What so few economists know, but nearly all the good legal scholars understand

Free Photo: Stacks of Tires in a Rubber Factory

Many of the blogs I’ve enjoyed most over the years feature recurring motifs. One of Kevin Drum’s hobbyhorses is the relation between the phasing out of lead in the United States beginning in the 1970s and the drop in violent crime over the last two decades. If a prominent article proposes an explanation of the fall in violent crime (for example, arguing that “broken windows” policing was responsible) without mentioning the possibility that Americans are less violent because they’re no longer being poisoned by lead at an early age, Drum will chime in. Similarly, Paul Krugman returns again and again, both in his blog and in his columns, to failed predictions of runaway inflation by commentators on the right. Whenever a new warning against “printing money” and the risk of hyperinflation appears, Krugman posts a response. Likewise, Sanford Levinson (at Balkinization) circles back repeatedly to the criticism of political analysts who fail to recognize the harmful political effects of the undemocratic, hardwired structural provisions in the U.S. Constitution, such as the malapportionment of the Senate, the selection of the President by the electoral college, and life tenure for Supreme Court justices.

If I were going to have a hobbyhorse, it would probably be the failure to recognize the role of government in the economy. Not the role of government in regulating the economy. The role of government in constituting the economy. Progressive legal scholars have been hammering away at this point for nearly a century, at least since Robert Hale’s “Coercion and Distribution in a Supposedly Non-Coercive State” (1923), but it has never gotten through to the public consciousness. It has never shaped the way that the American public thinks and talks about the economy. And that’s a tragedy for our national economic conversation.

One reason that the progressive legal scholar’s view of the economy as a government creation has not gotten through to the general public may be that the public (naturally) looks to economists for guidance on how to think about the economy. Unfortunately, even most progressive economists today talk about “the market” as something that exists in opposition to the government, rather than as something created by the government. Whether on the left or right, mainstream economists tend to share the basic conceptual framework of the Reagan era when it comes to the economy, the framework I criticized in an earlier post on Greg Mankiw.

Consider Joseph Stiglitz’s recent remark in Harper’s: “Of course, there is no such thing as a ‘purely’ capitalist system. We have always had a mixed economy, relying on the government for investment in education, technology, and infrastructure.” These statements may sound progressive at first glance, but they adopt some of the central and most damaging assumptions of the Reagan era.

When Stiglitz says that there is “no such thing as a ‘purely’ capitalist system,” he’s right–but not in the sense he intends. The reason there is no such thing as a “purely capitalist” (or “purely free market”) system is not that all modern governments engage in infrastructure spending and the like. The reason is that “capitalism” is not a concept that has an essence or a core. We can talk about pure water–water with all the impurities removed, water that is nothing but H2O. But it simply makes no sense to talk about “pure” capitalism if this means something like capitalism with all traces of government removed. Markets without government aren’t markets at all, at least not in any sense we would recognize today. If the government plays no role in the economy, then there are no property or contract rights–and surely private property rights are one of the features of every economic system that we would call “capitalist.”

Hearing this, a libertarian might try to argue that “pure capitalism” means an economy where the government does basically nothing but enforce property and contract rights, as in the minimalist “nightwatchman” state sometimes invoked in political theory. But this only leads to further questions, such as: which property and contract rights? Can I poison the river that passes through my farm before it reaches yours, or not? What are the natures of the intellectual property rights in a “purely capitalist economy”? Do pharmaceutical companies enjoy exclusive rights to sell their new drugs for five years, ten years, forever–or do they have no exclusive rights? Am I free to sell a movie about Mickey Mouse, or are you the only one who is free to do so, because your corporate ancestor created Mickey Mouse eighty years ago?

Is there a central bank in a “pure capitalist” economy? Is there a national currency issued by the government, or no? Also, are there corporations? Corporations are one of the best illustrations of the all-pervading role of government in the modern economy. They are literally created by the state, yet the national economic dialogue tends to treat them as purely private entities existing apart from the government unless the government chooses to tax or impose visibly new regulations on them.

For nearly a century, left-leaning legal scholars have been pointing out that the Mankiw/Stiglitz way of talking about the economy overlooks the pervasive role of government in defining and enforcing the basic legal rules that structure all economic transactions. It is not the case that the government is over here, and the market is over there, and the economy is only “mixed” when the government builds roads or pays for firetrucks. The economy is always “mixed,” because it always consists of legal rules defined and enforced by government actors, including legislators, judges, bailiffs, and the police. The government creates the market by laying down and upholding the rules of property, contract, torts, criminal law, and all the rest. And once we see that these rules are government creations, it becomes easier to see that they are logically arbitrary–in the sense that there is no single “free market” system that can be deduced from the mere concept of “property” or of “free will.”

The rules that define markets are our choices. They are government policies, and in a democracy, we can and should choose the policies that best serve our ends. An economy that bans child labor, protects unions, or imposes severe leverage requirements on the finance industry is no less a “free market” than one that does not. In fact, it is easy to defend each of these policies as realizations of freedom rather than constraints on it. Moreover, if markets have a natural telos, it would be efficiency–and it’s easy to argue that these progressive policies are the ones that realize the telos, while their alternatives stray from it.

In that sense, an economy structured by progressive, efficiency-enhancing legal rules can be described as a true market economy, while an economy structured by libertarian or conservative legal rules can be seen as a corruption of the market ideal. The only virtue of the kinds of rules preferred by libertarians is their simplicity. But why should the legal rules that structure a market be simple, if this leads to gross inefficiency and the destruction of wealth? The kinds of crony capitalist rules preferred by conservatives lack even the virtue of simplicity. They have no virtues, unless one happens to be one of the powerful beneficiaries of the rules, such as a member of the public-good-absorbing, tax-avoiding 0.01% or a corporation benefiting from lobbyist-drafted subsidies.

Stiglitz and other progressive, mainstream economists agree that progressive economic policies maximize human welfare. Yet they continue to accept a framing of economic debates that favors the libertarian point of view. Stiglitz writes as though there is government on one side, and a private market on the other, and the government only “intervenes” in the private market when it spends on public goods that the private market fails to provide in adequate amounts. Based on this view of the economy, the baseline is arbitrarily set exactly where libertarians, not progressives, want it to be. The assumption is that the natural (or initial or pure) state of the market is to consist only of some arbitrarily chosen set of simple property and contract (and a few other related) rules, as in a libertarian fantasy version of the pre-progressive-era (Gilded Age) American economy, and that any departure from this baseline must be viewed with skepticism. The non-libertarian bears the burden of proving that the benefits outweigh the costs.

So, if I had a hobbyhorse, it would probably be to insist that markets are government creations. They are one form of government action, not an alternative to government action.

Hearing this, someone might object: but isn’t it possible for markets to exist without a state? And doesn’t this show that markets are not a creation of the state? It might be possible to argue that some kinds of markets chronologically preceded the state, according to certain definitions of “the market” and “the state.” I don’t know. (Didn’t ancient Athens make great strides both in trading and in the development of state institutions, including the establishment of relatively widespread property rights?) In any case, the historical question is irrelevant. What matters is that no market system seriously advocated in economic debates today–including the simple, inequality-promoting, misery-generating, inefficient and unfair markets beloved of economic libertarians–is free from the constituting role of government. Even when you can’t see the government, because no one is going to court or calling the police, the government is still there, shaping how each transaction unfolds. All transactions take place in the shadow of the rules of property and contract that define who owns what and how they can use it.

Progressive legal scholars have been trying to draw attention to the foundational, all-pervasive role of the government in markets for nearly a century. They continue to do so today. Law professor and sometimes gubernatorial candidate Zephyr Teachout just co-authored another article along these lines last month.

But mainstream economists–even very sophisticated progressive economists like Stiglitz–seem largely unaware of the legal scholars’ arguments. As a result, the national economic conversation suffers. People continue to ask why the government should intervene in some area of the economy, rather than asking whether the rules governing some area of the economy are the best ones, the ones that will lead to widespread prosperity and greater freedom rather than inequality, stagnation, and misery.

I should close by noting a major exception to everything I have said about economists: Dean Baker, a progressive macroeconomist who correctly observed the growth of a housing bubble early in the 2000s and predicted that its collapse would lead to recession. Baker understands what progressive legal scholars have been trying to say for the last century. I don’t know how he got the message, but he did. Here’s part of a blurb for his 2011 book, The End of Loser Liberalism: Making Markets Progressive, which is available as a free download here:

Progressives need a fundamentally new approach to politics. They have been losing not just because conservatives have so much more money and power, but also because they have accepted the conservatives’ framing of political debates. They have accepted a framing where conservatives want market outcomes whereas liberals want the government to intervene to bring about outcomes that they consider fair.

This is not true. Conservatives rely on the government all the time, most importantly in structuring the market in ways that ensure that income flows upwards. The framing that conservatives like the market while liberals like the government puts liberals in the position of seeming to want to tax the winners to help the losers.

This “loser liberalism” is bad policy and horrible politics. Progressives would be better off fighting battles over the structure of markets so that they don’t redistribute income upward. This book describes some of the key areas where progressives can focus their efforts in restructuring market so that more income flows to the bulk of the working population rather than just a small elite.

Baker’s arguments may be the closest thing I have yet found to a Capitalism and Freedom for a new progressive era–the subject of my earliest posts on this blog. Hopefully I’ll have a chance to write more about Baker’s ideas soon.



6 thoughts on “What so few economists know, but nearly all the good legal scholars understand

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