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Free Markets Fail at Self-Promotion

Summary:
In my latest column for AIER, I review some instances of market failure – specifically, the market’s failure to make people aware of the good that it delivers to them. A slice: Back at home capitalist successes also often generate ‘true statistics’ that tell misleading tales. Consider, for example, the statistical quirk created when increasing wealth and health reduce the average size of households. As we grow wealthier, young adults are better able to move out of the family home into their own apartments. Women are better able to divorce abusive or unfaithful husbands and set up households on their own. Widows and widowers can more easily afford to live alone rather than move in with their siblings or children. With more wealth and health, grandma and grandpa can live longer by

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In my latest column for AIER, I review some instances of market failure – specifically, the market’s failure to make people aware of the good that it delivers to them. A slice:

Back at home capitalist successes also often generate ‘true statistics’ that tell misleading tales. Consider, for example, the statistical quirk created when increasing wealth and health reduce the average size of households. As we grow wealthier, young adults are better able to move out of the family home into their own apartments. Women are better able to divorce abusive or unfaithful husbands and set up households on their own. Widows and widowers can more easily afford to live alone rather than move in with their siblings or children. With more wealth and health, grandma and grandpa can live longer by themselves on their retirement savings.

This reduction in the number of people who reside in the typical household pulls down the measured income of the average household. And so when the inflation-adjusted income of the average (or median) household of today is found to be only modestly higher than that of the average (or median) household of decades ago, “Progressives” and many conservatives mistakenly conclude that the market has failed ordinary people.

Another statistical illusion is created when inflation chips away at the real value of the legislated minimum wage. As the real value of the minimum wage falls, some low-skilled individuals who in the past were unemployable become employed. This increase in the number of workers paid wages below the average pulls the average wage rate down, thus creating the false impression among careless observers that workers are being oppressed by employers.

A similar statistical misimpression can arise as improvements in the likes of home appliances and store-bought prepared meals increase the attractiveness to women of working outside of the home. Because the typical woman who first enters the workforce at the age of, say, 30 or 40 has less workplace experience and fewer workplace skills than does the average worker, the wage this woman is paid will at first be lower than the average wage. The average wage will thus be pulled downward despite the fact that no worker’s wage has fallen. This statistical quirk can mislead careless observers to the incorrect conclusion that wages are stagnating and, thus, markets are failing.

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Don Boudreaux
He is a professor of economics at George Mason University in Fairfax, Virginia. Previously, he was president of the Foundation for Economic Education.

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