Market Efficiency
As if anyone needs a lesson! The fundamental inefficiency of market mechanisms has been understood and explicitly acknowledged by mainstream economists for a very long time.
Market mechanisms are inefficient because they almost never take into account all the factors relating to an economic transaction. A classic example involves buying a car. A car dealer may sell someone a car at a price that maximises the benefit to both parties. According to traditional economic propaganda, a market transaction between these two parties is the most efficient way to determine the correct value to be placed on the car, but this ignores all the costs that follow from the transaction. In the case of buying a car, the costs not taken into account by the market mechanism are obvious: constructing and maintaining the road system, rectifying the consequent ill–health and injuries, waging wars in order to steal the fuel, and so on.
In economics jargon, these factors are called externalities: they are external to the market transaction in question. At a small scale, externalities are usually trivial, but at a large scale they matter hugely.
Externality Machines
Private companies are largely in the business of creating externalities. The current rules of the game are that companies must put the acquisition of short–term profits for themselves above every other consideration. The more of their costs that they are able to palm off onto others, the more profit they can make. The owners of a manufacturing plant that involves the production of toxic chemicals as a by–product are likely to make more short–term profit if they dump the chemicals in a river than if they process them to remove the toxicity. The owners of a restaurant will make more short–term profit if they pour their left–over animal fat down the drain than if they dispose of it properly.
Markets and the State
The existence of externalities is the main reason why market economies require the existence of a strong state. To stop things grinding to a halt, an institution not motivated by profit has to organise the road system, clear up the toxic chemicals, and flush out the sewers. Left to market mechanisms, none of these would get done, for the obvious reason that there will rarely be any short-term profit in them. You won’t be able to make a profit by charging companies to dispose of their waste products cleanly if there is a river nearby which they can use as a dumping ground free of charge.
Incidentally, this is part of the reason why environmental legislation occurs: it provides opportunities for making profits in an artificial market created by the state. Laws against dumping toxic chemicals in rivers, for example, may have been suggested by environmental activists, but they are only implemented when they benefit those who can profit by them. Chemical treatment plants and wind farms are just two areas which would be entirely unprofitable without laws regulating industrial output and energy consumption.