Politics

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.”

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Politics

Guest post: The sharing economy as strip mining

A reader emailed me with a connection between the Reagan Era and the New Deal, one I had never considered before. His argument leads to a critical view of “the sharing economy” associated with firms like Airbnb, Taskrabbit, and Uber:

I’ve said … that the post-deregulation American economy resembled strip mining.  Just as [Secretary of the Interior under Reagan] James Watt‘s dispensationalist/eschatological worldview led to the idea that we should be maximizing resource extraction from our lands because there would be no need for them after the Rapture, the plutocratic mind saw the Reagan administration as offering an opportunity to finally harvest the bounty that the New Deal state had been nurturing for decades.  So, for example, the public trust in fair financial markets could be exploited, just as a seam of coal, by a peddler of junk bonds; the gains would be privatized, and the only thing that would ultimately be lost was the public’s trust in the fairness of the system, which (after all) belonged to no one person.

It’s a “tragedy of the commons” story, really, except in this case the commons was the middle class and the economy that had been created through regulation–of labor relations, of financial markets, of consumer safety, of environmental protections, of food and drug safety, and so on.  And, really, that’s what 2008 marked the culmination of–the final extraction of value from the economic system by the plutocrats, at the expense of the system; our economy would shrink, or not grow, but the fortunes of a few people would rise.  A law and economics type might point to it as not so different from the worst of the leveraged buyouts of the 80s–a takeover, followed by profit-taking, followed by the deployment of golden parachutes, followed by the deluge.

Which brings me to “the sharing economy”, which promises to use technology to lower transaction costs to usher in a more liquid world in which more people can participate in voluntary transactions that should make everyone better off.

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