But in the end, Americans of the day rejected revolution and communism. Americans of our time forget, or never learned, that that wasn't inevitable. We can thank the success of FDR's New Deal in creating a safety net for those suffering the most from the failure of the free market. And on the other side of the coin, the totalitarian nature of communism in the Soviet Union gradually became clear to Americans. With the atomic bomb and ICBMs, the USSR posed an existential threat to the US. Partly in reaction to the threat of Soviet communism, memory of the failure of the free market during the Great Depression faded and was replaced by its opposite, a glorification of the free market. It became a matter of self-evident truth: the free market could do no wrong.
The pendulum had swung too far. After the jump, restoring some balance.
Paul Krugman, winner of the Nobel Prize in Economics, points out the obvious way that free markets often get things wrong. It's by failing to adequately price the effects of negative externalities like pollution. In a 2011 column, he refers to a study that quantifies those effects and finds that the costs are huge and concentrated in a few industries, whereas the price is paid by other industries, or by all of us:
Those are negative spillover effects that the free market gets wrong. There's a corollary to this market failure, where the market fails to exploit positive spillover effects because there's no incentive for individuals to do so. Gene Sperling, director of President Obama's National Economics Council, recently attempted to explain how manufacturing firms can potentially generate important economic benefits for society at large, but don't because individual firms themselves cannot capture those benefits for themselves. Instead, the firms shut down or never start up in the first place. Economics journalist Ezra Klein quotes Sperling:At one level, this is all textbook economics. Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right.
Source: Paul Krugman, New York Times.
Americans still have the mindset that the free market is always right. It isn't. Market failure is possible. In fact, it's visible all around us, literally, in the dirty air we breathe. Market failure is also all around us, invisible, in lost opportunities. It's time we restore some balance in our thinking. It starts by admitting that the free market does, sometimes, fail."While we know that economists often start from the premise that any type of preferential treatment of a single type of investment over another is viewed as distortionary," Sperling says, "we also know that when an economic activity has positive spillover effects that an individual firm cannot capture, there is a risk we as a nation under-invest in areas that can be beneficial to the economy at large." In other words: There's a market failure here.
Source: Ezra Klein, Washington Post.
What lessons can we learn from this locally? Does the Richardson City Council have the right balance? What are some examples where Richardson has prevented or compensated for failures of the free market? What are some examples where Richardson is failing?