Reflecting on my friend Lyle Albaugh’s new entrepreneurial venture , as well as on the market’s capacity to solve problems (such as the “lemons problem”) , drives home to me the importance of economists never speaking of markets as being “perfect.” Markets never are perfect. And it’s a dangerous error to claim, or imply, that markets work well only if and when they are perfect – for such a claim or implication suggests that the scope for successful government intervention to ‘correct’ market ‘imperfections’ is far wider than it is in reality.
The market process is chiefly one of entrepreneurs spotting market failures and sub-optimal situations – spotting problems that have yet to be ‘solved’ adequately by market (or non-market) forces – and then experimenting with actions to address such problems. The discipline to ensure that such experiments work as well as possible over time is supplied by (1) the fact that those who do the experimenting in private markets put their own money and effort on the line (rather than money and effort forcibly commandeered from others), (2) consumers’ freedom to buy or not to buy the resulting products, and (3) the actual and potential competing experimenters who do, or might, arise along side of the initial entrepreneurial experimenter. And this on-going process is indeed just that: a process that, as much as it improves market performances over time, never comes close to creating any situation that deserves the name “perfect market.”
Not all identifiable problems are even potentially solvable through such entrepreneurial experimentation. If, for example, carbon emissions creating destructive global climate change were a real problem, it isn’t a problem that any private entrepreneur can likely respond to in ways that promise a realistic resolution. (It does not follow, by the way, that inability of private market actions to solve a problem implies the ability of political actions to solve that problem. Too often people jump from the first conclusion to the second. That jump is often illegitimate.) Yet while not all identifiable problems are potentially solvable through entrepreneurial experimentation within private markets, a great deal of the problems that professors, pundits, politicians, and preachers claim to identify with the real world can indeed be solved – or at least greatly mitigated – by private action of the sort that entrepreneurs routinely take.
The problem of monopsony in labor markets is one such problem. If it’s the case that employers today of low-skilled workers do in fact possess sufficient monopsony power to cause large numbers of low-skilled workers to be underpaid, this problem is precisely the sort that is exploitable – and, hence, solvable – by private entrepreneurial actions. It is because of this reality that I keep insisting to the more economically sophisticated proponents of minimum-wage legislation (be these proponents ones who demand nationally set minimum wages are ones who are merely willing to tolerate minimum-wages set by local governments) that they voluntarily put their own money where their mouths are by starting their own companies to take advantage of the profit opportunities that they (at least implicitly) claim to spot rather than advocate that government forcibly put other peoples’ money where their – these minimum-wage-advocates’ – mouths are.
Yet, of course, none of these minimum-wage advocates or apologists are willing to put their own money where their mouths are. And this reality means that the typical such academic or pundit – unlike my friend Lyle and other entrepreneurs who, with self-respect and demonstrable courage, actually take steps to improve the world – is someone who is so lacking in pride that he refuses to act with a stake on his own stated convictions, yet is also so slathered up with hubris and arrogance that he fancies himself justified to force other people to act on his stated convictions. Such academics and pundits are the very last people on earth whose advice on any public-policy matter should be heeded.