Beyond market failure and government failure

Criticisms of market outcomes often rest upon a notion of ‘market failure,’ meaning that the market has failed to align incentives and knowledge to produce an optimal outcome. Rejoinders to classic market failure arguments have taken several forms: that there are institutional or contracting solutions to various forms of market failures, that optimality is not a reasonable goal for real world economic activity, or that government may fail as well. Similarly, Wittman (The myth of democratic failure, University of Chicago Press, Chicago, 1995) and others have argued that concepts of government failure are equally problematic as the ordinary forces of political competition may render politicians sufficiently accountable to achieve realistically defined standards of efficiency. Even thinkers like Buchanan imagine that constitutional design may allow politics to fend off its tendency to become a zero-sum game. Both concepts are problematic in a world of entangled political economy in which market and government activity are interconnected. We argue that it is time to abandon both ‘market failure’ and ‘government failure,’ and instead focus on problems of institutional mismatch, when the rules governing interaction are ill-suited to the problems that agents confront.