We know the shadow that was cast upon the reputation of free-market ideas since the beginning of the financial crisis. How many of us have received e-mails disparaging our long-held belief in the efficiency of markets? How could we continue to argue that markets work better than government?

It makes this paper, “What Happened to ‘Efficient Markets’?”, even more important. In this work, the great Austrian economist Peter Boettke of George Mason University shows that yes, there was a failure, but it wasn’t the failure of the market. It was an intellectual failure. He writes, for instance:

But this is due to earlier intellectual failings in the discourse concerning the nature of the market economy, the failings of socialism, the costs of government intervention, and the role of public policy. Simply put, we must always remember that bad economic ideas result in bad public policy that in turn produces bad economic outcomes. The role of the economist must be to counter the first step and defeat the promulgation of bad economic ideas. That is no easy task given the counter-intuitive nature of economic reasoning and the role of vested interests in the development of public policy in democratic systems. But if the economist does not do the job, there is the risk that market corrections can be transformed into economic crises through ill-fated government policies, and that economic crisis can be transformed into political and economic catastrophe as bad ideas are joined with opportunistic politicians who, in the name of meeting the challenge of the crisis, are able to persuade the public to trade off their liberties for security.

As I see it, this paper is an important demonstration of how for too long economists have failed to explain (or, maybe worse, have failed to understand) that efficient markets do not mean that no errors are ever made and that adjustments are instantaneously made so that perfect pattern of resources allocation exists on the market. Instead, efficiency is a process that takes time.

Read the whole thing here.