The British Horseracing Authority has announced tougher new rules on jockeys' use of the whip. This draws attention to an insufficiently appreciated failing of free markets.
What I mean is that using the whip is an example of an arms race. In the absence of rules against whipping, each jockey would whip his horse to go faster. The upshot would be no advantage to individual jockeys - only one of whom could win the race - but lots of discomfort to the gee-gees. In other words, the rational pursuit of individual self-interest leads to an outcome that is, in aggregate, worse for everyone* - 'smart for one, dumb for all', as Robert H. Frank has said.
What's more, this problem cannot be solved reliably merely by voluntary contracts. Jockeys cannot agree among themselves not to use the whip, simply because any individual jockey would have an incentive to defect and use the whip to increase his chances.
The only solution, then, is to have rules imposed from outside, as the BHA is doing.
But here's the thing. There are, perhaps, lots of examples in economic behaviour of arms races.
1. In a workplace each individual has an incentive to work longer hours to win promotion. But if everyone does so, individuals' chances of promotion don't change. All that happens is that people work longer (pdf) than they'd like.
2. One objection to Catherine Hakim's advice that women should make more of their erotic capital is that, if all women do this they will over-invest in surgery, clothes and cosmetics without improving their earnings. Men will benefit from there being fewer munters, but women will lose.
3. Education, arguably, has become an arms race. If loads of people have degrees, others need one merely to avoid the negative signal sent by not having one. And yet others will get a postgraduate degree to signal their superiority over first degree-holders. The upshot is over-spending on education and over-qualified workers.
4. Robert H. Frank has argued (pdf) that Americans' over-indebtedness in the 00s arose from a kind of arms race. As people saw friends and neighbours spending more, they too spent more in order to keep up with the Jones'. The result was high debt and anxiety arising from a fear of 'falling behind.'
In all these cases, rational self-interest can lead to a decline in aggregate well-being. Adam Smith's invisible hand, then, fails more often than is generally realized. In this sense, the BHA has reminded us of the limits of 'neoliberalism'
* I'm ignoring here the possibility that race-goers gain utility from the increased speed of all horses.