Economic fundamentals that are ridiculously simple

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It's Friday evening so I don't want to get too deep into anything, but here's what I consider to be a huge idea that is simple enough for a high school economics student to understand. It's called The General Theory of Second Best, the title of an article explaining an economic model referred to by economists as "Lipsey-Lancaster." I first heard of it a week or two ago on Eschaton in a sort-of throwaway post by Atrios (who is an economist). I'm a nonspecialist in pretty much everything except Simple Country Editing (TM), but this theory is so darn simple that it seems impossible to argue with. That is, I don't see why it's not declared a Law instead of a mere Theory.

The crux of the theory, as I understand it, seems to be this: we don't exist in a perfect world, so therefore it is inevitable that many aspects of it are unavoidably non-optimal. That seems like a noncontroversial statement. Well, so what?

This: for 30-plus years U.S. public policy has been driven primarily by the myth of the perfect free market, and how this myth applies not only to economics but purportedly every other domain of life (such as "the marketplace of ideas"). The ideologies of laissez-faire economics (and its pernicious soul sister, Libertarianism) are based on the concept that if we all just leave everything alone, selfish individuals will collectively behave in the greater interest of society because the Free Market Faeiries (as Atrios calls them) will make everything function perfectly. Paul Krugman, a Nobel laureate and fan of all things dumb such as South Park, refers to certain shibboleths of free market economics as The Underpants Gnomes Theory of [Fill In]: Phase 1 --- declare that free markets are perfect; Phase 2 --- ???; Phase 3 --- a ideal economy!

The unwavering belief in the failed ideas of free-market economics by our ruling elites has poisoned the public discourse, bankrupted governments, and enabled financial services corporations to loot the wealth of the U.S. middle and working classes... repeatedly... for decades. And these ideas are based on a demonstrable (if not provable) fallacy: that free markets always function perfectly without government intervention or regulation. But it seems that over 40 years ago, some guys named Lipsey and Lancaster put forth the outlandish idea that we don't live in a perfect world, but instead in a second-best world. Nothing can always be "optimal." And sometimes, lots of things are very sub-optimal indeed. And that unless your idea of an ideal market is one that deliberately creates speculative bubbles to scam wealth from middle-class investors, and your idea of enlightened self-interest is to profiteer while almost 20 percent of the population is unemployed or severely underemployed, then someone has to do something about it.

Lipsey-Lancaster seems like such a simple, bulletproof idea in its basic form that it's hard for me to understand  (1) why a well informed person like me never heard of it until 2 weeks ago and (2) why it isn't invoked as a knockdown argument every time some know-nothing wingnut policy wonk lectures us about "government takeovers."

[Editor's note: the previous essay was hastily written and not meticulously sourced because the author is late for his Friday Evening Prayer Meeting. Also, it's too long because he didn't have time to write a short one.]