Friday, June 3, 2016

Market Failure And Milton Friedman's Free Market Utopia

The Chicago School has historically provided the rationale against government intervention in the economy.  One of the difficulties with their position is that market failures are very common.  Markets often produce externalities.  That is, a decision to sell or purchase a product that pollutes the environment may be good for the seller and buyer but bad for the those who may suffer from the free market decision.  Governments tend to intervene in the private market when externalities affect social welfare.  The Chicago School found many ways to support its free market ideal in the face of externalities.  One method was to argue that government regulators would be captured by those who benefited from the externality.  The regulators would intervene in the market but make matters worse by producing weak regulations that led to market inefficiency.    Another method was to argue that left to their own devices market participants would find a way to reduce externalities without the need for government regulations.

The free market is presumed to be protected by competition which puts pressure on sellers to produce good products at competitive prices.  Anti-trust laws were designed to enforce market competition.  The government protected the market by preventing sellers from colluding in ways that limited competition.  Anti-trust laws have typically been opposed by large firms even though they provide a market based solution for a market failure.  Carbon taxes provide another form of a market based solution designed to let the market reduce carbon emissions which result from a market failure.

Milton Friedman was one of the leaders of the Chicago School.  This article argues that he was not really a ultra-conservative.  It describes some the ways in which Friedman was able to support government intervention in the free market in short term even though he was committed to the utopian ideal of the free market in long run. Unfortunately, externalities and market failures are so common in the real world that economists struggle to maintain the ideal of free market while they introduce a variety of ways in intervene in the market.  We might be better off if we did not invoke utopia to prevent governments from doing what every economy requires in order to serve society.

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