Why must government policy be justified by market failure?

Robin Hanson writes:

In ordinary talk, you often hear arguments like:

  • There aren’t enough Jazz stations – government should subsidize them.
  • Too many kids today let their pants hanging low – that should be illegal.
  • Not enough kids want to be scientists – schools should push that earlier.

But to an economist, it is not enough to note that you do or don’t like something, to justify a policy to encourage or discourage it. We instead hold ourselves to a higher analysis standard – is there a net market failure sufficient to justify an intervention?

Except, alas, on (national at-a-time between-family) income and wealth inequality. There, most economists think it sufficient to just note that a policy influences inequality – they rarely feel a need to identity an associated market failure…

As Obama has decided to make reducing inequality a central issue in his reelection campaign, we are going to hear a lot about it between now and November, including from economists. Could economists who support policies to reduce inequality please identify their market failure arguments?!  Why lower our usual standards for this topic?

This strikes me as utterly bizarre. I’m not going to worry here about the “official” meaning of “market failure,” since I strongly suspect that economists don’t use the term totally consistently. Instead, let’s just think about what well-functioning markets do. Well, what they do is if I have money and would like to spend it on something, they give people an incentive to provide that thing to me at a reasonable price. Similarly, if I have something I want to sell (including, say, my labor) markets give people an incentive to give me a reasonable price for it.

And in general, I think free markets are awesome! When the government tries to say things like, “you can’t charge more than $X for such-and-such,” the result tends to be not that such-and-such gets sold for $X, but that it doesn’t get sold at all (that is to say, you get a such-and-such shortage). And protectionist policies may benefit a few groups in the short-run, but in the long run we’re all better off without protectionism.

But markets aren’t much of a help if you don’t have any money to spend in them. I’m agnostic on whether inequality in and of itself causes problems, but it’s pretty clear that being poor does: it gets in the way of having access to things like health care and education, even food and shelter in extreme cases (extreme by USian standareds, that is.) And there’s a pretty simple government intervention to fix that: tax the rich to pay for things like health care, education, and food stamps.

The reason this makes sense is that, in terms of actual human welfare, the difference between a $2 million house/yacht/whatever and a $2.01 million house/yacht/whatever is a lot smaller than the difference between, say, no health care and $10,000 in health care. The issue isn’t market failure, but diminishing marginal utility and people’s tendency to not care much about strangers.

Now, in an update Robin claims that he isn’t necessarily objecting to this kind of argument:

In case it is not clear, this post is directed to economists, in their role as economists. I’m not saying market failure is the only consideration anyone uses to decide policy, but I am suggesting that it is the main consideration that economists use in their role as holders of economic expertise. Economists don’t have much expert to say about whether we have too much or too little inequality, outside of their expert ability to discern and fix market failures.

But even accepting the premise here, so what? Why shouldn’t economists comment on things outside their main area of expertise, as long they’re at least as well-informed as other kinds of commentators, like journalists? And the premise seems implausible: why should economists be restricted to knowing how to fix one kind of problem? Whatever you think about how much economists actually understand or are able to predict, wouldn’t an economist who was good at making predictions be able to understand a range of effects that policies affecting the economy can have?

I’ve been reading Overcoming Bias since the days when Eliezer Yudkowsky was blogging there, and find some of Robin’s stuff hugely insightful. But posts like these read like a case study in how knowing about biases can hurt you–a case of being way to quick to insinuate that the other side must be under the effect of some kind of irrationality.


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