Thursday, May 05, 2005

What Are You Calling Failure?

There are two related logical misdemeanors committed by claimants for market failure. One is to blithely assume that any successful business model, were it to exist, would have or has been tried. The other is to assume that government action in the past was the best possible response to the problem at hand. Both of these errors are ironic, since they both impute error-free action to entrepreneurs in the wide sense—a charge that is inaccurately leveled at the advocates of laissez-faire. It is well known that entrepreneurs have come onto the scene time and again using hitherto untried business models.

For the very rare case where it is claimed that there is a net benefit to all which can only be obtained through a coercive institution, we must be explicit about the consequentialist or utilitarian ethics being applied, but also tread carefully, since subjective value informs us that all manner of costs often escape notice.

Will the regulatory body actually act in the public interest, or in its own interest, à la Public Choice theory, or in the interests of the regulated, à la capture theory? If there exists a solid case for government intervention today, will the objective factors upon which it rests change? They almost certainly will. When the case for intervention is no longer strong, or has a completely different structure, will the regulatory apparatus adapt appropriately, or go quietly into the night, or will it instead fight tooth and nail for the status quo and its legitimacy? The costs of such a future unjustified regulatory apparatus must be captured in the calculus.

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