"I may be wrong and you may be right, and by an effort, we may get nearer to the truth." (Karl Popper)

Friday, February 10, 2006

The market and the state need each other

"The market is ... among the most sophisticated products of civilisation. It requires for its successful working a complex mixture of constraints, both internal and external to the market itself." (Martin Wolf, Why Globalization Works, Yale Nota Bene, 2005; p.12)

We should be careful not to present the relationship between state and market in purely oppositional terms. The constraints to which the above quote refers include the rule of law, property rights (including intellectual property), financial markets, laws of contract (and a relatively honest and accessible judicial system), as well as more indirect contributions like the education and health of a population. Markets only work, in other words, when they are civilised. Those who advocate the market economy are therefore put in the prima facie awkward position "of demanding some sort of state monopoly to enforce the rights that make a decentralised economic system possible." Indeed "voluntary transactions and private property take place on top of a social infrastructure that no market can supply."* In other words, markets operate on the basis of a social, physical and legal infrastructure that only the state can provide.

It is necessary for the state to intervene in what would otherwise the realm of free choice and voluntary exchange in certain instances. Most of those instances are contestable, such as the modern state's involvement in organising the schooling, pensions and healthcare of its citizens. The most elegant reforms proposed today often involve, not the complete withdrawal of the state from such areas (allowing them to be organised in an unregulated manner) but to switch the direction of the intervention: Let the market intervene in the domain of the state. This mechanism - the harnessing of private interest (through incentives) for public benefit - is the logic of the market and provides the theoretical underpinning for, among other things, copyright and patent law. The same means can and should be used to improve education and healthcare in this country - to let the markets for healthcare and education correct themselves. For an example, one need only observe howin Britain private providers have been allowed by Tony Blair's government to treat public patients to reduce waiting lists.

The question is not whether we favour the market or the state per se but how to correctly design and alter the institutional and regulatory borders between free exchange and state control. The less intrusive the intervention, the better, ceteris paribus.

*Richard A. Epstein "Free Markets Under Siege : cartels, politics and social welfare"; thirty-third Wincott Lecture October 13th, 2003 (London : Wincott Foundation, 2004; pp.30-31)


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