what is "Market Failure"?
Source Sean Andrews
Date 12/02/10/00:17

Sean Andrews wrote:

Jim Devine wrote:

>> The employers of any standard of market success -- including Pareto
>> efficiency -- must recognize that markets are a human-created
>> institutional framework that exists due to the operations of the other
>> artificial institutions (mostly the state and its monopolization of
>> the means of coercion). Because people are involved, other criteria
>> must be heeded in order to preserve the _legitimacy_ of the system:
>> these include fairness (equity), democratic participation, and
>> individual freedom.

Thanks, Jim. I read David's e-mail before I had to wash the dishes
and put the baby to sleep and the whole time I was just thinking about
how to (again) respond to this kind of sociopathic Hobbesian
utopianism (which must position itself as the only option except the
furthest thing that anyone ever asks - golf courses and pools. How
dreadful!) It's both tiresome and an addictive sport I'm trying to
go cold turkey on. I have many other things to write and read
tonight, but couldn't stand leaving unchallenged this infuriating
absolutism. Yes these are all subjective, historical ways we assign
value to culture and social morals: but so is the free market. It's
one possible orientation among many arrangements, yet every one of its
adherents examine every alternative arrangement as if their own were
the natural predisposition of the human animal rather than a
hypothetical arrangement itself.

Market failure is, as everyone here has said, is only applicable in so
far as it is understood that the market is (and must be recognized as)
one mechanism among many for arranging our productive social
relationships. You are right that judgements about values and morals
are indeed subjective, but en masse they function objectively - and in
most cases it is only when someone else's declaration of morality
appears to be subjective (or are made to appear so) that we bother to
notice or even acknowledge the social fact of the dominant culture.
It would be unlikely that everyone would believe that the 4000sq ft
house on a golf course should be the basic standard of living. But
you might convince a great number of them to believe that the
distribution of basic human knowledge to be a social good.

In the case of pharmaceutical knowledge, particularly of the life
saving variety, there is broad support for the notion that the
discovery of that kind of knowledge is a patrimony to your species,
that it represents the equivalent of an evolutionary elevation in the
ability of our species to survive. Like the discoverer, humans have
benefitted from discoveries their ancestors made - discoveries that
helped humans defy nature in order to live longer. From stone age
tools and ancient medicine, to the simple knowledge that, though they
may be okay for other animals to eat, some foods can kill you. Were
this knowledge closely guarded, never collected or shared, we would be
still be sitting around that damn obelisk in the opening of the movie

But lest I seem to be sneaking human nature back into the frame, I
will say that all of the above may be a complete fabrication, but in
any case it is a fabrication that many people are convinced is true.
On the surface, whatever its legacy, our general understanding of our
history makes two things fairly clear: One that, no matter what
economic structures are in place (free market utopia notably being one
of the rarest actually existing economic structures till now) the
discoveries of this variety are truly unpredictable in the history of
human kind. A great array of factors have to come together in just
the right way to produce discoveries like Pasteur or Fleming or
Watson/Crick, etc. Which isn't to say that some conditions aren't
more conducive to it. And Two that thus the good fortune to discover
something is only partially the result of the human who did the
discovering: it was, in a sense, also the result of the human society
around her. There is a continuum here, of course, with absolutely
life saving knowledge being difficult to morally keep from others;
less essential, but useful, knowledge more privileged; and almost
useless knowledge either shrouded in obscurity or broadcast on TV.

People in our culture (the one that has come up with concepts like
"market failure") do believe this. We have arranged our culture and
our legal structures on this assumption. Patents, in this case, are
an accommodation to present circumstances - as is the federal (public)
funding of basic science (which far outweighs the importance of R&D by
Phirms, a point it seems absurd to have to make - or even address - on
a listserve run by the author of Steal This Idea, but whatever). They
are a recent invention, largely in the era of wage labor when it was
realized that the people who could discover things might - gasp! - not
be members of the elite class who could afford liesure and thus might
need to forego the life giving, commodity-buying labor of the multitud
in order to make them. Or, rather, if you gave a general social
incentive - the patent - to people who might discover something
important, then it might broaden the pool of people available to make
discoveries (it would also be handy to have as many of them as well
educated as possible, maybe even by people who have thought about
teaching and learning rather than programming computers, but that is a
crazy socialist idea. I elaborate something like it below). It did
indeed help that process to some extent, though it still wasn't nearly
enough - hence the public funding for basic science. Likewise all
those charities that collect money to study different diseases like
cancer or parkinson's or ALS.

By the time we get to market failure in pharmaceutical sales, it
likely has almost nothing at all to do with patents. A pill that
costs $5 to produce either faces too small a market to make scale
profitable or the producer is too inefficient in the production
process itself (after the knowledge production). In the first case, a
patent won't help obviate the high price - it won't magically enlarge
the people who the drug applies to (though once it's patented,
companies generally try to find off label uses in order to try). And
in the second, the patent only prevents generics who might be able to
derive a better way of manufacturing it were they able to. If it is so
necessary, so fundamental, and widespread an improvement of the human
condition, it will likely be easy to recoup costs because of this
scale. A manufacturer would therefore realize that, if they can be
elastic on their price early on, they will be able to make it back
over the long life of the drug. If they really can't produce it any
cheaper, then it doesn't make sense for them to prevent others from
doing so. No one else is likely to produce it at all if it simple
can't be made any cheaper.

In each case, the market fails to call the drug to production because
effective demand is not enough to produce a profitable or sustainable
business. When we call it market failure, we mean that, even though
we have all sorts of mechanisms in place to aid in the discovery and
production of important medical and technological breakthroughs, the
final mechanism - i.e. the private market - in the chain of
mechanisms through which we produce and distribute that knowledge in a
material, functional form is failing to produce the effects we
understand to be the main goal of the process - i.e. it isn't
producing and distributing that knowledge in a material, functional

It is here that we as a society need to start reflecting on some of
our assumptions about the current iteration of this process. First
absolute human desperation drove people to discoveries - or, more
likely, only the people who made these discoveries were able to
survive. Then as a baseline of human existence begins to level, many
more of the new discoveries were made by people with extra time and
resources with which to learn science or, as in the case of people
like Bacon's Invisible College or Taylor's time-work study, to collect
and synthesize others discoveries. Then we developed systems to
reward people who couldn't otherwise afford to not labor (in part
because, with the discoveries so far, the cost of human labor needed
to survive is so much cheaper) systems like patents and direct state
funding, and charities for basic science.

Now we face a terrible situation of broad market failure. We could
possibly advance scientific and technological means to catapult us to
some never dreamed up level of comfort and liesure. But, as Gortz,
points out, the way the most recent advances are being distributed,
there again becomes an underclass of people who, despite being alive
when it should be the easiest possible thing for a human to do, still
struggle on a daily basis to meet their needs. This is, ironically,
because it is the cheapest it has ever been to live in terms of the
cost of human labor - thus those souls have less value as potential
bearers of basic human labor, at least according to the metric being
used to distribute the rewards of human labor produced in aggregate.
In short, we have plenty of people to work; and we have dwindling, but
likely sufficient (but unequally distributed) resources to maintain a
base of support for everyone; in many cases, we have plenty of
finished goods (houses comes to mind in the current economy) that
simply can't call forth a market for their sale. This generalized
market failure risks creating what is almost unheard of in nature:
where there are plenty of resources, readily available and easily
satisfying needs, yet a third of the population is left to die simply
because they don't readily fit into the arbitrary schema devised
within some segment of the group for how those resources and goods
will be distributed. Namely, they demand money from people who have
no way to get money because their labor is unnecessary in the
incredibly productive system that produces those goods. Or, as Zizek
riffs on Pareto optimality in /First as Tragedy, Then as Farce/

"A century ago, Vilfredo Pareto was the first to describe the
so-called 80/20 rule of social (and not only social) life: 80 percent
of the land is owned by 20 percent of the people, 80 percent of the
profits are produced by 20 percent of the employees, 80 percent of
decisions are made in 20 percent of the meeting time, 80 percent of
the links to the Web point to less than 20 percent of the Webpages, 80
percent of the peas come from 20 percent of the peapods. As some
social analysts and economists have suggested, the contemporary
explosion of productivity confronts us with the ultimate case of this
rule: the coming global economy will tend towards a state in which
only 20 percent of the labor force are able to do all the necessary
work, so that 80 percent of people will be basically irrelevant and of
no use, thus potentially unemployed. As this logic reaches its
extreme, would it not be reasonable to bring it to its self-negation:
is not a system which renders 80 percent of people irrelevant and
useless itself irrelevant and of no use."

If the current system were tweaked ever so slightly (note, I'm
bracketing the full communist solution, though I think, ultimately,
there is an overly utopian belief in science and progress there) such
that the incredible productivity realized a more generalized liesure
(i.e. ability to not work) that would set the new stage on which these
spikes of discovery can occur. The more people are educated, healthy,
and able to subsist without the essential necessity to work a
meaningless job for the majority of their life (a portion of it, sure,
but 8 whole hours a day! what is this, the 20th century?) the more
likely it is that new breakthroughs will occur - and that there will
be an enormous market to support their production and distribution.
Instead there is a microscopic overclass that can't stop making money
long enough to take a break so it perverts the entire edifice of
society in order to to buy more time, paying another handful of people
to do mundane tasks at a higher price than it is actually, socially
worth and doing nothing to advance knowledge or industry, relying
instead on patents, copyrights, trademarks, complicated financial
instruments, international arbitrage, legislative courtesans, and well
paid lawyers to leverage the general social production of value into a
rent paid to them for, evidently, simply being alive.

It is this arrangement of social production and distribution that
creates "market failure" in our contemporary global society. It also
creates a generalized disintegration between what level of life we
could support and the level of life we do support. It is a long way
from obviating this, realigning these to values in some significant
way, to demanding golf courses and swimming pools for all. On the
other hand, it is likely only by artificially and collectively
deciding to mindfully realign these values that we will ever be able
to achieve that absurdly high level of sustainable, generalized
welfare. The sooner we recognize that, the sooner we can work towards
it an make it happen. It would by nice to think we'll get there
before we destroy the planet, but we seem more interested in the
latter than the former. Looks like the monkeys might get another shot
at it.

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