TOTM, Now with Extra Nuance!

Cite this Article
Joshua D. Wright, TOTM, Now with Extra Nuance!, Truth on the Market (June 16, 2006),

In response to Thom’s post on the merits of federal subsidies for private efforts to develop alternative fuels, frequent and thoughtful commentor William Goodwin issues a critique of Thom’s post, and of TOTM more generally. I will leave the merits of Mr. Goodwin’s specific criticisms (do read them) to Thom, but this particular portion caught my eye:

As for Hayek, public choice, etc., these critiques apply to all government action, and say nothing interesting or specific about how to solve the collective-action problem raised by positive externalities. And while I realize that every post at Truth on the Market effectively ends: “Let the market figure it out,� at some point it’d be nice to hear a more nuanced, and less ideological, position.

Do TOTM bloggers advocate market-based solutions for public policy problems more frequently than our friends at the other blawgs? Probably. But I’m puzzled by the notion that the prescription to “let the market figure it out” is an inherently simplistic and ideology-driven position. This sort of criticism is often leveled at those who advocate market-based solutions to public policy problems, so I do not mean to single out Mr. Goodwin, but this view, in my mind, suggests a fundamental misunderstanding of how markets work. Why?

One of the fundamental Hayekian insights is that the information required to make efficient resource allocation decisions is scattered throughout the population in a manner such that no central planner could successfully obtain all of it. It is the price mechanism that allows aggregation of these diffuse parcels of information. Public policy problems, I’m sure we can all agree, can be incredibly complex. To “let the market figure it out” is not to assume that any pre-determined set of individuals (say, those in a government agency) will have the information necessary to solve these problems correctly (much less the appropriate incentives to solve them). Rather, a preference for the market is to concede that the complexity of the problem requires a solution which depends on the creativity of market participants. While “let the market figure it out” sounds simple enough, and no mantra is an appropriate substitute for rigorous analytics, the mechanism by which resources are allocated by prices is wonderfully nuanced, and necessarily more so than the alternative central planning mechanism.

Don Boudreaux at Cafe Hayek articulates this point wonderfully in this post, which I recommend in its entirety, and from which I cannot resist excerpting:

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… .

While declaring “Let the government handle it” comes across as a solution, it’s no such thing. Instead, it is merely a sign of a simple and baseless faith — a simple and baseless faith that people invested with power will not abuse it; that political appointees possess or will find better answers than will millions of people pursuing solutions in their own ways, and staking their own resources and reputations on their efforts; that only those ‘solutions’ that are spelled out in statutes and regulations and that have officials paid to implement them are true solutions.

I’m not sure I know what it means to label as ideological the view that it is generally superior to rely on decentralized allocation of resources and individual incentives rather than central planning. So I plead no contest to the charge that the prescription to “let the market figure it out” is ideological. But I am quite sure there is nothing inherently “less nuanced” about this solution than the alternative. To the contrary, market solutions are inherently complex and nuanced.