The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [109]
The immediate crisis is probably the least interesting way in which markets are failing at the moment, however. Financial crises do indeed recur in market economies, at least as far back as the tulip mania of the seventeenth century.17 The economist Hyman Minsky has argued that there is an internal cycle of capitalism that guarantees there will be banking crises from time to time.18 There have been a few in recent decades—in 1993–94, 1997–98, in 2001, as well as 2007–8. Each one is different, and the most recent crisis has been distinctive in involving the world’s very biggest banks. So each carries new lessons, the lesson from the most recent being that regulators have allowed banks to grow too big. The full force of antitrust law now needs to be unleashed on the banking industry.19
Figure 15. The symbolic capitalist bull isn’t trusted.
But although the scale and seriousness of the recent financial crisis has been uniquely severe, it focuses attention on just one way of many ways that markets can fail, namely bubbles in financial markets. Other types of market failure deserve more scrutiny. They are unlikely to lead to headline-grabbing crises but nevertheless have profound implications for social welfare. It is worth underlining that markets even so are the best way of using the resources available to provide people with the goods and services they want. Markets are a uniquely efficient way of co-ordinating the separate decisions of many consumers and firms, reflecting in prices the masses of information needed about their preferences, about costs, about their budgets. According to Paul Seabright, after the collapse of the Soviet Union a Russian policymaker visited the United States and asked who was in charge of supplying bread to New York City.20 This anecdote is funny precisely because we recognize the much greater effectiveness of the market for making sure people have the bread they need—in all the fantastic variety available in the city.
Having said that, it has to be recognized that market failure is widespread. Markets fail because, while they reflect individual preferences and valuations more effectively than any other mechanism, market prices do not take account of the impact individuals have on each other. There is a failure of the assumptions underpinning the conclusion that market prices truly reflect social value and therefore market provision is optimal. The most obvious type of market failure is an externality. These occur when the consequences of one person’s or one firm’s economic activity affect others who were not directly involved in the decision and whose interests were not taken into account. A classic example is the (negative) externality of pollution, such as when a factory pollutes the atmosphere to the detriment of all residents, without paying for clean-up or compensation. Externalities are often now referred to as spillovers. A particularly important kind of externality is the one discussed extensively in the first half of this book, the inability of future generations to participate in today’s markets, even though they are affected by today’s outcomes. Longer-lived institutions are needed for the future to be represented, and for decisions to be taken over a much longer time horizon. This is vital for decisions affecting the environment but also for investments such as large-scale infrastructure or policies that impinge on national assets and patrimony (the national heritage).
Other types of externality are also important. Missing markets arise when consumption is nonrivalrous, which means that consumption by one person does not prevent consumption by another, and/or nonexcludable in that it is not possible to exclude anyone from consuming the good or service. Products of this kind are also referred to as public goods, although some may be provided privately. Examples are parks or television programs (both