It is not hard to find examples of markets not being able to deliver a solution to a particular social problem. Note that I did not say a market failed – because the concept doesn’t exist. As I’ve said time and again, humans interact with other humans to find out ways to make their lives better. The basic social problem is one of how best to coordinate the activities of each other in harmonious ways. It’s not always easy – and the fact that markets themselves exist is testament to the idea that these have been stumbled upon as pretty effective institutions to help overcome coordination problems.
Remember however that there are many other ways for humans to coordinate their activities – including religious organizations, extended familial relationships, community organizations, governments, and so on. That government is the other major institution in society today is also telling – we stumbled upon that too as a way to help overcome other classes of coordination problems.
That said, it is very easy to imagine that a market setting (given current culture, technology and property rights institutions) may not easily overcome certain classes of coordination problems. For example, allowing the free and open buying and selling of ocean fish may result in rapid depletion of open fisheries. But from that observation (empirically verifiable too!) it certainly does not follow that having the government own and operate ocean fisheries will make the problem any better.
The only way that the latter observation follows is by assuming a natural state of perfection when governments operate. Of course, if transactions costs within government were zero, and information costs within government were zero, monitoring government was cheap and easy and incentives within government were aligned perfectly with the objectives of citizens, then yes, sure, government management of the commons would solve the fishery problem. But that is not the world we live in. It never was and never will be. You cannot under any reasonable operational model of human behavior compare the inability of people to coordinate their activities under market institutions as they actually exist on earth today, with the ability of people to coordinate their activities under political institutions that only exist in the land of unicorns. But that is precisely what we do. It’s a pretty unsophisticated and uncharitable approach to doing comparative institutional analysis.
We can do better than that. And that’s true for those of us that appreciate how well market institutions work. Extra credit to anyone who can figure out why the post is titled what it is.