Markets are a means, not an end

Markets are a means, not an end

We are concerned economists. We are free marketeers that admire the market system, we think that markets solve most economic allocation problems.
But we also know markets can fail, and are not able to solve every economic problem. That is, we are not market fundamentalists. For us, markets are a means to an end, not an end in itself.

Market fundamentalism is the belief that basically everything can be left to the market and that government is always the problem, never the solution. Specifically, market fundamentalism is blind to:
  • Market failures
  • The ways markets need government
  • Cases in which government can improve on market outcomes
Market fundamentalism is an ideology that treats markets as an end in themselves. If only the government will get out of the way, economies prosper.

It has a simple understanding of how markets work in real life, it’s dependence on institutions, regulations, trust, the rule of law. Instead, it portrays a simple introductory textbook model of markets in which these issues are abstracted away, so it seems there is no need for all that, and markets are the only viable institutions.

While markets are generally a good way to allocate resources, they’re not without their own limitations.

Market fundamentalism simply assumes that in a free market economy, markets will always clear pretty rapidly, so lasting slumps are either ruled out by definition, or blamed on some form of government intervention (or the central bank).

We can see this ideology at work in the explanation of the 2008 financial crisis, which market fundamentalist blame on:

  • Central bank policies being too ‘loose’
  • The CRA and/or Fannie Mae and Freddie Mac
These explanations miss the mark.

Market fundamentalists also underestimate the role governments have played, and still can play, in creating functioning market economies, as these don’t just emerge, but are dependent on a host of supporting institutions (independent courts, rule of law, regulations and standards, infrastructure, education, research, independent competition policy, macroeconomic stability, etc.).

That is, government plays a crucial and positive role in the economy, for instance:

We also happen to think that there are some natural reasons for government go grow when countries get richer. For instance, government produces mostly services where productivity grows slower than in manufacturing, preferences tend to change towards public goods (safety, healthcare, education, environment, etc.) and increasing complexity requires more regulation.

There is also plenty of evidence that it isn’t necessarily the size of the government that is important, it’s the quality of public institutions. We see that countries that have made such a switch are usually happier.

All this doesn’t mean that we’re blind to government failures, or that we want the government at the commanding heights of the economy, far from it. We think that most economic activity can be left to markets and private companies (we’re not ‘socialists,’ ‘central planners,’ or ‘statists’).

We want a realistic, facts based approach to markets, not an abstract and ideologically driven one. Markets are a means to an end, not an end in themselves.

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