Tuesday, June 06, 2006

Markets Don't Fail! By Brian P. Simpson

Gideon Reich has reviewed Brian Simpson's Markets Don’t Fail!:

When I finally got around to taking basic micro- and macro-economics in graduate school, it was in many ways a disappointment. I was certainly not an expert, but by this time in my life, I had been exposed to many ideas about how economies ought to work. However, the class I took was nothing like the few books I had previously read. Those books argued for laissez faire capitalism and criticized government intervention. The instructor and the textbook were united in believing that actual markets are “imperfect” and break down and government intervention is required to keep order and safety. At the time I had some trouble coming up with arguments against market failure since aside from large economics treatises that I did not have time to read, there were seemed to be no concise refutations of such supposed circumstances.

Today the situation is quite different thanks to Brian P. Simpson, Assistant Professor in the School of Business and Management at National University, La Jolla, California. As its name implies, Simpson’s book, Markets Don’t Fail! (Lexington Books, 2005) provides an antidote to the almost universal college economics textbook assertions about market failure. In that respect, it’s an excellent resource for those who want to understand the issues behind these claims.

In his text, Simpson addresses some of the most common claims of market failure, examining issues such as monopolization, externalities, environmentalism, and public goods, just to name a few. In each example, Simpson lays out the strongest case of the interventionist side—and then proceeds to utterly demolish it. An illustrative example is his coverage of externalities. He begins by clearly defining the term “externality”:

An “externality”… is a cost imposed, or benefit bestowed, on people other than those who purchase or sell a good or service. The recipient of the externality is neither compensated for the cost imposed on him, nor does he pay for the benefit bestowed upon him. These costs and benefits are labeled “externalities” because the people who experience them are outside or external to the transaction to buy and sell the good or service. (P.85)
After further describing the difference between positive and negative externalities, Simpson explains why it is claimed that markets fail in this instance:

The alleged failure of the market occurs because, it is claimed, the market provides too many goods that produce negative externalities and too few goods that create positive externalities. Too many goods that create negative external effects are allegedly produced because the costs imposed on those who experience the negative externalities are not taken into account in the production of the goods creating the negative side effects. Remember, these costs are imposed on people who neither buy nor sell the goods. If these costs were accounted for in the production of such goods the cost of producing them, and therefore the price needed to purchase them, would be higher. Hence, fewer of them would be produced and purchased.

The “solution” … is government intervention into the market. …It is claimed that the government must take some action to restrict the production of these goods by, perhaps, imposing a tax on the producers of such goods so that these will experience the effects of all the costs they impose on others. (P.86-87)
Finally, Simpson proceeds to analyze and refute not only the economic arguments behind both positive and negative externalities, arguing that acting on “externality theory in a consistent manner and implement[ing] policies based on it . . . would lead to economic stagnation, a much lower standard of living, and thus a much lower level of individual satisfaction in the economy” but going deeper and arguing that the entire concept of “externality” is philosophically invalid and absurd.

He concludes the chapter by writing that “[t]he externality argument does not provide any evidence of market failure. The only evidence of failure this argument provides, as with all the arguments against the market, is the failure of contemporary economists and other intellectuals to embrace sound concepts and ideas.”

Markets Don’t Fail! is about more than just economics. Just as in the case of externalities above, Simpson presents a multiple level refutation of each of the market failure claims. In a separate chapter he also provides a good review of the positive case for capitalism, showing in detail how capitalism is the only moral social system and rests on an ethics of egoism. Simpson rewards the reader with a wealth of arguments that will help him understand the issues involved—and students of economics will finally have a resource with detailed answers to the false claims so often made in their textbooks.

1 comment:

Ryan said...

Why is "the entire concept of 'externality' ... philosophically invalid and absurd"?

There is no argument justifying this in the foregoing excerpt.