Faculty: Unfinished Oped
Market Infatuation
Brett M. Frischmann, Assistant Professor
August 27, 2003
The recent East Coast blackout raises once again a question I have been asking myself for several years now: Why are we so infatuated with the market? Privatization, deregulation and commercialization of virtually everything seems to be on a par with Christianity as the supposed religion of this country. Such a myopic vision of America will cripple us. Don't get me wrong, I love capitalism and the idea of competition among private firms to provide me with goods and services (and I love Christianity, too). I have absolutely no qualms about relying on the market to provide me with most of the goods and services that I elect to purchase, such as cereal for breakfast or a haircut during my lunch break. I am concerned, however, about certain types of goods and services that the market simply fails to provide efficiently.
For some types of goods and services, such as the provision of critical infrastructure - electricity grid, communications network, transportation network - or the protection of environmental resources, "government intervention into the market" may be sufficient to correct "market failures." Such intervention may take many forms, ranging from direct regulation of market actors to tax subsidies aimed at encouraging market actors to make particular investments. Ideally, both the degree and form of intervention are tailored to address the particular reasons for market failure, which vary as well. Of course, we do not live in an ideal world, and the political economy through which government interventions are designed often leads to poorly-tailored, pork-laden measures - essentially a "government failure."
For other types of goods and services, such as the provision of national security, the market failures are simply beyond repair. Because it simply would be ludicrous for society to rely on market actors to effectively supply these goods and services, the government supplants the market and acts as the supplier. Of course, as I discuss briefly below, government failures occur in this arena as well. In the past two-and-a-half decades, market infatuation has significantly affected the evolving relationship between government and the market in these areas.
Market infatuation has driven policy makers to minimize the role of government and maximize the role of the market in infrastructure industries. This has been accomplished typically by privatizing government-owned resources, by deregulating industries in which heavily-regulated monopolists are to be replaced by competing firms, or by weakening existing institutions through which government constrained market actors. It is difficult to generalize about the success rate of these policies. But it is becoming increasingly clear that deregulation and privatization does not always meet proponents' rosy-colored expectations.
Despite what the infatuated may preach, deregulation does not always lead magically to competition and lower prices. As noted in the NY Times article by Jonathan D. Glater on August 21st, for example, deregulation in Montana led to dramatic price increases for electricity. There are numerous other examples. Perhaps more importantly, deregulation does not naturally lead to effective self-regulation. In the absence of government intervention, can we realistically expect the power industry to collectively adopt reliability standards and invest in transmission lines? Of course not, and for a perfectly legitimate, understandable reason: The industry is made up of profit maximizing firms (with relatively short time horizons); reliability standards and transmission line expansion are simply not attractive investments, unless, of course, the government intervenes (or even credibly threatens to intervene) to "adjust" the cost-benefit calculus employed by these firms. Yet getting government to intervene is difficult. To overcome the power of the free market fundamentalism, it seems we must wait for ominous predictions of a crisis to come true.
Thankfully, we do not (yet) rely on the market to provide national security. To do so would be a serious mistake (as I think most would agree). Sure, private firms provide a number of amazing technologically advanced goods and services to the military, but the military itself is not comprised of private firms seeking to make a buck. While I remain skeptical, although hopeful, that the government is doing a decent job at securing our nation against terrorism and other threats, there is no doubt in my mind that privatization of the military, Homeland Security, the CIA, the FBI and other related government agencies would be a terrible idea. The government has a comparative advantage over private firms in this area precisely because (in theory, at least) government officials are not seeking to maximize their profits.
I suppose the reason that I am somewhat skeptical about the job being done by the Bush Administration is in part based on my suspicion that special interests seeking to make a buck (through reconstruction contracts, for example) have had a pernicious influence on government policy. (I am willing to admit, however, that my skepticism and suspicion are not based on any real evidence. But is evidence really necessary anymore?) I am surprised that, in contrast with the uproar generated by regulatory proposals (or other proposals for government intervention into the market), there is very little attention paid to the grave risk that market intervention into government poses for our society. Perhaps our infatuation with the market has blinded us. We must always remember that while the fire of the market - unbridled self-interest - drives the engine of our economy, it also may burn down the institutions upon which our society is built.
