I was telling my colleague Danny Finkelstein about my new theory that the free market doesn\’t work properly when the real customers are those who commission a product rather than those who use it. It is, for example, businesses, not the householder, that choose the courier service that makes you stay in all day in case it calls; it is insurance companies, not patients, that are are private medicine\’s real customers. “Ah,” said Danny, “this conundrum is well known to economists. They call it the Principal-Agent Problem. There are whole chapters in textbooks about it.”
I felt as proud as Molière\’s Bourgeois Gentleman, enchanted to discover from an expert that quite spontaneously he had been speaking something called “prose” all his life.
Not all that unusual. You see someone struggling to a conclusion, working from first principles, and they then come up with the answer. And it\’s already there in the textbooks, they just didn\’t know that it was.
One example I like currently is all those greens, telling us that markets don\’t take account of externalities, that we have to make the cost equal the "real cost". Indeed, and economists did indeed note this a long time ago. Vast amounts of modern economic research is in trying to work out "how" to do this: it\’s already accepted that "whether" to do this is either useful or necessary (dependent upon circumstances).