THE GREEKS HAVE TAKEN TO THE STREETS again in violent protest against narrowly approved austerity measures cutting public employment, pensions and the social safety net. The Americans have returned to partisan squabbling over budgets (economic stimulus or dangerous deficit?), education and health care (big government or investing in people?), and social safety nets (a helping hand or a motive for sloth?) after the Presidential election clarified almost nothing. The world has started to murmur again about climate change—the “greatest and most wide-ranging market failure ever seen” in the words of the 2006 Stern Review of the Economics of Climate Change—even as the 2012 Doha Climate Change Conference (the 18th round of global negotiations on how to respond to this failure), from 26 November to 7 December, thrashes it out.
There is that old saying that “Democracy is the worst system except for all of the rest.” It’s beginning to look like markets might be that way too. Systems for bartering, buying and selling are undeniably powerful forces for motivating innovation, matching goods and services to those who want them, and invisibly aggregating the voices of many into some kind of collective statement of preference. But the market only works for things that can be seen, measured, verified and shared. It is also selectively deaf: it hears only the ‘voice’ of purchasing power, not of need or want. By itself, it neither rewards nor penalises externalities, the social side-effects of production and consumption. Air polluters don’t pay for emissions unless governments mandate it; those who invest in vaccinating their children will never be paid back by the parents of the other children who become that much less likely to encounter an infected classmate. The market’s main force—competition—relies mainly on open, impersonal access to the infrastructure of production, and labour market opportunities to produce.
Public economics has long been preoccupied with how and when states should step in to herd market forces when these conditions do not hold, but the academic discussions have taken on an increasingly intense political life. The principle of the state role in markets has come up for discussion as economic volatility has increased. The practice of policies that inevitably create winners and losers has attracted scrutiny as inequality has risen.