I read someone talking about the ubiquity in reality of what are called “market failures” in neoclassical welfare economics, which is true enough, but it reminded me of the confusion the ethical half-theory of neoclassical welfare economics may produce. Let’s discuss.
In the world of the artificially defined and constrained ethical half-theory of neoclassical welfare economics, a “market failure” refers to some feature of a market that prevents it from corresponding entirely to the “perfectly competitive market” model defined in that theory. Just FYI, no real market corresponds to the “perfectly competitive” market model of normative neoclassical welfare economics, which is a theoretical construct that includes false factual premises such as perfect information, perfect rationality. In that area, confusion between normative and positive economics is rife, with many seemingly not understanding the normative significance of false factual premises in ethical theory, trying to relate it back instead to positive issues of usefulness, predictability. I discuss those issues often enough and anyway don’t want to discuss the definition and significance of so-called “market failures” in real markets as much as to compare and contrast that category of normative issues with the vastly more significant one of equity issues.
“Market failures” involve normative considerations endogenous to the ethical theory presented in neoclassical welfare economics. “Equity issues” involve normative considerations recognized and acknowledged in neoclassical welfare economics but not discussed there, exogenous in that sense. I commented before on possible equivocation on the term “exogenous” as meaning not recognized or acknowledged, rejected, versus “exogenous” as meaning recognized, acknowledged as having standing, accepted, but not discussed, so I won’t belabor the point here, as long as we know what we mean.
Rather than talking it all out in an abstract, theoretical way, let’s discuss the relevant issues using the concrete example of a policy of allocating scarce vaccine by medical need, a policy used without significant normative controversy during the recent covid epidemic. The policy of allocating the scarce resources of a vaccine by medical need conflicts with allocating that resource using economic power plus personal preferences in markets. It leads to results that differ from what one would find if vaccines were allocated by a “perfectly competitive market.” Such a policy exhibits the same problem as a so-called “market failure” and could thus be seen as a type of self-inflicted “market failure,” although because of the more direct government involvement, as opposed to creating or defining real markets, some may want to call it a “government failure.” So why were so few concerned about this self-inflicted “market failure” given the supposedly minimal and uncontroversial normative content in neoclassical welfare economics? Interesting question. If you can follow along here, you may be in a good position to reject bad economics entirely.
The “failure” here is relative to the normative issues taken up, discussed in, endogenous to neoclassical welfare economics, so about individual preference ranks only. The reason the policy was not seen by many, if any, as a “failure” needing fixing is due to “equity issues, interpersonal ethics. Apparently, most thought the ethics of allocating the scarce vaccine to those who need it more compelling than allocating it to those with sufficient economic power and preferences to claim it, unnecessarily and possibly only on the slightest of whims. It’s fine. It’s one reason we have democracy. The point is accepted in good economics, real neoclassical welfare economics, where equity issues are acknowledged as having standing, albeit not discussed, so voters weighing in on such issues may override any endogenous findings based on individual preferences alone. In real neoclassical welfare economics, no endogenous normative judgment may be made relating to real outcomes or solutions that differ on the basis of interpersonal results, who gets what, regardless of how closely they correspond to perfectly competitive market model results. That’s why issues that occur in reality like evaluating the distribution of economic power, mechanisms for distributing economic power, various market outcomes, choosing market or non-market allocation methods (extent of the market), cannot be resolved within neoclassical welfare economics.
However, what happens if one does not understand the ethical half-theory structure of neoclassical welfare economies, does not understand the role of equity issues, interpersonal ethics, voters, democracy, is one may simplistically glom onto “market failure,” try to fix it. That’s what makes the language of “market failure,” and its fix of pursuing perfectly competitive market arrangements and expanding the extent of the market to cover every allocation of every scarce resources, so rhetorically useful to those who wish to suppress consideration of equity issues. The point is to not get confused by the contradictory policy recommendations if one looks only at the normative issues involving individual preferences discussed within neoclassical welfare economic theory versus if one looks at the interpersonal ethics that have standing but are not discussed. If voters agree no equity issues, no disagreements, controversies relating to interpersonal ethics, fairness, justness, objective human welfare, what have you, then sure, concentrate on “market failure.” If there are equity issues, concentrate on and address those, not “market failure.”
