The Market Failures of Life

One day, I was strolling through twitter when I found something fascinating. A biology lecturer at the Faculty of Maths and Sciences in Universitas Indonesia was bursting with rage as he had found some sort of poster within the complex of the faculty denouncing evolution theory, apparently due to religious beliefs.  He then concluded his rant with rather sarcastic questions: How many students there had put the science faculty as the first choice on their university placement tests? And how many are there only because they were not good enough for the School of Medicine or School of Engineering?

I couldn’t care less about the science students' religious defence of creationism, but being an economics student his last question struck me into thinking: There is a market failure present. The best students should be in Science. They should be the ones propelling scientific research and innovation forwards. We cannot afford to let such an important aspect of civilization to fall to the hands of only second or third rate future scientists.  But why won’t the best kids study Science?

The same answer as why many Engineering School graduates leave their fields and find employment at investment banks. They can get better pay elsewhere.

As you look through the realities of life, you’ll find many of these things, things that don't really add up. Some people in America believe they have too many lawyers and too few engineers. Mind you, the field of law, finance, or accounting are only supporting roles in a functioning economy (Yes you too, Economics Science students like me, you’re no use). They are not the core, they don’t add much real value to the economy. But since they pay more, they got the best talents.

I’ll dig deeper. In each of those fields there are also a few market failures present. Take Law for example. The best law school graduates become lawyers, who help their clients win their cases at the courtroom. The second-rate graduates become prosecutors, and those leftover become judges. How is this an efficient allocation of talents? Shouldn’t the best instead become judges, so they are not easily fooled by the defendant’s lawyers? The benefit that a firm gets when it hires top law graduates in the form of cases won in court far outwheigh the amount of money that the state is willing to pay these graduates to preside over the courtroom upholding the law.

Same case happens in the field of Finance. Author of The Big Short Michael Lewis noted a saying that goes like this: “Those who cannot find employment at Wall Street, work at Moody’s”.  Now how is that justified? The people that has to rate the soundness of a particular investment are those who could not  make it to the investment banks in the first place. No wonder that during the buildup to the world crisis of 2008 they got fooled into rating toxic assets AAA, as good as riskless US treasury bills. Shouldn’t the rating agency people be the cream of the crop financiers instead?

A market failure occurs when the private benefits of an economic activity is not equal to the social benefits of that activity. In the cases of the scientists, engineers, judges, financial rating people, and many others, those jobs don’t pay as much as the benefits they provide to society in general. Economists used to say that market failures justify government interventions, so should we start subsidizing these professions to attract the best people? Or let’s end with a question we all can relate too: shouldn’t our pool of teachers come from the best students? I think it should.