What We Mean By “Let The Market Handle It”

In a comment on this excellent EconLog post by Alberto Mingardi, “Phil” writes:

In his book Economics Rules, Dani Rodrik writes: “The hedgehog’s take on a problem can always be predicted: the solution lies in freer markets … . Foxes … sometimes … recommend more markets, sometimes more government.” It’s better to be a fox than a hedgehog, according to him.

(I add that “Phil” does not seem to endorse Rodrik’s point.)

 

I’ve not read this Rodrik book, but I’m familiar with the argument.  The argument is quite common.  It’s also wrong.  Its error is that it incorrectly identifies the set of choices for dealing with problems (and with “problems”).

Rodrik’s argument appears to be the height of reasonableness.  “It is dogmatic and dangerous,” the argument’s champions rightly note, “to assume that one solution or one approach is the answer to every problem.  Some problems call for the use of screwdrivers, others call for the use of hammers.  Only a benighted fool insists on using a screwdriver to hammer in nails and on using a hammer to insert screws.  The wise, non-ideological, enlightened, open-minded, reasonable, and scientifically aware person sometimes uses a screwdriver and other times uses a hammer.  What could be more reasonable?!”

To say “Let the market always handle it” is to warn that using government as a fix crowds out – prevents – experimentation with many other possible fixes.

The error in this formulation is that markets are many tools.  Markets are a toolkit with far more tools in it than government has access to.  While government has only a few tools – mostly hammers (some sledge), saws, and clamps – the market is filled with many, almost countless, tools.  And the market’s tools are much more varied, nuanced, specialized, and creative than are the government’s simple set of tools.

Put differently, to say “Let the market handle it” is just a shorthand way of saying “Let whoever is most willing, most able, most experienced, most knowledgeable, and best equipped be free to try his or her hand at dealing with each specific problem.”  And to say “Let the market always handle it” is not – contrary to what Rodrik’s argument suggests – to propose a single, simple fix for all problems; it is to propose that the field be left open for as many fixes as are feasible to be tried.  To say “Let the market always handle it” is to warn that using government as a fix crowds out – prevents – experimentation with many other possible fixes.

In short, the choice is not between only two alternative possible fixes: the market or the government.  Instead, the choice is between a gigantically large and varied set of possible fixes (the market, with its many detailed specialized carpenters and master builders) or a tiny set featuring one possible fix (the government, with its hammering, sawing, and clamping officials, none of whom – unlike the case with market participants – can be reasonably presumed to know enough of the finer details of any of the problems that they are called upon to ‘fix’).

The truly reasonable person – the one who understands the benefits of having access to as many ‘solutions’ to problems as possible – supports the market because he or she knows that to turn to government solutions is to drastically reduce the number of ‘solutions’ that will be tried.

Below the fold is a post from ten years ago that addressed the same topic.

“‘Let the market handle it! Let the market handle it!’ Don’t you tire of muttering this simplistic formula?” So ended an e-mail that I received from a reader.

It’s true that all of us sometimes are tempted to avoid thinking hard about complex issues and, instead, to fall back lazily upon simplistic mantras. We should guard against this weakness, in ourselves and in others.

At the same time, though, we shouldn’t confuse consistency with simplicity. The two are different. Just because I instruct my eight-year-old son to be always truthful does not mean that I’m a simpleton offering simplistic advice; it means, instead, that truthfulness is a virtue that should be pursued consistently — even if in a handful of instances my son might be made better off by telling a lie.

I admit that my proposed solution for many public-policy problems is to say “Let the market handle it.” But this response is neither naive nor lazy. It’s realistic. It reflects my understanding that almost any problem you name — rebuilding the Katrina-ravaged Gulf Coast, providing excellent education for children, reducing traffic congestion on highways — is most likely to be dealt with efficiently, fairly and effectively by the market rather than by government.

Saying “Let the market handle it” is to reject a one-size-fits-all, centralized rule of experts. It is to endorse an unfathomably complex arrangement for dealing with the issue at hand. Recommending the market over government intervention is to recognize that neither he who recommends the market nor anyone else possesses sufficient information and knowledge to determine, or even to foresee, what particular methods are best for dealing with the problem.

To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances.

To recommend the market is to understand, or at least to cooperate with, the wisdom of James Buchanan’s important insight that “order is defined in the process of its emergence.”  It is to understand, at some level, Vernon Smith’s awareness that “ecological rationality” is greater than individual or “constructivist” rationality.

This process is flexible and it encourages creativity. It also denies to anyone the power to unilaterally impose his own vision on others.

In brief, to advise “Let the market handle it” is a shorthand way of saying, “I have no simplistic plan for dealing with this problem; indeed, I reject all simplistic plans. Only a competitive, decentralized institution interlaced with dependable feedback loops — the market — can be relied upon to discover and implement a sufficiently detailed way to handle the problem in question.”

None of this is to say that getting the government out of the way is sufficient to create peace and prosperity. Markets require a rule of law to ensure that, among other blessings, property rights are secure and exchangeable. At their best, governments can help to protect our rights. Markets also require a culture in which commerce flourishes.

Unfortunately, no recipe exists to create the legal institutions and commercial culture required by capitalism. If these prerequisites are absent, there can be no market to handle any problem. So saying “Let the market handle it” is not the same as saying “All will be just dandy if only the government gets out of the way.”

But when these prerequisite institutions are mostly in place, as they are in the United States and other developed countries, markets are amazingly creative and reliable. Calling on markets to deal

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