Wednesday, September 23, 2020

Government's role in markets

Two perspectives on government's role in markets are the "market failure" view and the "market making" view. Anna Kovner and Antoine Martin describe the market failure view in a Federal Reserve blog post from today. Mariana Mazzucato described the market making view in a European Central Bank conference paper from 2017.

Market failure

Anna Kovner and Antoine Martin write 

"In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure." 

The market failure approach focuses on externalities to make the case for government spending during events like the pandemic.  

"Private incentives don't take into account some important costs ... The official sector can take these costs into account and offer support that increases social welfare when the private sector would choose not to."

Market making

Mariana Mazzucato writes

"the classic market failure perspective on public investment in innovation does not justify the breadth and depth of public investments that we observed across the entire innovation chain, from basic research to applied research, early-stage financing of companies, and demand-side procurement policies ... as the history of innovation shows, the great extent of public commitment that is required entails more of a market-making and market-shaping approach than a simple market fixing one."

Mazzucato reviews the history of public financing of innovations, using the smart phone technologies that were funded by government spending as an example.

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