the limits of markets

NYU economist Michael Spence explains that competitive markets, however useful and necessary for economic efficiency and growth, do not ensure stable and sustainable growth, nor an equitable distribution of income.

In the 66 years since World War II ended, virtually all centrally planned economies have disappeared, largely as a result of inefficiency and low growth. Nowadays, markets, price signals, decentralization, incentives, and return-driven investment characterize resource allocation almost everywhere.

This is not because markets are morally superior, though they do require freedom of choice to function effectively. Markets are tools that, relative to the alternatives, happen to have great strengths with respect to incentives, efficiency, and innovation. ….

But markets have … fundamental weaknesses. Or, rather, most societies have important economic and social objectives that markets and competition are not designed to achieve. In today’s rapidly globalizing world, the most important of these objectives – expressed in various ways through the political and policymaking process in a wide range of countries – are stability, distributional equity, and sustainability. ….

A relatively narrow focus on efficiency and growth, at least in many advanced countries, may have worked in the early decades after WWII, when distributional patterns were benign and instability rare. Today that is not enough. Stability, equity, and sustainability challenges have become crucially important, and the role of the state in relation to markets may need re-thinking as a result.

Michael Spence, “Mind over Market“, Project Syndicate, 13 January 2012.

Click on the link above to read the full column.

Michael Spence (born 1943) won the 2001 Nobel Prize in Economics, jointly with George Akerlof and Joseph Stiglitz, for “analyses of markets with asymmetric information”. His latest book is The Next Convergence: The Future of Economic Growth in a Multispeed World (Farrar, Straus and Giroux, 2011).

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