Monday, March 06, 2006

 

Market Failures, Redux: Does the Market have a Purpose?

In an earlier post ("Sometimes, Markets Fail"), some of us debated on what constitutes market failure. Chris followed up by paraphrasing Roy's important question, "How do you define market success?"

I'd like to take it further, by asking simply: What is the purpose of the free market?

In answer to my own question, I'd like to venture that markets have no purpose; they simply happen given a certain set of conditions: property rights and freedom of choice being the foremost amongst them. The market is a spontaneous process, not one that has a predetermined end in mind.

Given that, we can certainly argue about the effects of allowing a free market to flourish, however, we can't claim that any of these effects are really "successes" or "failures," as such. Or, we can argue about the desirability of conditions under which markets operate: i.e. are property rights good?; should individuals make their own choices?, etc.

Planned economies, on the other hand, may have purposes: utility-maximization, "social justice", etc. We could talk all day about those failures.

Comments:
From "The Principles of a liberal Social Order", Hayek Studies in Philosophy, Politics and Economics, p. 163

…neither has the spontaneous order a purpose nor need there be agreement on the concrete results it will produce in order to agree on the desirability of such an order, because, being independent of any particular purpose, it can be used for, and will assist in the pursuit of, a great many different, divergent and even conflicting purposes. Thus the order of the market, in particular, rests not on common purposes but on reciprocity, that is on the reconciliation of different purposes for the mutual benefit of the participants."
 
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