Does the state create the market - and should it pursue efficiency?

AuthorSandefur, Timothy
PositionEconomic freedom

INTRODUCTION

The economic turmoil that began in late 2008 has led many pundits to trumpet the death of free markets and welcome the final proof that allowing individuals to make economic choices without government oversight will lead to injustice and poverty. It is therefore time not merely to examine the specific policies proposed to deal with present economic problems, but to address the broader context in which we interpret those problems and the deeper premises on which contemporary policy proposals rely. Whether it be the push for nationalized health care, for economic "stimulus" through government spending, for government takeovers of lending institutions, or for a host of other interventions, many of today's proposals for expanding government's role in private life have at their core a deeply flawed conception of the nature and function of markets. Only by reexamining these premises can we hope to make sense of the specific proposals advanced today.

The basic error is the common notion--shared by both left and right--that governments create markets, and must manage and control individual economic choices to ensure that those choices serve collective goals. President Bush famously confessed to having "abandoned" his "free-market principles" in order to "save the free-market system" and "ensure that the economy doesn't collapse." (1) In his book The Audacity of Hope, President Obama complains about what he sees as a "tendency to take our free-market system as a given, to assume that it flows naturally from the laws of supply and demand and Adam Smith's invisible hand." President Obama believes that markets instead "depend[] on government action" to "open up opportunity, encourage competition, and make the market work better." (2) Many of President Obama's intellectual allies are even more explicit on this point. Former Clinton Administration Labor Secretary Robert Reich has written that "[g]overnment creates the market by defining the terms and boundaries for business activity, guided by public perceptions of governmental responsibility for the overall health of the economy." (3) Professor Cass Sunstein, recently appointed to a prominent office in the Obama Administration, agrees, and, quoting President Franklin Roosevelt's statement that economic laws are "not made by nature" but "by human beings," he contends that people "created economic markets and existing distributions. Laws underlay markets and made them possible. If they had good reasons for doing so, people might change those markets and existing distributions." (4) A popular book on economics for the layman asserts that government "does not just fix the rough edges of capitalism; it makes markets possible in the first place." (5) Another commenter holds that the "great fallacy of laissez-faire" is that "markets come first and social intervention thereafter," whereas "[t]he reality" is that "the state creates markets and sustains them: the important point being that it should do so in such a way that the individual energies released lead to socially desirable results." (6)

In short, government supposedly creates the market by defining and enforcing property and contract rights; consequently, there is nothing particularly wrong with the government radically altering those rights, or the other terms on which individuals engage in economic transactions. Such alterations are not infringements on existing freedoms, but merely shifts in the distribution of rights that the state created in the first place.

I want to challenge this premise and defend the classical liberal proposition that markets do, in fact, come first--although I consider all such terminology misleading. The state is neither historically nor ontologically prior to the market. Nor is it prior to other types of free human interactions. It can therefore assert no "ownership" claim over the market as a justification for controlling individual economic choices. After addressing these issues, I conclude with some observations expressing reservation about the related argument that government policy should be organized to increase economic efficiency.

  1. TANSTATM ("THERE AIN'T NO SUCH THING AS "THE MARKET'") (7)

    The initial error in the claim that the state creates the market is that there is no such thing as "the market" in the first place. The term "market" is terribly misleading. When we speak of "the market" we are using shorthand for a whole spectrum of exchanges that take place between individuals. (8) There is nothing unitary about these exchanges except in the abstract. To reify them, and to speak of "the market" as an existing entity, or as a corporate agent with an identity in itself, creates confusion, as expressed in the phrase "the market will do such and such." Of course, markets do not do anything at all; only individual actors do. Economists observing transactions might group these individual actions into categories and observe certain trends within those categories, but "the market" is simply not the sort of thing that acts the way a living being does. When defenders of economic freedom say "the market will provide" a good or service in the absence of government interference, they are doing themselves a disservice. What they mean is that individuals are likely to pursue their self-interest by providing that good or service if they are free to do so.

    It would be nice if the term "market" could be abolished entirely and replaced with another. The Framers preferred "commerce," which has the advantage that it cannot take on that misleading definite article "the." Even better would be "commercial intercourse," or simply "intercourse." This term would be preferable because it would emphasize that markets are interactions among people--just as sexual intercourse is intercourse between people. Nobody would speak of "the sexual intercourse" doing something, because such a phrase is incoherent; "sexual intercourse" is simply shorthand for a certain kind of interaction between people, which takes place in a variety of different contexts. Likewise, commercial or economic intercourse is a shorthand phrase, not a unitary entity that can do any particular action or act in any particular way.

    The primary error of the assertion that the state creates the market lies in envisioning the market as a unitary institution that could be "created" in the sense that a car or a sculpture or Paley's watch is created. The "market" is not such a thing--it is not a thing at all; it is a term for the multitude of economic interactions between individuals, each choosing for himself or herself which transactions are worthwhile. This mistake is by no means limited to those who advocate greater government control over economic choices; even so emphatic a defender of laissez-faire systems as Ayn Rand sometimes spoke of capitalism as having been "created." (9) Capitalism and free markets were never "created"; these words describe a category of intercourse that evolved along with other human behaviors. The market has characteristics and a nature, but no unitary purpose or design.

  2. ECONOMIC INTERCOURSE IS NOT CREATED BY POLITICS BUT IS A RATIONAL RESPONSE TO INHERENT BUDGET AND TIME CONSTRAINTS

    Economic exchange--what we sometimes call "the market"--arises from the intersection of limited resources and unlimited desires. Human beings are finite creatures, limited at the very least by their mortality. Every action therefore imposes an opportunity cost, and that means that, even in a state of nature, there would be limits on what human beings could accomplish in their efforts to survive and thrive. That they seek to thrive is the basic element of human ethical life. That they have limited time and unequal capacities for thriving is simply an objective fact. Specialization and exchange is the rational solution to this problem. Economic intercourse is the logical response to comparative advantage, which is an inescapable consequence of differential opportunity costs. Exchange is implied by the need of living creatures to maintain their existence within the inescapable constraints of reality. The state need not enter into the picture at all. (10)

    Does the state create the exchanged resources? No, the resources exchanged are products of the earth, transformed into wealth by human effort. Does the state create demand? No, demand arises from the desire to thrive and the need for certain material elements--at the least, food and water. Does the state create the idea of mutual exchange? Unlikely; mutual exchange is a universal human trait. Adam Smith famously noted that nobody saw dogs deliberately and fairly exchange bones, (11) but more recent research suggests that apes will make exchanges according to what appear to be norms. (12) Indeed, most animals make "exchanges" of some sort, possibly even according to rudimentary social rules. (13) Interactions between human beings of widely different cultures--for example, between American Indians and Western explorers in the fifteenth century and after--show that exchange (not to mention resentment at being cheated!) is a cross-cultural, universal human capacity. There was much wisdom in John Locke's observation:

    The promises and bargains for truck, etc. between ... two men in [a] desert island ... or between a Swiss and an Indian, in the woods of America, are binding to them, though they are perfectly in a state of nature in reference to one another. For truth and keeping of faith belong to men as men, and not as members of society." (14) III. STATES ARE NEITHER HISTORICALLY NOR ONTOLOGICALLY PRIOR TO MARKETS

    1. History Strongly Suggests that Trade Precedes the State It is impossible to trace the historical origins of the state separately from the origins of economic intercourse. Most likely, the state evolved from tribal groups that cohered through different types of exchange and found it necessary also to exchange with other tribes. (15) We can be certain that...

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