The visible hand in economics

Left-wing libertarians?

Posted on: October 8, 2007

Leftie liberals tend to be in favour of government intervention in markets. They tend to claim it prevents abuse of market power by powerful firms. However, these self-proclaimed left wing economists write that

[l]abour-market flexibility, deregulation of the service industry, pension reforms and greater competition in university funding is not anti-equality. Such reforms … tend to increase productivity by basing rewards on merit rather than on being an insider. Pursuing pro-market reforms does not imply facing a trade-off between efficiency and social justice. In this sense, pro-market policies are “left wing”.

I think that they are confusing deregulation and competition. Here on this blog we are in favour of efficient competitive markets, yet often advocate regulation. The problem we see is that many markets do not generate much competition. Perhaps there are natural barriers to entry, or perhaps an incumbent has the market power to deter others from entering. In either case deregulation does not lead naturally to greater competition and one wouldn’t necessarily expect increases in efficiency when the government left the market to its own devices.

However, one can’t conclude that a market will do better when regulated simply because it is not perfectly competitive. As Alesina and Giavazzi point out, there can be perverse incentives created by government regulation that run contrary to the goals of the intervention:

The young are hired with temporary contracts which offer no social security … When the contract expires, the employer opts not to renew it, so as not to run the risk of having to convert temporary hires into permanent employees

Such cautionary examples should stop us from jumping on a bandwagon either in favour of, or opposing, regulatory intervention. There is no bullet that will solve an economy’s problems or it would have been done long ago. It is rarely possible to solve a difficult problem using sweeping generalisations as many politicians and ideologues would like to do.

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