In a cold and snowy land there lived the people of the North Country.  Some of them made a living by plowing and disposing of the snow that seemed to fall endlessly from the skies between November and March.  Though the work was hard, and often took place in the dark hours of the early morning, they frequently prospered, since the snowfalls came each year and the people of the North Country needed their driveways and parking lots free of the beautiful white flakes.  The Snow Plowers were happy.

But in the winter of 2011-12 the snows seemed to stop.  Oh there was a little ice and some snow, but not really enough to plow: Warmer temperatures quickly melted the little that fell.  The Snow Plowers were not happy.  They gathered the people of the town and complained that the lack of snowfall was devastating the economy of the North Country.  Without the income they earned from plowing, they told their fellow citizens, they would have no money to spend at the local grocery store or bars or restaurants.  And their fellow citizens who owned those fine establishments (and worked there too) would see their income fall, leading quickly to an economic disaster.

Saving the Economy

At first the people of the town nodded along in agreement.  “Yes,” they said, “we must save our economy. But how?”  The Snow Plowers suggested a petition to the Clouds, begging them to bring the snow that would save their business and, through the Magic Multiplier, save their town’s economy.  And so a petition was created.

But then a wise old man stepped forward and declared this was foolishness.  When asked by the townspeople to explain, here is what he said:

It is true that the lack of snow hurts our friends the Snow Plowers, and that is truly unfortunate.  However, just because they have lost income and therefore cannot spend it in the town and beyond, that does not mean the town as a whole is suffering.  Consider your own situation.  Most winters you spend perhaps $300 to pay the Snow Plowers to clear your driveways.  This winter you have spent but $50.  What has happened to that other $250?  You have presumably spent it (or perhaps put it in the bank to be lent to others who have spent it).  And where did you spend it?  On the exact same things the Snow Plowers would have spent it on.  You have been able to eat out a few more times, buy some extra beers, or a nicer steak at the grocery store, or even some candles.  The economy hasn’t been harmed; the flow of spending has just been altered.  You must, in the words of a wise man, “see the unseen.”  And what is unseen is what you have done instead of pay the Snow Plowers.

The Difference It Makes

One young man raised his hand and asked, “If this is true, then what you are saying is that it doesn’t make a difference whether it snows or not to our local economy.  So why should we not ask for more snow and help out our friends the Snow Plowers?”

The wise man responded:

Ah, but it does make a difference.  The rest of us are better off when it doesn’t snow.  Think of it this way: Each time it snows we must spend $25 to get the thing back we value: a usable driveway.  So in snowy winters we give up $300 and have a clean driveway — and that is all.

This winter, by contrast, we have both the clean driveway and the $300.  And we are free to spend that $300 on other things we might want, such as a new flat-screen TV.  This winter we are able to have both a new TV and a clean driveway, while in past years we’ve  had only the clean driveway.  Are we not all better off as a result?   It is unfortunate that our Snow Plower friends are worse off, but would we really prefer a world where we spend $300 to get us right back where we were before the snow?

The people pondered his wisdom, and they understood.  Some of them suggested that if their Snow Plower friends were truly suffering, the rest might use some of the money they saved by not plowing to help them through winter, perhaps by asking them to do some other sort of much-needed work around their homes or around the town.  After all, painting a room or installing new thermal windows would make them better off in a way that unnecessary snow plowing would not.

So the Snow Plowers’ petition to the Clouds was ripped up, and the people of the town rejoiced in the windfall created by the absence of snowfall.

(Thanks to Sarah Skwire for some stylistic suggestions.)

Krugman claims that the Republican argument for the importance of job creation relies too heavily on the “heroic entrepreneur,” rather than recognizing that “successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation.” For Krugman this means there’s plenty of help from government. Although I can’t speak for all Republican politicians, I can say that Krugman’s view of the argument for free markets is utterly mistaken.

The argument for the market is based precisely on the fact that the entrepreneur exists in a social context that helps to determine how effective her actions will be. The most heroic entrepreneur imaginable cannot be very productive if she is shackled by government regulations or is trying to operate in a society with ill-defined or poorly enforced property rights. As Ludwig von Mises recognized as far back as 1920, this is the same reason that successful entrepreneurs fail miserably when they try to run government agencies like businesses: What gives the entrepreneur the ability to succeed are market signals, which are necessary to determine what people might want and how well it was provided. Even the smartest person can’t learn if a teacher uses black chalk on a blackboard in a dark room. No entrepreneur can succeed in isolation.

The Hard Task

More important, though, is that both Krugman and politicians from both parties are much too concerned about job creation when they should be concerned about value creation. Creating jobs is easy; it’s creating value that’s hard. We could create millions of jobs quite easily by destroying every piece of machinery on U.S. farms. The question is whether we are actually better off by creating those jobs — and the answer is a definite no. We want labor-saving, job-destroying technology because it creates value by enabling us to produce things at lower cost and thereby free up labor for more urgent uses.

A century ago 40 percent of Americans worked in agriculture; today it’s less than 2 percent. The former farm workers didn’t all go unemployed. The wealth created by higher farm productivity and lower prices enabled us to demand all kinds of new products that in turn created many more jobs than were lost in agriculture. This is the story of innovation everywhere.

So rather than talking about job creation, let’s focus on value creation. The case for freeing markets is that such freedom best enables individuals to find ways to use their knowledge and skills to create value for others and thereby create wealth for themselves. The more wealth that value creators can keep, the more likely they are to continue to create it. Even if a value-creating innovation destroys jobs in the short run, the increased wealth will bring a great deal of job creation in its wake.

Ancillary Jobs

Krugman tries to criticize Apple by pointing out that the “heroic” Steve Jobs has only created about 43,000 Apple jobs in the United States (though around 700,000 overseas). But this misses the point: The real job-creation number that matters here are all the ancillary jobs created through the invention of the Mac, iPod, iPhone, and iPad. Those inventions, along with every other technological innovation, have created tens of millions of jobs in programming, web design, app design, hardware maintenance, and more.

Krugman also takes a swipe at fans of Ayn Rand by referring to “the John Galt, I mean Steve Jobs-type ‘job creator.’” But Krugman is blind to the error of his own joke: John Galt’s innovative motor took static electricity out of the air and turned it into useful energy, which would have been a huge job destroyer! Again, the triumph of entrepreneurial innovation is not in creating jobs, but in creating value. Galt’s motor would have freed up a lot of labor to be devoted to new wants made possible by the cheap source of energy. Krugman can’t even see that his own example undermines his argument.

The next time anyone starts talking about job creation, stop listening. Jobs come into existence when entrepreneurs are free to create value. Aiming directly at job creation is a recipe for waste and poverty. Set people free to use their talents to create value for others and the jobs will follow.

The answer is that the call for privatization does not get at the real reason the private sector works better than the political sector.  The great advantage of the private sector is not private ownership per se but that private owners compete with one another.  Classical liberals would do better to contrast not the “private” and “public” sectors, but the “competitive” and “monopolistic” sectors.  If the goal is efficiency in delivering the goods, private ownership is a necessary but not a sufficient condition.  Instead of calling for the “privatization” of government services, classical liberals should be calling for “de-monopolization.”

Private Monopoly

Suppose a local government decides to privatize trash collection.  This often means that rather than running the trash collection organization itself, the local government offers the monopoly right to collect trash to the highest bidding private firm.  Although the interested firms compete in bidding for the contract, they nonetheless end up with a monopoly privilege in the locality.  From the consumer’s perspective, a political-sector monopoly has been replaced with a private-sector one.

Private monopolies might be marginally more efficient than political ones, if only because they have a bottom line and presumably have to do the job well enough to get the contract renewed.  Those incentives may be stronger than those that flow from the public’s ability to complain or vote out local officials in the case of government provision.  However, notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not the consumers.  How much the public really gains from swapping a government monopoly for a private one is not at all clear.

Imagine instead that the local government simply opened up trash collection to any firm that wished to sell the service to consumers.  This “de-monopolization” would lead to actual competition among (potential) providers, forcing trash collectors to serve consumers well, instead of just local politicians who hand out monopoly privileges.  Competition drives firms to provide better quality, lower cost goods to consumers rather than political benefits to government agents.  Yes, you can’t have competition without private ownership, but private ownership alone is not enough.  You need de-monopolization to generate the competition that is at the core of the private sector’s effectiveness.

Several Property

In some of his later writing, F. A. Hayek recognized a similar point when he suggested that it was problematic to talk of “private property” and that we should talk instead of “several property.”  The distinction is not merely semantic.  His point is that the important thing about “private” property is not that it is private, but that it is divided among “several” owners who then compete to make the best use of it.

The rhetoric of “privatization” may turn people off who might otherwise be more sympathetic to classical-liberal ideas if we were to frame them as opposition to monopoly rather than as support for shifting resources from “public” to private hands.  It’s also worth mentioning that the “public” sector is far more “private” than the private sector.  Compare how little we know about what “public sector” organizations like the CIA or the Fed do versus how much we know about Apple, Google, or other public corporations, which regularly open their books and provide annual reports to the public.  If we believe that the benefits of de-monopolization will go to “the public” as consumers, then let’s drop the talk of “privatization.”

Private ownership is not a goal but a means to an end.  What really matters is what best serves the public in its role as consumers.  Private ownership only does that if it’s within an institutional context that promotes competition. We classical liberals need to shift our rhetoric from promoting privatization to promoting competition by ending government monopolies wherever possible.  That is the path to lower prices, higher quality, and more freedom.

Large chain stores and franchises do affect local businesses, especially in small towns, but note that it’s mostly a shift rather than destruction: Some businesses find ways to compete effectively by filling niches that the larger stores can’t fill, particularly with respect to distinctly local products, such as restaurant food.

However, larger chains have at least two big advantages worth discussing.

First and perhaps most obviously, their size normally gives them the ability to buy in larger quantities, keeping their costs and prices down.  Walmart grew to the size it did through highly effective inventory management; it pressured suppliers to keep their input prices low and passed those low prices on to consumers.  Low prices are a big part of what lures people to shop there rather than at the smaller boutique stores.  Chains like McDonald’s work in similar ways; a burger, fries, and drink there is usually no more expensive (especially if you count the lack of a tip) than the diner up the road.

Known Commodity

The second advantage is less commented on. The very similarity of chain stores and franchises nationwide, and even worldwide, is a big attraction to many customers because they are a known commodity.  If you’re hungry in a strange town, you know that you can always go to a national fast-food chain and get a meal of nearly identical quality to what you’re used to at the chain’s restaurant at home — and for a good price.  If you are sufficiently risk-averse, the consistency of a national brand is very valuable.  In an economy where national chains were more difficult to operate, we would be far more at the mercy of the unknown.

And it’s not just about food. On a recent trip I forgot to pack dress socks.  Thankfully, in a strange town 2,500 miles from home there was a Walmart five minutes up the road.  I happen to like Walmart’s in-house Faded Glory cotton dress socks, so I was able to buy several pairs of exactly the socks I like and usually wear (for less than $2 per pair).  In a “local only” economy, not only would I have had to spend more time searching for a store that carried dress socks (and was open at 8:30 a.m.!), I would also have faced uncertainty over whether those socks would be the kind I like.  And I probably would have paid considerably more.  A highly local economy constantly puts strangers in a similar position to the traveler with car trouble who knows he is at the mercy of a mechanic he’ll never see again.  Chain stores and franchises bring reputation and repeated dealing into the equation, removing uncertainty and reducing the seller’s power over the buyer.

Freedom of Choice

One final advantage of a global economy is that it still permits people to “buy local” if that’s what they prefer.  I love living in a small town with a Walmart ten minutes away and a farmer’s market during the summer and a top-notch restaurant that serves lots of local beef and produce.  In a world where everything is local, those of us who want to “buy global” presumably would be prohibited from doing so — in the name of preserving the local character.  Just as markets allow pockets of voluntary socialism, but socialism cannot abide capitalist acts between consenting adults, so a global economy has room for the local, while mandatory localism cannot meet the needs of those who prefer to buy global.

Whether it’s food or socks or pretty much anything else, the freedom of the marketplace allows for firms of varying size and composition to meet the equally varied wants of consumers.

Although this perspective has much truth to it, it leaves aside an even more fundamental question that is frequently overlooked in discussions about the efficacy of market economies. Knowing what to produce is one problem, but figuring out how best to produce it is perhaps an even bigger one.

To Build a Bridge

Suppose we know that people would value a bridge over a nearby river. Suppose we even know the location they prefer (and suppose they’re unanimous about it). For some, the hard economic problem has been solved. But that leaves unanswered the question: How we are going to build that bridge? And by “how,” I mean not the engineering question, but the economic ones: With what inputs? How much of each? And are we going to build that bridge with the least valuable resources possible, leaving the most valuable ones for other wants?

We could perhaps build it out of wood, or stone, or steel. We could build it in a labor-intensive way, using lots of workers doing things by hand, or we could go more capital-intensive by using lots of heavy machinery and less labor. If we care at all about the economic well-being of our citizens, getting these questions right matters a great deal. If we could avoid it, we would not want to build the bridge with resources that had more highly valued alternative uses, since that would reduce the total wealth we were capable of creating. Ideally, we’d like to use the least valuable set of resources possible consistent with having a functioning bridge. How are we to figure that out?

Almost a hundred years ago, in one of the social sciences’ most important articles (“Economic Calculation in the Socialist Commonwealth”), Ludwig von Mises gave us the answer. He argued that such comparisons require a common standard of value and that the only standard that would permit rational resource allocation consists of prices generated by a genuinely free market in capital and labor. Market prices, Mises argued, require exchange against money, and exchange requires private property. Only in a free-market economy, characterized by the private ownership of capital, could we figure out not just what to produce, but how best to produce it.

“Groping in the Dark”

Imagine a dark room with stacks and stacks of potential inputs lying around and all kinds of potential consumers trying to find the outputs they want. Free-market prices provide us with a series of lights that allow us to navigate that room and begin to get a sense of how we might answer those questions. Profits and losses tell us after the fact whether or not we got it right. Hence Mises referred to socialism as just so much “groping in the dark.”

No matter how much we know about people’s desire to cross that river, or how much engineering knowledge we have, we cannot figure out the best way to build the bridge unless we can compare the values of the relevant inputs. That is why the prices that emerge from the exchange of privately owned of capital are an irreplaceable feature of an advanced society.

Pennington nicely brings together a lot of familiar material and, more important, applies this “robust political economy” perspective to arguments raised by critics of classical liberalism. One such group is those who favor various forms of so-called “deliberative democracy.” These critics argue that the market privileges wealthier people in the way it allocates resources and ranks wants or needs. The deliberative democrats favor a system in which these matters are decided through conversation among all people (regardless of wealth) either directly or through representatives. The deliberative democrats argue that this would give more scope to minority voices and encourage people to take more seriously the views of those with whom they disagree.

Winners and Losers

As Pennington points out, one major problem with this argument is that democratic processes ending in a vote necessarily mean that some views win and others lose. Compare that to markets, which can meet the tastes of just about everyone, even if a particular demand is fairly small. If you love lounge music covers of heavy metal songs, your odds of verbally persuading others to vote for such music are slim. In contrast the market requires not verbal persuasion, but simply a willingness to pay if we like something and the ability to walk away (or “exit”) if we don’t.

Understanding the importance of verbal persuasion is key to seeing the real flaw in deliberative democracy: The system pretty much has to assume that all knowledge relevant to social decision-making can be articulated. But can consumers and producers always articulate what they want and how best to make it? How exactly can the potential producers of health care articulate what sorts of inputs would be best to use, or what sorts of health care to produce and how to produce it, apart from the market and its prices?

As Mises, Hayek, and other Austrian economists have argued, one of the great advantages of markets is that they do not require us to be able to articulate what we want or why we think one good is more useful than another. All we need to do is act by choosing one thing over another. Often we do not know whether we would prefer one good or another until faced with the specific choice. Our actions convey, through the price system and other institutions, our comparative and contextual valuations. Deliberative democracy suffers from what Hayek called the “pretence of knowledge,” or the false belief that we know a lot more about the economy, and society as a whole, than we actually do.

Rigged Game?

Notice who would likely do best under deliberative democracy: those with a comparative advantage at persuading others using words and numbers. It would be a tyranny of the articulate and rhetorically sophisticated. Pennington cleverly notes that if deliberative democrats think it’s okay for those who were better able to persuade others in previous deliberations to have more power in future ones, why is it not okay for entrepreneurs who get rich by more effectively persuading others to buy their goods to have more economic power in the future?

The people who created the idea of deliberative democracy are largely academics, who, perhaps not coincidentally, specialize in using language to persuade others. Only academics could cook up this sort of proposal because they are so focused on that form of persuasion that they are blind to the market’s use of the price system to make inarticulate knowledge socially usable and to the communicative power of exit.

The real failure of deliberative democracy is that it’s a reflection of the tendency of academics to privilege their own world of reason, rhetoric, and articulate knowledge, even as they decry the supposedly unearned privileges of others. A little more modesty and a little less hubris might open more academics to the communicative superiority of the market.

This week I want to return to that theme but with a different example that provides a another window on what we mean by innovation and how hard it can be to measure improvements in well-being.

My example this time is the Keurig coffeemaker my department recently purchased.  For those unfamiliar with Keurigs, they make coffee one cup at a time through an ingenious brewing system that runs the hot water right through a small container that holds the coffee, dispensing it right into your mug.  Unlike instant coffee, this is actually brewed — and quickly.  The coffee tastes pretty close to what you’d get from a typical automatic drip system.  It can also brew tea and even hot chocolate.

Design-Consciousness

So what’s so great about this device?  First, it’s beautiful — and that matters.  You can see from the picture that it looks like something Apple or some other design-conscious company would make.  Second, the single-cup technology (known as K-cups) is a wonderfully consumer-friendly innovation.  If you live in a house or share an office with people who like different kinds of strengths of coffee, or, like me, prefer decaf, you are used to the problem economists call “imperfect preference satisfaction.”  Even the best solution is likely to be imperfect for most, if not all.

The Keurig system solves this problem.  One colleague can have the lighter roasts she likes; another can have tea; and I can have my French roast decaf — all without affecting the ability of others to satisfy their preferences.  Imagine a car that can change models depending on who’s driving it and how that would solve the problem couples face in finding a car they both really like.

This may seem like a little thing, but it’s part of an important trend of the last few decades, a process that some have termed “mass customization.”  Innovations in technology and production processes have increasingly enabled us to purchase products that are either created uniquely for us or that permit customization.  The most obvious example is Dell computers, which was one of the first companies to let consumers pick the components they wanted rather than take a unit “off the rack.”  At one time Burger King was able to differentiate its product by telling us to “Have it your way,” but now this is increasingly standard operating procedure across an increasing number of industries.

Missed by the Data

The ability to fine-tune a mass-produced device to one’s own preferences cannot be accounted for easily in the traditional economic data.   Our incomes aren’t any higher, nor is there an obvious net effect on GDP.  However, the ability to have a product that more precisely matches your preferences is clearly a gain in consumer well-being.

Finally, the Keurig is a really nice example of consumer sovereignty.  The wonderful thing about markets is that firms are always trying to figure out how to deliver the things consumers want.   This is also what government bureaucracies are notoriously bad at.  Compare, for example, the one-size-fits-all approach of government schools to the idea of mass customization.  Can we even imagine a machine whose central purpose is to individualize the coffee-drinking experience being produced in the former Soviet bloc?

The Keurig is not just a beautiful piece of innovative technology, it’s also a symbol of many of the things markets do so well and how our lives are better as a result, whether or not we can measure them in the usual ways.  The world of the Keurig is not a world of stagnation, but one of small changes (one might even say “marginal revolutions”) that improve our lives bit by bit, year to year.

* * *

Happy holidays to all. To regular readers of this column, thanks for spending another year with me and for all of your kind words in the comments and email.

Editor’s Note: This column first appeared in September 2010.

One of F. A. Hayek’s most accurate, and oft-repeated, lines about John Maynard Keynes comes from a review of Keynes’s 1930 book, A Treatise on Money.  Hayek wrote: “Mr. Keynes’ aggregates conceal the most fundamental mechanisms of change.”  That Austrian macroeconomics rests firmly on the microeconomic “mechanisms of change” that ultimately comprise economic activity remains a crucial reason why that insight can better explain both the mistakes of the boom and the way out of the bust.

The Austrian insight is relevant to both capital and labor.  In standard Keynesian models (as well as most other macroeconomic models), capital is understood as an undifferentiated mass.  The Keynesian model also assumes that interest rates do not equilibrate the supply of savings and the demand for investment funds.  Thus when people save more, there’s no signal transmitted to investors that they should build more for the future.  As a result, the decline in consumption that accompanies the increase in savings causes firms to invest lessas their inventories pile up without any offsetting increase in investment elsewhere due to the lower interest rate.

In the Austrian view investment cannot be treated at this high a level of aggregation.  The production process that leads to consumption goods comprises a number of stages, starting with the “early” stages of research and development and raw materials, and finishing with the “later” stages, such as wholesaling or inventory management, which are closer to the final consumer purchase.  Looking at the structure of production this way enables Austrians to note that when saving increases and causes interest rates to fall, resources will indeed be drawn away from the late-stage investments in inventory, but they will be drawn toward investment in early stages of production, as the interest lower rate makes longer-term production processes involving more stages relatively less costly.  Over time, savings promotes those longer-term processes, which are more productive and provide us the capital base for economic growth.

By disaggregating investment, the Austrian model also reminds us that different kinds of  capital goods have to “fit together” to be productive.  This is most clear when central banks try to inflate to generate growth.  In this case, the lower interest rates produced by excess money lead to increased investment in those same early stages.  However, unlike the first story, where that increased investment is financed by reduced investment in the later stages, inflation also increases consumption as the lower interest rate reduces savings.  The credit expansion creates no new resources but leads to more investment at both the very late and very early stages of production. This is the boom of the business cycle.

However, like a railroad being built, misaligned, from two directions, the plans of both sets of investors are unsustainable and the capital projects are left unfinished.  We have a recession.

Labor Too

All that is true of capital here is also true of labor.  Most Keynesian models also treat labor as an undifferentiated aggregate, speaking of “the” labor market and “the” wage rate.  Once we look at the microeconomic processes underlying the structure of production, we see that each of these stages has its own labor market.  Thus when resources move from one stage to another, the demand for labor will shift also, leading to changes in each wage rate.  Growing sectors will attract labor, and shrinking ones lose it.

During an inflation-generated boom, labor, like capital, is misallocated across stages.  And when the boom turns to bust, workers will lose their jobs as the projects they were working on are abandoned.  Unemployment results as we enter the recession.  However, that unemployment, like the misallocation of capital, will not be evenly distributed across the economy.  To see the real costs of inflation-generated business cycles, we need to get behind the aggregates to see the fundamental mechanisms of change.

Being too focused on Keynes’s aggregates can also mislead us as to the best ways to get out of the recession once we’re in it.  It may look as if all we need more is investment or more jobs. But once we understand that the “fundamental mechanisms of change” have to do with the boom’s microeconomic misallocation of capital and labor, we see that what is needed is a reallocation of resources not just more of them.  Capital needs to move out of unproductive lines and back toward productive ones, and the same is true of labor.

Stimulus spending, bailouts, and extension of unemployment benefits only prevent the fundamental mechanisms of change from doing their work in unwinding the errors of the last decade.  The cure for macroeconomic discoordination is freeing up the entrepreneurial market process to reallocate and coordinate resources.  But 80 years after Hayek first made the point, the fascination by economists and politicians with Keynes’s aggregates continues to conceal the fundamental mechanisms of change, and in so doing, also continues to block the processes through which a sustainable recovery can take place.

The market-failure criticism has two problems, both related to the fact that the critics rarely understand the meaning of term has in economics.  First, the meaning itself is problematic from a Austrian understanding of the market process.  Second, saying that markets have failed does not mean that government intervention can improve on the outcome.

In the technical literature a market failure refers to any situation in which a market does not produce the “Pareto-optimal, general equilibrium” outcome.  Standard neoclassical theory argues that “perfectly competitive” markets will produce outcomes in which resources are allocated to their highest valued uses and no one person can be made better off without making at least one other person worse off.  In general equilibrium, prices of all goods are exactly equal to the marginal cost of producing them and all households maximize their utility.  In addition, all firms are profit maximizing, but the level of real profits earned is zero, as no reallocation of resources could improve on the current one.

Unreal Conditions

Strictly speaking, any market outcome short of this reflects a “market failure” in that markets have failed to produce the ideal outcome that theory predicts.  However, in the real world the conditions necessary to produce a general-equilibrium outcome are not remotely feasible: perfect knowledge, homogeneous products, and a large number of small firms in every market with none able to influence price.  Given that such a world is not possible, the charge of market failure boils down to the claim that markets don’t produce a level of “perfection” that is unattainable under any realistic circumstances.

In this sense of the term, markets “fail” constantly.  It takes an Austrian perspective to understand that these sorts of imperfections (a better term than “failure”) are not only part and parcel of real markets; they also are what drive entrepreneurship and competition to find ways to improve outcomes.  In other words, what markets do best is enable people to spot imperfections and attempt to improve on them, even as those attempts at improvement (whether successful or not) lead to new imperfections.  Once we realize that people aren’t fully informed, that we don’t know what the ideal product should look like, and that we don’t know what the optimal firm size is, we understand that these deviations from the ideal are not failures but opportunities.  The effort to improve market outcomes is the entrepreneurship that lies at the heart of the competitive market.

Thus the value of markets is not that they will achieve perfection, but that they have endogenous processes of discovery that enable people to correct the market’s imperfections.  Just as it’s the very friction of the soles of our shoes on the floor that enable us to walk, it is the imperfections of the market that encourage us to find the new and better ways to do things.

Government Failure

However, even if all of the above weren’t true, or if critics don’t believe it, there’s a second half of the argument that must be dealt with.  To say that markets fail does not, in and of itself, mean that government intervention will improve things.

Note that the market-failure critics fail to apply the same logic to government that they do to the market: Just as markets lack the impossible features that would enable them to achieve perfection, so do governments.  In fact, government failure is at least as common as market failure.

So why then do we think markets are better?  To answer that question, we must ask: Which process has better built-in mechanisms to provide the knowledge and incentives necessary to notice imperfections and improve on them? It is here that the Austrian argument for markets comes to the fore.  Markets are desirable not because they don’t fail, but because they are better able than government to respond when they do fail.  Thus the charge of “market failure” itself fails to address the main issue.  Rather than worrying about when and why markets supposedly fail, we should be concerned with how well they, and the political process, respond to imperfections.

As arguments go, this one is pathetically weak. One obvious point is that those camping out in front of Best Buy did not set up house indefinitely (they’ll be gone when the store opens), nor are they leaving mounds of trash and human excrement all over the place. Even given the sporadic reports of in-store mayhem last Friday, I do not believe any Best Buy lines saw murders, rapes, or armed robberies, as have several OWS sites.

Less obvious perhaps is that the lines in front of stores are there because the stores themselves “invited” shoppers with early opening times. The stores can do that because, for the most part, they are located on private property, either their own or that of the mall or shopping center they contract with. In either case, the “occupation” is part of a consensual relationship between sellers and buyers. OWS, by contrast, is either on private property without the owner’s consent or on public property. This is a difference that matters.

Taking Care of What You Own

Political economy teaches that people take better care of resources they actually own than those they simply use. Best Buy has every reason to make sure that those waiting in line overnight behave themselves, and it has the ability to enforce whatever rules it puts in place. If queuing customers made a fraction of the mess that occupiers have, Best Buy would lose business, hence its incentive to make sure that doesn’t happen.

Aside from Best Buy’s ability to enforce whatever rules it deems necessary, its customers are less likely to misbehave in the first place. This is so not just because they know the property belongs to someone else, but more because Best Buy is offering them something they want. That gives them reason to respect its property. The mutual benefit of commerce creates a very different relationship between those camping out and those who have the right to control the site than does the generally adversarial nature of political protest, especially when the property in question is either public or an ill-defined “privately owned but mandated to be publicly available” space like Zuccotti Park in New York City.

Attempting to compare the peaceful, temporary, respectful lines created by the mutual benefit of commerce with the less peaceful, ongoing, mess associated with political protests — which include demands for redistribution rather than mutual benefit — is an extraordinarily weak bit of political rhetoric.

Violence Against the Nonviolent

The other big OWS topic in the last week or so was the casual pepper spraying of nonviolent protestors at UC-Davis. Even if those protesters were blocking access and even if they had been told to leave or face consequences, the reaction of the campus police was over the top, particularly the casual near-joy the officer took in spraying the protesters as if he were watering his garden. This was not the only violent overreaction by police.

Whatever we as libertarians might think of the views of the OWS movement, we cannot be silent in the face of this sort of police behavior. Responding to nonviolent protests with pepper spray or other physical violence is wrong, and libertarians need to join those on the left who have rightly condemned it. In addition, the news that police actions to remove protesters were coordinated by the Department of Homeland Security should give libertarians even more reason to raise our voices. What we saw last week was yet another symptom of the increased militarization of the police. It does not matter whom such tactics are used against – they are a sign of an encroaching police state.

Perhaps libertarians can offer our friends on the left a little bargain in the process: We will join them in protesting the police-state tactics being employed against OWS if they will join us in protesting the occupiers’ often disgraceful treatment of the small businesses that surround their camps, particularly those run by immigrants trying to make an honest living. The reports of damage to businesses and threats to owners are no less troubling than casual pepper spraying and the like. If you object to violence against nonviolent protesters, you should also object to violence against nonviolent entrepreneurs, especially those struggling to support families.

The lesson from both of these issues is one the occupiers could benefit from: If you want a peaceful, prosperous, and pleasant world, work to encourage commerce and limit the State. It’s the bourgeois virtues of a commercial society that create the orderly sit-in known as the Black Friday queue, and it’s not businesspeople who pepper-spray their patrons.