Polly Cleveland: It Takes Government to Create Markets

by Polly Cleveland | June 15, 2013

When the US Army blasted into Baghdad in 2003, expelling Saddam’s Baathist regime, Defense Secretary Donald Rumsfeld expected “free markets” to pop up all over. Instead, he got looting, murder, and chaos. So much for the neocon myth that markets are “natural,” requiring only the absence of “government interference.”

In The Surprising Design of Market Economies, urban journalist Alex Marshall shows how in fact it always takes government—even bad government—to create and maintain markets. The idealized “free market” we meet in Ec. 1, with its large numbers of well-informed competing buyers and sellers—that kind of market would not exist without intensive government support and regulation. I provided an example in my post on Public Meat Markets in Old New York.

From the earliest times, government—at first perhaps just the local warlord—has at least provided a safe physical space for trade. Before 2000 BC, Chinese, Egyptian, and Babylonian governments not only established market places; they also built roads and canals to them. They created and enforced systems of weights and measures, and even forms of money. They also drew up sets of rules, such as the Code of Hammurabi, and provided courts to resolve disputes. Later, under the Roman Empire, of course Christ found money-changers in the temple courtyard, along with all sorts of other merchants—because that was a nice, safe, central location for a market.

As Marshall points out, government creates and enforces titles or “rights” to property. If we don’t have the right to own something, we can’t trade it. Most critically, rulers of early civilizations created land titles, that is, they arbitrarily carved the earth’s surface into parcels, assigned owners, recorded them in central registries—and used the information to collect taxes. When William I conquered England in 1066, he recorded his new property in the Domesday Book. This allowed him to grant lands to his nobles as a privilege, conditioned on their military support. Only in the last two centuries did private citizens of developed countries gain the right to hold, buy and sell real estate “in fee simple.” (Or rather men gained the right—most women had to wait.)

In Ec. 1, we study markets in a spaceless, timeless vacuum. In the real world, infrastructure precedes markets. Hurricane Sandy reminded us that markets and even life in New York screech to a halt when we lose electricity, telephone, water, sewers, subways, roads, police, fire protection, or hospitals. In the longer run, public schools ensure another market essential: a literate and skilled population sharing basic values. Marshall notes that English language requirements in schools, much as they may offend multiculturalists, teach us a common vocabulary and foster the rapid inclusion of immigrants.

Corporations are no more “natural” than markets. Originally, governments chartered corporations only for specified public purposes. William I chartered the City of London in 1075; James I chartered the colony of Jamestown in 1606. In the US, only in the 19th century did state governments begin to grant private owners a right to incorporate—setting off a race to the bottom in lax requirements—a race won by Delaware. Yet, corporations aren’t the only viable form of economic organization. Marshall examines cooperatives like Land O’Lakes, which thrive especially well in Wisconsin and neighboring states with a German or Swedish heritage. I myself spent a summer studying cooperatives in the ancient northern Italian city of Bologna, center of the Emilia-Romagna region. Cooperatives big and small dominate this original “Red” region of Italy, making it among the most productive and prosperous parts of the European Union.

Like Adam Smith, Marshall decries the excess of government-granted monopolies like patents and copyrights. While these may or may not have some short term justification as rewards to innovators, today they enable the One Percent to block competition and vacuum up wealth. Surprisingly, unlike Smith, Marshall does not address another powerful way governments shape markets: taxation. Smith opposed tariffs and excise taxes, which “obstruct the industry of the people.” Smith favored “the most equitable of all taxes”: taxes on land—which he regarded as just payment to the state for the privilege of secure titles. Henry George and later economists argued that land taxes actually make markets function better by counteracting resource monopolies.

As for international markets, a few years ago my step-daughter, a US State Department attorney, spent a year at the Hague Conference on Private International Law. There she helped draft the 2005 Convention on Choice of Court Agreements. Since 1893, the Hague Conference has been churning out conventions—which become international treaties when adopted. These are just a small part of what Marshall calls “the dense forest of rules and regulations” that make possible international trade. We couldn’t even send Christmas cards to our English nephews without the Universal Postal Union of 1878!

If government creates markets, then we the people should force government to create better markets, ones that serve us all. Marshall offers a number of proposals. For example, shouldn’t large corporations have national charters? A “US National Companies Act” could require companies operating in the US to meet certain standards—putting an end to tax evasion via Bahamian post office boxes.

Conventional economics wittingly or unwittingly provides cover for the One Percent, by professing that “the market” operates benevolently on its own. Alex Marshall gives us an entertaining, thoughtful, and well-written antidote to this dangerous abstraction.

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