Harnessing Self-Interest: Mill, Sidwick, and the Evolution of the Theory of Market Failure

Abstract

This essay is the first step in a larger effort to understand exactly how and why the marginal revolution gave us a theory of economic policy that evidenced an increased confidence in the ability of governmental policy actions to improve on the performance of the market. This was done via two relatively simultaneous changes in the views of the problem: first, in terms of demonstrating both a greatly expanded theory of the failure of the system of natural liberty (akin to what we today call market failure) as against the classical view, and second, through a more markedly positive view of the possibilities of corrective policy actions by the state. The writings of John Stuart Mill and Henry Sidgwick mark a turning point in this line of literature, and this essay will show how their work represented a departure from that which came before, the forces that led them to their respective views on the subject, and the role these ideas played in the development of the more expansive role for government evidenced in early stages of welfare economics.

Keywords: Mill, Sidgwick, market failure, government

JEL Classification: B12, B13, D62, H00