Market Failure

Just as in economic history people talk of ‘long waves’ or cycles in economic activity, there are perhaps long waves in terms of ideas and beliefs about economic institutions and policies. We would argue that we have now passed through two long waves since World War II, the first (from World War II to the late 1970s) was characterised in Western industrialised countries by large scale active state involvement in a mixed economy (including in housing), Keynesian macro-economic management to achieve full employment and growth, extensive state regulation of markets, and a growing welfare state funded by quite high levels of taxation.

The second, from about 1980 to about 2010, was characterised by reduced direct state involvement in an increasingly privatised and mar- ketised economy, more limited macro-economic management focussed more on stable monetary frameworks and fiscal rectitude (but higher risks of unemployment), less regulation in markets, and attempts to maintain a large welfare system alongside lower taxation levels by a combination of a mixed economy of provision, ‘service reform’ and introduction of ‘quasimarkets’ or ‘outsourcing’. In this second phase, direct state involvement in housing provision lessened and housing became more predominantly marketised, although this was a bigger change for some countries (e.g. Central and Eastern Europe, or Scotland) than for others (e.g. Australia). The changes in this second phase were strongly reinforced by the rise of ‘globalisation’, the combination of technological and regulatory change that exposed most countries to much more open competition in many markets across a global scale, and the consequent large scale economic restructuring resulting (e.g. as labour intensive manufacturing relocated to low-wage regions or shifted to more automated processes). In this second phase, belief in the efficacy of markets was at its zenith, and came to be shared not just by traditional parties of the right and ‘economic liberals’ but also by parties of the social democratic ‘left’ (Bramley et al. 2004, also discussed in Chap. 1).

The bundle of political and economic reforms introduced over this time is typically referred to in shorthand as ‘neoliberalism’, sharing an emphasis on reducing government intervention in markets through deregulation, state divestment, privatisation and marketisation of assets and services, although the manifestation of neoliberal reform has taken different shapes and trajectories in different places (Brenner and Theodore 2002).

It is not yet clear that this second phase has ended. It was certainly punctuated by the financial and banking crisis of 2008-09 which morphed into the great recession and then the sovereign debt and Euro crises of 2010-12 and current discontents around the politics of austerity. These crises, particularly the first, demonstrated that markets could not always be trusted to work benignly with no or only ‘light touch’ regulation (Stiglitz 2012). The belief in markets as a universal panacea, that governments should only interfere with at their peril, has been punctured to some extent. The dangers of a ‘race to the bottom’ in tax rates have become more apparent, as it has been shown that disappearing tax revenues are as big a fiscal problem as escalating public spending, and as the scale of tax evasion and avoidance by both corporates and individuals has been exposed (Shaxson 2011). It has also become more acceptable to talk again about inequalities in income and wealth and whether recent trends towards extreme inequality are sustainable (Picketty 2014). Informed and political discourse across a fairly broad spectrum is once again adopting a potentially critical stance towards markets, deregulation, low taxation and fiscal orthodoxy. This point of view is not necessarily dominant in governments in many countries, but there is at least a much more lively and critical debate about markets.

In this context, it is perhaps timely and appropriate to revisit and dust off a well-established and respectable tradition in economic thought, which goes variously under the labels of the ‘(Pigovian) welfare economics’ (referred to in Chap. 2) or ‘market failure’ paradigm (for accessible accounts, see Hill and Bramley 1986; Le Grand et al. 2008). This tradition accepts that markets are efficient and that this is socially desirable, but only under certain conditions, which are often infringed.

 
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