David Friedman: My response to a critique of my lecture offered by Vegard Martinsen.

Mandag 30. april publiserte vi her på Gullstandard.no en kommentar til professor David Friedmans foredrag om markedssvikt. Christoffer Nilsen oversatte denne kommentaren til engelsk, og sendte den til Friedman. Friedman skrev et svar som vi med hans tillatelse publiserer her.  

(I do not read Norwegian, so am basing my response on a translation kindly provided me by Christoffer Nilsen) 

Martinsen writes: “one would expect that in the talk he’d explain that «market failure» does not exist” 

Only if it doesn’t. My obligation is to say what is true, whether or not it supports my political views. In this particular case I am trying to show why one argument for those views, popular among libertarians, is wrong, and offering a better one. 

As I explained at the beginning of my talk, “market failure” is not about markets. It is a problem which occurs in markets and many other contexts―situations where individual rationality fails to produce group rationality. A number of Martinson’s criticisms seem to miss that point. In the case of the traffic jam, for example, it may be that a private road system could, in one way or another, avoid the problem, engineer around market failure, something I offered several examples of. But in the situation I described, the individual drivers are acting rationally and the result is worse for all of them than it would be if they acted differently. 

I cannot tell if Martinson thinks this claim is false, in which case he needs either to show that, in my examples, the individuals are not acting in their rational self-interest or that they would not all be better off if they acted differently, something he does not do. Alternatively, he may agree that market failure in my sense exists but be claiming that it never results in the outcome of a free market being worse than what would happen with sufficiently wise and benevolent government regulation, hence that the first half of my argument, that market failure rebuts the simple argument for freedom, is false. But that doesn’t seem consistent with his writing, near the end of his piece, that “Now, it is correct that the result may be less optimal for the whole than if someone had decided on behalf of all, even though each person chooses what is best for themselves and theirs,” which appears to concede my claim. 

Martinson attempts to rebut my examples. 

1. I am not using a battle a thousand years ago as an example of a failure in a free market, as should be obvious. I am using it as an example of market failure, a situation where individual rationality fails to produce group rationality; I started my talk by explaining that market failure was not limited to markets. 

So far as the idea that running away is not rational because deserters will be punished, that is one way of trying to prevent that particular form of market failure, a subject I discussed in my talk. Whether it is workable depends on the situation―an army that has just been defeated may not be in a position to punish anyone. 

2. Again Martinson assumes that my example has to be of a failure on the free market. 

3. Does Martinson claim that the situation I describe doesn’t happen? If not, does he deny that the people in the restaurant would be better off if all of them kept their voices down, but that each of them is better off raising his voice, given the action of the others? 

4. The example was an example of how to avoid market failure. Martinson seems to have missed the fact that the later part of the lecture was about situations where one way of doing something worked badly because of market failure and one should therefor do things in a different way. 

On point 5, Martinson never explains how the rule of first in time, first in right will prevent a situation where a firm finds it in its interest to produce air pollution even though the cost imposed is larger than the cost of preventing the pollution. He seems to be trying to convert an economic argument into a moral argument. The question isn’t who is at fault, it is whether the outcome could be improved by sufficiently wise regulation. I think my analysis of market failure shows that it could. The reason that doesn’t imply that we should have such regulation was one of the subjects of my talk― because the same logic that implies that the free market will sometimes produce the wrong outcome implies that government regulation will do so much more frequently. 

Martinson suggests control of air pollution by marketable quotas. Who does he suggest should set the level of those quotas and assign them to individual firms if not a government regulator? 

The final part of Martinson’s critique is about reasons he is in favor of freedom, none of which are relevant to the point of my talk, which was that a particular reason, what I described as the simple argument for freedom, was wrong, and should be replaced by a better argument, which I offered. 

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