Wednesday, June 5, 2013

Market Failure Theory

From Organized Crime: The Unvarnished Truth About Government by Thomas DiLorenzo:

Market failure theorists, whose epicenter was for many years the Harvard and M.I.T. economics departments, had three main characteristics: 
First, they concocted mathematical models that were usually far removed if not totally detached from economic reality. ...
The second characteristic of the market failure theorists is a con- sistent application of what UCLA economist Harold Demsetz labeled “the nirvana fallacy.” The game is played as follows: First, construct a totally un- realistic theory of “perfect” competition that assumes away all real-world competition with assumptions of perfect information, homogenous prod- ucts and prices, free or costless entry and exit from industry, and “many” firms. Second, compare real-world markets to this utopian Nirvana state and condemn the markets as “imperfect” or “failed.”

The third characteristic of market failure theories is to recommend intervention by presumably perfect government that is assumed to suffer from no failures and which will correct the failures of the market. (p. ix-x)

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