Does the State Create the Market - and Should It Pursue Efficiency?

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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. …