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Market Failure

Market Failure
October 29, 2008

A voice overhead in the Washington, D.C., metro system warns “customers” not to try to hold open the doors of a subway car as they are closing. The announcement is made every stop or two. You hear it at least a couple of times during each trip. Yet I am always taken aback. A spirit of usage crankiness kicks in -- my inner Edwin Newman -- to insist on the difference between being a passenger and a customer. The words aren’t mutually exclusive, of course, but why not use the one that applies to the concrete, particular circumstance of being in the mass transit system?

Not that complaining would do any good. The language will get mangled, irregardless. Besides, this is a case of usage reflecting an established, nearly ubiquitous attitude. Everything is a market, and everyone is now (in all ways and at all times) a consumer. Someone who pays taxes for public transportation is not so much a citizen as a customer, in exactly the same sense as folks in line at McDonald’s. Likewise with the student in a university classroom -- who, having paid good money, expects both a passing grade and a certain level of entertainment, and may not be shy about expressing these demands.

Perhaps it’s a cultural residue of the past few decades of “market utopianism,” to borrow an expression used by Lawrence D. Brown and Lawrence R. Jacobs in The Private Abuse of the Public Interest: Market Myths and Policy Muddles, just published by the University of Chicago Press. The authors are serious wonks (Brown is professor of health care policy and management at Columbia University, while Jacobs directs the Center for the Study of Politics and Government at the University of Minnesota) rather than testy guys muttering about the Zeitgeist while riding the subway. But their book, which is compact and jargon-free, is intended for ordinary readers trying to understand the limitations of free-market fundamentalism – including its clear tendency to backfire.

The book's timing is remarkable. At this point, not even Business Week is completely faithful to the doctrine that “markets are smart, government is dumb,” as former Republican House Majority Leader and onetime econ prof Richard Armey once put it. A recent cover of the magazine announced: “Washington’s new role in banking is just the beginning of the ‘public-private’ world to come.” The phrase “public-private” is printed in red, which one might interpret in a couple of ways -- either as a sign of creeping socialism, or because the global economy is swimming in that color of ink.

Dogmatic advocates of “the magic of market forces” suffer, according to Brown and Jacobs, from not having understood Adam Smith very well. “Far from offering an unqualified celebration of unrestrained self-aggrandizement,” they write, “Smith struggled to balance individual self-interest against the social need for institutions that harnessed self-regard to the service of society.” The discipline of the market is not enough to achieve that balance. The state must provide certain public goods. Market forces alone aren’t sufficient to meet the common need for national defense, rule of law, public education, and the maintenance of infrastructure for transportation.

 

Such services are “for the benefit of the whole society,” according to Adam Smith, and must be “defrayed by the general contribution of the whole society.” Which means taxes. (It seems a matter of time before Sarah Palin releases an attack ad regarding all the crypto-Marxism in The Wealth of Nations.)

Brown and Jacobs laud what they call Smith’s “pragmatic realism,” including his recognition of the need for state regulation of banking. But somewhere along the way, Smith’s notion of a balance between the play of private interest and the role of the state was turned into a zero-sum game -- a fervent antistatism, for which market competition was the ideal prescription for what ails us. For just about all our problems -- according to the “marketist” doctrine, anyway -- come from government programs or regulations.

Minimizing the role of the state clears the way for such market-induced virtues as “responsiveness to consumer preferences, competitive equilibration of supply and demand, and so on.” Plus smaller government means lower taxes -- which, in turn, reinforces smaller government.

It all sounds so perfect. And no one can say it has not been attempted. “States that attempted to unleash the magic of competition ended up costing consumers $292 billion in higher electricity prices between 2000 and 2007,” note Brown and Jacobs, including “$48 billion more than consumers paid in states that maintained traditional rate regulation from May 2006 and May 2007.” Bush-era initiatives for “managed competition” in education and health care had the perverse effect of increasing federal power over local school systems while adding “burgeoning regulatory clarifications and correctives as far as the eye can see” to Medicare.

Deregulation of the airlines reduced the price, and increased the convenience, of travel -- at least for a while. But now overbooking of planes, constant rescheduling, and the congestion of routes during peak hours point to the limits of competition.

Meanwhile, pro-market rhetoric never reduces the appetite for pork. “The growth of government is not mainly the work of profligate ‘tax and spend’ Democrats,” the authors point out. “Solidly among the spenders and promoters of government activism were the antistatists who controlled Washington in the early twenty-first century and, indeed, dominated policy debates and held the levers of power in Congress and the White House for three decades.”

The issue here is not philosophical inconsistency. The problem, as Brown and Jacobs understand it, is built into the tendency to frame the relationship between state and market forces as “either/or” instead of “both/and.” They trace a recurrent cycle in public policy over recent decades in which reforms are enacted to increase the role for markets and decrease government regulation. Then follow unintended consequences (higher prices, threats to public safety, breakdown of institutions) -- leading to calls for renewed regulation by state agencies.

But the public sector often proves overextended and underfunded. “All too often government disappoints expectations,” write Brown and Jacobs, “which fuels the rhetorical attacks of the state bashers and deepens the democratic disconnect.”

It leads to a situation the authors call “management by objection” in which “headlines scream, heads roll, band-aids adhere, and the cycle resumes....” Public policy consists of damage control. And that is always too little, too late. Thus it is that “the era’s reigning non sequitur --– if government is so bad, markets must be better -- begins to look axiomatic.”

“Pragmatic” appears to be the authors’ favorite word, with “realist” being a close second. “When politics is premised on a principled denial of the obvious,” they write, “government grows without vision, purpose, or a due concern for its capacities to serve the public.” The result is inefficiency and incoherence -- at best.

The panacea of deregulation leaves “political leaders and civil servants in obscure agencies scrambling to forestall market failures, repair the breakdown of services that the public expects, and respond to the complaints of concerned constituents,” according to Brown and Jacobs -- who presumably wrote this well before things started getting really bad. “Institutional realism should be introduced earlier and more prominently in discussions of policy reform.”

Well, okay -- that all seems fair enough, given the spirit of managerial centrism that pervades this book. But just where is the “institutional realism” supposed to come from?

The authors note that “the development of specialized, well-trained managers and officials equipped with thoughtfully articulated operating procedures and advanced information technologies” has lagged. Meanwhile, when things go wrong, “the public wants government to respond fast and well as is outraged if it dithers.” It does not sound like a promising alignment of circumstances.

The Private Abuse of the Public Interest closes with an expression of hope that recent events may “clear a new space for pragmatism in public policy.” So they might. But things will probably get worse before they get better.

 

 

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