Market Failure or Institutional Failure?

The inefficient use and allocation of sources and resources (e.g., human talent, infrastructure, etc.) decrease overall productivity, threaten long-term sustainability and the short-term viability of most business efforts. These inefficiencies manifest themselves, inter alia, in such issues as lack of employee engagement, lack of commitment, lack of leadership, lack of creativity, and the list goes on and on.

The inefficient use and allocation of resources is most often referred to in terms of “market failure.” Economists argue that lack of productivity results from the failure of the market system to put a better value on productivity.

This market “failure” appears as inefficiencies of production reflected by higher operational costs and lower quality.

The solution offered is to simply put a higher price on efficiencies of production. This approach assumes that market failures can be solved through the superimposition of an economic construct called a market.

The “market,” however, is an abstract device for rationalizing an aggregate of human behaviors in one sphere of human interactions. Markets are, most often, the predictable results of institutional/organizational factors which, directly and indirectly, impose and reinforce patterns of individualistic thinking and behavior.

People create markets, or keep them from being created or functioning efficiently. People are at the core of market “failures.”

To accept as given, and to focus on the market and its failures, may only reinforce the very values that are at the root of most business problems, limiting, a priori, the search for answers and possible solutions.

It has been argued that markets, far from being free or operating efficiently (through the “invisible hand”) to allocate resources in the interests of society, are dominated by few market forces (e.g., large firms and corporations), also referred to as the “invisible elbow” (Jacobs, 1991).

This “invisible elbow” aims at maximizing private profit by focusing on effectiveness (i.e., meeting its target) while not necessarily reducing, or even trying to reduce, much less eliminate, inefficiencies of production (i.e., total costs).

Some even argue that the market, with its focus on “effectiveness,” is a deliberate ploy by those in power to counteract any possibility of new agents from entering the market.

These market “failures,” responsible for the generation of factor market distortions, such as subsidies, taxes, and quotas, cause the divergence between private and social marginal costs.

This divergence not only creates a new barrier to entry but also incentivizes profit-maximizing firms to transform private costs into external costs (i.e., negative externalities), shifting the market supply curve to an artificially low point based only on private costs.

When social costs are ignored, a production subsidy of sorts is created which leads to artificially low product prices (disincentives for new agents in to the market) and excessive production, higher pollution, and unsustainable growth.

The failures to eliminate or reduce these inefficiencies or divergence between private and social costs and uncompensated effects (i.e., negative externalities) associated with the production and manufacturing of everything are not inherent to specific regions or communities. Nor are they due to financial constraints, poor science/technology, or socio-economic and environmental circumstances.

These inefficiencies are consistently associated with organizational or institutional structures based on a “centralized mindset” (Resnick, 1997) and “mechanistic” or “organistic” world views (i.e., close-system perspectives) (Pepper, 1943).

These close-system perspectives and a centralized mindset seem characteristic of most organizational structures in every business (i.e., bureaucracies). Consequently, inefficiencies of production are not the product of some technical failure of an abstract economic construct called a market, but a consequence of inadequate human behaviors and interactions created by a restrictive organizational structure namely, bureaucracy.

Hence, the importance of an enhancive organizational structure to develop and establish an organizational/institutional environment conducive to ideal-seeking behaviour and the reduction/elimination of inefficiencies at every level throughout the organization.

JC Wandemberg Ph.D.

President & Founder

Sustainable Systems International

About the author: Dr. Wandemberg is an international consultant, stock trader, professor, and analyst of economic, environmental, social, managerial, marketing, and political issues. For the past 30 years Dr. Wandemberg has collaborated with corporations, communities, and organizations to integrate sustainability through self-transformation processes and Open Systems Design Principles, thus, catalyzing a Culture of Trust, Transparency, and Integrity.

Tropophilia Creation & Development.