Friday, December 30, 2011

Market failure

I was walking down the street yesterday morning and noticed the taped-up, dusty windows of a closed business in an office building. Slightly more than half of small businesses fail before their fifth year, a waste of resources and human effort. Such failures can bankrupt the individuals and families that make the attempt, and such people are real entrepreneurs rather than fake ones: this is real economic risk, unlike the "risk" that corporate and financial executives claim to brave when they venture other people's money while protected by golden parachutes when they fail. Aside from small businesses, giant corporations also fail, sometimes so badly that they need government welfare to survive. Even though the public usually bails out companies that are "too big to fail," corporate failure distends itself in other ways, through layoffs, closures of branches, and the like. The economic damage that comes from business failures is real, it ruins lives, and it is wasteful and inefficient.
My point is not that we should demand perfection, for there is waste in any system. My point is to highlight how standard economic theory performs a little conceptual trick that makes these business failures invisible.
In standard economic theory, business failure is wrapped up into the market mechanism and presented as part of the workings that make markets efficient: firms that make mistakes or that can't compete with ruthless competitors get wiped out, to supposedly be replaced by firms that can. The market thus learns from mistakes and, in this theory, becomes more efficient. Things that are, in reality, mistakes and failures are built into the theoretical concept of the market and end up not really being failures at all. It's magic!
But also notice how market believers, whether reactionary conservatives or moderate liberals, are quite ready to condemn government when it fails. It is true that sometimes government bureaus and offices display inefficiencies or have to be shut down or folded into other organizations. But many of these inefficiencies are the result of imperfect institutional accountability or others dynamics inherent to large organizations, whether public or private. Corporations often display a wasteful sluggishness that is similar to government: the "Dilbert" cartoon’s lampooning of corporate inefficiency wouldn’t ring true if it didn't exist. In the freak show of market ideology, government failures are perceived as real, but business failures are not, and government is universally held to be more inefficient than the market. This way of thinking blinds us to the failures of the market, and is is inherently biased.  Business failures don't count, on this model, even though the shuttered business with its dusty windows that I walked past yesterday was still closed. 

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