The Failure of the “Market Failure” Argument

Dr. John Hasnas, Law professor at Georgetown University, gave a lecture to the Students for Liberty (Webminar Series) on November 8, 2010. Hasnas lecture was not on the Market Failure (MF) but rather the FAILURE of the Market Failure argument. Hasnas exposed his arguments against the MF from his knowledge in law and ethics. Hasnas could not being more eloquent in establishing the distinction of what constitutes for him the disappointment in the argumentation of the defenders of the subject in question.

I will now share my notes from Hasnas’ lecture:

The Market Failure (Definition according to Hasnas):

The market is full with transactions that happen simultaneously. There are unregulated voluntary as well as regulated voluntary transactions. However, the market failure occurs when the good outcome(s) of these transactions affect negatively third parties. Advocates of the MF often mention the following examples when the “market fails;” air pollution, deforestation, water contamination to name a few. Economists call these consequences of market forces “negative externalities”; while lawyers call them “negative social transactions.” Therefore, MF happens when:

Negative Social Transactions or Negative Externalities > Benefits produced by market transactions.

The Law:

According to Hasnas, the US’ Law System has two forms: the Statutory Law and Common Law.

Statutory Law: Governments create the general rules and the citizens must follow the statutory law. Hence, legislators write statutory laws; it reflects the political interest. It does not represent individual interest.

Common Law: It settles disputes. Property Law, Tort Law, Contract Law are parts of the Common Law. Common Law implies that there is a victim.

The Real World Conception (Market + Law):

Hasnas expresses that in the real world market and law meet in one place. This place should be the Common Law rather than Statutory Law. Hasnas proceeds to explain in detail his interpretations of market and law as follows:

Market: Voluntary transactions regulated by customs, ethics plus common law.

Law: Legislation is the regulation of voluntary transactions by the state to serve the politically dominant interest plus the common law.

John Hasnas describes the need for a self-correction of the market through the Common Law Regulatory Process (CLRP). Professor Hasnas describes the CLRP in this way:

“Exercise the degree of care that a reasonable person would use to avoid causing harm to others by his/hers actions.” (Hasnas’ Lecture PP Slide)

According to Hasnas, if you deny the claim listed above you deny Common Law. Its denial constitutes an abuse on others. People can an always will be able to regulate themselves without the intervention of the government.

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I believe that Hasnas insights on the MF and its invalidity give us a different approach to the subject. The law approach is a fascinating tool to analyze policies. The understanding of the significance of Common Law and its use constitutes a strong tool to demonstrate the Failure of the MF argument. During, Hasnas lecture I could not help myself but to think in the words of Israel Kirzner.

Kirzner says the following:

“Efficiency for a social system means the efficiency with which it permits its individual members to achieve their individual goals.” (Kirzner 1963)

Kirzner expresses that inefficiencies may occur when the means of achieving a goal it is inconsistent with the goal itself. So the question, is the Market Failure a valid argument? I agree with Kirzner and Hasnas the Market Failure argument FAILS to demonstrate itself.