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The Unicorn Test

It is striking how often my friends on the left have in mind the practical equivalent of a unicorn when they make policy pronouncements.

So I wrote about this, for the Freeman.

A surprising (surprising to me, at least) number of folks have responded that “free market fundamentalists” make the analogous mistake, with reverse polarity, assuming perfection in market processes.

I guess I just don’t see that.  The “market failures” paradigm is well established, and goes something like this:

1.  Markets fail to achieve a Pareto Optimum, because of (choose one or more:  economies of scale, public goods, externalities, information asymmetries, etc.)

2.  There exists, in principle, a reallocation that is Pareto-preferred to what is delivered by actual markets.

3.  Therefore, the state should intervene.

In other words, we start with market failure.  That’s the premise.  Objecting “markets fail, too!” is idiotic.  Markets failing is where we came in.

The question is whether the actual politicians in the actual government will do any better.  You can’t assume a perfect state as a solution to an (admittedly) imperfect market.  The point being that step 3 does not follow from steps 1 and 2.  Step 3 might be true, mind you.  But you have to run the Munger test.

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