Market failure
The market is too crude, arbitrary[1] and imperfect to allow us to step to one side and let it rule the economy alone.
In the theoretical world of the discipline of economics it would indeed seem that we can leave it all to the market, provided it is a perfectly competitive market. But real-life markets are nowhere near perfect, and never will be.
There are many examples of significant market failure.
The price of electricity generated by nuclear fission is one example.
In the 1950s nuclear energy was hailed as the energy-source of the future; cheap and potentially limitless, particularly if the power of fusion was harnessed. Nuclear power stations were constructed all over the world, and became a symbol of forward-thinking governance.
Now the public is wary of nuclear energy. Chernobyl will happen again.
The disposal of the wastes of nuclear power generation has always been the Achilles' heel of this supposedly wonderful innovation. It was brushed under the carpet for many years, perhaps in the hope that technological advance would devise a way of dealing satisfactorily with the accumulating wastes.
Nuclear electricity was too cheap, whether in command or market economies, because neither the market nor the central planning authorities factored into the price the full cost of waste disposal, the cost of decommissioning at the end of plant life, or an appropriate insurance premium to cover for the cost of major mishaps during plant operation.
A massive complex of vested interests ensured that for decades the public were not adequately informed of the long-term consequences and costs of nuclear power generation. Those who stood to gain waged a propaganda campaign[2] that understated the problems, and overstated the likelihood of satisfactory solutions.
It is only now that communities have started refusing to allow the construction of nuclear power plants in their back-yards, and, more to the point, rejecting the storage or disposal of nuclear wastes, that the costs to the generators have become prohibitive.
Given the state of the technology, nuclear power generation should have been uneconomic to the generator from the outset. But it took several decades for many of the costs of the product to seep back to the producer. Product and market information clearly were far from perfect, yet one of the key assumptions in the perfectly competitive models of the economic theoretician, is that the economic agents operate with perfect information.
Markets of their own accord do not appear to distribute resources and opportunities sensibly across regions or populations or technologies or time. Resources flow to centres of resources and political power.
The market is not broad or forward-thinking. It works well with products that have very short life-cycles, and limited environmental impacts; where the total cost to society of the product's creation, distribution, consumption, and disposal can rapidly be sheeted home to the economic agent who makes the initial decision to produce.
Unfortunately the newer the product, and the greater and more lasting the environmental impact of a product, the less likely it is that the market price of the product will reflect the true cost to society of that product. The profit seekers who make the decisions to produce and market the product have a vested interest in letting others carry the downstream costs of their decisions.
The market is imperfect and often significantly understates the price of a product causing it to be over-consumed from the long-term point of view of society[3] as a whole. In a market who bids for future generations?
The consumption of non-renewable resources such as fossil fuels is another example of market failure. Fossil fuels are far too cheap - if the market were functioning perfectly with perfect information, fossil fuels would possibly be so expensive that they would hardly be extracted at all. The environmental impact of burning fossil fuels for the generation of electricity is more diffuse than that of using nuclear fuel for the same purpose, yet over the long term the impact may in fact be more severe. Ironically it could now be argued that nuclear generated electricity should be significantly cheaper than fossil fuel generated electricity, and both should be considerably more expensive than they are.
The market fails when the agent who makes the decision to produce and market a product is able to significantly avoid the full social cost of that decision, thereby inflating their profits at the expense of society over the long term.
The market also fails when property rights over resources cannot be restricted and enforced. Everybody's property is nobody's property. A resource like a fishery will be exploited to extinction because property rights to it cannot be economically enforced, even more so for migratory species. The individual fisherman whose livelihood is at stake knows that if he doesn't make the catch somebody else will; there is no incentive to harvest the fishery in a sustainable manner. The fish that are caught are significantly under priced in the market because their price does not include an extinction premium.
No reasonably functioning market would allow a sustainable resource to be exploited to extinction. Yet, world-wide, the norm is for fisheries to be exploited to extinction.
Direct third party intervention in the setting of prices is necessary to ensure that they incorporate social costs and benefits that unfettered market places would not. The most practical third party would be a State entity set up for that purpose. The information technology now exists to allow this to be done automatically at the level of each and every monetary transaction, as a modulating charge differentiated by product and producer. The greater the environmental impact of the product or the greater the exploitation of human labour its production entailed, the higher the charge.
The ideologues of free trade would cry that such price modulation would amount to trade barriers[4]. Yet what they would be are barriers to the destruction of the biosphere and the exploitation of fellow human beings.