[OPE] Why Markets Fail

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.

The commitment of funds for fixed capital entails taking a risk. In the
words of John Hicks, one of the earliest economists to win a so-called
Nobel Prize, pointed to the obvious problem: "an entrepreneur by
investing in fixed capital gives hostages to the future" (Hicks 1932, p.
183). Unfortunately, neither Hicks nor virtually any other economist has
explored this fear of investment.

The most popular response to this reluctance to invest came from a very
conservative Austrian economist, who once served as a socialist minister
of finance, before landing at Harvard. Joseph Schumpeter was indeed one
of the giants of 20th century economics. Here his reputation to his
personal brilliance, as well as a willingness to learn from Karl Marx.

I have attached the rest of the piece as a pdf at

http://michaelperelman.wordpress.com/2008/11/11/why-markets-fail/

It was written to help me focus my thoughts for my talk in San Francisco
tomorrow. Any comments will be appreciated.

-- 
Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901
www.michaelperelman.wordpress.com
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