… is from pages 32-33 of Steven Cheung’s important April 1973 Journal of Law & Economics article, “The Fable of the Bees: An Economic Investigation“:
Whether or not Keynes was correct in his claim that policy makers are “distilling their frenzy” from economists, it appears evident that some economists have been distilling their policy implications from fables. In a desire to promote government intervention, they have been prone to advance, without the support of careful investigation, the notion of “market failure.”
…. [I]t is true that costs involved in the enforcement of property rights and in the formation of contracts will cause the market to function differently than it would without such costs…. But it is equally true that any government action can be justified on efficiency grounds by the simple expedient of hypothesizing high enough transaction costs in the marketplace and low enough costs for government control. Thus to assume the state of the world to be as one sees fit is not even to compare the ideal with the actual but, rather, to compare the ideal with a fable.
DBx: Free people are far more creative in dealing with collective-action problems than the typical person – or even the typical economist – gives them credit for. In the article from which the above quotation is drawn, Cheung reports the results of his careful study of real-world contracts, market arrangements, and informal relationships between beekeepers and orchard owners. He found that such individuals when acting privately (and, here, also driven by the commercial profit motive) do not behave in the inefficient ways that naive neoclassical economic theory predicts them to behave – or, at least, do not always behave in these predicted ways.
Economics textbooks and journals are stuffed with theories and ‘proofs’ that the kinds of mutually beneficial activities that Cheung found to take place between beekeepers and orchard owners will not – cannot – occur. Reality proves these theories and ‘proofs’ wrong.
Economists such as A.C. Pigou, James Meade, and Paul Samuelson, for all of their brilliance, failed to see the market as a process of discovery and creation. These economists’ too-narrow understanding of human creativity and flexibility, their underestimation of the profit motive, and their inattention to the importance of institutions led them both to miss the many real-world ways that markets work well even when textbook ‘ideal’ conditions aren’t present and to miss the damage that is unleashed by empowering government to “solve” alleged “market failures.”