Economics, Law, Philosophy, Politics

Markets Are Government Creations: A Resource Guide

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[Note: This post is unlike the other posts on the blog, for the reasons described here. It offers a series of very rough notes toward a historical sketch of the idea that markets are government creations — in other words, the rejection of the neoliberal, neoclassical, or Reagan Era idea of a conceptual opposition between government and markets. More specifically, it fleshes out the claim in an earlier post that the idea of markets as government creations has been widely accepted by legal scholars, yet largely ignored by academic economists.]

“[T]he market is rational and the government is dumb.” Dick Armey[1]

“[T]he self-regulating economy does not always work as well as its proponents would like us to believe.” Joseph E. Stiglitz[2]

The idea that government plays a constitutive role in markets, including classical liberal markets, is not a new one. But it has never achieved dominance in either public or academic debates about what we would now identify as economic issues. It has never gained the status of a widely shared assumption in the way that its contrary has—the notion of a conceptual opposition between government and the market, public and private. Here, I will offer a brief history of the idea of markets as creatures of government, partly with the simple aim of bringing together in one place the disparate legal and economic contexts in which the idea has been expressed.[3]

At least in the United States, the peak influence of the idea that government constitutes markets arrived a century ago during the Progressive Era, when the “legal realist”[4] and (intellectually related) “institutionalist economics”[5] movements rose to prominence in academic and professional legal and economic thought, respectively. Both movements reacted against the orthodoxies of late-nineteenth-century thought in their respective fields. In law, this orthodoxy is sometimes referred to as “Classical Legal Thought” (CLT).[6] In economics, the orthodoxy often goes under the name “neoclassicism.”[7] A more general term encompassing both threads of intellectual history, but also extending beyond them, would be “classical liberalism.”

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Economics, Law, Politics

Markets Are Government Creations: An Introduction

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[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.

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Politics

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

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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.”

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