When Is a Market Failure Not a Market Failure?

It’s good to be reminded every so often that there are only two known ways of allocating scarce goods:

1. A market system
2. A command system

Any enthusiasm for market systems is not because they’re so great but because command systems are so bad. As my Econ 101 prof said all those years ago, “We don’t know how to promote prosperity but we do know how to create shortages”. Every command system always runs into something called “the knowledge problem”. The central planners simply don’t know enough. Command systems always have deadweight loss, a reduction in total production due to overproduction of some goods and underproduction of others.

John Cochrane has a lengthy diatribe on two articles blaming, of all things, our pandemic response and slowness in adopting new technologies as market failures. Here’s the strongest part of his critique:

More deeply, even I, devoted free-marketer; even at the late night beer sessions at the CATO institute, nobody puts mask distribution in a pandemic as the first job of free markets. There is supposed to be a public health function of government; infectuous diseases are something of an externality; safety protocols in government labs doing government funded research are not a free-market function. As we look at the covid catastrophe, do we not see failures of government all over the place, not failures of some hypothetical free market? California even had mobile hospitals after H1N1. Governor Brown shut them down to save money for his high speed train. We might as well blame free markets for the lines at the DMV.

Our response to the pandemic had high points and low ones. I think the CDC’s bellyflop on a test for COVID-19 early on was a low point; Operation Warp Speed was a high point. I think we could use a high level commission to review the federal government’s response. My understanding is that partisanship has prevented the proposed commission from getting started. That itself speaks volumes.