The Tyranny Of The Market
October 7th, 2007
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In a very interesting article, Joel Waldfogel discusses how markets can fail for the same reason democracy often does: tyranny of numbers.
John Stuart Mill pointed out that voting gives rise to a tyranny of the majority. If we vote on what color shirts to make—or whether to make wide or narrow shoes—then the majority gets what it prefers, and the minority does not. The market, on the other hand, is supposed to work differently. As Milton Friedman eloquently put it in 1962, “the characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market is that it permits wide diversity. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit.” This is a wonderful argument. Except that for many products and for many people, it’s wrong.
Two simple conditions that prevail in many markets mean that individual taste alone doesn’t determine individual satisfaction. These conditions are 1) big setup costs and 2) preferences that differ across groups; when they’re present, an individual’s satisfaction is a function of how many people share his or her tastes. In other words, in these cases, markets share some of the objectionable features of government. They give bigger groups more and better options.[link]
Waldfogel’s arguments are fairly persuasive. In case of marginalized groups, it is indeed true that the nature of the market with profit as its guiding tool won’t allow it to offer viable solutions. Here a case could be made for state intervention by incentivizing solutions for smaller groups via provision of subsidies e.t.c
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