Saving "the Market” out of Cambridge: “Market Failures”

 

An opening question: Is the market as in economics a conceptual framework or a sample marketplace as is in the reality? The most probable answer or the most realistic one at least will be a metaphorical framework of reasoning.

            A flowing question: Have we ever seen a widely-recognized time-tested metaphor fail? A plausible answer would be “No, almost by definition.”

            Well, “so many macroeconomists” so often blame the market for “failures,” the case number of which has ever been growing. More often than not, they are “barking up the wrong tree,” so to speak.

            First of all, they miss the point that the market is of their own invention. If anything goes wrong therewith, they must point fingers at themselves. Put it differently, the market is the conceptual venue of trade with perfect information and without transaction costs. Before anything else, theories are approximations as per Eugene Fama at Chicago. As such, blaming the market is equivalent to defaming Isaac Newton for imprecision of the Gravity Theory.

            Specifically, the case of “information asymmetry” is no news at all. How on Earth, where information is always and everywhere partial, could any piece of information be communal in the first place before symmetrical in the second place? Please get out of dream!

            Next on, the case of externality: No more detail is necessary than the fact Ronald Coase from Chicago has long given the answer to the world audience. It’s the property right!

            Imperfect competition? That’s a matter of transaction costs out of visible or invisible infrastructure, the rule of law included.

            Underground economy? That’s a matter of public governance.

 

By way of closing, we quote the following:

As Keynes famously observed during those rare times of deep financial and economic crisis, when the “invisible hand” Adam Smith talked about has temporarily ceased to function, there is a more urgent need for government to play an active role in restoring markets to their healthy function. (Lawrence Summers as quoted in Gregory Mankiw, Principles of Economics, 6th edition, 2012)

Good news to some and bad news to others, such a hypothesis has no merit at all.

             First, in return for a “government play” we must repay in the future more than “economically” justified. No bailout comes for free! The government may sometimes spend money for the sake of “spending”: Lo and behold those ubiquitous “white elephants”!

             Second, recession is not due to a “failure” of the market as often blamed or “paralysis” of the invisible hand as sometimes alleged. There are many hypotheses for causes of recession, of which the most prominent might be “financial crisis,” “deep” or otherwise. Among the rest of us, Ben Bernanke gets the Nobel Prize owing to his article to the effect that the Great Depression was triggered by macro-meltdown of financial markets.

             After all, we might not forget the ABC that Finance is not Economics: the former is about the purchasing power as at a moment while the latter economic activities over time. The “invisible hand” of Adam Smith governs “the market” (T^-1), not “financial markets” (T⁰).

             Wait, how often and how keenly are we interested in the “real quantities” as traded in financial markets? What on the other hand are prime variables in Cambridge macroeconomics?