Nick Clegg thinks that the “short-termism and recklessness [that] eventually consumed our banks, taking the whole economy to the edge of a cliff” is an example of “market failure”.
For David Cameron, it is a sign of “a market failure [that] between 1998 and 2010 the average pay of FTSE executives [went] up four times”.
While for Ed Milliband, there is a “the market failure in the finance gap for SMEs that want to expand.”
All three make a common and simple mistake: they believe that market success is defined by a number of uneconomic measures such as social justice, or even (that ultimate weasel-word) fairness, and that it is a sign of market failure if market participants (that is to say, you and I) do not act in a way that the politicians think is appropriate for a market actor.
But that isn’t what market failure means at all. Market failure is a clearly defined economic term, and it has nothing to do with whether we get the outcomes that we want.
I explain this in more detail in my latest article for the Institute of Economic Affairs. Please visit their site to read more and to leave your comments.