Duncan O'Leary
Duncan works on projects looking at public services, skills and work.
at 10:05am on Tuesday, 14th August 2007
John Kay has an good article in Prospect this month, presumably based on his book The Truth About Markets, which I have never got round to reading. He argues that seeing state intervention purely through the prism of market failure risks leading us to an impoverished view of politics, democracy and collective decision-making. It’s a relatively long one and is hidden behind the subscription wall, so here are some his key points:
- The market failure doctrine is based on an imperfect understanding of why markets succeed, not just why they fail,
- [Market failure has] nothing to do with the real reasons most people – including Brown –support a publicly funded NHS. These reasons begin with concepts like compassion and fairness rather than information asymmetry
- Much medical treatment is not very cost-effective in terms of health outcomes, and a high proportion of total spending goes on the last year of life: but the economic approach to health policy, which measures output only in terms of "quality-adjusted life years" gained, fails to recognise that even in matters of life and death we care about processes as well as outcomes.
- Moreover, the policy relevance of the market failure doctrine is limited by another, perhaps more subtle, problem of connection between the model and the world. The resources and endowments which economic agents trade are not given by nature, as the model implies, but established through social process.
- Political consensus about the nature of society cannot find expression through individual choices in the marketplace…The notion that some economic choices are essentially collective, and cannot be described as a summation of personal preferences, strikes at the heart of the market failure doctrine.
- Yet the most serious weakness of the market failure doctrine is that its model provides not just an inadequate account of how markets fail, but also of how they succeed.
- If the partial genius of market economies lies in their capacity to achieve co-ordination without a co-ordinator, the greater genius lies in their ability to innovate and adapt in an environment of uncertainty and change. The sustained achievement of market economies comes from their pace of innovation—in products, technology and organisation—derived from the ability of market systems to undertake small-scale experiment, to watch the results, to mimic what works and discard what doesn't.
- The historic error of old Labour has been to conflate the need for collective choices and collective action with central direction and political control.
- That insight—the economics of Friedrich Hayek (concerned with the dynamic capacity of a market economy to experiment and innovate) rather than of Milton Friedman (concerned to promote the allocative efficiency of competitive markets to attack all kinds of state intervention)—is the lesson the left needs to learn from the right.
- The market is a tool, not a fount of wisdom.
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