PSST as Market Failure
By Arnold Kling
Noah Smith seems to think of it that way.
in a PSST world, there is no invisible hand.
This opens the door for a hugely expanded role for government (or other large, centralized actors) in the macroeconomy. If global patterns matter as much as local prices, then an actor large enough to perceive and affect the overall pattern might be capable of nudging the economy out of a bad equilibrium and into a better one.
I would put the first sentence slightly differently. In a PSST world, there is no Walrasian auctioneer. Prices have to be discovered by ordinary economic actors–firms and individuals. In fact, the discovery issues go way beyond this. In contrast with neoclassical economics, I want to describe a world in which the set of inputs, outputs, and technologies is not fully specified. Those, too, have to be discovered in a process of entrepreneurial groping.
As to the second paragraph quoted above, I would say that the fact that we need entrepreneurial groping is indeed a form of market failure–at least relative to the neoclassical ideaI. However, market failure does not imply government success. I outsource further comments to Tyler Cowen.