Market Failure is Profit Opportunity

Markets are not perfect.  They do fail.  Every worker isn’t paid exactly what his marginal labor is.  Goods and services do carry with them externalities.  I’ve never met an economist, regardless of his school of thought, who argues otherwise.  But the failure isn’t necessarily a bad thing.  In fact, it offers an opportunity for advancement.

All advancement is based off of challenge.  To quote Dr. Mordin Solus:

Can’t carry a load, so invent wheel. Can’t catch food, so invent spear. Limitations! No limitations, no advancement.

These limitations, these challenges, are exploited by clever people to make a profit:  Man invents spear, trades it to his neighbor, for fresh meat.  Or, to bring this into a modern time frame: man noticed workers underpaid.  Starts business, offers higher wages.  Lures employees from competitors.  Makes profit.  Or, man notices vehicle emissions harmful.  Invents more efficient engine.  Sells to companies for royalties.  Makes profit.

Any market failure can be (and often is) exploited to make a profit.  Their new inventions (which don’t need to be physical, by the way.  A process improvement can be an invention, too) help humanity advance.

The ability to make a profit off a market failure is also a barometer of how effective the applied remedy is (and whether or not there is an actual market failure).  If an entrepreneur is unable to earn a profit, it’s possible his solution won’t solve the market failure (for example, trying to solve auto emission by selling new steering wheels) or that his perception of the marketplace was wrong (hiring workers at a higher wage but unable to earn profits suggests the workers are paid above their productivity).

When markets are allowed to compete, when this profit motive is allowed to thrive, then market failures, when they do arise, can be corrected.  When competition is not allowed, when profit is treated as a curse word, then these failures can become systemic.

One final thought: there are certain types of goods, specifically public goods, where conditions and characteristics are such that it would be extraordinarily difficult for an entrepreneur to correct a market failure.  In this case, it may be (and sometimes is) appropriate for government to supply the good/service.  But these goods are few in number and the Public Choice Problem remains.  One must be very careful when calling for government to fix a market failure.

5 thoughts on “Market Failure is Profit Opportunity

  1. This is a great way to think about “market failure,” which is a word anti-market types tend to throw around with wanton abandon. What innovation ISN’T the result of a market failure? Was it a “market failure” when there were no iPads before Steve Jobs came along? If so, I hope we have thousands –no, millions more market “failures,” because they will certainly lead to more and more human progress (not to be confused with “progressivism”).

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  2. There is no such thing as market failure. The market is a mechanism for the transmission of information. “Failure” can only occur when an outside agent of coercion damages the market mechanism.

    The fact that one may not like or disagree with any market data is not an indication of failure.

    von Mises understood this. Obviously you do not.

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    • With respect, I think you fail to understand what my argument is, what LvM’s argument is.

      I’m not arguing against market data at all. I’m pointing out that the market is not always 100% at equilibrium, mistakes happen. I doubt LvM would disagree. I know Hayek wouldn’t.

      Prices are a signal, and do signal when a market is misaligned: if prices are too low, it suggests there is a relative glut, and a crafty entrepreneur can take action to “correct” this by consuming more resources. If prices are too high, it suggests there is a relative scarcity, and the crafty entrepreneur can “correct” this by consuming fewer resources, or tapping into new veins of the scarce resource.

      Of course, “too high” or “too low” is a judgement made by everyone. If the person judges wrong, he will pay by lacking profit. If he judges right, he will be rewarded.

      Failure can occur at any time simply because humans make mistakes and we are all humans. It can only become perpetual when an outside force breaks the price mechanism.

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