David R. Henderson  

Market Failure or Market Success?

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Rising incomes also have contributed to our expanding waistlines. U.S. GDP per capita and calorie intake have risen virtually in tandem since 1970. At the same time, the growth of the service sector and the use of workplace technology have made our working lives more sedentary, so we burn fewer calories.

The net effect of these changes has been a classic case of market failure: Unbounded demand has met almost unlimited supply, and the resulting over-consumption has greatly harmed our society's health. Contrary to conventional wisdom, we don't believe that the remedy is necessarily better education about nutrition: Everyone reading this probably knows, for instance, that salad is a healthier option than pizza. The plain fact is that we gain weight by eating too much. What we recommend instead is an austerity program based on a handful of insights from economics.


This is from Chris Payne and Rob Barnett, "Would Adam Smith Eat That Burger," Wall Street Journal, December 22, 2017.

When "unbounded demand" [I think they mean "big increases in demand"] meets "almost unlimited supply" [I think they mean very elastic supply], the result is a large increase in output without much of an increase in price. This is not market failure, classic or otherwise. This is market success. We can regret demanding the things we do. But it's not the market's fault that we are supplied with the things we demand.


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CATEGORIES: Economic Education




COMMENTS (23 to date)
Tom DeMeo writes:

Blame only makes sense when it is assigned to people. Blaming markets, or money, or greed isn't helpful.

That being said, I think its pretty obvious that it is possible to manipulate what many people demand, and that it is also possible to prey on people's inattentiveness or weakness. They are defining the market for an unhealthy and consciously addictive product as a failure. You seem to be making a semantic argument that they should phrase it differently.

Fine. Its not a market failure. It's an ethical failure.

Jon Murphy writes:

I agree. This is a huge market success. Another way of looking at this situation is that the market makes food too abundant. And frankly, I'd rather have the problems from abundance rather than scarcity.

robc writes:

Tom,
I think the 1977 Select Committee on Nutrition and Human Needs did far more damage due to government failure then anything done by the market.

Tanstaafl writes:

I just spent some time in the US, first in Birmingham, AL, then in Seaside, FL. The impression is that the USA are home to TWO entirely unrelated nations: the middle and upper class, and the lower and underclass. The physical appearance couldn’t be more different. And only one of them seems to have ‘unlimited’ demand for food.

The problem is, only the better-off live in (a semblance of) a free market society. The lower half is, sadly, subject to much more paternalism AND being taken advantage of (these two seem to go together, unsurprisingly). And it shows...

Tim Worstall writes:

I am deeply, deeply, sceptical of this fact:

"U.S. GDP per capita and calorie intake have risen virtually in tandem since 1970."

Calorie intake in the UK has plunged over the past century and we've the same obesity problem as the US. I've seen figures which show US consumption has fallen as well.

To give an idea, current UK advice is that men should have 2,500 kcal a day, women 2,000. But in WWII, under rationing, it was noted that people on less than 2,900 lost weight. WWI frontline troops got 4,300 to 4,400 a day.

My reading of this is that calorie expenditure has declined more than calorie intake - but that calorie intake has declined all the same.

Scott Wood writes:

Do you suppose they’ve noticed how contradictory their initial observation is with the idea that middle class income has stagnated the last 30 years?

Floccina writes:

@Tim Worstall is that adjusted by age. I need to eat less and less to keep my weight down.

Tom DeMeo writes:

The failure part is not delivering more food. There are also certainly other issues to consider that have nothing to do with food companies. Some of the observations from Payne and Barnett may be inaccurate.

The failure part is when large market players pursue a strategy specifically designed to take maximum advantage of certain behavioral weaknesses to the clear detriment of their customers. There is always demand for things that are unhealthy. I would think that pursuing strategies to maximize that demand is not something to be admired.

Many, many services and products do some version of the same thing to various degrees, and I'm not in favor of some huge government regulatory regime to babysit everyone. I just find it odd that someone wants to argue that when markets do this, that it is a success.

Jon Murphy writes:

@Tom DeMeo

I just find it odd that someone wants to argue that when markets do this, that it is a success.

When a market supply meets the demand, then it is indeed a success, by definition. A person may not like said outcome, but that is irrelevant (eg, I may not like that too few books on philosophy are published and read, but that does not have any bearing on the fact that the book market is only meeting the demand).

The failure part is when large market players pursue a strategy specifically designed to take maximum advantage of certain behavioral weaknesses to the clear detriment of their customers. There is always demand for things that are unhealthy. I would think that pursuing strategies to maximize that demand is not something to be admired.

One needs to be very careful with this line of reasoning because it implies a level of knowledge on the part of the observer that is not prima facie warranted. Specifically, the observer (and, for that matter, the firm supposedly acting unethically) needs to have more knowledge of the individual's preferences than he himself does. This is an extremely difficult claim to support but is necessary to make the charge of unethical behavior on the part of the firm. Without this knowledge (which in and of itself is only revealed through the price system), there's no reason to suspect a change in consumption patterns isn't just a change in preferences.

robc writes:

Tom,

Did you miss my response to you from early AM?

It was the government pushing unhealthy behavior due to junk science that has been the primary problem.

Tom DeMeo writes:

@Jon Murphy

"When a market supply meets the demand, then it is indeed a success, by definition."

OK, but as I said earlier, you are engaging in a strictly semantic argument. Demand can be manipulated. Companies can choose to target more vulnerable people and/or more destructive behaviors.

"One needs to be very careful with this line of reasoning because it implies a level of knowledge on the part of the observer that is not prima facie warranted. Specifically, the observer (and, for that matter, the firm supposedly acting unethically) needs to have more knowledge of the individual's preferences than he himself does. "

That may be true for any individual transaction, but firms know that you can apply a strategy to a set of target motivations, and that you can use data to greatly improve the odds of matches in a population. If your goal is to seek out opportunities to take advantage of the weaknesses of vulnerable people, you are unethical, and the fact that some of the resulting transactions actually work out fine does not make it otherwise.

Jon Murphy writes:

@Tom-

You're not really discussing market failure or unethical behavior here. Using data to "improve the odds of matching" (which is just another way of saying getting quantity supply to match quantity demand) is hardly unethical. In fact, it's a sign of the market improving itself. By way of metaphor, am I engaging in unethical behavior when I use online dating, a method of using data to improve the odds of matching in the dating market?

Furthermore, your response doesn't challenge my objection. For the claim of unethical behavior and "manipulating demand" to hold, you need to have knowledge of such preferences; that doesn't change if we're dealing with an individual or aggregate. In short, you're assuming you have the very knowledge you need to make such a claim. When you make such an assumption, it's easy to see any deviation as some nefarious scheme rather than some lack of knowledge on the part of the observer, or some changing condition in the market (change in relative prices, change in preferences, availability of substitutes and complements, etc.)

David R Henderson writes:

@robc,
I think the 1977 Select Committee on Nutrition and Human Needs did far more damage due to government failure then anything done by the market.
Good point. I caught it and learned from it. I can’t speak for Tom DeMeo.
@Tim Worstall,
To give an idea, current UK advice is that men should have 2,500 kcal a day, women 2,000. But in WWII, under rationing, it was noted that people on less than 2,900 lost weight. WWI frontline troops got 4,300 to 4,400 a day.
Interesting facts. Thanks. I had no idea.
@Tom DeMeo,
I think Jon Murphy has answered you quite effectively. The only point I would add is that even if it’s true that those who cater to people’s weaknesses are unethical, it doesn’t follow that catering to their weaknesses constitutes market failure.

Fred Foldvary writes:

Government subsidizes the mass production of grains and meat, while regulations and misleading advertising fool people into thinking foods are safe and healthy. Most folks probably don't realize how unhealthy are sugar, white flour, and meat. A pure free market would have more disclosure.

Tom DeMeo writes:

@robc - I'll do some reading on this, thanks.

@Jon Murphy - I've been quite specific here. Using data to "improve the odds of matching" is only unethical if you are explicitly trying to "match" with vulnerable people and/or destructive behaviors. Otherwise, its just normal marketing.

As to your other arguments:


"...Specifically, the observer (and, for that matter, the firm supposedly acting unethically) needs to have more knowledge of the individual's preferences than he himself does. "

"...This is an extremely difficult claim to support but is necessary to make the charge of unethical behavior on the part of the firm. Without this knowledge (which in and of itself is only revealed through the price system..."


Why is it necessary to have more knowledge of the individual's preferences than he himself does? What does that even mean? That seems to imply that it is impossible, under any circumstances to accuse someone of an unethical act.

And how is unethical behavior only revealed through the price system?


@ David R Henderson - I started out by accepting your point about calling this a market failure.

I'm curious, since you seem to find Jon Murphy's argument so effective, how do you also feel comfortable with the point made by @robc? How can we possibly know whether the government was the cause of any damage? In short, you're assuming you have the very knowledge you need to make such a claim.

Jon Murphy writes:

@Tom-

There is no tension between ROBC's argument and mine.

ROBC is pointing out that the government's effort to correct a supposed market failure was itself a market failure; the science they were pitching at the time turned out to be completely wrong and they likely made nutrition work in the US.

Conversely, I am saying that in order to make the claim you made, you need to have knowledge that you do not have and merely assume you do.

ROBC's argument is a technical one. Mine is an informational one.

Jon Murphy writes:

@Tom DeMeo-

Forgive me replying to you in two comments; last night was very busy and I wanted to answer your first objection as soon as I could because I think it was a great question.

Why is it necessary to have more knowledge of the individual's preferences than he himself does? What does that even mean? That seems to imply that it is impossible, under any circumstances to accuse someone of an unethical act.

When you say someone is "manipulating demand," then you are essentially saying that they are causing someone to buy something they normally wouldn't. This requires knowledge of the buyer's preferences. In fact, to claim anything is manipulative rather than economic, you need to know preferences. It is the implication of your argument.

Regarding ethics, as Prof. Henderson said, it doesn't follow that catering to a weakness is unethical. To call something unethical, to call for someone to have demerit for their behavior, you need to show that the action is itself unethical. What virtues does it violate? Is it beyond the bounds of propriety? Who is harmed? In short, to use the metaphor from Adam Smith, would an impartial and super-knowledgeable spectator object?

If a firm were to lie in its advertising, that'd surely be unethical. If it were merely to pursue an aggressive sales technique (discounts, lots of ads, etc), then it would not.

One final point: in our lives, we live in two worlds: we live in the personal world, where we have many rules in which we live (how we treat ourselves, others, family, etc), and we have the commercial world which have different rules. To apply the rules of one to the other is a mistake; the rules are formed for different purposes. To apply the rules of the personal world to the commercial world leads to casuistry. To apply the rules of the commercial world to the personal world leads to moral anarchy. We must be careful when calling Behavior X in the commercial world unethical; we may be applying the wrong standard.

robc writes:
ROBC is pointing out that the government's effort to correct a supposed market failure was itself a market failure

No, the government's effort was a government failure, not a market failure.

It reminded me of something I saw recently, probably Boudreaux quoting Buchanan, about just because you have discovered a market failure, that doesn't mean that a government solution is needed, because you have to consider whether their might be a government failure that makes it worse instead of better.

And that was specifically the case for the 1970s government nutritional guidelines.

Alos, like e e cummings, my name is all lowercase, not upper.

robc writes:

I used a bad example, Cummings was okay with his name being capitalized.

Replace the e e cummings reference with bell hooks.

Tom DeMeo writes:

@Jon Murphy

You said:

"There is no tension between ROBC's argument and mine.

ROBC is pointing out that the government's effort to correct a supposed market failure was itself a market failure; the science they were pitching at the time turned out to be completely wrong and they likely made nutrition work in the US."

@robc actually said:

"Tom,
I think the 1977 Select Committee on Nutrition and Human Needs did far more damage due to government failure then anything done by the market."

I'm sorry, but you can't have it both ways. You can't claim the Select Committee caused any damage without first claiming it influenced the preferences of the buyers and sellers in the market. You have repeatedly claimed that is impossible to determined.

If you go back and look at my actual comments, I really haven't made specific claims. I've primarily been interested in pushing back on Prof. Henderson's larger points about markets and how it is possible for an ethical failure to exist even in cases where there is increase in output without much of an increase in price.

I'm really not interested in litigating a specific case in the food industry. I wanted to make the general point that companies don't just fulfill natural demand. They can also consciously affect demand and that has the potential to be unethical. I have not made an attempt to construct a specific example here.

That being said, your point about not knowing the preferences of buyers makes little sense, particularly with the topic that kicked off this discussion: corporate fast food and processed food markets in America. Almost every adult American is immersed in this topic, shares a common set of experiences, is a regular buyer and understands the struggle to control eating impulses with great nuance. Most people talk about food issues incessantly. You might argue that we all know more about food issues than we do about anything else.

What exactly is there to talk about in economics if we can't make any observations about market preferences?

Finally, I couldn't disagree more about needing to have a different set of ethics for commerce. If your personal ethics don't also apply to commerce, they aren't much use at all.

Jon Murphy writes:

@robc:

My apologies to you for both misstating your argument and misspelling your name.

@Tom DeMeo

You can't claim the Select Committee caused any damage without first claiming it influenced the preferences of the buyers and sellers in the market.

Except that's not my claim. My claim, however, was that their supposed correction for a supposed market failure was itself incorrect. That has nothing to do with any kind of influence on the market. Rather, the point is that any action by the government can, and indeed most likely will, exacerbate any market imperfections (of which there are plenty), partly because of the knowledge problem I mentioned above.

I've primarily been interested in pushing back on Prof. Henderson's larger points about markets and how it is possible for an ethical failure to exist even in cases where there is increase in output without much of an increase in price.

Right, but my point is that you need to be very careful with the line of reasoning you're employing as it requires a level of knowledge that is pretty impossible to get. In other words, your pushback is on shaky grounds.

That being said, your point about not knowing the preferences of buyers makes little sense, particularly with the topic that kicked off this discussion: corporate fast food and processed food markets in America. Almost every adult American is immersed in this topic, shares a common set of experiences, is a regular buyer and understands the struggle to control eating impulses with great nuance. Most people talk about food issues incessantly. You might argue that we all know more about food issues than we do about anything else.

This paragraph confuses a few things: information about the market is not the same as knowing preferences. In a technical sense, preferences may be affected by information, but also there are many other factors (relative prices, tastes, availability of substitutes and complements, incomes, etc) that'll affect behavior in the marketplace. To attribute a market change to some kind of manipulation requires knowledge of all these things, much of which even their possessors do not know they have.

You might argue that we all know more about food issues than we do about anything else.

Which makes your argument for "unethical manipulation" even more unlikely.

What exactly is there to talk about in economics if we can't make any observations about market preferences?

The good economist knows you can't talk about market preferences except in a very abstract sense because value is subjective and the "market" doesn't have preferences since it is not a rational creature but rather the name of the institution that develops to facilitate exchange.

If your personal ethics don't also apply to commerce, they aren't much use at all.

That's all well and good, but down that road leads to casuistry. Besides, how do you deal with the inherent conflicts? Some people believe gay marriage is unethical. Is it ok for them to impose their personal ethics on the social world? If not, why not? They're just acting in an ethical manner. You'd also have to deal with the fact that ethical rules tend to be loose, vague, and indeterminate. Ascribing precise and accurate rules (which would be necessary) to them is bound to failure (see my aforementioned casusitry).

Jon Murphy writes:

@Tom DeMeo-

In reading my most recent comment to you, I don't think I did a very good job explaining what I meant between the two kinds of rules for the two worlds. With permission, I'd like to try to elaborate further with a better example:

Some behavior that would be considered unethical or impolite in the personal world would be perfectly acceptable in the commercial world. For example, if a friend asked you for a ride, it'd be frowned upon if you asked him for money (outside gas money or maybe tolls). However, for a taxi to do the same thing, you'd expect to pay and there'd be no impropriety. No one would accuse the taxi driver of inappropriate behavior and no disapprobation levied on him. However, for a friend to make a profit, it'd be inappropriate and he would be saddled with disapprobation (considered a bad friend, etc).

With few exceptions (pretty much exclusively those of mere justice), it is difficult to expand the rules of one world into the other. Attempts to legislate fraternity lead to casuistry, which leads to disrespect for the law as it becomes increasingly arbitrary.

Hazel Meade writes:

I think the problem is that while market actors are perfectly capable of exploiting people's weaknesses, it's inappropriate to call that a market "failure", since the market isn't supposed to do anything other than meet demand. It's not designed for a purpose like the way you would construct a supply chain to deliver food to soldiers. Calling it a failure implies that a repair of some sort is required, which would entail finding a more ethical designer who can repair the failure. But government neither has the knowledge to design a system that would repair that failure(how are they going to force us to eat healthy) nor is there any reason to believe it is more ethical than private actors. Politicians exploit human weaknesses every bit as thoroughly as private corporations. Indeed probably more so, as they have to answer to their customers far less frequently.

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