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July 20, 2004

Why the Answer to Every Problem is Not "The Free Market" « Politics As Usual »

Nicely said by Q and O.


...the a priori assumption that, in a free market where all transactions are voluntary, no actor will engage in a transaction that is not to his benefit. Therefore, every exchange will increase the overall wealth and well-being of a society.

Now, that's a reasonable assumption, except for two things:
1: imperfect information.
2: externalities.

These two factors can result in exchanges that reduce the wealth/well-being of a society, even though it was no part of the original intent of the transaction.

Imperfect information can result in transactions that don't benefit one or both sides of the transaction. (ex: I give you $5000 for a used car, thinking it's worth it to me....but, as it turns out, the car is a lemon. With better information about the state of the car, I could have made a better choice)

Externalities (def: "...costs or benefits arising from an economic activity that affect somebody other than the people engaged in the economic activity and are not reflected fully in prices.") are perfectly illustrated by pollutants. The pollution given off by a factory is not a factor in the cost of making a product, and--though it has a cost--has no direct reflection in the price of the produced item. In other words, it assigns a cost to people not involved in the transaction.

Even though I've already quoted the bulk of the article, you might as well go read the whole thing. The impact is better that way.

Posted by Nathan at 10:54 AM | Comments (2)

Perhaps not, but it's still a good default answer until someone demonstrates they have a better one.

Posted by: charles austin at July 20, 2004 06:55 PM

Well, I do think a free market solves most problems, or perhaps, solves most of all problems. I'm also convinced the problem is just that most to all of humans are dolts, cads, and idiots.
Most of my arguments are with the assumption that libertarianism is attractive and sounds pretty good, but breaks down in the same place communism does: basic human nature.
Here's the main test: libertarianism assumes that people will control themselves more effectively than the government can. But how many a$$clowns have you encountered over the past year....and how many of those people actually considered themselves to be a$$clowns? The person you think is the biggest jerk in the world probably has as many friends and loved ones as you do. And we can't even stop people from driving on the shoulder (or closed lane) for as long as possible to merge right at the slowdown how can you expect to get the 80-90% of the population to agree to control themselves well enough to make libertarianism work?
In that, a free market is like democracy: the worst system in the world, except for all of the other systems...
The only reason for this post is to remind people that even free markets aren't the perfect solution to every problem. Government does have its purpose and uses...although I will agree ours has far outstepped those bounds long ago, particularly under FDR and LBJ...

Posted by: Nathan at July 20, 2004 07:17 PM
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