by Neville Kennard, veteran preaching and practicing capitalist

I have never been a bureaucrat or a politician. But when I occasionally engage with such people and they learn that I am a preaching and practising capitalist, it does not take long for the question of the Producers vs the Plunderers, the Tax Producers vs the Tax Consumers, to arise.

Invariably, the expression “Market Failure” is uttered.

We will come to just what is this apparent “Market Failure”, but first let me state that bureaucrats and politicians need this concept of “Market Failure”. At some level bureaucrats and other Tax Consumers know they produce nothing, that they are parasites. And this is not something they can be proud of. Among themselves they need to justify their existence and to propagate the idea of Market Failure to which they can ride to the rescue and become useful members of society.

And so the Market Failure expression is born and voiced. It is absolutely necessary for this idea to take hold and be acted on. The bigger the Market Failure and the bigger the Crisis, the better. “A crisis! How wonderful!”

“A major Market Failure — just what we need!”

So what is it this “Market Failure”? Do markets fail?

If a grocer runs out of milk a couple of hours before closing, this could be called “market failure”. Or if the grocer has too much milk and has to discard some, this too could be called another “market failure”. Of course it is quickly corrected, as the grocer learns to monitor his supply and demand more closely. Imagine if the government stepped in and created a “Milk Supply Authority” to ensure there is no more such “market failure”. Of course this would be absurd, and even most bureaucrats and politicians would realise this.

But if it is a “Major Market Failure”, such as the recent global financial crisis, this is too big a Crisis to be passed up and allow the market to correct. And it is too immediate to go looking for causes, to back up and look for a possible previous intervention that may have caused this unintended consequence. Especially when Intervention is piled on Intervention, as was the case with the GFC, and each Intervention was shrouded in economic mystique or political need, enacted by Parliaments and Congresses after being recommended by bureaucrats. Then, what could be better than a huge and threatening Crisis, of Market Failure, of “the Capitalist System needing Regulation”?

Markets, if left alone, correct quickly. Capitalists, if allowed to laissez-nous faire, will quickly find solutions. But the bureaucrats and politicians won’t waste a good crisis. They put themselves to work to create Programs, Ministers, Departments and Regulations to prevent any future Market Failures — they hope.

Unfortunately it seems to be almost never asked whether the apparent Market Failure was an Unintended Consequence of a previous Regulation and Intervention — which it almost always is. The causes of the recent Global Financial Crisis can be traced back years, decades perhaps, to interventions themselves intended to correct some perceived economic or societal issue that politicians sought to change.

Sometimes the Unintended Consequence of an intervention can be obvious. For example, Minimum Wage Laws create unemployment. Sometimes the consequences are less obvious, and further reaching. Minimum Wage Laws causes unemployment, which calls for unemployment benefits, which calls for more bureaucrats to administer, which calls for more taxes, which causes higher costs for producers, which can cause further unemployment. And so it goes.

A wily bureaucrat will conveniently label all of these Unintended Consequences “Market Failure” and seek a further intervention, a bigger budget and more staff.

All Interventions have Unintended Consequences, which can be labelled Market Failure. How very convenient!