[Note: The thoughts below are a new, slightly more developed sketch of the legal institutionalist view of the economy discussed in a 2014 post, “What so few economists know, but all the good legal scholars understand.” For additional context, including my hope that legal institutionalism or “law and political economy” might play a central role in progressive political-economic thought after the Reagan Era, see the previous post, “After Neoliberalism.”]
One of the guiding assumptions of political and economic debate in the contemporary United States has been the idea that we face a choice between government and the market. Either government can centrally plan and direct what economic actors are to do, or economic actors can be given the freedom to choose what to do. In the latter case, economic actors will enter into private transactions for their mutual benefit. To the extent that market failures do not interfere, price signals will coordinate the incentives of these private actors in such a way that their self-interested behavior will, ideally, serve the good of all—as though under the beneficent operation of an invisible hand.
Of course, everyone recognizes that in reality market failures are always present to a greater or lesser degree. All sides in the discussion accept this. There will be information asymmetries, positive and negative externalities, and other market imperfections. As a result, there will be a role for government in the economy. In fact, it often seems in contemporary political debate that the government’s primary role is to correct market failures by intervening in the market, whether through the direct provision of public goods and services, or through regulations.
The rhetoric of “government versus the free market” reflected in the paragraphs above has become so familiar that it may simply seem natural. How else could one speak of economic policy choices? What is the conceptual or rhetorical alternative, assuming that we are not going to lapse into discussion of the kind of radical economic experiment that so often resulted in humanitarian catastrophe in the twentieth century?
It would not be an exaggeration to say that the conceptual opposition between government and the market has been the central organizing principle of political debate regarding the economy in the United States, and to a greater or lesser degree around the world, for roughly the past four decades—the period identified with the rise of Reagan and Thatcher, although its origins precede them, and labelled by critics on the left as “neoliberalism.” The distinction is so central to our politics that the defining disagreement between the Left and the Right during this era has often been seen as the disagreement over the degree to which markets are imperfect and would benefit from government intervention. Partisans on the Left present themselves as seeking a greater role for government in restraining the excesses of the market, as well as attempting to protect various realms of life from market forces; partisans on the Right present themselves as seeking smaller government and more market-based solutions. All seem to agree that the fundamental choice is between government and markets.
Yet one of the puzzling features of the distinction between government and markets, given its ubiquity in public discussions, is that the distinction itself arguably does not make sense. Economic markets in the modern sense are not something that exist apart from government. To the contrary, they are government creations. There are many obvious senses in which this is the case. But the more fundamental point is often neglected.
Taking the contemporary United States as an example, no one would dispute that every corner of the economy, from agriculture to finance to pharmaceuticals, has been shaped by the countless regulations issued since the rise of the administrative state, whether through industry-specific regulations or more general ones concerning, for example, labor. One of the major categories of economic actor, the corporation, is literally a government invention. Through taxation and benefit policies, and less visible tax benefit policies, as well as policies concerning education, infrastructure, health, housing, and the provision of other public goods, government reshapes what economic actors have the ability and incentive to do in various markets. State and federal governments are themselves major economic actors through purchases of goods and services. Through the Federal Reserve, government controls the supply of money. Through trade policies, government shapes the exchange rate and the relative strength of various industries. Through immigration and occupational licensing policies, as well as anti-discrimination law, government helps determine who the participants are in labor markets. And so on. It should not be controversial to say that in the contemporary United States, government policy pervades the economy. No market is untouched by the hand of government today.
The more fundamental and often neglected point, however, is that the foundational role of government in markets is not new, and does not depend on developments from the last century such as the expansion of the administrative state. There is a recurring blindness in the public political imagination around how even the simplest, most classical economic transactions work.
We imagine a consumer entering a store and using some coins to purchase a good from the storekeeper. The transaction appears to have been entirely “private,” just a matter between a buyer and a seller. The government appears to have played no role. The state remains invisible.
In fact, however, the transaction takes place in the shadow of government rules, and ultimately the threat of government coercion and force. These rules constitute the market. In the United States, they include, to take a few examples, the rules of property, defining what can be owned, how to determine who owns what, which rights are entailed by ownership, and what remedies follow from a violation of those rights; the rules of contract, defining what is an enforceable agreement and how it is to be enforced; the rules of tort, defining various harms, many of which could affect interactions in the market, and remedies for those harms; and, importantly, the rules of criminal law, which among other things make possible additional punishments for certain violations of the rules of the market that are seen as especially morally serious, such as theft and fraud.
Even if the coins used by the consumer at the store were not government currency, and even if the store did not depend on government-supplied financial, transportation, communication, and other forms of infrastructure for its business, the government would continue to play a foundational, if routinely unacknowledged, role in the transaction through its defining and enforcing of the rules of the economic market in which the transaction takes place.
If property law did not exist, it would make no sense for the consumer to exchange her coins for the good she purchases. The coins would not be hers to give, and the good would not be the store’s to sell. If the relevant property law existed but the law of torts and criminal law did not, nothing would prevent the storekeeper from taking the coins without giving anything in return, or the consumer from taking the good without paying. If contract law did not exist, we might imagine the storekeeper signing an agreement to deliver the good, then refusing to do so with impunity. If contract law existed, but specified for reasons of public policy that a contract to purchase what the consumer seeks to purchase cannot be enforced, then the transaction might not take place at all. If property and contract law existed, but the laws specified, for example, that members of the consumer’s race, religion, or gender were incapable of owning property or enforcing contracts, then once again this supposedly purely private confluence of wills might not take place. Finally, even if all of the needed market rules existed as laws on the books somewhere, but there existed no state infrastructure—courts, judicial administrators, police, and so on—for enforcing violations of the laws, then nothing but vigilante justice would prevent someone (like the calculating “bad man” described by Oliver Wendell Holmes, Jr.) from breaking the rules.
In other words, even the most simple, apparently private transaction in the marketplace, as we recognize it today, takes place in the shadow of and depends upon the public rules that constitute the market, and potential state action to enforce the rules. Even in the absence of administrative regulations and other more overt signs of state involvement, the state’s rules and enforcement inevitably shape the terms of the transaction and whether it takes place.
It is perhaps worth noting that this need not be true in theory. One can point to hypothetical, game-theoretical, economically marginal, or distant historical scenarios in which a market, or at least a relatively simple form of trading, might spontaneously organize itself in the absence of a shared coercive authority. There are a variety of current contexts, from bitcoin to black markets, in which markets have only a tenuous relationship, if any, to the coercive powers of a state to define and enforce market rules. International trade throughout much of history has taken place in a condition of anarchy between the parties, with each side effectively limited to self-help, often based on collective sanctions in the case of a violation of apparently agreed-upon rules.
But these marginal contexts have little relevance to the serious economic choices faced by democratic publics today—the choices that are most often discussed in terms of a choice between “government” and “the market.” When the Left and the Right debate the extent to which government should be involved in the healthcare market, for example, the debate is not between advocates of a healthcare system governed by enforceable legal rules and advocates of an anarchic black market in health services in which contracts are unenforceable in public courts and each hospital employs a private army to punish theft. The discourse that opposes government to markets—the neoliberal discourse that dominates political and economic thought and discussion today—is in fact concerned with an opposition between different legally enforceable rules, and thus between different government policies.
Why has this arguably obvious critique of the opposition between government and the market failed to gain wide recognition?
When it was reported that an opponent of President Obama’s health care reform told his congressman in 2009 to “keep your government hands off my Medicare,” the nonsensical assumption that Medicare exists apart from government turned the statement into a widely repeated joke. Yet the same basic fallacy arises habitually in respectable, mainstream academic and popular discussions of economic policy. Rather than being treated as a laughable idiocy, the assumption that there is a choice between “government intervention” and “leaving the free market alone” tends to be accepted without comment, uncritically and almost universally.
It is as though we are held captive by a certain, misleading picture of the market—a picture like the one above, in which two individuals make an isolated exchange, and the government is invisible. Even when we occasionally acknowledge the role of government in such transactions, we soon after return to the captivating picture, as though it contains all that truly matters for understanding the economy.
In the next post, I offer notes on some of the thinkers who have attempted to dislodge the neoliberal assumption of an opposition between government and markets.
Other posts in this series:
- After Neoliberalism (Nov. 17, 2017)
- Markets Are Government Creations: An Introduction (Nov. 19, 2017)
- Markets Are Government Creations: A Resource Guide (Nov. 20, 2017)
- The Intellectual Foundations of a New Progressive Era? (Nov. 22, 2017)
- The Tragedy of the Obama Administration (Nov. 24, 2017)
 See Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457 (1897).
 Philip Rucker, Sen. DeMint of S.C. Is Voice of Opposition to Health-Care Reform, Wash. Post, July 28, 2009 (quoting Rep. Robert Inglis’s quotation of a constituent’s statement at a town-hall meeting).
 See, e.g., Timothy Noah, The Medicare-Isn’t-Government Meme, Slate, Aug. 5, 2009.