When Markets Learn Faster Than Governments

The debate over “market failure” has raged for decades, rooted in a false premise that the economy should behave like an equation rather than an ecosystem. This isn’t just academic. The idea of ‘market failure’ keeps resurfacing in policy debates over AI, climate, and housing, as if the lessons of the last 25 years never happened.  As the Austrian economists at the Mises Institute argued years ago, the notion of market failure is itself a myth; a rhetorical tool used to defend intervention when human imperfection makes outcomes inconvenient for planners – markets outperform government. Today, after Web 2.0 democratized information and AI democratizes intelligence, it’s clear that what we once called “failures” were actually transitions: proof that markets evolve faster than governments can reform.

In revisiting this debate, we now have empirical evidence, not just theory, to show that the market was never failing; it was outpacing the institutions trying to control it.

In the 1998 Journal of Economic Perspectives, Nobel Prize winning economist, Joseph Stiglitz, famously argued that government could be made efficient through greater openness, transparency, and participation. “Perhaps we can bring [efficiency] to government,” he mused, framing inefficiency as a curable defect rather than an inherent design flaw – if solved, overcomes market failures. Admirable optimism, sure. But a quarter century later, after both the Web 2.0 revolution and the current wave of AI, it’s fair to ask whether Stiglitz’s “perhaps” still belongs in the realm of economics, or in the fantasy section next to alchemy and flying cars.

Government Can’t Be Made More Efficient; That Requires Determinate Decision

Government can’t be made more efficient; efficiency requires determinate decision – that is, decisions driven by clear incentives, feedback, and accountability, not political negotiation.

The modern economy has now run the experiment Stiglitz never could: we digitized the world, democratized access to information, and let markets and networks evolve under their own weight. What we discovered was that markets learn faster than governments reform. The platforms that defined Web 2.0 (Google, Amazon, Facebook, YouTube) weren’t efficient because regulators decreed it so; they were efficient because inefficiency died on impact. Users clicked away. Data corrected errors in real time. And while that same dynamic gave rise to monopolistic tendencies (reinforced by regulation), it also exposed the core lesson Stiglitz and many of his disciples still seem unwilling to acknowledge…

Web 2.0 was messy, markets are messy, but work. Government, in contrast, remains a pre-digital institution in a post-digital age; where “transparency” means another PDF uploaded to a federal website, and “participation” means filling out a form that leads to a public comment period that no one reads. The irony is that Stiglitz’s own prescriptions (transparency, participation, consensus) are precisely what the internet delivered. And yet, when those same principles were allowed to flourish through private innovation, the push against it dismissed them as dangerous, exploitative, or in need of regulation; ironically, resulting in regulation.

The underlying issue isn’t that markets fail; it’s that economists like Stiglitz used “market failure” as a rhetorical escape hatch whenever government fails worse – to propose the government being more transparent would address it, but not only did government to become so, we uncovered that the failure is a myth. The term became a cudgel to justify intervention rather than a diagnostic tool to understand where intervention actually helps. When Web 2.0 exposed inefficiency in legacy systems (from media to taxis to education) the state didn’t learn from it. It doubled down on control, invoking “public interest” as the excuse for bureaucratic inertia.

And now, with artificial intelligence, we’re watching the same pattern repeat. Markets are again evolving faster than government comprehension. While policymakers hold hearings about “AI safety” and “ethical frameworks,” the private sector is out there solving problems that bureaucracies have debated for decades: optimizing energy grids, improving logistics, predicting disease. These are real efficiencies, achieved through voluntary systems of information exchange and incentives. Yet, to read Stiglitz and his cohort, one might think the true crisis is that innovation keeps happening without permission.

The ideological bias at play is not subtle. The essay from Mises was right to accuse Stiglitz and his intellectual kin of hiding behind “technical jargon” while promoting the expansion of the state as an end unto itself. That tendency has only grown stronger. In today’s academic and policy circles, “market failure” is invoked with theological fervor; rarely to diagnose specific externalities, but to justify preordained conclusions, decisions determined more by ideology than evidence, about the moral superiority of regulation. It’s a linguistic sleight of hand, where every success of capitalism is treated as a problem to be solved and every failure of government as an argument for… more of it.

Let’s revisit the premise. What if the so-called failures of the market (inequality, disinformation, environmental risk) are not proof of capitalism’s collapse, but evidence of its capacity to evolve? AI, for example, is exposing how much inefficiency is embedded in legacy sectors of healthcare, education, and public administration, that have resisted automation precisely because they are entangled with government monopolies. Consider healthcare, where AI diagnostics outperform public systems that still rely on fax machines; or education, where adaptive learning platforms advance while state curricula remain frozen in committee. The market isn’t failing; it’s being restrained.

The better question, then, is not whether government can be made efficient (it can’t, not in the way markets can) but whether technology can reimagine governance itself. We’re already seeing glimpses: decentralized finance (DeFi) that routes around central banks, AI systems that simulate regulatory oversight, open-data protocols that make transparency autonomous rather than bureaucratic. These are not anti-government impulses; they’re post-government solutions to the same inefficiency Stiglitz lamented.

To be fair, Stiglitz’s early work on information asymmetry was revolutionary. He correctly identified that markets aren’t omniscient and that imperfect information distorts outcomes. But what Web 2.0 and AI have shown us is that markets can correct asymmetry faster than government can recognize it exists. The solution to imperfect information is not another layer of oversight; it’s more information, distributed widely and processed intelligently.

Perhaps it’s time to retire the term “market failure” altogether, or at least demote it from gospel to hypothesis. The failures we face now are institutional: a failure to adapt, to decentralize, to let go of the comforting fiction that government can fix what it fundamentally cannot understand.

All this brings us to a simple point: the concept of market failure has outlived its usefulness.

In the end, the myth of market failure persists for the same reason bureaucracy does: both are job security for people whose value depends on complexity. 

The rest of us, thankfully, have the Information Age of the internet, and now AI, to simplify what bureaucracy insists on complicating.

If the internet democratized information and AI is now democratizing intelligence, the next frontier is democratizing governance itself.  A wonderful statement to proclaim in a democratic form government: we need more of what you’re supposed to be.  Efficiency doesn’t need permission and certainly shouldn’t be constrained; letting people determine what’s best isn’t a symptom known as market failure, it’s the market correcting mistakes.

Since market failure is a myth, then what’s actually broken? It isn’t capitalism, it’s communication.

The Real Failure We Can Fix: Information Withheld, Not Markets Gone Wrong

Arthur Hays Sulzberger, the long-time publisher of The New York Times, once admitted a truth far more enduring than he could have imagined:

“Obviously, a man’s judgment cannot be better than the information on which he has based it. Give him the truth and he may still go wrong when he has the chance to be right, but give him no news or present him only with distorted and incomplete data, with ignorant, sloppy or biased reporting, with propaganda and deliberate falsehoods, and you destroy his whole reasoning processes, and make him something less than a man.”

That line, written in the age of print journalism, now defines the crisis of governance in the Information Age. Today, private companies hold richer, more actionable data about human behavior, mobility, and economics than entire governments; and yet, instead of using it to make smarter civic decisions, we shun it. 

Private firms already possess the insights that could make cities, healthcare, and logistics dramatically more efficient, if governments had the humility to learn from them. Strava can show exactly how people move through cities hour by hour, exposing inefficiencies in urban planning, and opportunities. Uber and Lyft can reveal where public transit fails or should exist. Amazon and Walmart track the pulse of supply chains and affordability in real time with Walmart famously known for responding more quickly and effectively to emergencies than FEMA. Google, Waze, and Apple know traffic problems down to the second, yet city planners ignore data that could solve them. Target and Costco understand consumption and inflation better than any CPI index. CVS, Walgreens, and UnitedHealth possess unparalleled insight into public health trends that might meaningfully improve healthcare. Airbnb and Zillow have housing and rental data that could guide zoning and affordability policies. Even platforms like DoorDash or Instacart could illuminate food deserts and access inequality more precisely than federal surveys that arrive years too late.

Yet rather than integrating this private-sector intelligence into public decision-making, governments dismiss or regulate it away under the banners of “market failure” or “data privacy.” Those excuses, while sounding noble, mask a deeper insecurity: bureaucracies no longer control the flow of information (and never should have). Transparency is no longer their gift to bestow; it’s the default state of a connected world. And so, they withhold, obscure, or delay. In doing so, they make citizens less informed, less empowered, and, as Sulzberger warned, less than fully human.

The tragedy isn’t that markets fail to produce good outcomes; it’s that we’ve failed to trust and use the information they generate. The private sector has already built the infrastructure of understanding: real-time, decentralized, and self-correcting. But public institutions, mired in analog processes and political theater, refuse to plug in. We handicap the Information Age with opacity, hiding behind ideological myths about “market failure” that justify control while denying evidence.

Markets didn’t fail us; we fail to use what they reveal. Every dataset locked behind regulation, every public record released as a PDF instead of an API, every study commissioned to rediscover what Uber’s heat maps already show, these are acts of institutional sabotage. They aren’t protecting democracy; they’re preserving bureaucracy.

The Information Age already gave us the tools for smarter governance, tools built by markets that evolved far beyond the reach of twentieth-century economic dogma. The only thing standing in the way is the lingering faith that government inefficiency is virtuous and market intelligence is suspect. The cure Stiglitz once imagined, transparency and participation, isn’t coming from government reform. It’s already here, in the networks and technologies we keep sidelining unless or until we’re engaged to fix that.

If we want efficiency, equity, and accountability, we must stop treating the private sector’s knowledge as a threat and start treating it as the foundation of modern governance. Until then, we’ll keep pretending that markets fail while quietly ignoring the data that proves the opposite; and missing the chance to let intelligence, not ideology, guide our governance.