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The twenty-first century sees more knowledge to be learned and thus a greater role for education—and if there is a single sector in which behavioral-economics and adverse-selection have major roles to play, it is education. Deciding to fund education via very long-term loan-finance and thus to leave the cost-benefit investment calculations to be undertaken by adolescents has been a disaster.

The twenty-first century will see longer life expectancy, and thus a greater role for pensions. Yet here in the United States the privatization of pensions via 401k(s) has been an equally great disaster.

The twenty-first century will see health-care spending as a share of total income cross 25% if not 33%. Enough said. Sooner or later some insurance plan is going to start saying that we do indeed cover cancer treatment as part of our essential health benefits—but we believe that the proper and state-of-the-art treatment for cancer is via aromatherapy.

The twenty-first century will see information goods a much larger part of the total pie than the twentieth. And if we know one thing, it is that it is not efficient to try to provide information goods via a competitive market for they are neither rival nor excludible. It makes no microeconomic sense at all for services like those provided by Google to be funded and incentivized by how much money can be raised not off of the value of the services but off of the fumes rising from Google’s ability to sell the eyeballs of the users to advertisers as an intermediate good.

Infrastructure and R&D. Enough said.

The only major category that should not and to an important degree cannot be provided by a competitive price-taking market that might be a smaller share of total income in the twenty-first century than it was in the twentieth might be defense.

Now all of these raise enormous problems: We know that as bad as market failures can be, government failures are often little if any less immense. We will badly need to develop new effective institutional forms for the twenty-first century. But it is clear that the increasing salience of these market failures means that the private market sphere in the twenty-first century needs to shrink relative to its proper size in the twentieth century.

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