The Market Is Perfect. It’s Our Expectations and Manipulations That Are Imperfect.
- Jeff Hulett
- Aug 15
- 16 min read
Updated: Aug 31
Is the market really perfect? It may not always feel that way—especially when we see income inequality, homelessness, or other visible struggles. The answer depends on the source of comparison. If we compare ourselves to neighbors who seem to have more, the market feels unfair. But if we compare our lives today to those of our ancestors—marked by much lower wealth and far shorter life spans—the market begins to look, if not perfect, then at least perfectly amazing.
And therein lies the problem: our comparisons. We live in an age when markets have delivered more health, wealth, and innovation than any generation in history—yet they are blamed every time reality falls short of our expectations. From eradicating deadly diseases to making information available at the speed of light, markets have lifted billions out of poverty and extended life far beyond what our ancestors could imagine. And still, when outcomes are uneven, our first instinct is to “fix” the market.
But markets are not fragile machines to be fine-tuned by well-meaning hands; they are living systems—rooted in physics, shaped by human nature, and driven by the sum of billions of individual choices. They adapt over decades or centuries, not election cycles. When we manipulate them for short-term gain, we often disrupt forces that quietly compound long-term prosperity. The bill always comes due, and the later payment is almost always higher—and often invisible at the moment the intervention is made.
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
Table of Contents
Why “Market Failure” Is a Misdiagnosis
The Speed Mismatch Between Markets and Politics
Commutative Justice: The Minimal Guardrails
The Market Era and the Great Enrichment
The Imperfect Human Lens
How Well-Intended Interventions Distort the Market
Example 1: Regulatory Realignment, Not Just Deregulation
Example 2: The Birth of Unaffordable Housing
Example 3: When Price Signals Go Missing—The Case of Carbon Markets
The Market Is Not a Child to Scold
Aligning Policy With Market Reality
Conclusion: Gratitude and Restraint
Resources For The Curious
1. Why “Market Failure” Is a Misdiagnosis
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” — Adam Smith
“Market failure” is one of those phrases that sounds sophisticated but often becomes an all-purpose excuse—used to shift blame when policies or personal expectations do not deliver the desired outcome. Yet this presents an interesting paradox. We do not “blame” the sun for a sunburn, nor do we imagine manipulating its inner workings. That would be absurd—the sun is too vast, too powerful, and too essential to life. Instead, we adapt: we wear sunscreen, seek shade, and build solar panels to harness its energy as it is.
Markets, however, are treated differently. Despite being even more complex than the sun, they not only operate under the laws of physics but also integrate the quirks and unpredictability of human neurobiology—billions of decisions shaped by emotion, bias, and limited foresight. Yet society regularly intervenes in markets, adjusting them as though they were a simple device. We tinker, regulate, and manipulate in ways unimaginable for the sun. Economist and Nobel laureate Friedrich Hayek, one of the foremost critics of centralized control, cautioned…
“The curious thing is that in the very act of trying to control society, we are in fact producing forces which, if we understood them, would make us realize how little we are able to control.”
Perhaps, if the sun could worry, it should.
To riff on Donald Rumsfeld, while policymakers may know what they know and know what they do not know, the greater challenge lies in what they do not know they do not know. As Rumsfeld famously put it:
“There are known knowns; there are things we know we know. We also know there are known unknowns… But there are also unknown unknowns—the ones we don’t know we don’t know.”
It is in that vast realm of “unknown unknowns” that the most dangerous interventions are often born.
There is no such thing as a costless intervention. Every manipulation of the market carries a price, even if the bill does not arrive immediately. The real question is: How much are we willing to trade the future for today, given that we rarely understand the full scope of those future costs? The old saying, “Pay me now or pay me later,” rings true here—except in the market’s case, the “later” price is almost always higher.
It is mostly hubris to believe we can “run” the market from the top down—especially through government. Like the sun, the better approach is to respect the market’s unfathomable complexity, understand that its stability and adaptability emerge from its interconnected parts, harness its power, and support it by mostly staying out of its way.
2. The Speed Mismatch Between Markets and Politics
“Ambition must be made to counteract ambition.” — James Madison (The Federalist No. 51)
One of the greatest points of friction is the mismatch between how markets evolve and how government responds.
Markets are not abstract numbers on a screen—they are the living outcome of billions of human decisions, each shaped by our neurobiology and bounded by the laws of physics. This makes them adaptive, evolutionary systems that often operate on timescales far longer than an election cycle. While markets can appear to move suddenly—during a panic or boom—those shifts are usually the accumulated result of forces that have been building over years or decades.
The founders of the United States understood this dynamic. They recognized that while elected officials might change every two, four, or six years, the underlying drivers of prosperity and progress move on a much longer arc. Markets themselves embody this arc—built on the constant evolution of supply and demand. As environments shift, demand gaps inevitably appear, and it is entrepreneurs who invent, innovate, and take risks to fill those gaps. But this process does not happen in chaos. Markets require a stable foundation of ex-ante law—rules set in advance, applied consistently—to inspire the confidence and predictability necessary for supply to meet demand.
To safeguard this delicate balance, the founders embedded governance “speed bumps”—branches of government, checks and balances, and a separation of powers—designed to slow the pace of legislative change and ensure it focused only on the most important and necessary interventions.
As Mike Munger has noted, capitalism itself is a kind of “time travel,” where entrepreneurs, through capital and finance, can draw from the future to build in the present. Yuval Levin similarly emphasizes that the legislative branch provides society’s legal scaffolding for the future, ensuring today’s debates and decisions translate into durable, long-term progress. In this way, both capitalism and Congress share a forward-facing quality: they make the future present.
“Capitalism is a set of specialized market institutions that allow time travel.” — Michael Munger
One of the most impactful, yet often underappreciated, pieces of this design is the 10th Amendment. Ratified in 1791, it declares that powers not delegated to the federal government by the Constitution, nor prohibited to the states, are reserved to the states or the people. In effect, it makes private citizens and local communities the preferred “opt-in” condition for action, with the federal government as the subordinate “opt-out” actor—able to intervene only when truly necessary. This structure was intended to keep decision-making as close to the people as possible, preserving the adaptability and long-term stability that markets require. The 10th Amendment makes entrepreneurship permissionless. If there is no law preventing it and there is a demand for it, then an entrepreneur is incentivized to invent and innovate it without asking permission.
The intention was not to freeze government action, but to align it with the enduring rhythms of the market’s physical and social foundations. In this way, the founders designed institutions to act like a form of time travel—slowing down immediate impulses so that laws and governance could serve the future rather than the passions of the present. This discipline preserved space for private initiative—whether in economic growth, innovation, education, or community development—while shielding markets from the distortions of short-term political oversteering.
3. Commutative Justice: The Minimal Guardrails
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” — Adam Smith
The founders’ approach reflected a deep philosophical lineage. The ancient Greeks, especially Aristotle, described commutative justice—a principle later extended by Adam Smith into market economics. In plain language:
“Don’t mess with me, and don’t mess with my stuff.”
In practice, that meant government should protect life, property, and contracts—but stop short of micromanaging outcomes. The Declaration of Independence expresses it as:
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
This is a statement of opportunity, not a guarantee of outcomes. The founders recognized that individuals differ in their definitions of happiness and in their abilities. The market was the mechanism for people to pursue their own ends within the guardrails of commutative justice.
4. The Market Era and the Great Enrichment
“The argument for the free market is a complicated and sophisticated one…and I have confidence market efficiency will win out.” — Milton Friedman
The “market era” emerged in the late 18th century, rooted in Enlightenment ideals and given structure by the new American Republic. Adam Smith’s The Wealth of Nations (1776) offered the intellectual foundation, but it was Alexander Hamilton—America’s first Secretary of the Treasury—who operationalized those ideas into a functioning economic system.
In his Report on Manufactures (1791), Hamilton argued that prosperity could not rest on agriculture alone. A dynamic nation required diversified production, the encouragement of enterprise, and institutions capable of channeling capital efficiently. As he observed:
“To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients by which the wealth of a nation may be promoted.”
Hamilton’s genius was to translate Smith’s principles of productivity, specialization, and exchange into concrete policies suited to America’s circumstances. By stabilizing public credit, creating a national bank, and deploying targeted tariffs and incentives, he laid the groundwork for market dynamism. In doing so, Hamilton ensured that Smith’s theoretical insights became not just an academic vision, but the operating system of an American economy built on secure property rights, innovation, and limited but enabling government.
The results have been staggering. Economic historian Deirdre McCloskey calls it “The Great Enrichment”—a leap in human well-being unmatched in history. Since the dawn of the market era:
Global life expectancy has more than doubled.
Global GDP has risen exponentially.
By coupling Smith’s theory with Hamilton’s practical statecraft, the United States set in motion a market system that, left largely to its own devices, has delivered health, wealth, and opportunity on a scale unimaginable in 1776.
5. The Imperfect Human Lens
“Nowhere is the gap between rich and poor wider…than in societies that do not permit the free market to operate.” — Milton Friedman
If the market is so effective, why do we keep trying to “fix” it? The answer lies in human psychology.
Humans are comparative and impatient by nature. We struggle to measure our well-being against the distant past, even when the differences are staggering. We treat the eradication of smallpox, the near elimination of polio, or the ready availability of antibiotics as though they were always part of the human experience. We think nothing of instant communication with anyone on the planet, affordable air travel, or the ability to summon nearly any product to our doorstep within days. These once-unimaginable advances, delivered through centuries of market-driven innovation, have become fixed entitlements in our minds—background conditions rather than extraordinary achievements.
Instead of recognizing our massive upward leap in quality of life, we fixate on lateral comparisons—why our neighbors have newer cars, bigger homes, or more leisure time, while others have less and struggle to keep up. These sideways glances fuel both envy of the more fortunate and pity for the less fortunate, obscuring the real story: compared to our ancestors, our lives are fundamentally MUCH better. As Hans Rosling warns,
“When things are getting better we often don’t hear about them. This gives us a systematically too-negative impression of the world.”
The fact is, almost everyone today—across income levels—lives better than the kings and queens of centuries past in terms of health, comfort, and access to knowledge. And that is because we allowed markets to operate, adapt, and innovate over generations.
Political cycles amplify our short-term mindset. Elected officials operate on two- to six-year horizons, incentivizing promises that deliver quick, visible benefits, even when they erode the long-term foundations of prosperity. The temptation is to manipulate the market to create the appearance of fairness now, even if the ultimate effect is reduced opportunity for everyone.
The "unseen" entitled benefits over time
vs.
the "seen" comparative unfairness
6. How Well-Intended Interventions Distort the Market
"The first lesson of economics is scarcity: There is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics."
– Thomas Sowell
Dr. Sowell’s point is timeless. Yet in today’s world of extraordinary abundance, it is not always clear where true scarcity lies. Lifespan and GDP data, alongside what Deirdre McCloskey calls the Great Enrichment, show that markets have lifted humanity far beyond the survival-level scarcity our ancestors faced. Still, because of our insatiable and comparative nature, people often behave as if the world exists in a state of extreme scarcity.
Thorstein Veblen, the 19th-century sociologist and economist, captured this paradox with his aphorism:
“Invention is the mother of necessity.”
The more society improves, the more people demand. This appetite for “more” ensures that even in an age of abundance, the perception of scarcity never disappears—it simply shifts—like a moving goal post.
Adam Smith warned that without restraint, governments—no less than individuals—would try to direct markets toward favored groups or goals. In The Wealth of Nations, he cautioned:
“It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense… They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs.”
His point was clear: unchecked government meddling often distorts the very markets it claims to fix. When laws and regulations go beyond the narrow bounds of commutative justice, they inject noise into the market’s most important output—the price signal—reducing its fidelity and weakening its ability to coordinate billions of independent decisions.
The 1970s offer two clear examples of this pattern.
Example 1: Regulatory Realignment, Not Just Deregulation
The 1970s are often remembered for deregulation in industries like airlines and trucking. But this was also the decade when the modern regulatory state reached maturity. Agencies like OSHA, EPA, and EEOC gained sweeping authority over workplace safety, environmental policy, and civil rights compliance.
The intentions were noble: protect workers, ensure fairness, safeguard the environment. The outcomes were mixed:
- Compliance costs diverted capital from productive investment.
- Innovation slowed as approval timelines stretched into years.
- Small firms were disproportionately burdened, reducing job creation.
The seen effects—cleaner discharges, diversity seminars—were celebrated. The unseen effects—jobs never created, equipment never purchased—were harder to measure but often more damaging. In Thomas Sowell’s terms, these were the unintended consequences of well-meaning policy.
Example 2: The Birth of Unaffordable Housing
The Civil Rights Act of 1964 outlawed explicit housing discrimination, but it did not eliminate discrimination—it simply moved much of it from the visible to the less visible. What could no longer be written into deeds or stated openly in advertisements found new life in subtler forms: zoning ordinances, homeowners’ association covenants, and other regulatory tools that shaped who could live where.
Under the banner of “preserving community character” and “protecting property values,” local governments and HOAs adopted policies that:
- Restricted housing density.
- Banned multi-family developments.
- Imposed costly building requirements.
On paper, these rules appeared neutral. In practice, they created artificial scarcity—driving home prices far beyond personal incomes and locking out many of the very lower-income and minority families the Civil Rights Act was meant to protect. Essential workers found themselves priced out of high-opportunity areas, forced to commute long distances or accept diminished access to schools and jobs.
In economic terms, we traded adaptability for exclusion—freezing neighborhoods in time to protect incumbent property owners. As Jerusalem Demsas observed:
“A home’s value is directly tied to the scarcity of housing for other people.”
The result is today’s housing affordability crisis—a second-order effect of civil rights reform that replaced visible barriers with hidden ones, but left the underlying exclusion intact.
Example 3: When Price Signals Go Missing—The Case of Carbon Markets
So far, the message has been to minimize government intervention and let markets operate in their natural state. Are there exceptions? That is, are there cases when an "artificial market" is helpful to improve price signals and the resulting market operations? The answer is maybe, but the jury is still out.
Markets thrive on information, and the most powerful form of information is the price signal. But when negative externalities like pollution are not priced, markets cannot coordinate resource allocation effectively. Climate policy illustrates this clearly.
Cap-and-trade was designed to fix that gap. By capping total emissions and letting firms buy and sell permits, governments created a market for pollution. When structured well—like the U.S. Acid Rain Program of the 1990s—cap-and-trade produced dramatic reductions in sulfur dioxide at far lower costs than predicted. But in other cases, political compromises broke the signal:
- Over-allocation of permits flooded markets, collapsing prices and erasing incentives to cut emissions.
- Volatile or weak carbon prices left firms uncertain, stalling investment in cleaner technologies.
- Equity blind spots meant total emissions fell, but local pollution in disadvantaged communities sometimes worsened.
As Hayek observed, prices are more than numbers—they are signals that communicate scarcity and opportunity across society. When policy fails to create credible scarcity, the market cannot do its job.
The pollution lesson is not that markets fail. If the price of pollution is shielded from the market, the market will operate perfectly based on the information provided. The result will likely be more pollution than desired. So the answer is not to blame the market but to ensure pollution information is provided to the market.
This is the idea of cap-and-trade. When cap-and-trade is disciplined—credible caps, stable prices, transparent oversight—it unleashes innovation and allocates the costs of pollution efficiently. When diluted by politics, it becomes another example of intentions without impact.
The bottom line: Cap-and-trade can work, but only in a highly disciplined system that enables the true price of pollution to be absorbed by the market. This requires government programs designed with integrity and enforced with consistency. Unfortunately, intentions and practice often diverge. The track record is spotty—some cap-and-trade systems have proven successful, while others have fallen short.
And there is another challenge: Goodhart’s Law—the idea that
“when a measure becomes a target, it ceases to be a good measure.”
Once permit prices or emissions levels become political trophies, the underlying signal degrades. To guard against this, cap-and-trade programs should not be permanent monuments. Instead, they should periodically sunset and reset, allowing policymakers to recalibrate caps, metrics, and safeguards so the quality of the price signal remains intact.
7. The Market Is Not a Child to Scold
These examples illustrate a broader truth: the market is not a pet project that needs constant tinkering. It is the emergent outcome of billions of individual decisions interacting with physical and social constraints.
The trap of government manipulation is that yesterday’s intervention often acts like a form of oversteering—though those at the wheel rarely realize it at the time. When the unintended outcomes of that intervention become visible, the political instinct is not restraint but to correct by oversteering in the opposite direction. The result is an ever-widening oscillation, as policy lurches from one crisis to the next, each swing amplifying rather than stabilizing the system. As Hayek warned:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
Every unnecessary rule that goes beyond commutative justice adds friction to this delicate process. Sometimes the harm is immediate; more often it accumulates slowly, like sediment in a riverbed, diverting the flow in ways no one intended and making the next overcorrection all but inevitable.
The 1970s were a high-impact decade. Among other manipulations, the U.S. went off the Gold standard. Since that time, political incentives to increase debt to fund more manipulations have been impossible to ignore. Naturally, economic volatility has followed suit.
8. Aligning Policy With Market Reality
This does not mean “no government.” It means right-sized government that understands its role. The table below expands the concept into 10 core roles that support markets without distorting their underlying signals.
# | Role of Government | Impact on Markets & Society |
1 | Protect property and personal safety (Commutative Justice) | Creates trust and stability, encouraging investment and economic activity. |
2 | Enforce contracts and rules of exchange | Strengthens the reliability of transactions, lowering risk and transaction costs. |
3 | Avoid outcome manipulation | Maintains accurate price signals for efficient resource allocation. |
4 | Provide a stable, ex-ante legal framework | Reduces uncertainty, allowing for long-term planning and innovation. |
5 | Uphold the rule of law equally | Builds public trust and prevents cronyism or rent-seeking behavior. |
6 | Maintain security | Preserves sovereignty and safeguards the conditions for open markets. |
7 | Support essential infrastructure | Enhances commerce, connectivity, and productivity. |
8 | Provide limited public goods | Prevents under-provision of critical shared resources. |
9 | Establish a predictable currency and monetary system | Enables efficient trade and protects against inflationary or deflationary shocks. |
10 | Enable mobility and opportunity | Encourages adaptability and maximizes human capital utilization. |
When policy aligns with these roles, markets can do what they do best: allocate resources efficiently, reward innovation, and adapt to changing conditions without unnecessary distortion.
9. Conclusion: Gratitude and Restraint
Is the market “perfect”? In the sense that it reflects the best available aggregation of human knowledge and incentives, yes. But it is not magic. It operates within the laws of physics and the wiring of human brains.
We would do well to treat it with both gratitude and restraint—thankful for the unprecedented wealth and health it has delivered, cautious about distorting it for short-term gain.
When we align our laws and political actions with the market’s natural state, we get the Great Enrichment. When we manipulate it to suit transient desires, we risk unintended consequences that can last for generations.
The market is perfect. Our expectations—and our manipulations—are not.
Resources for the Curious
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell, 1776.
Hamilton, Alexander. Report on Manufactures. Submitted to the U.S. Congress, December 5, 1791.
Friedman, Milton. Capitalism and Freedom. University of Chicago Press, 1962.
Friedman, Milton, and Rose Friedman. Free to Choose: A Personal Statement. Harcourt Brace Jovanovich, 1980.
McCloskey, Deirdre. Bourgeois Dignity: Why Economics Can’t Explain the Modern World. University of Chicago Press, 2010.
Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy. Basic Books, 2000.
Buchanan, James M., and Tullock, Gordon. The Calculus of Consent: Logical Foundations of Constitutional Democracy. University of Michigan Press, 1962.
Roberts, Russ. “The Price of Everything: A Parable of Possibility and Prosperity.” Princeton University Press, 2008.
Hayek, F.A. The Constitution of Liberty. University of Chicago Press, 1960.
Rumsfeld, Donald. Known and Unknown: A Memoir. Sentinel, 2011.
Munger, Michael. “What Is Capitalism?” EconTalk, hosted by Russ Roberts, July 2025.
Levin, Yuval. American Covenant: How the Constitution Unified Our Nation—and Could Again. Basic Books, 2024.
Rosling, Hans, with Ola Rosling and Anna Rosling Rönnlund. Factfulness: Ten Reasons We're Wrong About the World—and Why Things Are Better Than You Think. Flatiron Books, 2018.
Demsas, Jerusalem. “America’s Housing Crisis Is a Disaster.” The Atlantic, Jan. 9, 2023.
Aldy, Joseph E., and Stavins, Robert N. “The Promise and Problems of Pricing Carbon: Theory and Experience.” Journal of Environment & Development, vol. 21, no. 2, 2012, pp. 152–180.
Goodhart, Charles A.E. “Problems of Monetary Management: The U.K. Experience.” Papers in Monetary Economics, vol. 1, Reserve Bank of Australia, 1975.
Hulett, Jeff. Making Choices, Making Money: Your Guide to Making Confident Financial Decisions. Personal Finance Reimagined, 2022.
Hulett, Jeff. “Seeking What Not to Seek: How to Align Achievement and Happiness.” The Curiosity Vine, Dec. 9, 2024.
Hulett, Jeff. “Behavioral Economics – From Neuron to Market Price.” The Curiosity Vine, July 29, 2025.
Hulett, Jeff. "Cap-and-Trade Isn’t Broken—But We Keep Breaking It: Why market-based climate solutions fail—and what we’ve learned from those that work." The Curiosity Vine, April 14, 2024.
Easterlin, Richard A. “Will Raising the Incomes of All Increase the Happiness of All?” Journal of Economic Behavior & Organization, vol. 27, no. 1, 1995, pp. 35–47.
Maddison, Angus. Contours of the World Economy, 1-2030 AD: Essays in Macro-Economic History. Oxford University Press, 2007.
Our World in Data. “Life Expectancy.” Accessed Aug. 15, 2025. https://ourworldindata.org/life-expectancy.
Hayek, Friedrich A. The Fatal Conceit: The Errors of Socialism. University of Chicago Press, 1988.
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