Why Markets Fail

Here is a short piece on “market failures” written by Michael Perelman. In the article Perelman uses economic and historical examples to explain the differing theories on why markets fail. (Click here to skip the introduction and read the article on why markets fail)

Article Introduction & Excerpt (Via Michael Perelman)

Markets fail for many reasons. With all the attention to the current financial crisis, the time has come to look at another part of market failure — the reluctance to invest in long-lived plant and equipment. I’m not merely thinking about the deindustrialization of the US economy, but a more general reluctance.

“As business stagnates and profits fall, money will seek higher profits and finance,
which will become riskier and riskier. Eventually, the house of cards falls,
irrational and outdated investment becomes scrapped, and one of two things will
happen. After a painful depression, bankruptcies will wipe out a good deal of
debt. New investment opportunities present themselves. Eventually, the
economy will be reinvigorated for a while until the cycle begins again.
Alternatively, the dislocation of the depression to a different way of organizing
production.”

Click here to  read the article on why markets fail (as a pdf)