… is from page 37 of the hot-off-the-press new volume by my colleagues Matt Mitchell and Pete Boettke, Applied Mainline Economics: Bridging the Gap between Theory and Public Policy (footnotes deleted):
Entrepreneurs are alert to unrecognized opportunities for mutual gain. By seizing these opportunities, they earn profits, and the mutual learning from the discovery of gains from exchange moves the market to a more efficient allocation of resources. In addition, the lure of profit continually prods entrepreneurs to seek innovations that increase productive capacity. For the entrepreneur who recognizes the opportunity, today’s imperfections represent tomorrow’s profits.
At each and every moment in time real-world markets are full of ‘failures.’ (Let us not forget, though, that at each and every moment in time real-world markets are full also of successes.) Each and every instance of some consumer not currently being served as well as he or she could be served might be called a “market failure.” The market is a process of entrepreneurial discovery of such failures and entrepreneurial creative effort to profit by ‘solving’ the ‘failures.’
Some of these market ‘failures’ are so commonly recognized as being solved by ordinary market processes that they are not classified as failures. If the price of coffee is currently below its market-clearing level, even the most conventional of neoclassical economic textbooks explains that market forces will push the price upward and thereby bring the quantity of coffee demanded into equilibrium with the quantity of coffee supplied.
But other market ‘failures’ are not recognized by the typical economist today as being subject to the same corrective market process. If, say, in a section of town many low-skilled workers are in fact currently paid wages less than the value of their marginal product, the typical economist quickly leaps to the conclusion that employers there have monopsony power – monopsony power perhaps due to these workers’ lack of information about other, better job opportunities. This typical economist then concludes that the market has failed and will continue to fail. This typical economist recommends government intervention; in this case, the recommended intervention is a government-imposed minimum wage.
This typical economist is blind to the profit incentive that such a market ‘failure’ offers to entrepreneurs – which is to say that this typical economist does not really understand how real-world markets work. Nor does this typical economist understand how real-world policy-making works, for implicit in this typical-economist’s recommendation of government intervention is (1) the faith-based belief that politicians, bureaucrats, and college professors are more likely than are entrepreneurs to recognize the existing problem, and (2) the faith-based belief that the government interventions will generally be done apolitically and expertly.
The typical economist is offended by such descriptions of him or her. He or she fancies that his or her diploma and ability to describe a system of general competitive equilibrium using truly impressive mathematics – or his or her mastery of the latest econometric techniques – necessarily means that he or she is a competent economist. Yet while such abilities are indeed impressive and useful, they alone do not an economist make.