<blockquote>
<p>Market failure</p>
</blockquote>
<p>Market failure is in general a very misunderstood phenomenon. There is a massive amount of incorrect information about it out there. The [3 broad categories of market failures][1] are:</p>
<ol>
<li>Externalities</li>
<li>Anti-competitive markets (ie natural monopoly)</li>
<li>Suboptimal initial resource allocation</li>
</ol>
<p>What is usually missing from discussions of market failure as a justification for government involvement is the concept of government failure. Market solutions clearly have theoretical inefficiencies, but government solutions also have those. Too often, imperfect markets are compared to utopian perfect government solutions (which generally never pan out anywhere near so perfectly).</p>
<p>Public choice theory shows that government processes have substantial barriers in place to allocative efficiency, and tend to distribute resources very suboptimally for most if not all real political environments. This is one major reason why Austrians are skeptical of government solutions to market failure. A government solution is only acceptable if its realistic implementation should be expected to do better (higher value per cost) than the market situation. Most government solutions are simply not held to that standard, and public choice theory gives solid reasoning as to why we shouldn't expect them to be held to that standard in the future.</p>
<blockquote>
<p>monopoly rents</p>
</blockquote>
<p>Natural monopolies do not gain rent. They earn their profits through producing a service that is more valuable than the price they sell it for. The theoretical inefficiency of monopoly does not come from economic rents, but rather the higher price a monopoly would charge. Price discrimination usually mostly solves that problem. A second problem of natural monopolies is the limited ability for competition to arise. However in real natural monopolistic situations not caused by government intervention, there is generally significant competition, making things oligopolistic at worst.</p>
<blockquote>
<p>Keynesian demand management makes sense in the face of massive credit or spending slumps</p>
</blockquote>
<p>What aspect of Austrian economics do you see that you think should be sympathetic to demand management? Credit or spending slumps in the Austrian economic doctrine are price signals that people <em>should</em> be spending or borrowing less. These corrections are important for eliminating inefficient activity and increasing the efficiency of the economy. Any manipulation of markets as kenesians would advocate for destroys the very important price signals that lead the invisible hand. In other worse, Keynesian stimulus leads the invisible hand in the wrong direction.</p>
<blockquote>
<p>channel spending into more productive direction if the policy process allows for and incentivises the use of clear hypotheses, performance indicators, and regular reviews that cut and reallocate what does not work.</p>
</blockquote>
<p>We can relate this to a monopolistic situation. Where in a natural monopoly, the monopoly still has an incentive to limit costs and improve their product (some economics arguing that the incentive to innovate is even higher than for competitive companies, because of the ability to capture a much larger fraction of the surplus). And what limited competition or even the threat of competition can spur a monopolistic company to be less complacent.</p>
<p>With government spending, there is no direct incentive to keep costs under control or produce things of value. There is no reason to expect that policies for evaluating performance and allocating resources would tend towards something efficient. In fact, in the absence of a profit motive, there is most surely some other motivating factor for the actors involved. Perhaps its political or career oriented. It is noncontroversial that this kind of thing generally leads to substantially less efficient behavior. Even companies with existential need to retain profits often get their decision making processes wrong, it seems very strange to think removing that profit incentive could be expected to lead to better results.</p>
<blockquote>
<p>surely any data driven approach would have rooted such waste out</p>
</blockquote>
<p>But what would the data be used for? As I said above, if the motive isn't profit, what is the motive? Whatever data driven approach is used would quickly be redirected to the ends of whatever the true motives of the organization are. I have seen no theory showing how any kind of government structure is likely to do better than the profit motive of private companies.</p>
<blockquote>
<p>surely suboptimal investment into research, information, network, coordination, and other externalities, and low appropriability of returns to innovation are real phenomena?</p>
</blockquote>
<p>Suboptimal basic research investment seems likely, however government direction of investment money has been very likely disastrously inefficient. A voucher system where individual voters choose what research to fund would be substantially better. But again, government failures here must be considered. They are substantial.</p>
<p>Not sure what you mean by &quot;information, network, coordination&quot;. Those don't seem like usual externalities to me.</p>
<blockquote>
<p>a strict market failure filter</p>
</blockquote>
<p>What do you mean by this?
[1]: <a href="https://governology.substack.com/p/the-role-of-government-part-1" rel="nofollow noreferrer">https://governology.substack.com/p/the-role-of-government-part-1</a></p>

CC BY-SA 4.0
2023-08-31T05:43:01.013Z
2023-08-31T05:43:01.013Z
Governology
<p>Predominantly free market and small government, albeit with room for redistrbution and funding of health care and education, Austrians stress the planning fallacy, emergent order, and incentives facing government. They share a common enemy with their more interventionist peers, interest capture, lobbying, and cronyism - and private privileges arising from such phenomena, such as monopoly rents.
Why then do so many attack what may be the most harmless parts of interventionism? Keynesian demand management makes sense in the face of massive credit or spending slumps, whether exogenous or resulting from a cycle of overinvestment a la Hayek. Market failure paradigm constrain or at least could constrain and channel spending into more productive direction if the policy process allows for and incentivises the use of clear hypotheses, performance indicators, and regular reviews that cut and reallocate what does not work. US spends twice as much on poverty as the cost of cash transfers needed to bring everyone well over the poverty line, and a third more per capita than Sweden on health without offering universal almost free access… surely any data driven approach would have rooted such waste out.
And surely suboptimal investment into research, information, network, coordination, and other externalities, and low appropriability of returns to innovation are real phenomena?</p>
<p>Why are these concepts, rather than the assumption that the us federal government all of a sudden would do a splendid job of spending a 50% budget windfall wisely, the target of the vitriol of the likes of Boettke and others (came up as I read one of Boettkes kampschrifts)? Or for that matter the dangers posed by concepts such as mission orientations and semi planned system transitions tied to impossible net zero ambitions? If anything, a strict market failure filter would reduce such ambitions to sensible things like ghg taxation to create predictable price incentives and basic research into dozens of ways to harness energy, and chuck out massive subsidies of wind mills and fantasies about collective virtue replacing simple price signals that will prompt everyone to change.
I look forward to thoughts on this.</p>

CC BY-SA 4.0
2023-05-31T20:03:01.577Z
Austria is a little alpine country in Europe.
Michael Greinecker
<public-economics><externalities><market-failure><keynes>
Why do Austrians oppose market failure and demand management as policy rationales?
Landjo
# Why do Austrians oppose market failure and demand management as policy rationales?

(Asked by: username_0 on 2023-05-31)

Predominantly free market and small government, albeit with room for redistrbution and funding of health care and education, Austrians stress the planning fallacy, emergent order, and incentives facing government. They share a common enemy with their more interventionist peers, interest capture, lobbying, and cronyism - and private privileges arising from such phenomena, such as monopoly rents.
Why then do so many attack what may be the most harmless parts of interventionism? Keynesian demand management makes sense in the face of massive credit or spending slumps, whether exogenous or resulting from a cycle of overinvestment a la Hayek. Market failure paradigm constrain or at least could constrain and channel spending into more productive direction if the policy process allows for and incentivises the use of clear hypotheses, performance indicators, and regular reviews that cut and reallocate what does not work. US spends twice as much on poverty as the cost of cash transfers needed to bring everyone well over the poverty line, and a third more per capita than Sweden on health without offering universal almost free access… surely any data driven approach would have rooted such waste out.
And surely suboptimal investment into research, information, network, coordination, and other externalities, and low appropriability of returns to innovation are real phenomena?

Why are these concepts, rather than the assumption that the us federal government all of a sudden would do a splendid job of spending a 50% budget windfall wisely, the target of the vitriol of the likes of Boettke and others (came up as I read one of Boettkes kampschrifts)? Or for that matter the dangers posed by concepts such as mission orientations and semi planned system transitions tied to impossible net zero ambitions? If anything, a strict market failure filter would reduce such ambitions to sensible things like ghg taxation to create predictable price incentives and basic research into dozens of ways to harness energy, and chuck out massive subsidies of wind mills and fantasies about collective virtue replacing simple price signals that will prompt everyone to change.
I look forward to thoughts on this.

**Tags:** public-economics, externalities, market-failure, keynes

> **Comments:**
> **username_1**: Austria is a little alpine country in Europe.  

---

## 1 answers

### Answer by username_2 on 2023-08-31. Score: 0

> Market failure

Market failure is in general a very misunderstood phenomenon. There is a massive amount of incorrect information about it out there. The [3 broad categories of market failures][1] are:

1. Externalities
2. Anti-competitive markets (ie natural monopoly)
3. Suboptimal initial resource allocation

What is usually missing from discussions of market failure as a justification for government involvement is the concept of government failure. Market solutions clearly have theoretical inefficiencies, but government solutions also have those. Too often, imperfect markets are compared to utopian perfect government solutions (which generally never pan out anywhere near so perfectly).

Public choice theory shows that government processes have substantial barriers in place to allocative efficiency, and tend to distribute resources very suboptimally for most if not all real political environments. This is one major reason why Austrians are skeptical of government solutions to market failure. A government solution is only acceptable if its realistic implementation should be expected to do better (higher value per cost) than the market situation. Most government solutions are simply not held to that standard, and public choice theory gives solid reasoning as to why we shouldn't expect them to be held to that standard in the future.

> monopoly rents

Natural monopolies do not gain rent. They earn their profits through producing a service that is more valuable than the price they sell it for. The theoretical inefficiency of monopoly does not come from economic rents, but rather the higher price a monopoly would charge. Price discrimination usually mostly solves that problem. A second problem of natural monopolies is the limited ability for competition to arise. However in real natural monopolistic situations not caused by government intervention, there is generally significant competition, making things oligopolistic at worst.

> Keynesian demand management makes sense in the face of massive credit or spending slumps

What aspect of Austrian economics do you see that you think should be sympathetic to demand management? Credit or spending slumps in the Austrian economic doctrine are price signals that people *should* be spending or borrowing less. These corrections are important for eliminating inefficient activity and increasing the efficiency of the economy. Any manipulation of markets as kenesians would advocate for destroys the very important price signals that lead the invisible hand. In other worse, Keynesian stimulus leads the invisible hand in the wrong direction.

> channel spending into more productive direction if the policy process allows for and incentivises the use of clear hypotheses, performance indicators, and regular reviews that cut and reallocate what does not work.

We can relate this to a monopolistic situation. Where in a natural monopoly, the monopoly still has an incentive to limit costs and improve their product (some economics arguing that the incentive to innovate is even higher than for competitive companies, because of the ability to capture a much larger fraction of the surplus). And what limited competition or even the threat of competition can spur a monopolistic company to be less complacent.

With government spending, there is no direct incentive to keep costs under control or produce things of value. There is no reason to expect that policies for evaluating performance and allocating resources would tend towards something efficient. In fact, in the absence of a profit motive, there is most surely some other motivating factor for the actors involved. Perhaps its political or career oriented. It is noncontroversial that this kind of thing generally leads to substantially less efficient behavior. Even companies with existential need to retain profits often get their decision making processes wrong, it seems very strange to think removing that profit incentive could be expected to lead to better results.

> surely any data driven approach would have rooted such waste out

But what would the data be used for? As I said above, if the motive isn't profit, what is the motive? Whatever data driven approach is used would quickly be redirected to the ends of whatever the true motives of the organization are. I have seen no theory showing how any kind of government structure is likely to do better than the profit motive of private companies.

> surely suboptimal investment into research, information, network, coordination, and other externalities, and low appropriability of returns to innovation are real phenomena?

Suboptimal basic research investment seems likely, however government direction of investment money has been very likely disastrously inefficient. A voucher system where individual voters choose what research to fund would be substantially better. But again, government failures here must be considered. They are substantial.

Not sure what you mean by "information, network, coordination". Those don't seem like usual externalities to me.

> a strict market failure filter

What do you mean by this?
[1]: <https://governology.substack.com/p/the-role-of-government-part-1>


---

