The Market isn’t the Failure

Housing advocates frequently claim that the housing crisis represents a market failure, which Investopedia defines as

an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group. In other words, each individual makes the correct decision for him or herself, but those prove to be the wrong decisions for the group.

The idea of market failure regards the alleged well-being of the group as the standard of value.

Notice that the definition states that when individuals are rational—use reason to guide their actions—the group does not enjoy “rational outcomes.” What this really means is that when individuals objectively judge the facts and act accordingly, others may not like the results. And this, we are supposed to believe, represents a failure in the free market.

The operative word in free market is free—the absence of government intervention in economic affairs. The housing market hasn’t been free for more than one hundred years. Zoning, rent control, eviction moratoriums, housing subsidies, and a plethora of other policies have increasingly regulated and shackled housing producers since the early twentieth century. And all of those policies were enacted because the alleged well-being of some group was regarded as the standard of value.

The housing crisis is not an example of market failure. The housing crisis is a failure of government policies.

As an example, single-family zoning is increasingly recognized as a major cause of soaring housing prices. Zoning and similar regulations prevent property owners from using their land as they judge best. Zoning prohibits property owners from acting rationally in regard to the land they own. A free market provides the social conditions in which individuals can act rationally; in negating an individual’s judgment, government intervention makes rationality irrelevant. Yet, when intervention causes new problems, it is the free market that takes the blame.

The solution to the housing crisis isn’t more government intervention, as housing advocates propose. More government intervention makes it ever more difficult to act rationally. The solution is economic freedom, and with it, the social conditions that enable individuals to act rationally.