Yesterday was Opening Day for the Washington Nationals at Nationals Park in Washington, DC. Some 40,000 people made their way to the Waterfront to see the Nationals take on the Miami Marlins. At the corner of N and First Streets, SE, the traffic and pedestrian crossing was a nightmare. People were flooding out from the Metro headed to the Park. The crossing guards could barely keep order, and both cars and pedestrians were getting frustrated (this effort was compounded by the fact the traffic lights were still on, often contradicting the guards’ orders). It was, in short, a charlie-foxtrot. One might even say it was a government failure.
Although the government’s solution to the pedestrian issue was less-than-ideal, it would be incorrect to immediately jump to the conclusion that a laissez-faire approach would automatically be better; that a “free-market” approach would be better than the government approach. The free-market approach would come with its own set of problems (perhaps, for example, since pedestrians have the right-of-way, tens of thousands of people would have crossed the streets and no car would have been able to move for hours). It’s indeed possible that the free-market approach would have generated a worse outcome than the government approach.
Harold Demsetz (among others) warns us against the Nirvana Fallacy; that is, assuming a different (often preferred) method would not contain the same flaws (or flaws at all) from the current method. We see this very often in politics (eg socialism), but free-market supporters can run aground of the fallacy, too. Markets, just like governments, are populated with humans with the same foibles. The incentives are different, to be sure, but markets can fail, too. One mistake I think far too many market supporters is to assume that markets are not only perfectly efficient (the “efficient market hypothesis”), but also they instantly adjust. That is not the case. By arguing, as many do (especially many anarcho-capitalists) that the market solution is always the superior solution is incorrect for the exact same reasons that socialists arguing the government solution is always superior to the market solution.
Markets are extremely powerful. Generally speaking, they provide excellent results. But markets are just one of our institutions, and they function best when search and transaction costs are minimized. For certain problems, there may be other institutions out there that would perform better.