This fact, however, does not imply that exposure to more economics is necessarily good. The sad reality is that economists too often present their analyses of markets in ways that confuse not only unsuspecting non-economists but also—and too often—economists themselves.

A frequently encountered instance of this confusion is economists’ discussion of competition. What introductory economics textbooks describe as “perfect” (or “pure”) competition resembles nothing that occurs in the real world. In the world of the textbooks, firms don’t differentiate their products from those of their rivals. Firms never try to win more customers by improving the quality of their products. Also, firms don’t advertise. Indeed they don’t even cut prices because each “perfectly competitive” firm is a “price taker”: It’s too small to affect the market price and so can sell as much as it wishes at whatever price prevails in the market.

These and other problems with the model of “perfect competition” have been pointed out repeatedly, especially by economists steeped in the Austrian tradition—see, for example, Hayek’s essay “The Meaning of Competition.” Yet the typical economist still clings to the notion that “perfect competition” is perfect competition. This typical economist, it must be admitted, does understand that the conditions necessary for “perfect competition” to prevail in actual markets can never exist. But the model remains the ideal against which real-world markets are judged. The closer real-world markets appear to be to textbook “perfectly competitive” markets, the more competitive real-world markets are assumed to be.

And competition being a good thing, this typical economist presumes that policies advertised as moving real-world markets closer to the “perfectly competitive” ideal are desirable.

Assumed Conclusions

But such a presumption is unwarranted, in part because many of the conclusions of the analysis are snuck into the model’s initial assumptions.

Most important among this model’s foundational assumptions is that competitive forces play out only in the form of price cuts. Therefore anything that prevents prices from being cut (down to levels that the model specifies as appropriate) is regarded as an obstacle to competition—indeed, as an element of monopoly that prevents the economy from operating more efficiently.

To this day, many mainstream economists describe any firm that can raise, even modestly, the price it charges for its product without driving away all of its customers as possessing some monopoly power.

Note the confusion: A pest-control producer that aims to increase its sales by making a better mousetrap is regarded by this model as behaving monopolistically! Competing for customers by doing something other than simply cutting prices is, according to the model, not competitive.

You can’t make this stuff up.

Another example of how economists commonly confuse themselves (and others) involves the issue of “market failure.” That same introductory economics textbook that teaches the model of “perfect competition” explains a few chapters later that markets perform suboptimally whenever some groups of people act in ways that affect other groups of people without the consent of these third parties. The textbook then explains that, happily, economists know how to design taxes or regulations to fix the problem.

Externalities and Assumptions

Such situations—economists call them “externalities”—are indeed bad. If Smith pays Jones to hit me in the head with a hammer without my consent, I—the third party—am unquestionably made worse off. (A simple, and best, solution in this case is to give me an enforceable property right in my person: No one can hit me and get away with it without my consent.)

But the stories that economists typically tell of externalities—and of how to “solve” them—too loosely sneak in illegitimate assumptions.

Here’s an example: Smith pays Jones for pork chops whose production at Jones’s pig farm next door to where I live fills my house with obnoxious odors. The economist leaps to the conclusion that I am wronged. Perhaps I am. But suppose that I bought my house knowing that it was next door to a pig farm. Am I still wronged? No: The price I paid for my house was discounted because of its location within smelling distance of the farm. Not only have I consented to endure swinish odors in my home, I’ve been compensated for doing so (in the form of a lower price than that of a similar home located in a sweeter-smelling neighborhood).

Or suppose, alternatively, that the pig farm moves into my neighborhood by surprise, after I buy my house. Now am I harmed? The answer is unclear. If the location of my house is such that homebuyers should reasonably expect the possibility that farms might set up shop nearby, then when I bought my house there was an open question about whether or not home-owners have the right to odor-free air in the neighborhood. And because this question cannot be answered by economics alone, it’s illegitimate for an economist to conclude that the farm necessarily should be taxed or regulated for the purpose of cleansing the neighborhood air of stinky odors.

The Largest Externalities

Economists are correct to point out that externalities exist. But economists are far too frivolous in going about labeling this or that effect an “externality”—and, what is even worse, are far too glib in supposing that government can be trusted to “internalize” externalities in ways that improve the allocation of resources rather than making it worse.

Don’t forget what too many economists seem never to grasp: Collective decision-making itself—from citizens voting to politicians spending taxpayers’ money—is infected with what are perhaps the largest and most intractable externalities. Costs are imposed on third parties constantly.

Economics done properly would highlight the dangers of trying to cure externalities with a process that itself is deeply infected with externalities. Unfortunately economics is too often done improperly.

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.

First, something that is right.

With one major exception (discussed below), the typical economist, when doing economics (and regardless of political bent), doggedly avoids ad hominem explanations. That is, economists don’t explain observed reality as resulting from specific human personalities or personality traits. Instead, economists (try to) identify the constraints and opportunities that confront decision-makers and then explain patterns of human activities as being predictable outcomes of the ways that individuals—any individuals—respond to identified constraints and opportunities.

This avoidance of ad hominem explanations is the source of one of the most important lessons that economists teach: greed explains nothing. Because greed—or, more accurately, “self-interestedness”—is largely unchanging across time, no observed changes in the economy can be explained by it.

Greed can’t explain rising fuel prices, for example, given that fuel sellers (and also fuel buyers) are just as greedy when prices are lower as they are when prices are higher. Likewise with booms and busts. Because people’s greed remains constant something else must explain booms and busts. And so too for any other economic phenomena you care to name—everything from the fact that Americans are richer than Armenians to the fact that, say, big-box retailers’ market shares are growing while those of mom-’n’-pop retailers are shrinking.

Of course the particular constraints and opportunities identified by economist Doe as being most relevant for explaining some phenomenon often differ from those identified by economist Jones for explaining the same phenomenon. Doe, for example, might identify an increase in the rate of growth of the money supply as the most crucial factor for explaining an observed boom and bust, while Jones identifies an easing in government regulation of banks as the crucial factor. But neither Doe nor Jones explains the boom and bust as caused by the likes of greed or ignorance.

Economists’ refusal to use always-popular (and often half-baked) romantic notions about human behavior to explain economic phenomena goes a long way toward making economics a genuine science, and it accounts for much of whatever good economists have managed to bestow on society.

What’s Wrong

Turning now to something that is wrong with economics, much of the harm that economists inflict on society is a direct result of the one area in which economists too often embrace such ad hominem explanations: analyzing government involvement in the economy.

Despite a long-established tradition in economics of studying the “public” sector using the same analytical tools that we use to study the private sector—and despite two founders of this Public Choice tradition being awarded Nobel Prizes (George Stigler in 1982 and James Buchanan in 1986)—far too many economists persist in sloppy, unanalytical ad hominem thinking about government.

For too many economists government is assumed to be able to escape many of the constraints that unavoidably bind and trip up people in the private sector. Asymmetric information, moral hazard, and adverse selection, as well as confirmation bias and the legions of other alleged “irrationalities” identified by behavioral economists, are just some of the “imperfections” economists find in markets and then too frequently simply assume can be dealt with effectively by government.

Overlook here the fact that many of the problems alleged to be unavoidable in the private sector are in fact handled quite well by human beings acting without government who exhibit far more ingenuity than the typical economist believes is possible in private-sector settings. (It’s notable that Elinor Ostrom, the first woman to win the Nobel Prize in economics, isn’t a professor of economics but instead of political science. She won the prize in 2009 for her work showing how creative people in private settings often overcome obstacles—such as free-rider problems—that most economists naively assume can be overcome only by government.)

Unanalytical Assumptions

Focus instead on economists’ bizarre stumble into an unanalytical assessment of government. That stumble goes like this: “Omigosh! There’s an imperfection in this private-sector market! My textbooks and the many refereed journal articles I’ve read and written make quite clear—with lots of difficult mathematics—that this market will therefore fail. My textbooks and journal articles also imply, and in many cases explicitly state, the conclusion that the government—and only the government—can solve the problem. Models prove this conclusion.”

Such stumbling is common. From today’s insistence that America needs more stimulus spending, through the support that many economists express for the new Consumer Financial Protection Bureau, to economists’ overwhelming belief that countries need central banks, too many economists unscientifically reach their conclusions about the alleged efficacy of government intervention without first asking how the information available to government officials, and how the incentives these officials face, will affect government decision-making.

In short, economists mysteriously conclude that desirable public-sector outcomes follow from the praiseworthy intentions that economists assume motivate most public officials.

Nowhere does this mystery run more deeply than in fiscal policy. Even if it were true that increased government spending can hasten an economy’s escape from a recession, the large number of economists who today endorse such spending is discouraging. Seldom do these economists inquire into the incentives facing government officials in charge of spending. The assumption is that these officials will spend the money in ways sure to promote the public interest. Also, seldom do these economists inquire into the information asymmetries and other constraints that might hamper even well-meaning officials’ efforts to carry out fiscal policy effectively.

Save for the relatively few economists steeped in Public Choice economics, the typical economist today remains a political naif—and a dangerous one at that. He is bloated with unjustified confidence in models which show that if government officials behave in the public interest and if these officials are immune to the same decision-making quirks and knowledge limitations that afflict decision-makers in private markets, then government can perform all manner of marvels. This economist then uses his authority to support interventions that are utterly unjustified by genuine scientific standards.

It’s shameful.

Regardless of how political actors in the 1960s might have sought to exploit economic analysis to gain a plausible public-interest rationale for their proposed programs, the most prominent body of economic analysis in those days—the sort taught by the leading lights at Harvard, Yale, Berkeley, and the other great universities—virtually cried out to be exploited in this way. During the mid-1960s the so-called Neoclassical Synthesis achieved its greatest hold on the economics profession.

This term “synthesis” refers to the combination of a microeconomic part, which contains the theory of individual markets that had been developed over the preceding two centuries, and a macroeconomic part, which contains the ideas about national economic aggregates advanced by John Maynard Keynes in his landmark 1936 book The General Theory of Employment, Interest, and Money and further developed by Keynes’s followers during the three decades after the book’s publication.

On the microeconomic side, the Neoclassical Synthesis incorporated the so-called New Welfare Economics that had been developed during the 1930s, 1940s, and 1950s. In this form microeconomic theory advanced a general-equilibrium theory of the economy’s various markets, identified the conditions for the attainment of equilibrium in this idealized system, and demonstrated that various “problems”—springing from external effects, collective goods, less-than-perfect information, and less-than-perfect competition, among other conditions—would cause the system to settle in a state of overall inefficiency: The value of total output would fall short of the maximum that would have resulted from systemic efficiency, given the economy’s available resources of labor and capital and its existing technology.

Attainment of such an inefficient state was characterized as a “market failure,” and economists expended enormous effort alleging the existence of such market failures in real-world markets and in proposing means (mainly taxes, subsidies, and regulations) by which the government might, in theory at least, remedy these failures and thus maximize “social welfare.”

Had economic theorists rested content with using the microeconomics of the Neoclassical Synthesis strictly as a conceptual device employed in abstract reasoning, it might have done little damage. However, as I have already suggested, this type of theory cried out for application—which, in practice, was nearly always misapplication. The idealized conditions required for theoretical general-equilibrium efficiency could not possibly obtain in the real world; yet the economists readily endorsed government measures aimed at coercively pounding the real world into conformity with these impossible theoretical conditions.

Closely examined, such efforts represented a form of madness. As the great economist James Buchanan has observed, the economists’ obsession with general equilibrium gives rise to “the most sophisticated fallacy in [neoclassical] economic theory, the notion that because certain relationships hold in equilibrium the forced interferences designed to implement these relationships will, in fact, be desirable.”

Great Society measures such as the Elementary and Secondary Education Act (1965), the Higher Education Act (1965), the Motor Vehicle Safety Act (1966), and the Truth in Lending Act (1968), as well as many of the consumer-protection and environmental-protection laws and regulations, found ready endorsement among contemporary neoclassical economists, who viewed them as proper means for the correction of purported market failures.

The assumptions that underlay these economic interpretations and applications, however, could be sustained only by wishful thinking. Economists presumed to know where general equilibrium lay, or at least to know the direction in which the quantities of various inputs and outputs should be changed in order to approach general-equilibrium efficiency more closely. But neoclassical economists cannot move the earth with a mathematical lever because they have no place to stand—no “given” information about (presumably fixed) property rights, consumer preferences, resource availabilities, and technical possibilities. What neoclassical economics takes as given is, in reality, revealed only by competitive processes.

If the microeconomic side of the Neoclassical Synthesis fostered government measures to remedy a variety of putative market failures, its macroeconomic side endorsed government measures to remedy the greatest alleged market failure of all—the economy’s overall instability and its recurrent failure to bring about a condition known as “full employment.”

The supposition that mass unemployment constitutes or reflects a market failure came easily to economists who had reached maturity during the Great Depression. By the early 1950s Keynesian ideas had entrenched themselves among the leading lights of the mainstream economics profession. Since then, some species of Keynesianism has been either in the professional saddle or clamoring to get there.

In the 1960s few economists disputed this general framework of analysis. Even critics such as Milton Friedman accepted it, arguing only that certain second-order aspects of the model differed from what the Keynesians assumed.

Few macroeconomists looked to monetary-policy changes as important means of pushing an economy out of what they viewed as a mass-unemployment equilibrium. For the typical macroeconomist of those days, fiscal policy—changes in government spending, taxing, and borrowing—held the key to keeping the economy on a steady growth path. By employing these instruments policymakers could effectively select from a menu of inversely related rates of inflation and unemployment, a tradeoff schedule known as the stable Phillips Curve. As if to certify the completeness of Keynesianism’s conquest, in December 1965 Time magazine put an image of Keynes on its cover and featured a long, laudatory article titled, “We Are All Keynesians Now.”

The Great Society programs, whether for microeconomic remedy of alleged market failures or for macroeconomic fine-tuning, had an important element in common: the presumption that technocrats possessed the knowledge and the capacity to identify what needed to be done, to design appropriate remedial measures, and to implement those measures successfully. In short, the Great Society amounted to social engineering—or worse, to sheer, groping social experimentation—on a grand scale. People ought not to have been surprised when its attainments failed to match its pretensions.

I think so. It is best seen in the way mainstream economics tends to define the fundamental question concerning the “optimal allocation of resources.” Economics tries to explain how resources might (or might not) get optimally allocated to their various possible uses. In a world of limited resources and unlimited wants, how do we ensure that resources are devoted to people’s most urgent wants?

Most standard economic models seek to demonstrate how, under certain conditions, resources will be allocated optimally by the free market. Those same models can also show that if the specified conditions do not hold, then resources will be less than optimally allocated. This generally referred to as “market failure” because free markets fail to achieve that optimal allocation. Many mainstream economists argue that government can step in and either change the conditions under which the market operates, or directly allocate resources itself, so that society reaches that optimal allocation pattern.

Notice that optimal allocation is the goal. In other words, what is valuable about markets is the degree to which they “get it right,” with the “it” being the resource allocation. Government intervention is deemed justified by people who believe that, in some cases, it can allocate resources better than markets can.

Fundamentally Different

For Austrians, the fundamental issue is not whether markets get it right. True, Austrians think markets are pretty good and governments quite bad in that respect. And even though Austrians might explain things differently from the mainstream, there are plenty of mainstream economists who would agree with those general conclusions. Note, though, that the question here is still about getting it right.

Where the Austrian view differs, I would argue, is in understanding that markets are also really good at helping people to know when resources are not optimally allocated and providing the signals and incentives needed to correct the mistakes. Being adept at getting things right at a given point is of course a good thing. But it is probably more valuable — given that we aren’t likely to get things perfectly right on a regular basis — to be able both to know when we are wrong and to have an incentive to do better.

Government Failure

This approach provides a way to see the problems government has in allocating resources even remotely well: It’s not just that government gets it wrong at various points but that political processes do not have the same error detection and correction abilities that markets have. Political actors are far less likely to know when they’ve erred and to have the right incentives to correct things. Government is not only less able to get it right; it’s also less able to know when it’s got it wrong.

A whole new light is now shed on the idea of “market failure.” In this more Austrian view, markets frequently “fail” by not allocating resources optimally at a given time. But calling this a “failure” ignores the Austrian point that what markets are particularly good at is telling us that resources are not optimally allocated and providing the knowledge and incentives necessary to correct the errors. From the Austrian perspective, “failure” should refer not to suboptimal allocation at a given time, but rather the inability to detect and correct error. If we understand that the crucial question is how well alternative processes do those things, we realize that supposed market “failures” are better seen as opportunities for market successes.

In 2006 officials in Indiana leased 157 miles of the Indiana Toll Road to a private Spanish/Australian consortium. While this was called a “privatization,” Block would clearly dismiss it as nothing of the kind. The Indiana Toll Road remains owned by the state. Real privatization would mean completely private ownership of all streets, roadways, paths, and freeways. Only private roadway owners would determine regulations and prices.

In the current political climate it may seem Block has the cart before the horse. Arguing for free-market roads these days is a little like a starving person worrying about his dessert. Shouldn’t we first try to halt the current growth in the size and scope of government and deal with the almost Utopian idea of private streets and highways later? But anyone who has read Block’s provocative book, Defending the Undefendable, or has heard him discuss free-market ideas one on one, knows he does not blink in his support for freedom. Besides, if “we can establish that private property and the profit motive can function even in ‘hard cases’ such as roads, the better we can make the overall case on behalf of free enterprise,” he writes.

A big roadblock, so to speak, in arguing for private roads and highways is that practically everyone takes government ownership for granted. Even many economists, using “market failure” arguments such as the one about “externalities,” often cite roads as something only government can provide. Block carefully takes apart these arguments. For example, the “externalities” argument contends that private investors would underinvest in roads and highways. But who is to say, given a complete lack of market signals, a government agency would invest the correct amount? Indeed, this part is among the book’s best contributions.

In addition to giving readers a seminar in logical economic reasoning, Block’s book also reflects his passion for freedom. He believes firmly that government management of roads and highways is not only inefficient but also deadly. “Road socialism” causes the deaths of more than 40,000 people in the United States each year. And although many people blame highway deaths on alcohol, unsafe vehicles, or speeding, Block lays the blame on the government officials who manage the highway system. He explains his conclusion: “It may well be that speed and alcohol are deleterious to safe driving; but it is the road manager’s task to ascertain that the proper standards are maintained with regard to these aspects of safety. If unsafe conditions prevail in a private, multistory parking lot, or in a shopping mall, or in the aisles of a department store, the entrepreneur in question is held accountable.” The problem is that government officials are not accountable.

Much of the book, a collection of essays, involves answering practical questions, such as how private road owners might deal with intersections. Block answers this and other questions fully—maybe a little too fully for the casual reader. Still, Block is serious about this complex subject, and his book is not intended to be light reading. Fortunately, his writing style is clear and easy to follow.

An important assumption underlying the book is that a competitive free-market road system would necessarily be superior to one operated by government. In supporting that assumption Block presents a series of arguments familiar to students of the Austrian school of economics. For example, he notes the importance of market signals in directing entrepreneurial decisions. Block also addresses the neoclassical notion of “perfect competition.” This highly unrealistic model suggests roads require government management. Yet, as Block notes, “perfect competition” exists practically nowhere and, if that were truly our standard, nearly all markets would call for nationalization.

After making a strong case for road privatization, Block addresses the thorny matter of getting from here to there. After wrestling with several possible approaches, he admits that privatizing today’s system of public roads would be like trying to unscramble an egg. Yet even an “imperfect privatization will be far preferable to none at all. Government streets are an administrative and safety nightmare. It is inconceivable that private initiatives could do worse.”

The fall of the Soviet Union and other collectivized systems clearly showed the gigantic problems inherent in government ownership and management of any enterprise. This lesson has not yet been applied to our roads and highways. Thanks to Block’s comprehensive work, that may not always be the case.

This activity has focused on the fact that traditional news-producing businesses aren’t making the money they used to make because of competition from new kinds of outlets.

This, allegedly, is a market failure.

Print journalism lost income to television, then the Internet, and now from the expanding capabilities of mobile handsets. In this new and still rapidly evolving order, print news media are increasingly discovering they are at a comparative disadvantage in attracting advertising dollars. Like dial-up Internet access, the newspaper is getting left behind.

But is this a market failure? The FTC argues that journalism is a public good, that the severe contraction of the industry proves that the market has failed, and thus that even tirelessly experimenting entrepreneurs have been unable to find new and sustainable streams of revenues for news organizations, especially for traditional newspapers and their online extensions. As paragraphs 14 and 15 of the FTC paper argue:

14. There are reasons for concern that experimentation may not produce a robust and sustainable business model for commercial journalism. History in the United States shows that readers of the news have never paid anywhere close to the full cost of providing the news. Rather, journalism always has been subsidized to a large extent by, for example, the federal government, political parties, or advertising.

15. Economics provides insight into why this has been the case. The news is a “public good” in economic terms. That is, it is non-rivalrous (one person’s consumption of the news does not preclude another person’s consumption of the same news) and non-excludable (once the news producer supplies anyone, it cannot exclude anyone). Because free riding is usually easy in these circumstances, it is often difficult to ensure that producers of public goods are appropriately compensated.

The policy recommendations, in turn, are intended to raise revenues and decrease costs to news-producing organizations, while making life more difficult for online news aggregators and other new media “free riders.”

Major New Programs

By my count the FTC report contains 30 potential policy proposals, ranging from major new programs to tweaks of existing interventions. I have categorized most of the proposals into six broad areas:

• Raise revenues to news organizations by: amending the Copyright Act to allow licensing of news content and expand protections of “hot news” while also narrowing the scope of fair use; and exempting news organizations from federal antitrust laws to encourage collusion in charging end users and online news aggregators.
• Reduce costs to news organizations by: granting free access to government computing centers; expanding R&D subsidies to information technologies that journalists use; and standardizing the way governments issue electronic information as fodder for what journalists report.
• Increase current funding of journalism by: increasing subsidies to the Corporation for Public Broadcasting; increasing postal subsidies for mailing of print media; and funding newly created domestic counterparts to international radio broadcasting like Voice of America and Radio Free Europe.
• Create new federally funded programs including: a new journalism division of AmeriCorps; a national fund for local news in “places the market has failed to serve”; and grants to universities for student-produced investigative journalism.
• Offer tax preferences to news organizations including: credits for hiring journalists to “help pay the salary of every journalist”; tax-exempt status for news organizations that convert from commercial to non-profit news organizations; and a newly created IRS status of news organizations as “for benefit” organizations that are tax-exempt.
• Harvest new funding mechanisms for earmarked spending on news organizations, including: a tax return checkbox for up to $200 to distribute to nonprofit news organizations; new Federal Communications Commission surcharges on new-media content; new taxes on spectrum use and spectrum auctions; a new 5 percent tax on consumer electronics; a new 2 percent tax on online advertising; a new 3 percent tax on wireless and Internet phone bills; and more.

This is what the best and the brightest have been up to.

Now just to be clear, the FTC authors are careful to state that these are merely potential proposals that are intended for discussion only. Yet after a year of workshops and dozens of studies, these are the ideas on the table—a thoroughgoing commitment to the coddling of a dying business model coupled with a seemingly wholesale disregard for freedom of speech.

Since there isn’t enough space here to talk about all the implications of the FTC report, I will focus on the economic argument that lies at the core of these proposals.

First, you might wonder what the FTC refers to in saying that journalism has always been subsidized by the federal government. Well, consider postal subsidies for shipping print news, first enacted in 1792. Then there are tax breaks to newspapers for costs incurred to increase circulation. Finally, there is direct funding of public radio and television. In light of these examples, it seems apparent that there is a long history of federal subsidies to print journalism.

But precedent does not a market failure make.

In fact, even if a good does have the properties of being non-exclusive and non-rival, as the FTC characterizes journalism, this still does not make the decline of newspapers a market failure. Voluntary provision of public goods tends to work when the supplier of a good can find indirect ways to charge users of a good, thus converting it from non-exclusive to exclusive.

Voluntary Provision of Public Goods

History shows us repeatedly that public goods are often and perhaps even usually provided voluntarily—without mandate or subsidy from government. Toll charges have been sufficient incentives to build roads and bridges for centuries. Beekeepers and orchard growers have found ways to contract and cooperate with each other to provide more of two goods—honey and flowers—that have classic potential free-rider problems. Casino hotels in Las Vegas provide free self-parking and security. Even law enforcement itself is not a public good. Neighborhood police forces have survived on a fee-for-service basis in San Francisco, of all places, for over 150 years.

The question of whether that classic public good, the lighthouse, was provided privately in England has been a matter of some controversy. But of course, ships don’t rely on lighthouses any longer. When navigation tools enabled precise longitudinal calculations, those tools began displacing lighthouses. More recently, GPS has made lighthouses obsolete. The lighthouse is now a dead business model. That doesn’t make a lighthouse a public good, though. It makes it no longer a good.

The same dynamics are true of journalism. Producers of journalism charge consumers of journalism indirectly through advertising. But the old business model is dying. That doesn’t make journalism a public good. It makes the traditional business model obsolete.

Forgotten Consumer

But what about the losses to news producers? This is not pleasant to see unfold, but it is not a market failure. A policy-relevant market failure is the experience of real net losses in society as a result of purely self-regulated voluntary action. When people stop using lighthouses and newspapers, it’s because they’ve turned to new and better substitutes. The lighthouse’s loss has been society’s gain. Similarly, as news producers’ revenue streams have dried up, this has created more than offsetting opportunities for new-media producers and consumers of information. It has also spurred innovation in new forms of journalism. To its discredit, the FTC report barely mentions news consumers in its litany of industry-enhancing proposals. And it treats new-media competitors as the bad guys. As a society, we wouldn’t want to go back to horse-drawn buggies unless we were fixing our focus entirely on the welfare of buggy-whip makers to the neglect of carmakers, consumers, and the rest of us. The authors of the FTC report do not seem to get this point.

Market-failure theory is of little help in understanding how markets really work and what is happening to journalism. A better framework is creative destruction. Old journalism is failing not because it is a public good that government has not adequately funded. It’s failing because it is being replaced with more innovative alternatives.

Take the oil spill in the Gulf. Market opponents are having a field day. They say this finally demonstrates the need for government to run things. Private firms can’t be trusted.

But it looks more like government can’t be trusted. The central government is, in law and in fact, the owner of the part in the Gulf where BP drilled for oil. (I did not say it is the legitimate owner.) The owner leased its property to a private company, BP, with a bad safety record, issued permits for the drilling operation, and required the company to use the government’s own flawed models in preparing for spills. It then failed to keep a sharp eye on what BP and subcontractors Transocean and Halliburton were doing to its property. That might have something to do with the fact that government regulators don’t have the sort of relationship to “their” property that normal private owners do, and they can always be counted on to get friendly with those they regulate. The Minerals Management Service in the Interior Department has a special conflict of interest: It makes money off the drilling it permits and regulates. Thus it could benefit from decisions that are bad for the public.

So what failed here, the market or the State? The call isn’t even close. The free market was nowhere near the scene. It has an airtight alibi: It didn’t exist.

Now you might get a die-hard anti-market person to concede this. So we move to the next step. What should replace the current hybrid (government-corporate) system? I see only two choices: full government management or full market management. Full government management wouldn’t appear terribly promising, considering that the current problems are traceable back to government management. How would things change substantially if, instead of contracting out the drilling to a nominally private company, the government instead hired the personnel itself and paid them directly from the U.S. Treasury? Who cares if the rig says “BP,” “Transocean,” or “U.S. Government” on it? The same fallible people would be in the same position to make the same fateful mistakes. Not much would change.

That’s because what matters is incentives, not whether a worker is on the government payroll. Why assume that civil service employees know or care more than people paid by corporations?

But, it will be said, government workers will have a mandate to protect the environment and the public. Okay, let’s go with that. Let’s say the decision-makers are environmental hawks who really don’t like oil drilling anywhere. They’ll be tough: no drilling unless it’s 100 percent safe. Leaving aside the obvious problem with this standard, that policy would have costs. The risk of oil spills may drop to zero, but we might have to forgo certain important benefits in the process. Poor people, say, might have their prospects dimmed by more expensive energy.

Is the tradeoff worth it? How do we go about answering that question? Government is no help here. It can certainly impose a plan, but constructing a plan beneficial to the public would be like playing darts in the dark. Mises and Hayek covered this in their writings on State socialism and economic calculation.

Things are sure looking bleak. Government assurances are worthless whether it contracts out for drilling or does it itself. That leaves only the free market. Can it be trusted?

First off, let’s remember that we live in the real world. There are no iron-clad guarantees. The best we can hope for is relative security. When people conclude that government management is the best alternative, knowingly or not they have rigged the game. They are comparing the messy real world in which free markets would operate to an impossible government-managed utopia, where regulators have complete knowledge and total dedication to the public interest. This is the Nirvana Fallacy.

Only two options are on the table: an arrangement where incentives align economic activity with the public interest and one where they don’t. Now which setup seems more promising? One where personnel risk no capital, face no prospects of bankruptcy, and procure their revenue by force (taxation) after flattering members of special-interest-serving congressmen? Or one where capital has to be raised from wary investors in a competitive environment, insurance is priced according to risk, products have to be sold to buyers who are free to say no, and full and strict liability haunts every decision, with bankruptcy always looming and no government bailout even implied?

When you come down to it, the choice is really rather easy.

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The fiscal fiasco we’re mired in is driving “responsible” heads to search for new sources of revenue, among them the value-added tax. It’s an idea whose time should never come, Roy Cordato writes.

The Fourth Amendment appears to enshrine the right to privacy against government intrusion. But it hasn’t quite worked out that way, according to research by Joseph Stromberg.

How can a nation of immigrants be so down on immigration? Aeon Skoble has some explanations.

We often assume the Founding Fathers would be spinning in their graves if they knew what’s going on in the United States. But probably not Alexander Hamilton, Nicholas Curott and Tyler Watts suggest.

A new era of financial regulation is upon us. Chidem Kurdas has the details of what’s been cooked up by some of the chefs who prepared the last collapsed soufflé.

Predicting the future is big business, but why do most prognosticators get it so wrong? Steven Horwitz applies some good economics and comes up with an answer.

The record of government regulation is consistently bad. Robert L. Bradley, Jr., and Richard W. Fulmer give us 15 reasons why this has to be the case.

From our columnists: Donald Boudreaux examines the language for bias. Stephen Davies detects a return of the economic way of thinking. David Henderson assesses the state of civil liberties. John Stossel laments the destruction of property rights. And Charles Johnson, confronting the assertion that opposing civil rights legislation means opposing civil rights, responds, “It Just Ain’t So!”

Books on animal spirits, a black entrepreneur, free trade, and Marbury v. Madison are evaluated by our reviewers.

And just how important are fossil fuels relative to so-called renewable energies? Oil, gas, or coal generates the electricity needed to fill in for intermittent wind and solar power and ensure moment-to-moment reliability. So renewable energy, ironically, is codependent on nonrenewable energy short of (currently) prohibitively expensive battery technology firming the flow of electricity.

As a component of all products and services, energy needs to be affordable, convenient, and reliable. To this end, public policy should respect consumer preference and allow energy producers to meet the demands of the marketplace. This requires a respect for private property rights and voluntary exchange to facilitate the global exchange of energy and its innumerable subcomponents.

Global energy supplies are primarily the product of government, unfortunately, not the free market. In state-run economies political elites make the decisions that otherwise would be made by the multitude. Win-win exchanges are supplanted by government-dictated win-lose transactions. Wealth is redistributed. Pure waste results from the intervention of (political) third parties into what otherwise would be mutually advantageous self-interested exchange.

For example, electric utilities may be forced to buy wind power, solar power, or another politically correct energy under state law. A mandate is required because a free marketplace would not support such expensive, unreliable—noncompetitive—supply.

Oil and gas producers may be unable to access offshore properties because of government constraint. In such cases, supply is not produced and higher-cost substitutes elsewhere pick up some of the slack. Consumers are left with less supply and higher prices. Economists have a name for this: inefficiency.

Government intervention may also give life to uneconomic projects. Such ventures may include carbon capture and storage, a “smart” electricity grid, or even a nuclear plant that requires a federal loan guarantee. Resources that go to these projects do not go to other, more economical projects (which may or may not be in the energy sector) as judged by the marketplace. Resources are again misallocated.

Proponents of government intervention cite “market failure” as the reason for regulating or subsidizing energy projects. Negative externalities created by self-interested exchange require the government to modify transactions in ways ranging from a prohibition to a tax, they say.

Nonmarket Failures

But there are two other types of failure that also must be considered before rushing to policy judgment.

One is analytic failure, in which the outside evaluator’s prescription for intervention (such as a per-barrel “energy security” tax on oil imports or a per-ton “climate change” tax on carbon dioxide emissions) overcorrects or undercorrects for the “real” problem. The error might be purely intellectual—or it might reflect the personal prejudice of the analyst. Fallible self-interest in the marketplace has a counterpart in the ivory tower.

Second, there is government failure, whereby even the “correct” analytical blueprint is altered and violated in the political process. Special-interest tinkering adds to or subtracts from the core proposal, and political actors resort to “logrolling,” where extraneous issues are added to the legislation just to win votes.

House passage of a cap-and-trade energy bill last year and health insurance legislation enacted this year are stark evidence of sausage-making in Washington, D.C.—and something scarcely recognizable in “we the people” textbooks.

Thus “market failure” does not automatically require a government correction. This suggests a different approach. Knowing that political solutions are likely to be as bad as or worse than the problems, alleged market failures should be scrutinized to see if they are really serious problems. And if so, can the real problems be addressed by novel voluntary approaches and reforms rather than by government dictates?

Intellectual and political debates over energy have revolved around four “sustainability” issues: depletion, pollution, security, and climate change. Whole books address these issues, most from the market-failure viewpoint, concluding that mankind is on a perilous path and government-engineered energy transformation is necessary.

But students of energy history and energy policy must ask: Has a political makeover of any industry ever worked well for consumers and taxpayers? Or has it had the opposite effect? Creative destruction—a market makeover from shifting consumer demand—is one thing; having government pick winners with carrots and sticks is quite another.

Free-Market Sustainability

The arguments for allowing free markets, rather than government planning, to address the four sustainability issues can be summarized as follows:

1. Estimated quantities of recoverable oil, gas, and coal have been increasing over time, according to the statistical record. Human ingenuity in market settings has and will continue to overcome nature’s limits, leaving in its wake errant forecasts of resource exhaustion. The resource challenge is political: restricting access and perverting incentives prevents the ultimate resource—human innovation and entrepreneurship—from expanding energy supplies and multiplying energy’s productive utilization.
2. Statistics of air and water quality in the United States show dramatic environmental improvement and, in fact, indicate a positive correlation between energy usage and environmental improvement. While improvements have been achieved by politicized, command-and-control environmental regulation, the results could have been achieved at lower cost through market methods.
3. Energy security in the electricity market is assured by abundant domestic coal and the fact that almost all U.S. gas imports come from Canada. Most of the oil needed for transportation comes from domestic supplies supplemented by imports from a variety of countries led by Canada and Mexico. Oil imports from unstable or unfriendly nations, such as Venezuela and those in the Middle East, can be more effectively addressed by privatizing U.S. oil and gas resources than by government penalties against oil imports that cannot distinguish between “good” and “bad” barrels. Even if the United States were to use the powers of government to pare domestic oil consumption, the resulting drop in world oil prices would encourage non-U.S. demand and subsidize foreign industry. The world oil market will continue to exist and thrive even with reduced U.S. participation, and this will become more true over time.
4. The global warming scare is plagued by open scientific questions, economic tradeoffs, and the reality that carbon-based energy is necessary for economic growth. Carbon rationing (via the Kyoto Protocol) is a failed policy for the developed world and a nonstarter for the developing world. Not only have targeted reductions proved to be elusive, the economic costs of carbon rationing are not unlike those from (postulated) deleterious climate change.

The recent oil spill in the Gulf of Mexico raises an additional sustainability issue: unexpected setbacks that cause massive property damage and even fatalities. Short-run problems, however, can result in longer-term gains so long as the firm faces full liability and pays restitution to the victims. Accountability in private property settings encourages companies to square profits, people, and the environment—and avoid the financial losses that come from performance failure. Currently companies have their liability for damages capped by law at $75 million, though politics could potentially nullify the cap in any given case, as it apparently will in the BP Deepwater Horizon incident.

Rather than expand government, public policy should end preferential subsidies for politically favored energies and privatize such assets as public-land resources and the Strategic Petroleum Reserve. Multibillion-dollar energy programs at the U.S. Department of Energy should be eliminated. Such policy reform can simultaneously increase energy supply, improve energy security, reduce energy costs, and increase the size of the private sector relative to the public sector.

To Al Gore the “planetary emergency” is five billion to six billion people using oil, gas, or coal for most of their energy needs. But the real energy problem is that nearly one and a half billion people do not use modern forms of energy. Rampant statism in place of private property, voluntary exchange, and the rule of law is behind this problem.

Energy-impoverished people use dried dung and primitive biomass to stay warm and cook their meals, destroying their health and shortening their lives. Without electricity or machines, they do not have clean water, reliable lighting, or other means for comfortable, sanitary living. This here-and-now problem demands energy freedom and an end to debilitating energy statism.

The free-market vision stresses that these impoverished people should not be subject to energy rationing by government. Solar panels and industrial wind turbines can only generate a fraction of the energy produced by diesel generators or a conventional power plant—and are much less reliable. Energy brawn is needed, not inferior but politically correct energies that appeal to energy planners.

Property Rights vs. the Resource Curse

More fundamentally, these victims of statism need private property rights to in-ground minerals and ownership title to energy infrastructure. In this way, they can overcome the so-called resource curse whereby siphoned energy wealth underwrites government control and bad economic policy.

Countries worldwide should reject energy planning from a politically endowed elite. Government planners suffer from a “fatal conceit” that their knowledge and goals must override those of the masses. But on-the-spot energy consumers and energy producers, guided by prices and profit/loss, have much more collective wisdom than faceless bureaucrats commanding from on high. Top-down planning misdirects and destroys despite the best efforts of even well-educated, well-meaning bureaucrats.

Freedom—the use of reason and persuasion in place of coercion—is a worthy goal. In the U.S. energy sector, market reliance, though compromised by both pro-business and anti-business government intervention, has produced economic coordination, fostered economic growth, and democratized wealth. Government intervention, on the other hand, such as occurred in the 1970s with U.S. oil and gas price controls, has produced shortages, civil strife, and bureaucratic waste.

Markets are not perfect, inspiring some to devise and champion government intervention. But political solutions must contend with analytic failure, implementation problems, and public-sector (taxpayer) costs. Imperfect markets, in other words, may well be better than “perfect” regulation in the real world. The burden of proof, therefore, should be on government intervention, rather than on voluntary transactions premised on private property and governed by the rule of law.

This activity has focused on two issues. First, traditional news-producing businesses aren’t making the money they used to make because of competition from new kinds of outlets.

Second, this allegedly is a market failure.

Regarding the first, print journalism lost income to television, then the Internet, and now from the expanding capabilities of mobile handsets. In this new and still rapidly evolving order, print news media are increasingly discovering they are at a comparative disadvantage in attracting advertising dollars. Like dial-up Internet access, the newspaper is getting left behind.

Regarding the second, the FTC argues that journalism is a public good, that the severe contraction of the industry proves that the market has failed, and thus that even tirelessly experimenting entrepreneurs have been unable to find new and sustainable streams of revenues for news organizations, especially for traditional newspapers and their online extensions. As paragraphs 14-15 of the FTC paper argue:

14. There are reasons for concern that experimentation may not produce a robust and sustainable business model for commercial journalism. History in the United States shows that readers of the news have never paid anywhere close to the full cost of providing the news. Rather, journalism always has been subsidized to a large extent by, for example, the federal government, political parties, or advertising.

15. Economics provides insight into why this has been the case. The news is a “public good” in economic terms. That is, it is non-rivalrous (one person’s consumption of the news does not preclude another person’s consumption of the same news) and non-excludable (once the news producer supplies anyone, it cannot exclude anyone). Because free riding is usually easy in these circumstances, it is often difficult to ensure that producers of public goods are appropriately compensated.

The policy recommendations, in turn, are intended to raise revenues and decrease costs to news producing organizations, while making life more difficult for online news aggregators and other new media “free riders.”

Major New Programs

By my count the FTC report contains 30 potential policy proposals, ranging from major new programs to tweaks of existing interventions. I have categorized most of the proposals into six broad areas.

• Raise revenues to news organizations by: amending the Copyright Act to allow licensing of news content and expand protections of “hot news” while also narrowing the scope of fair use; and exempting news organizations from federal antitrust laws to encourage collusion in charging end users and online news aggregators.
• Reduce costs to news organizations by: granting free access to government computing centers; expanding R&D subsidies to information technologies that journalists use; and standardizing the way governments issue electronic information as fodder for what journalists report.
• Increase current funding of journalism by: increasing subsidies to the Corporation for Public Broadcasting; increasing postal subsidies for mailing of print media; and funding newly created domestic counterparts to international radio broadcasting like Voice of America and Radio Free Europe.
• Create new federally funded programs including: a new journalism division of AmeriCorps; a national fund for local news in “places the market has failed to serve”; and grants to universities for student-produced investigative journalism.
• Offer tax preferences to news organizations including: credits for hiring journalists to “help pay the salary of every journalist”; tax-exempt status for news organizations that convert from commercial to non-profit news organizations; and newly created IRS status of news organizations as “for benefit” organizations that are tax-exempt.
• Harvest new funding mechanisms for earmarked spending on news organizations, including: a tax return checkbox for up to $200 to distribute to nonprofit news organizations; new Federal Communications Commission surcharges on new media content; new taxes on spectrum use and spectrum auctions, a new 5 percent tax on consumer electronics, a new 2 percent tax on online advertising, a new 3 percent tax on wireless and Internet phone bills, and more.

This is what the best and the brightest have been up to.

Now just to be clear, the FTC authors are careful to state that these are merely potential proposals that are intended for discussion only. Yet after a year of workshops and dozens of studies, these are the ideas on the table—a thoroughgoing commitment to the coddling of a dying business model coupled with a seemingly wholesale disregard for the freedom of speech.

Since there isn’t enough space here to talk about all the implications of the FTC report, I will focus on the economic argument that lies at the core of these proposals.

First, you might wonder what the FTC refers to in saying that journalism has always been subsidized by the federal government. Well, consider postal subsidies for shipping of print news that were first enacted in 1792. Then there are tax breaks to newspapers for costs incurred to increase circulation. Finally, there is direct funding of public radio and television. In light of these examples, it seems apparent that there is a long history of federal subsidies to print journalism.

But precedent does not a market failure make.

In fact, even if a good does have the properties of being non-exclusive and non-rival, as the FTC characterizes journalism, this still does not make the decline of newspapers a market failure. Voluntary provision of public goods tends to work when the supplier of a good can find indirect ways to charge users of a good, thus converting it from non-exclusive to exclusive.

Voluntary Provision of Public Goods

History shows us repeatedly that public goods are often and perhaps even usually provided voluntarily—without mandate or subsidy from government. Toll charges have been sufficient incentives to build roads and bridges for centuries. Beekeepers and orchard growers have found ways to contract and cooperate with each other to provide more of two goods – honey and flowers — that have classic potential free-rider problems. Casino hotels in Las Vegas provide free self-parking and security. Even law enforcement itself is not a public good. Neighborhood police forces have survived on a fee-for-service basis in San Francisco, of all places, for over 150 years.

The question of whether that classic public good, the lighthouse, was provided privately in England has been a matter of some controversy. But of course, ships don’t rely on lighthouses any longer. When navigation tools enabled precise longitudinal calculations, those tools began displacing lighthouses. More recently, GPS has made lighthouses obsolete. The lighthouse is a now a dead business model. That doesn’t make a lighthouse a public good, though. It makes it no longer a good.

The same dynamics are true of journalism. Producers of journalism charge consumers of journalism indirectly through advertising. But the old business model is dying. That doesn’t make journalism a public good. It makes the traditional business model obsolete.

Forgotten Consumer

But what about the losses to news producers? This is not pleasant to see unfold, but it is not a market failure. A policy-relevant market failure is the experience of real net losses in society as a result of purely self-regulated voluntary action. When people choose to move away from lighthouses and newspapers, it’s because they’re moving to new and better substitutes. The lighthouse’s loss has been society’s gain. Similarly, as news producers’ revenue streams have dried up, this has created more than offsetting opportunities for new media producers and consumers of information. It has also spurred innovation in new forms of journalism. To its discredit, the FTC report barely mentions news consumers in its litany of industry-enhancing proposals. And it treats new media competitors as the bad guys. As a society, we wouldn’t want to go back to horse-drawn buggies unless we were fixing our focus entirely on the welfare of buggy-whip makers to the neglect of carmakers, their consumers and the rest of us. The authors of the FTC report do not seem to get this point.

Market-failure theory is of no help in understanding how markets really work and what is happening to journalism. A better framework is creative destruction. Old journalism is failing not because it is a public good that government has not adequately funded. It’s failing because it is being replaced with more innovative alternatives.