Video Transcript: Myths of Market Failure | Thomas J. DiLorenzo

This talk that I'm going to give is on the myths of market failure, and to give you  a little perspective, you know, in the course of my career, I used to publish quite  a bit in the area of antitrust and industrial organization, and and one of the  things I published in an article a long time ago in a journal called Economic  Inquiry was about the origins of of antitrust and and what economists were  thinking about antitrust regulation at the time the first antitrust law was passed,  the Sherman Antitrust Law in the United States in 1890, the year 1890, and and  one of the things I found was that the the American economics profession was  almost unanimously opposed in principle to the whole idea of antitrust  regulation. They thought they thought it was inherently incompatible with the  whole idea of competition, and the reason was they they thought of competition  like the Austrians do as a dynamic, rivalrous discovery process that involves  entrepreneurship. It's ongoing, never ending, and they saw what was happening in their economic world at the time. With there was a merger wave in the late  1880s in the United States, and but they saw prices falling, output expanding.  They they saw new products, hundreds of new products being created. There  was deflation for 35 years after the American Civil War, and they thought it was  all all good. It's competition, so they didn't see the the merger wave of the time  as a bad thing. That, but and that that pretty much was the thinking until you get  to around the 1920s and 30s, and the the theory of competition changed, and  the theory of competition that was held by those who called themselves  professional economists became the the theory of perfect competition. I don't  know, maybe Peter Klein covered some of this in the last lecture, in last class,  but all of a sudden, the thinking of competition went from dynamic, rivalrous  entrepreneurship-the way Adam Smith saw it, the way the Austrians have  always seen it-to this this weird theory that says competition means many firms  producing homogeneous products, homogeneous prices, costless. entry and  exit, and perfect information. And as Friedrich Hayek wrote in a in a famous  article of his called "The Meaning of Competition, in perfect competition there is  no competition. It's all assumed away. And so, and so, if you look at if you define competition in that way, that led to a huge industry in the economics profession  of market failure theory, and the 1950s was probably the the high point of the  market failure theorizing, where there was market failure everywhere because,  after all, nothing on earth is perfect, and so if you posit that this is what  perfection is, and then you compare the real world to that. I sometimes call it  this. You you you compare the real world to this bizarre model of utopia, and you say, "Aha! The market has failed, and so there were hundreds, probably 1000s,  of articles written by by economists, you know, labeling anything that happened  in the market as a failure because it failed to reach this. And it got to the point of  absurdity, even by the by the 1970s. The late Robert Bork, who taught antitrust  law at Yale for I think 17 years or something like that, he wrote a book called  The Antitrust Paradox, and and there's a funny line in there. My my favorite line 

in the whole book is that he said if if we act if the government actually tried to  enforce perfect competition on the U.S. economy, it would have the same effect  on wealth as several strategically placed nuclear explosions, and and he wasn't  an Austrian. I never thought of him as an Austrian economist, but but he was a  Chicago school law and economics guy, so he he knew a bit about economics,  and and he wrote some pretty good things about about that subject, and so and  so you had this whole list of market failures based on basically what I, what the  economist Harold Demsetz called the Nirvana fallacy, and this was in an article  that Harold Demsetz. I'll write his name down here for those of you have never  heard of Demsetz. He was a UCLA professor, which I always thought he was  very close to being an Austrian. Although he never called himself an Austrian,  but his his the way he wrote about markets was very consistent with with things  that you'd expect to see from Peter Klein, for example, the emphasis. On  entrepreneurship and a dynamic market, and and so he was. I always thought of him as a fellow traveler of the Austrians. But he coined this phrase in an article  in the Journal of Law and Economics. I think it was 1969, 1970. It was called  "Information and Efficiency. I think it was called "Two Viewpoints, and so that's  the Nirvana fallacy, and so what I have here in this list is four reasons why I think there are there are a lot of myths about market failure, and then I'm going to talk  about some specific myths that that I that I think have been debunked either by  me or others, and the first one is the Nirvana fallacy. You know, comparing the  real world to utopia, the real world always falls short. The second is the ignoring  of entrepreneurship. A lot of the market failure stories are externality stories, for  example, and and they just condemn the market for not being perfect in some  way because there are the presence of externality problems. But human beings  are problem solvers. At least some of us are, and especially when there's money involved. If there's money to be made, someone is going to figure out how to  make that money. And a lot of times, the so-called externality problems are just  that. There's are solved by just that means. By there's a way of making money in it, and somebody does and solves a problem in in doing it, some of our friends  in Montana that run the Political Economy Research Center study what they call  enviropreneurship, for example. And I just sent them an article from my local  paper. I live in South Florida, and there's a brewery near my house, Saltwater  Brewery. I notice they sell the beer next door. Saltwater Brewery beer right next  door, but these guys, I think they're going to make a lot more money by solving  an environmental problem than they are selling beer. They're successful selling  beer because they just they just rented out a barn in Delray Beach, Florida, and  now I see their beer on tap at Mama Goldberg's. So they're they're going  national and international, but they're environmentalists, and they figured out  that there's a problem. If you live on the coast, you see these stories of fish  choking to death on six-pack rings, plastic six-pack rings. They got the residue  from brewing the beer, and they hired a chemist, and they figured out how to 

make six-pack rings that are that are degradable, so that they're good enough to hold six packs of beer or Pepsi or whatever. But they throw them into a fish tank, and the fish eat them. Fish eat they eat these six-pack rings. And the local paper said they just had an order from like Anheuser-Busch for 50,000 of these things,  and so that's the first order. So I don't know how much money they're going to  

make, but if you sell 50,000 of anything, that's a good piece of change. And so,  and so, and so, and they they didn't. There was money in it. They didn't do it  necessarily solely because they love fish, or they felt felt sorry for fish choking to death. They're becoming very rich doing that. So that's the second reason. Third reason is lazy economists who who spend their time never getting up out of their swivel chair in their faculty office and theorizing all day long without ever looking  out the window to see if the world matches their theories. And then the fourth  reason for this that I would give is it diverts attention to problems that are  actually caused by government. A lot of problems, monopoly and so forth, that  are historically been caused by government. All of a sudden, they divert  attention to saying, "Oh no, it's the market that causes all these problems. So  those are four reasons. So, so what are some examples I want to talk about?  The first one is antitrust, which I mentioned briefly earlier, and I once did a  survey of of all the all the when I was at George Mason University 100 years  ago, I got all the books from the library. I had a research assistant that about  antitrust law or antitrust economics, and I want to know well what are they  saying about the origin of antitrust? Because by that time, the Chicago School  mostly, and some of the Austrians, had decades of criticism of antitrust in  practice. But all the books seem to say, but there was a golden age in the 1880s where antitrust was needed. We we may have had 100 years of  counterproductive policy that actually makes markets less competitive, but it  was good at the beginning, and I wasn't really buying that story. And so, and so,  and sure enough, all the books said, yeah, there was a golden age. There was  rampant cartelization, rampant monopolization, and government came to the  rescue, and and and establish the Sherman Antitrust Law, okay, and so and  that's the standard story that's still in a lot in a lot of the books, and and so what  I did was I tried to look for the data that would back this up and found there was  none, none of the books had any not one statistic about. So my research  assistant and I dug it up. Didn't went to the Library of Congress. We we got all  what data statistical the statistics of the United States from the Census Bureau,  and and one of the things we found. I'll give you just very briefly what I found. I  published this article in the International Review of Law and Economics way  back. I think 1984, I think is when it was, but 10 years prior to the Sherman Act  being passed, passed in 1890, GDP was growing at 24% for that 10-year period. GDP, according to the government's own statistics, 24% The average growth,  the average growth rate of industries that were accused of being monopolies by  the U.S. Congress during that time grew at 175% on average. That's what is that

seven times faster. So the so the the industries that were accused of  monopolizing industry were growing seven times faster than the economy as a  whole, and the economy as a whole was was doing well. It's a period of  deflation. The government's CPI fell by 7% during that decade, but but these  these industries that were expanding their production seven times faster than  GDP were cutting prices even further. Steel rails, for example, fell by 53% That  was kind of pretty common during that time, and so what I found was that these  these industries that were targeted as monopolies and even involved matches  and castor oil that they were complaining about were the fastest growing,  fiercest price cutting, most innovating industries of all. So there was no  monopoly. There was no monopoly. The old economists had it right in my article, in economic inquiry. When I when I when I followed up from this article to the  economic inquiry article was published four years later, was that the economists  of the of the day got it right. There's nothing to worry about here. Even even  socialists like like Richard T. Ely was a big statist. Even he was against the  antitrust law at the time, and so that's that's the first big example I would offer of  a myth of market failure. One of the biggest ones. The second big myth is the  natural monopoly, and I wrote an article years ago in the Review of Austrian  Economics about called the myth of natural monopoly. It's online. You could  Google that and find it. You know, I was always suspicious of this story. Also,  that you know, the story that's still told today in the textbooks is that in the  industries with the heavy fixed cost, you know, and you know, what industries  don't have heavy fixed costs these days. You know, before you before you get  started, we'll have economies of scale. You know, once it costs a lot of money to build a power plant, but then once you start hooking up individual customers,  your your costs are mostly fixed, and then you you add you know customer after customer, and and so the cost per unit falls sharply, and the basic story is that in industries like that, with economies of scale, that there's one big one big  company will will will achieve economies of scale first, basically, and be able to  underprice everybody and become a monopoly. We don't want that. We don't  want a monopoly, but there could be a silver lining in the story. The story goes is that on the other hand, if the government creates a monopoly on purpose, then  we can have the advantage of the lower cost for electricity and all these things.  But then the government will regulate the price in the public interest, so that we  won't have a monopoly price. We'll have a competitive price. That's the theory of natural monopoly, and and so you know one thing. I so I dug into this too, as had other people, and and found out that well this this was the theory, but it never  happened in the in the United States. This it never happened that a natural  monopoly evolved in the free market, and and then the government came to the  rescue with some bureaucrat riding in on a white horse to to rescue the the  consumers. When when I had friends working at the Federal Trade Commission, by the way, there's a statue in front of the Federal Trade Commission of a a big 

cement horse and a big strong man, like you know a professional wrestler  wrestling the horse, and I asked my friend Bruce Yandle years ago. Was working there. Well, what's what's this about? What is the horse and the guy? And he  told me the horse was runaway government, and the man was an economist  that was trying to wrestle it down. But but but but actually, I think the real  meaning of it is the the horse, the the wild horse is capitalism, and the the big  strong he man was the government. It was taming taming capitalism. As to this  day, it's still still there. But again, there's a Harold Demsetz. This is why I kind of  I was I I was I wasn't a student of his, but I liked his writings back back in the  day when I was researching this. He wrote in his book Efficiency. Competition in  public policy. He did a survey of what was going on in these industries, the the  natural monopolies at the time, late late 19th century, early 20th century. He said this: six electric light companies were organized in one year of 1887 in New York City. 45 electric light enterprises had a legal right to operate in Chicago in 1907.  Prior to 1895, Duluth, Minnesota, had five electric light companies. During the  latter part of the 19th century, competition was the usual situation in the gas  industry in this country. Before 1884, six competing companies were operating in New York City. Competition was common and especially persistent in the  telephone industry, and on and on and on. So there was fierce competition and  all these so-called natural monopolies. And so, and I wrote about this in my  article. And I used to be a library rat before when I was early in my career before the internet. I was a library rat. That's how I got to write articles and books that  are sort of investigative. Like I enjoyed going through libraries. David Gordon is  probably like us too, but but and I the the Johns Hopkins Library was about a 15  minute walk from my office at Loyola in Baltimore. And one day I'm in the Johns  Hopkins Library and I'm looking at all this literature because I knew Richard T.  Ely taught at Johns Hopkins, so I went there to see what what kind of collection  of his writings they had, and I was digging around and I found Ely, and he had  written a lot on this subject at the time, you know, early 20th century, and I found an old book on the history of the Baltimore Gas Light Company that Richard T.  Ely wrote about, and it was it tells about the origins of natural monopoly in  America, of how it got started, and one of the first states to start it was Maryland, was was Baltimore, Maryland, and here's here's here's what this book says, how how it came into being. In 1890, a bill was introduced into the Maryland  legislature that called for an annual payment to the city from the Consolidated  Gas Company of $10,000 a year and 3% of all dividends declared in return for  the privilege of enjoying a 25 year monopoly, so before that there was  competition, and they sometimes tried to form cartels, but cartels always break  down, didn't work. So they run to the government and said, "Listen, this is how  we should do this. Give us a 25 year monopoly, and we will share the loot with  you, politicians. You know what it was at $10,000. You know, and at that period  of time, that that was a lot of money. $10,000 a year and 3% of all dividends for 

a 25-year monopoly, and another old economist I ran across in a journal, Journal of Land and Public Utility Economics, points out that you know the whole  National Recovery Act was basically like this when Roosevelt set about to to  monopolize all manufacturing industry, this was basically the model.  Government created monopolies with price fixing police roaming the the streets,  enforcing the price codes. That was basically how how those monopolies were  all created. In in this one other article that I ran across by an economist named  Horace Gray, he says this. He says you know before too long you know once  they started this with the the gas companies and the electric companies, he  says everybody everybody declared I'm a natural monopoly too, and this  included the radio, real estate, milk, airline, coal, oil, and agricultural industries,  to name a few. Everybody, don't forget me. I'm natural. I'm as natural as the  other guy, and so, and so, so that's that's that's the reality of so-called natural  monopoly. It was created by government, but this whole elaborate theory was  was was a big diversion away from the fact that government created it. You  know, in the common law, the English common law, which much of which was  adopted by by Americans, monopoly was always defined as a grant by the state. It wasn't until the early 20th century that monopoly was associated with the  market, and and I think the the creation of the perfect competition theory had a  lot to do with that. But it was always assumed before that that monopoly was a  grant by the king or the by the parliament or by somebody. Okay, I have a whole  list of these fallacies, and I'm going to talk. I'm going to talk about as many of  them as I can. I guess during the time that I have, the next one is the Fable of  the Bees. This is a, and this is associated with an economist named Stephen  Chung. If you Google Stephen Chung, Fable of the Bees, you find his famous  article, and and it was famous because in in all in all. The economics textbooks  in the 1950s and 60s, 70s, they they quoted an economist named J. E. Mead,  and when you get to the section on externality problems, externality negative  externality problems and positive externality problems, and the example he  gave, and this ended up in all the textbooks for a long time, was a situation  where you had beekeepers near an apple orchard, and you know the bees  pollinate the apple orchard, and as a result, the apple the apple grower has  more apples because his apples are pollinated, and this is a market failure  according to J. E. Mead, because there would be no mechanism for for the  farmer or the apple the apple grower to pay the beekeeper, and so there's a an  unpaid resource there, a positive externality, and at the same time it's reciprocal  because the the apple trees, the blossoms on the apple trees provide food for  the bees, but he said there's no mechanism though where the there could be  any kind of collaboration between the beekeepers who have bees and the apple orchard owner, and so there's these obvious benefits there. So he called for  government subsidies of beekeepers. He said to correct this market failure, the  government should start start subsidizing beekeepers. Now I always assumed 

that J. E. Mead must have been a beekeeper on the side, you know. In addition  to being a professor at MIT, you know, he had beehives in his backyard or  something like that. But anyway, Stephen Chung, he's he's a he's a professor at  the University of Washington. You know, if you went to the grocery store this  afternoon to buy apples, half of them in the in the apple bin would probably be  from Washington State, a big apple-growing state, and so he did something  almost unheard of among academic economists. He got up off his butt and left  his office, and he decided to investigate and actually educate himself about the  beekeeping and apple-growing industries. He was curious about this. He was in  all the books, all the textbooks, and sure enough, what he found was that for  generations they had implicit and explicit contracts between the beekeepers and the and the the apple orchard owners, and they were very explicit, very detailed. For example, they they even had things that would say if it were contractually  obligated, if we're going to spray bug-killing poison on our apple trees, we have  to give the beekeepers two weeks' notice so that they get the hives out of there,  and we don't want to kill off the bees with the the poison that we put on to kill the other bugs on the trees and things like that. And they and they had payments.  They had payments going in both directions depending on the the situation,  what kind of apple orchard or what kind of fruit orchard you had, and and the  bees, and so so basically, what he found was that for many generations, these  business people were not as stupid as economists assumed all entrepreneurs  are. There was money to be made by collaborating between the beekeepers  and the and the apple orchard owners, and there and sure enough, if there's  money to be made. Somebody will figure out how to make it, and so so again by by ignoring the whole process of entrepreneurship, economists tend to not even  think about private solutions to to problems like this. They just assume that it's a  it's you know it's never ending, and there be there be no end to it. The next  example is who knows what QWERTY is? It's the keyboard. It's the keyboard on a computer. This is the configuration of the keys on a computer. Well, the next  type of market failure has to do with what a buzzword is used for it is path  dependence, and the idea is that sometimes in a free market, there will be an  inferior technology that will be locked in. The people will will use this technology,  and there might be better, more efficient technologies out there. But you know,  once people adopt it, the market tends to lock it in, and so so the whole society  becomes less efficient with inferior technology, and there was an economist  named Paul David wrote several articles on this quite a few years ago, and and  he used the QWERTY as an example, as a prime example in in a couple of his  articles, because there was another keyboard configuration called the Dvorak. I  gave this talk at the in Prague once. I was invited to give lectures for 10 days at  the Prague University of Economics, and and the students all laughed when I  mentioned Dvorak. He was a Czech, but he was he was an American, but he  was of Czech descent. I don't know why they laughed. They thought it's funny 

that there's someone from Czech Republic would be in America. So, but they  thought that was a funny thing. But but anyway, Dvorak. It was a different  configuration of the keys, and and and Mr. Dvorak claimed that his configuration  was superior and that. This was way back in the 1940s. He was claiming this,  and then Paul David, the economist, in the 70s and 80s, is writing these articles  saying, "Well, yeah, the Dvorak configuration. There's evidence that it was  superior to the qwerty, although by then the qrti was just a sort of by  circumstance, happenstance, locked in, and the market fails us yet again, and  so anyway, two economists, Liebowitz and Margolis, Stan Lebowitz and Eric  Margolis, looked into this sort of like, and they did apparently what Stephen  Chung did, the the just unspeakable act of getting off off their butts and leaving  their faculty offices, and and investigating the whole computer keyboard industry and becoming sort of experts in the whole thing, and among the things they  found was that the evidence of the superiority of the Dvorak keyboard was  produced by a naval officer during World War II named Dvorak, and and who  had a patent on that keyboard, and it was his secretary who did the testing, and  and claimed that you know basically his keyboard was superior, and so so they  did you know Liebowitz and Margolis did they I think they hired somebody to do  you know they did additional tests of the of the things, and they found they got  pretty similar. There was no there was no extreme difference in in in one over  the other, according to what they said. But the thing is, it wasn't worth it to the  consumer to switch. You know, they had an opportunity to switch, just like you  can switch from Apple to to word processing on your on your writing and your  computers, but you know once you learn one system, it's just not worth it to a lot of people. Now, if there's a big significant improvement, it might be worth it to  retrain yourself, but but in this case, there apparently wasn't, and so so like the  fable of the bees, the fable of Qwerty turned out to be a dud as well, and I argue in in one of my articles that I published that that this also has everything exactly  ass backwards, because if when you think about it, where we really have locked in inferior technology is government. That's where the inferior technology is like  here's just one recent headline that it was in the news recently. U.S. nuclear  arsenal is controlled by 1970s computers with eight-inch floppy disks. I'm old  enough to have used floppy disks. On I bought my first IBM PC in 1983, but they weren't eight-inch floppy disks. They were they were four-inch. They were not  you know eight-inch floppy disks. And so talk about path dependence and  locking in inferior technology. And and I'm working a paper on this. If you just  you know this is a note I wrote to myself. It says Google quote outdated  government technology. I did that just before I left to come here, and there's a  big long list of articles like this, you know, on the web, and so that's that's where  the outdated technology comes from. The next example I'll give is the  asymmetric information problem, and I guess the one of the pioneering articles  of this was written by Mr. Janet Yellen. Yeah, Janet Yellen's husband. You know 

who Janet Yellen is, the chairman of the Fed or chairwoman of the Fed. Her  husband is George Akerlof, Harvard professor, and and he wrote an article on  what is known as the lemons problem in economics in 1970 in the American  Economic Review, and the story that's told is, for example, a used car dealer  has more information about the quality of the used car than the buyer, than you,  the customer. Therefore, he's able to rip you off and you know sell you a lemon,  and he predicted that the whole used car market would disappear because of  this. It'd be such a severe market failure that the whole car market would used  car market would just be non-existent. That's 1970, and there were already  warranties on used cars in 1970. So like, and and of course, now nowadays, if  you buy a car from CarMax, it's a big used car place in the U.S. I think they still  give you five days to take it back, no questions answered. If you decide you  don't like the car, 30-day warranties, you can buy inexpensive extended  warranties. So that pretty much solved the problem. So the problem of  asymmetric information that that he complained about was already solved at the time by product warranties. At the time he wrote the article, but nevertheless,  there's a huge literature. You know, Joe Stiglitz has written you know hundreds  of articles I think about this because it's an easy nirvana fallacy thing to do. It's  easy to posit that. Well, gee, I, the purchaser of an automobile, don't know  nearly as much as an automotive engineer who works for General Motors about  the workings of an automobile, don't I? And I, as a consumer of steak, don't  know nearly as much as a rancher who raises cattle and puts brings a steak to  market and all this stuff, yeah, that's true, that's true. So, so, so this is seen as  one big market failure problem. But I published an article, a short article about  this, in the Quarterly Journal of Austrian Economics in 2011, and I'll just give you a couple of things that I wrote here. I quoted Hayek, I basically argue that  asymmetric information is why markets exist. It's another word for it would be  the division of labor, or the division of labor and knowledge. You know, we I have I I teach economics. I make money teaching economics and writing books and  things like that, and I use that to buy the things that I buy: my house, food, and  so forth. And so that's that's what makes civilization exist: the international  division of labor and knowledge. We all have specialized knowledge in  something in our work lives, and we make money doing that. And we rely on  other people to provide us with our other goods. And so, but it's really the same  thing as what they're saying is asymmetric information. There wouldn't be  markets without asymmetric information. Here's what Hayek said in 1964: We  need to remember only how much we have to learn in any occupation after we  have completed our theoretical training. How big a part of our working life, we  spend learning particular jobs and how valuable an asset in all walks of life is  knowledge of people, of local conditions, and of special circumstances. The  shipper who earns his living from using otherwise empty or half-filled journeys of tramp steamers, or the estate agent whose whole knowledge is almost 

exclusively one of temporary opportunities, or the arbitrageur who gains from  local differences of commodity prices are all performing eminently useful  functions based on special knowledge of circumstances of the fleeting moment  not known to others. Asymmetric information. He's saying that's what makes the  market work that we all have different knowledge, and so and I ask in my article, you know, ask yourself these questions: Who knows more about home building,  home builders or home buyers? Who knows more about supplying grocery  stores with fresh meat, ranchers and farmers or consumers? Who knows more  about manufacturing automobiles, automobile engineers, or car purchasers? It's  the whole marketplace is based on asymmetric information. I also quote Mises,  who I didn't use the words asymmetric information, but he he wrote about the  the topic, and I'll quote very briefly. This says, "In an economic system in which  every actor is in a position to recognize correctly the market situation with the  same degree of insight. The adjustment of prices to every change in the data  would be achieved at one stroke. Perfect information, you know, non asymmetric information. In other words, it is impossible to imagine such  uniformity in the correct cognition and appraisal of changes in data, except by  the intercession, intersecession of superhuman agencies. So only only God  could create a situation where there is non-asymmetric or symmetric  information. Okay, we would have to assume that every man is approached by  an angel informing him of the change in data. Mises wrote, and he says, "If if  market participants did possess the same data and information, they are bound  to appraise it differently.” Even if you did have the same information, that's that's  after all. That's why that's why markets work. You and I could have the exact  same information about my bag here, but if you are in need of a new bag and I  decide I'm too old to be wearing a knapsack anymore and I should sell it to a  student, we look at the exact same physical object. We have the exact same  information, but we we trade. I get rid of it. You buy it if we can if we can agree  on a price. That's how. That's why markets exist. And so I make the case once  again that that this is also ass backwards to use the scientific language for this.  And I also make the case that the real asymmetric information problem is in  government. Just look at foreign policy, for example. You know who who has  more information about the next war we're about to jump into, the the dozen or  two people who start the war, or you and me? You know who has who has more  information about that, or about anything government does? You know,  government secrets. Okay, so. So that's asymmetric information. Now the free  rider problem is also, you know, greatly exaggerated. I think the way it's taught  by most economists, though, and most textbooks, that students tend to get the  impression that this is some sort of ironclad, insurmountable problem of  markets-the free rider problem. Whenever there's something in the form of a  public good, and one good example one example that I'll give you of something  that I've written about is you know as a lot of you know if you read some of you 

have read some of my books I'm interested in economic history, and and one of  the things I wrote about in a couple of my books is the the the debates that  began with Jefferson and Hamilton and went through the Civil War, so-called,  about internal improvements or government subsidies for railroads, roads,  canals, things like that, public works, so-called, and even beginning with  Alexander Hamilton in the U.S. he articulated the free rider problem and said  private markets would never finance in sufficient amounts, road building, canal  building. Therefore, we need we need government government spending to do  this. And American president after American president vetoed all of that until  Lincoln came along. It was it was all that's when it was all put in place. But but  they all vetoed Madison, you know the father of the Constitution, his very last  day as president, vetoed a a bill that was about it was about giving a bonus bill  to veterans, I believe it was, and and in there someone had snuck some money  for road building, and and the father of the U.S. Constitution said, to paraphrase  him, I can't put my finger on the part of the Constitution that allows us to spend  money on on that something like that. And other presidents said said something  similar. But I quote an article on this topic of government subsidies for road  building because of the free rider problem. Dan Klein, an economist Dan Klein  wrote an article in the Economic Inquiry some years ago about early American  road building, and here's what he says: The private road building movement  built new roads at rates previously unheard of in America. Over $11 million was  invested in turnpikes in New York. He's talking about the period 1800, 1801,  1802. Hamilton was still alive. Some 6.5 million in New England, over four and a half million in Pennsylvania. Between 1794 and 1840, 238 private New England  turnpike companies built and operated about 3,750 miles of road. New York led  all other states in turnpike mileage with over 4000 miles as of 1821. So, so even when this debate was started by Hamilton, private road building companies  were busy building all roads and canals with private funding, private investors.  How did they do this? Well, yeah, there was a free rider problem, but and at the  time, you could you could maybe make 10% on an investment somewhere, but  only 3% if you invested in one of these turnpike companies, or 4% But people  also realized that if their little town was connected to the next town over, it could  it could double the size of the market for their goods if they wanted to sell, and  vice versa. They would have more competition coming in to sell them things, it  may be at lower prices, and so the people did that, and they used social  ostracism to to get their neighbors to invest and cooperate in this back in early  America, and so and so they didn't they didn't use the barrel of a gun, which is  the governmental method, you know, pay up or die, or or or or pay up, or we will  make you live in a cage for for seven years, something like that. Final final  example I'll give of market failure mythology has to do with pollution, and I wrote  a couple of articles years ago. It was very interesting when when when  socialism collapsed around the world in the late 80s and early 90s. There were 

all these closed societies that were all of a sudden people from the West could  go into East Germany and and Poland and these places that had been part of  the Soviet Union, and and people did. The journalists, the United Nations sent  people, the academics of all sorts could could walk around and look around for  

the first time in decades, and one of the things I was thinking about at that time  was that, well, well, how's how is this going to affect the theory of negative  externalities? Because after all, the theory of negative externalities that was first  articulated by Arthur C. Pigou, the British economists was that because of in  unregulated markets, the pursuit of profit will lead businesses to only consider  the private costs and not the external costs like pollution of their factories.  Therefore, the government needs to come in and regulate in the public interest  or or tax in. Public interest corporations that polluting. So the root cause of  pollution is the the pursuit of profit in unregulated markets. Well, here we have a  natural experiment we had where where the pursuit of profits in unregulated  markets was outlawed for 40, 50, 70, years in all these countries. So what would you expect the environment to look like in these places? Pristine, you know,  heaven on earth, you know, like Al Gore's backyard, something like that. And of  course, the exact opposite was true. It was there was an environmental hellhole. There were books written with titles like Ecoside and the USSR, and I gathered  all this up. I wrote a bunch of articles at the time about this, and there's stories of of you know that the Russians almost depleted the caviar by the sturgeon  population, pretty much disappeared in Russia. There and the the Volga River in Russia had signs of a steamboat going down the Volga River had signs on it:  "Do not throw cigarettes overboard; the river may catch on fire. Because there's  so many chemicals in the in the river, there were 70 years of untreated sewage  pumped into into the Aral Sea and other big bodies of water in in Russia. And  one memorable thing is they they found an island of alkaline sewage three miles wide and eight miles long floating around in the in the in the Aral Sea, and you  can imagine being on a nice sunny day like this out on your sailboat and you fall  asleep after a couple of beers and you wake up with a big thud, you know you  crash into something and it's an eight-mile-long chunk of sewage. That's the sort of. There were in Poland. The air pollution was so bad in Poland that they had  water cannons going through downtown Krakow in Warsaw several times a day  to knock the lead and cadmium dust out of the air in Poland. And if you had lung disease in Poland, they had underground clinics in uranium mines and  underground uranium mines. That's that's where they sent you in Poland if you  had had lung disease from all this. And so, so you know we've had our problems here, but but when if you read about what happened in the in the countries that  outlawed markets altogether, the environmental problems were many orders of  magnitude worse, and so and so the conclusion is that once again, you know,  there has to be something more to it in terms of the sources of pollution than just corporate greed, you know, the pursuit of profit, because after all, if you have a 

system of property rights that punishes people from harming others, whether  through pollution or any other means, that can be a deterrent, can it? If private  property and the liability that goes along with private property, they had none of  that in the socialist world, and so it was one big commons, and and they  despoiled the commons in Czechoslovakia. One anecdote I remember: decades of chemical fertilizer had made the the soil toxic down to a foot deep, where  nothing would grow, and and that. But American capitalists came to the rescue.  They actually have soil cleansing machines that they went and used the soil  cleansing machines to to restore their their farmland to viability in the you know  after the collapse of communism. Okay, so those are my stories, and I'm sticking to it about the myths of market failure. There are many more myths of market  failure, and for those of you who are looking for dissertation topics or just paper  topics, it's it's you know the sky's the limit as far as that goes because there are  so many so many of these theories out there, and I guess our time is about up  and I'm going to stick around for office hours. Thank you for not falling asleep.