Tuesday, December 4, 2007

Economist's Notebook: Markets do not Exist in a Vacuum



One of the themes I have been harping on in the short life of this blog is that you cannot evaluate markets in a vacuum - markets exist in a time and place and work only as well as the structures that support them. As a development economist I am acutely aware of this fact. Markets constantly spring up where there were none before, but without good institutional underpinnings, these markets are badly organized and often inefficient. A case in point is rural credit markets. In developing countries where credit histories do not exist and collateral is scarce, formal credit markets often do not exist. The informal markets that spring up are often usurious and exploitative.



I bring this all up because of the rather dramatic storm that has just disrupted a huge network of infrastructure and services in Oregon and Washington that are vital for a market based economy and society to function and function well. We need road and rail networks, telecommunications, power, water and sewer networks, police and fire protection and on and on and on. (For example, above is I-5 in Centralia, Washington that is likely to be closed for about a WEEK!) I think that we too often believe that these things are part and parcel of the markets they serve, but the fact is that these are public goods and that no one markets would ever provide enough for the efficient running of society. How much is enough and what is the appropriate level of government involvement are all important questions but simply saying let the market take care of everything is no answer at all.

1 comment:

Jeff Alworth said...

You nose right up to the edge of an actual public policy prescription, but then peter out with, "How much is enough and what is the appropriate level of government involvement are all important questions but simply saying let the market take care of everything is no answer at all...."

You are actually in the best position to give us informed perspective on that "how much" question. Barring informed comment from those who understand markets and have read the research, we are left with politicians making uninformed decisions. Or worse, submitting to ideologically-driven positions that directly conflict the facts.

I would love to see a post where you wrangle with these a little and at least set out a blueprint for how one should approach these questions.