite Demsetz warning long ago against the commission of the nirvana fallacy, that fallacy continues to be committed daily, and conclusions drawn from its commission continue to serve as guides for public policy. This entire process of assessing economic reality and prescribing ‘corrections’ for all deviations from the ideal is simultaneously scientifically illegitimate and normatively obnoxious.
