Markets: The Solution to Market Failures

21Oct07

I know it might be old news to some of people, but following up on Erin Burnett’s pro-capitalism/pro-poisonous toys musings I’d like to say that her position was pretty similar to the standard pro-business spin on the Chinese toys. She said:

I think people should be careful what they wish for on China. You know, if China were to revalue its currency or China is to start making, say, toys that don’t have lead in them or food that isn’t poisonous, their costs of production are going to go up, and that means prices at Wal-Mart here in the United States are going to go up, too. So I would say China is our greatest friend right now. They’re keeping prices low and they’re keeping prices for mortgages low, too

At first glance this is a little like the Jonathan Swift’s “A Modest Proposal” to sell babies to rich people to eaten for food to reduce poverty. However, thinking a little harder I think her comments are more like the non-satirical suggestions of tons of people on cable news to just let the market fix the problem. Many business analysts don’t support increased safety regulations, however most them assert the market will take care of everything.

Think about it, “Doesn’t Mattel and the other toy makers have every incentive to make sure their toys are safe in the future?” True enough, but Mattel also had every incentive to make sure their toys were safe in the past and they weren’t. Economic theory suggests the toys would be safe, past experience suggests they might not be.

I think it’s transparent that since economic theory didn’t explain past experience nobody really believes it’s a reliable indicator of the future. Rather I think people that make this argument are in agreement with Burnett that the economic benefits of lower regulations outweigh the risk of more poisonous toys making it onto the market. Burnett just forgot to use economic theory as a shield to explain how all things, even previous market failures, can be fixed by the power of markets.


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