This post at Economist’s View touches on a problem that bothers me. The assumption by economists and policy makers that markets are competitive and efficient.

It is usual, and very much the received wisdom of our age, that market forces will deliver the best solution. However, we only know this to be true for a perfectly competitive market — one where all firms are price taker’s, barriers to entry are low etc. In fact many real world markets have high barriers to entry, and most markets are dominated by a small number of large firms who are (therefore) not simple price takers.

So, what grounds do we have for thinking that the market delivers the better results? None, if the market is controlled by sellers rather than driven by consumers.

In addition we need to consider externalities, the lack of a good market mechanism to fund R & D, and a host of other issues. Of course we have various beureaucrats trying to compensate for all this, either directly or by creating articifial incentives. Market mechanisms? Really?

The policy solution would be for governments to be more agressing in enforing competition. Breaking up big companies simply because they inhibit compeition (rather than looking for elusive evidence of hard to sonumers), preventing mergers simply because they concentrate power too much, enforcing opens standards to block network effects and vendor lock-in etc. I find it hard to see any of this actually happenning.