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nonrivalrous) and national defense and free-to-air public broadcasting (nonexcludable). If I walk in the park it does not stop others doing so too, and the additional cost of an extra visitor is zero. Covering fixed costs like buying flowers and paying a park keeper is most efficiently done through a fixed fee such as annual membership or a local tax. But determining what level that should be depends on the wishes of all potential park users. These circumstances mean there is often a role for the government to coordinate people’s wishes. But note that—referring back to the previous chapter—a number of increasingly important sectors of the economy such as music and software also have these characteristics of nonrivalry and nonexcludability. Moreover, many goods and services are characterized by a lack of information about their quality. This can be either because of an information asymmetry between buyer and seller (the seller of a used car knows much more about it than the customer), or because it is an experience good which must be consumed to know what it’s like, for example watching a movie. Information asymmetries and shortfalls are an important reason why markets might not work efficiently.

It will be apparent that there are many ways in which markets can “fail,” more so than was the conventional wisdom in the 1980s and 1990s, and covering many more activities than those normally provided by the government. In fact, the changing structure of the economy means market failures are perhaps becoming more extensive. The share of experience goods has been increasing, and so has the share in the economy of industries with high upfront costs and “public good” characteristics.

A “TRILEMMA”: CAPITALISM, DEMOCRACY, AND CULTURE

Why does market failure matter? The reason is that it introduces a gap between what society values and what the economy delivers. The scale of the recent economic crisis has opened many eyes to the shortcomings of capitalism, and in particular to what many would see as its ethical failings. Value is, of course, an ethical concept in addition to being an economic one. Market failure is the economic prism through which the gap between market prices and value can be viewed. There is a moral perspective as well.

A series of books published a generation ago forcefully made the point that capitalism only worked well thanks to the existence of moral values and social conventions that it gradually undermined.21 Daniel Bell, in The Cultural Contradictions of Capitalism predicted that the “voracious sensation- and entitlement-seeking” that were products of capitalism would threaten the health of capitalism itself. He believed that the moral foundations of both communism and capitalism were shaky; that the efficiency of the American economy in delivering on its citizens’ desires would threaten the ability to define a consensus on matters of public morality.

Galbraith, in one of his most famous works, The Affluent Society (1958), challenged the assumption that the continual increase in material production was a sign of economic and societal health. Because of this he is considered to be one of the first postmaterialists. Fred Hirsch, in The Social Limits to Growth, argued that Adam Smith’s invisible hand was no longer operative in developed economies. He argued that the luxuries of one generation became necessities for the next as if society were a column moving steadily forward with the rich tasting the fruits that would eventually be conveyed to the rest of humanity. He predicted a future of increasing personal competition in an ever more vicious rat race and that such a process would have a detrimental impact on the moral fabric of society.

These authors were writing at a time when the social strains of the late 1960s and the oil shock of the early 1970s had clearly triggered a crisis of capitalism. The lesson is being painfully relearned by our generation. One example is an essay by Manhattan Institute scholar Jim Manzi, who writes of the “bifurcation of social norms in America,” the chasm between patterns