Market Corrections Not Government Interventions

Table of Contents

1. Frontmatter

2. Chapter 1. Introduction

   Clifford Winston

   Abstract

   Economists have long argued that government should complement markets by implementing a policy intervention if markets fail. For example, if a firm monopolizes a market by using anticompetitive strategies and sets supracompetitive prices, they hold that the antitrust authorities should bring a monopolization case against the firm and seek a remedy that eliminates the cost to consumers from elevated prices.

3. Government Failure

   1. Frontmatter

   2. 2. Defining and Measuring Government Failure

      Clifford Winston

      Abstract

      Government failure is the leading cause of resource misallocation in the United States and in every other country in the world because it encompasses the vast array of economic, social, and even foreign policy interventions that adversely affect an economy.

   3. 3. Government Policies, Institutions, and Benchmarks for Assessing Government Performance

      Clifford Winston

      Abstract

      My analysis focuses on the two types of government microeconomic policies that give rise to government failures.

   4. Chapter 4. Empirical Evidence of Government Failures

      Clifford Winston

      Abstract

      In this chapter, I draw on books, academic journal articles, and working papers to present scholarly evidence of government policy failures and to categorize their welfare effects. I supplement that evidence with descriptive evidence in newspaper and magazine articles.

   5. 5. The Failure to Explain Government Failure

      Clifford Winston

      Abstract

      This chapter assesses the evidence of various theories’ ability to explain government failure in the book, Market Corrections not Government Interventions: A Path to Improve the US Economy. The theoretical literature has identified the major sources of government failures as comprising voters’ inadequate knowledge about policy issues, the influence of organized interests on policymakers, the self-interested behavior of policymakers and self-selection of individuals who choose to work in government, and the weaknesses of government institutions. However, the evidence obtained from tests of the existing theories suggests they have very little explanatory power and are unlikely to help guide improvements in government policy. Capture theory—the idea that government policymakers are captured by the entities that they are supposed to regulate—has been used to explain specific policy failures and empirically tested more often than any other theory of government failure. I conclude that capture is not more persuasive than alternative idiosyncratic explanations of a policy failure. Clearly, more work is needed to explain government failure but the complexity and opaqueness of policymaking makes it extremely difficult to explain the many relevant factors that may have contributed to a policy failure.

4. Market Corrections

   1. Frontmatter

   2. 6. Defining and Illustrating Market Corrections

      Clifford Winston

      Abstract

      This chapter defines and illustrates how market corrections occur in the book, Market Corrections not Government Interventions: A Path to Improve the US Economy. A useful definition of a market correction is an improvement in market performance that enables markets to address an alleged failure that motivated or could have motivated a government policy intervention. A market correction may be facilitated by an increase in competition or a technological advance or both. Market corrections may offset the cost of government failure by providing an opportunity for policymakers to withdraw their costly intervention in a market or by improving market performance even though government continues to intervene in a market. Some market corrections, however, may be possible only if the government withdraws its intervention.

      I use a series of stylized graphs to illustrate how the forces of competition and technological advance could address market failures that motivated government to implement policy interventions to address those failures. Market corrections are shown for a monopolist’s abuse of market power, natural monopoly, imperfect information, a negative externality, and public production.

   3. 7. Empirical Evidence of Market Corrections to Address Economic and Social Goals

      Clifford Winston

      Abstract

      This chapter reviews the empirical evidence of market corrections that have helped to address economic and social goals that government policies have failed to address efficiently in the book, Market Corrections not Government Interventions: A Path to Improve the US Economy. I draw on scholarly evidence in articles and books and supplement that evidence with descriptive evidence in media publications. Evidence is presented for market corrections that occur independently of government policies, market corrections that government has facilitated by significantly withdrawing a policy intervention that prevented a market solution, and preliminary market corrections in the sense that they have modestly but not significantly increased social welfare but they have the potential to substantially increase social welfare in the future if a major technological advance occurs that allows the initial correction to evolve fully.

      Market corrections that have occurred independently of government policies and improved social welfare include generating additional sources of competition to reduce alleged market power, advances in information technology, developing new innovations, increasing job opportunities and transportation access to labor markets, and technological innovations and new sources of competition that have improved alternatives for the public to obtain merit goods. Market corrections facilitated by government policy reforms include deregulation, which has greatly benefited consumers by increasing firms’ productivity and efficiency and technological advance, and the emergence of private companies, such as ridesharing, which are able to compete with public services. Market corrections that have the potential to produce large benefits include technological innovations to reduce the social costs of negative externalities and new actions to reduce discrimination toward all types of people.

   4. chapter8. An Assessment of and Ongoing Challenges for Market Corrections

      Clifford Winston

      Abstract

      This chapter shows the importance of market corrections by comparing their contribution to addressing economic and social goals with the government policies that have failed to address those same goals and considers the potential for market corrections to address ongoing economic and social challenges in the book Market Corrections not Government Interventions: A Path to Improve the US Economy. Government regulatory and technology polices have significantly reduced welfare, while market corrections have significantly increased welfare by enabling deregulated industries to operate more efficiently and by incentivizing all industries to develop important technological innovations without government incentives. Antitrust and information policies often appear to be solutions in search of a problem because they have generated enforcement and compliance costs while producing negligible welfare gains. Independently, market corrections have stimulated competition to reduce the welfare costs of anticompetitive behavior and have developed information technologies that have benefitted consumers and workers. Government policies to correct externalities, reduce poverty, and provide merit goods have increased welfare at excessive costs to the public, while market corrections have achieved some success in addressing those goals at lower costs. Present economic challenges to markets include the dominance of high-tech firms, the costs of transformative technologies, and the existential threat of climate change. Social challenges to markets include preparing for a future pandemic, preventing the social safety net from deteriorating, and improving social mobility. I discuss how market corrections could potentially help to address those problems.

5. Implications for Economists and Policymakers

   1. Frontmatter

   2. 9. Implications for Economists

      Clifford Winston

      Abstract

      This chapter discusses the implications of my analysis of government failure and market corrections for economists in my book Market Corrections not Government Interventions: A Path to Improve the US Economy. The main implications are that economists should broaden their perspectives to consider the potential for and cost of government failure to address a microeconomic policy issue efficiently. In addition, economists should be more receptive to the possibility that in the long run, a market correction may be a better solution to a microeconomic problem than a government intervention. Accordingly, economists should attach greater importance to government failure as well as to the potential for market corrections in the process of distinguishing between market failure and government failure, comparing market and government long-run performance, and identifying a market failure but ignoring government’s failure to address it efficiently. In future research, it would be desirable for economists to continue to provide new empirical evidence of market and government performance and attempt to provide theoretical explanations for government failure that are supported by empirical evidence. Finally, it would be desirable for economists to include extensive discussions of government and market performance in the content of their courses.

   3. 10. Implications for Public and Private Sector Policymakers

      Clifford Winston

      Abstract

      This chapter discusses the implications of my analysis of government failure and market corrections for public and private sector policymakers in my book Market Corrections not Government Interventions: A Path to Improve the US Economy. Economists frequently distill the implications of their empirical research into policy recommendations. Generally, economists prioritize offering policy recommendations to government policymakers because they believe that their research will be most useful if it is included as part of the public debate and if it helps to improve social welfare. Economists rarely offer policy recommendations to CEOs or other private sector decision-makers unless their work is intended to identify ways that firms could become more profitable by increasing their efficiency and competitive strategies. I reverse economists’ priorities here because I think it is in the interest of private sector decision-makers to consider seriously the policy implications of this book even though I do not explicitly identify and recommend efficiency improvements or competitive strategies for firms to increase their profitability. Of course, it would be desirable for government policymakers to find it in their and the nation’s interest to consider seriously the implications of my discussion. But after devoting much of the discussion to the persistence of government policy failures, it would be unrealistic for me to recommend policy reforms to reduce those failures and to expect that government policymakers would consider those reforms seriously. The private sector should recognize and appreciate that market corrections have assumed great importance for the performance of the US economy because they have helped to address significant economic and social problems that government policies have failed to address. Given markets’ compelling track record, it is in the private sector’s interest to accelerate and broaden its efforts to help address economic and social goals. Of course, those efforts should and will be motivated by the pursuit of profits. But whether they lead to greater competition or technological advance or both, those efforts have produced and will continue to produce large social benefits while benefiting enterprising market participants.

6. Backmatter