Markets are almost always wrong, because they’re almost never perfect. The array of market flaws is well known – RFF Board member Joe Stiglitz, who gave the first laureate lecture in RFF’s 60th Anniversary series last Friday, won his Nobel Prize in 2001 for “analyses of markets with asymmetric information.” Perfect knowledge uniformly shared is one of the textbook features of markets that actual markets almost never live up to.
Another common market flaw is the failure to include all the costs of producing a good in its sales price. This sounds nit-picky and who-cares, but when producers make the air, water and land we survive on an open sewer for their waste, we take our chances with their refuse, as destructive, or fatal, as that may be. Question: How can we rely on markets to make economic decisions when they are almost always wrong? Answer: We can if we can clean them up sufficiently – if we can identify and correct flaws that are too big to sail under the radar. The harm from acid rain is too great to allow power plants to throw sulfur dioxide into the atmosphere at will. Lead degrades IQ too much to permit its use as an additive in gasoline. Greenhouse gassing the sky is becoming too obviously consequential to continue a do-nothing policy on climate change.
Altering market prices to recognize true costs – to individuals’ health, environment, and economy – is not an incentive. It’s a correction – without it markets and market outcomes are flat wrong. Big wrongs mean big harm and often big payoffs to winners who leave the costs of their harm to losers. Declaring unrecognized costs to be zero is easy, lucrative to winners and often readily sold to losers, but it is false.
So who will decide when costs that the market treats as zero are too big to ignore? One answer is in the public domain, with open science, analysis, debate and rule of law. The other is in the volition of those imposing the cost, when they decide that some voluntary recognition or reduction is in order. Our answer in this country is the first. Until we leave democracy behind, the market masters must answer to the people, to the consent of the governed. This is good news, when the people are morally and mentally capable of citizenship and self-government. A core element of that capability is knowing and caring enough to safeguard themselves and their children, their community, their country and their world in an amoral market. As Joe Stiglitz said on Friday, there’s a good reason Adam Smith’s invisible hand can’t be seen – it’s not there.
