There is a series of sentences in Javier Milei’s speech at the World Economic Forum in Davos, Switzerland, which are truly radical. It was these:

…not even supposed libertarian economists understand what the market is… it’s impossible for there to be something along the lines of market failures.

…the market is a mechanism for social cooperation, where you voluntarily exchange ownership rights. Therefore, based on this definition, talking about a market failure is an oxymoron. There are no market failures.

If transactions are voluntary, the only context in which there can be market failure is if there is coercion…

In those words, Milei, who was elected Argentinian President in December last year, trashed the rationale for so much of the large bureaucracies that have become entrenched in Western countries.

It is ‘market failure’ that provides the economically respectable justification for much of bureaucratic activity. Let me illustrate this in relation to the regulation of banking in Australia. There are four key ‘market failures’ academics typically identify in banking markets.

The first involves an idea that ordinary bank deposit customers are unable to adequately ‘monitor’ the solvency and general health of the bank in which they have deposited savings.

These normal people either don’t have the time or ability to understand the sort of risks their bank is taking and, as such, they are making uninformed decisions as to which bank gets their deposit.

To remedy this market failure, governments around the world have set up dedicated agencies to ‘prudentially’ regulate banks, aiming to lower the probability of failure. In Australia, the agency with this task is called the Australian Prudential Regulation Authority.

In fact, the problem of deposit safety is considered so critical that, on top of having a dedicated regulator, the Commonwealth Government also provides explicit deposit insurance up to a value of $250k.

A second source of market failure is that involving the classic ‘bank run’ idea, where rumours or some other trigger can cause deposit holders to run to their bank to get their deposits out.

While this risk has been reduced somewhat with the existence of bank regulators and deposit insurance schemes, we saw last year that there was a deposit run on the US-based Silicon Valley Bank. The problem is not dead and may even be getting worse with electronic banking which can facilitate large money transfers from the convenience of a computer, meaning there is no need to line up at a bank branch (although electronic transfers don’t give you cash in the hand).

Because banks are highly leveraged businesses and because there is typically limited cash to satisfy high demand for withdrawals, depositors know they need to get in quick to avoid being last in a long line.

An avalanche of deposit withdrawal requests makes the bank desperate for cash, so it starts to sell assets at fire sale prices. In turn, this depresses the price for bank assets generally and the bank’s balance sheet becomes precarious. What started as a rumour has all of a sudden become a real-life problem, with implications for credit to businesses and unemployment.

This market failure is addressed by giving the Reserve Bank of Australia powers known as ‘Lender of Last Resort’, which allows the central banks to make emergency loans to solvent banks that are facing an irrational bank run.

The third market failure in banking involves an ‘asymmetry’ of information between bank customers and bank management over the value of bank products and services.

Banks have a profit incentive to get as many customers as they can, so like in other businesses there is a risk of misconduct and product value deception. We saw such problems highlighted in many case studies heard at the Hayne Royal Commission into banking and financial services which reported in 2018.

To help address this market failure, there is established a government agency known as the Australian Securities and Investment Commission (ASIC).

Lastly, there has long been a concern that Australia’s banking system is too concentrated as it is dominated by four large banks that have preserved this dominance over decades.

This is due to many factors, including the cost advantage of large-scale operations, that they are too big to fail, perceptions they are safer than smaller banks, and some favourable rules around minimum capital requirements.

The stated concern here is that these four banks can effectively cooperate with one another to increase prices and/or reduce the service standards, improving profit, but not suffering any material loss of customers. Hence, there is an alleged risk of market failure due to concentration.

To address issues of concentration and the negative competition effects, there is the Australian Competition and Consumer Commission (ACCC).

Indeed, on the grounds that the big four may coordinate more in the housing loans market, the ACCC in August last year publicly obstructed a commercial transaction, that of ANZ bank’s proposed acquisition of Suncorp Bank, a smallish Queensland bank.

As described above, you can see how the whole extensive regulatory and bureaucratic structure set up to supervise banks is in effect all based on ideas of market failure.

This is the very concept of which Argentina President Milei said in his speech to Davos does not exist.

Milei is clever enough to realise that if he is to seriously dismantle much of Argentina’s sclerotic bureaucracy, then he must make an intellectual case against the one generally accepted economic rationale supporting bureaucracy.

But does he have a point in both theory and practical reality?

Using the banking system as a case study, there are definitely periods in history when banking systems worked pretty well without any government oversight. But there are also examples of economic damage inflicted on economies by unregulated and failing banking systems. Australia’s example was in 1893 when half the trading banks failed, which helped facilitate a deep depression, much worse than the one in the 1930s.

You can envisage a world without much banking regulation, but it would require a society in which its people were willing to bear greater risks. This is probably not the case in wealthy Australia, but Argentinians may well have reached that point.

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Nick Hossack is a public policy consultant. He is former policy director at the Australian Bankers’ Association and former adviser to Prime Minister John Howard.

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