The Limits of Markets

Adapted by the author from Everything for Sale: The Virtues and Limits of Markets, Alfred A. Knopf / Twentieth Century Fund, published January 1997.

The claim that the freest market produces the best economic outcome
is the centerpiece of the conservative political resurgence. If
the state is deemed incompetent to balance the market's instability,
temper its inequality, or correct its myopia, there is not much
left of the mixed economy and the modern liberal project.

Yet while conservatives resolutely tout the superiority of free
markets, many liberals are equivocal about defending the mixed
economy. The last two Democratic presidents have mainly offered
a more temperate call for the reining in of government and the
liberation of the entrepreneur. The current vogue for deregulation
began under Jimmy Carter. The insistence on budget balance was
embraced by Bill Clinton, whose pledge to "reinvent government"
was soon submerged in a shared commitment to shrink government.
Much of the economics profession, after an era of embracing a
managed form of capitalism, has also reverted to a new fundamentalism
about the virtues of markets. So there is today a stunning imbalance
of ideology, conviction, and institutional armor between right
and left.

see related resources below

At bottom, three big things are wrong with the utopian claims
about markets. First, they misdescribe the dynamics of human motivation.
Second, they ignore the fact that civil society needs realms of
political rights where some things are not for sale. And third,
even in the economic realm, markets price many things wrong, which
means that pure markets do not yield optimal economic outcomes.

There is at the core of the celebration of markets relentless
tautology. If we begin by assuming that nearly everything can
be understood as a market and that markets optimize outcomes,
then everything leads back to the same conclusion—marketize! If,
in the event, a particular market doesn't optimize, there is only
one possible conclusion—it must be insufficiently market-like.
This is a no-fail system for guaranteeing that theory trumps evidence.
Should some human activity not, in fact, behave like an efficient
market, it must logically be the result of some interference that
should be removed. It does not occur that the theory mis-specifies
human behavior.

The school of experimental economics, pioneered by psychologists
Daniel Kahneman and Amos Tversky, has demonstrated that people
do not behave the way the model specifies. People will typically
charge more to give something up than to acquire the identical
article; economic theory would predict a single "market-clearing"
price. People help strangers, return wallets, leave generous tips
in restaurants they will never visit again, give donations to
public radio when theory would predict they would rationally "free-ride,"
and engage in other acts that suggest they value general norms
of fairness. To conceive of altruism as a special form of selfishness
misses the point utterly.

Although the market model imagines a rational individual, maximizing
utility in an institutional vacuum, real people also have civic
and social selves. The act of voting can be shown to be irrational
by the lights of economic theory, because the "benefit"
derived from the likelihood of one's vote affecting the outcome
is not worth the "cost." But people vote as an act of
faith in the civic process, as well as to influence outcomes.

In a market, everything is potentially for sale. In a political
community, some things are beyond price. One's person, one's vote,
one's basic democratic rights do not belong on the auction block.
We no longer allow human beings to be bought and sold via slavery
(though influential Chicago economists have argued that it would
be efficient to treat adoptions as auction markets). While the
market keeps trying to invade the polity, we do not permit the
literal sale of public office. As James Tobin wrote, commenting
on the myopia of his own profession, "Any good second-year
graduate student in economics could write a short examination
paper proving that voluntary transactions in votes would increase
the welfare of the sellers as well as the buyers."

But the issue here is not just the defense of a civic realm beyond
markets or of a socially bearable income distribution. History
also demonstrates that in much of economic life, pure reliance
on markets produces suboptimal outcomes. Market forces,
left to their own devices, lead to avoidable financial panics
and depressions, which in turn lead to political chaos. Historically,
government has had to intervene, not only to redress the gross
inequality of market-determined income and wealth, but to rescue
the market from itself when it periodically goes haywire. The
state also provides oases of solidarity for economic as well as
social ends, in realms that markets cannot value properly, such
as education, health, public infrastructure, and clean air and
water. So the fact remains that the mixed economy—a strong private
sector tempered and leavened by a democratic polity—is the essential
instrument of both a decent society and an efficient economy.

The second coming of laissez faire has multiple causes.
In part, it reflects the faltering of economic growth in the 1970s,
on the Keynesian watch. It also reflects a relative weakening
of the political forces that support a mixed economy—the declining
influence of the labor movement, the erosion of working-class
voting turnout, the suburbanization of the Democratic Party, and
the restoration of the political sway of organized business—as
well as the reversion of formal economics to pre-Keynesian verities.

Chicago-style economists have also colonized other academic disciplines.
Public Choice theory, a very influential current in political
science, essentially applies the market model to politics. Supposedly,
self-seeking characterizes both economic man and political man.
But in economics, competition converts individual selfishness
into a general good, while in politics, selfishness creates little
monopolies. Public Choice claims that office holders have as their
paramount goal re-election, and that groups of voters are essentially
"rent seekers" looking for a free ride at public expense,
rather than legitimate members of a political collectivity expressing
democratic voice. Ordinary citizens are drowned out by organized
interest groups, so the mythic "people" never get what
they want. Thus, since the democratic process is largely a sham,
as well as a drag on economic efficiency, it is best to entrust
as little to the public realm as possible. Lately, nearly half
the articles in major political science journals have reflected
a broad Public Choice sensibility.

The Law and Economics movement, likewise, has made deep inroads
into the law schools and courts, subsidized by tens of millions
of dollars from right-wing foundations. The basic idea of Law
and Economics is that the law, as a system of rules and rights,
tends to undermine the efficiency of markets. It is the duty of
judges, therefore, to make the law the servant of market efficiency
rather than a realm of civic rights. Borrowing from Public Choice
theory, Law and Economics scholars contend that since democratic
deliberation and hence legislative intent are largely illusory,
it is legitimate for courts to ignore legislative mandates—not
to protect rights of minorities but to protect the efficiency
of markets. Regulation is generally held to be a deadweight cost,
since it cannot improve upon the outcomes that free individuals
would rationally negotiate.

These intellectual currents are strategically connected to the
political arena. Take the journal titled Regulation, published
for many years by the American Enterprise Institute, and currently
published by the Cato Institute. Though it offers lively policy
debates over particulars, virtually every article in Regulation
is anti-regulation. Whether the subject is worker safety,
telecommunications, the environment, electric power, health care—whatever—the
invariable subtext is that government screws things up and markets
are self-purifying. It is hardly surprising that the organized
right publishes such a journal. What is more depressing, and revealing,
is that there is no comparable journal with a predisposition in
favor of a mixed economy. This intellectual apparatus has become
the scaffolding for the proposition that governments should leave
markets alone.

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The moral claim of the free market is based on the interconnected
premises that markets maximize liberty, justice, and efficiency.
In a market economy, individuals are free to choose, as Milton
Friedman famously wrote. They are free to decide what to buy,
where to shop, what businesses or professions to pursue, where
to live—subject "only" to the constraints of their individual
income and wealth. The extremes of wealth and poverty seemingly
mock the claim that markets epitomize human freedom—a poor man
has only the paltry freedoms of a meager income. But the constraints
of market-determined income are presumed defensible, because of
the second claim—that the purchasing power awarded by markets
is economically fair. If Bill Gates has several billion dollars
to spend, that is only because he has added several billions of
dollars of value to the economy, as validated by the free choices
of millions of consumers. An unskilled high school dropout, in
contrast, has little freedom to consume, because his labor offers
little of value to an employer. There may be extenuating prior
circumstances of birth or fortune, but each of us is ultimately
responsible for our own economic destiny.

Linking these two premises is the third claim—that markets are
roughly efficient. The prices set by supply and demand reflect
how the economy values goods and services. So the resulting allocation
of investment is efficient, in the sense that an alternative allocation
mandated by extra-market forces would reduce total output. This
is why professional economists who have liberal social values
as citizens generally argue that if we don't like the social consequences
of market income distribution, we should redistribute after the
fact rather than tamper with the market's pricing mechanism.

Of course, each of these core claims is ultimately empirical.
If in fact the freest market does not truly yield the optimal
level of material output, then it follows that a pure market is
neither just nor conducive of maximal liberty. A tour of the actual
economy reveals that some sectors lend themselves to markets that
look roughly like the market of the textbook model, while others
do not.

Why would markets not be efficient? The most orthodox explanation
is the prevalence of what economists call "externalities."
These are costs or benefits not captured by the price set by the
immediate transaction. The best-known negative externality is
pollution. The polluter "externalizes" the true costs
of his waste products onto society by dumping them, at no personal
cost, into a nearby river or spewing them into the air. If the
full social cost were internalized, the price would be higher.

Positive externalities include research and education. Individuals
and business firms underinvest in education and research because
the benefits are diffuse. The firm that trains a worker may not
capture the full return on that investment, since the worker may
take a job elsewhere; the fruits of technical invention, likewise,
are partly appropriated by competitors. As economists put it,
the private return does not equal the social return, so we cannot
rely on profit-maximizing individuals for the optimal level of
investment. By the same token, if we made the education of children
dependent on the private resources of parents, society as a whole
would underinvest in the schooling of the next generation. There
is a social return on having a well-educated workforce and citizenry.
As the bumper sticker sagely puts it, "If you think education
is expensive, try ignorance."

Standard economics sees externalities as exceptions. But a tour
of economic life suggests that in a very large fraction of the
total economy, markets do not price things appropriately. When
we add up health, education, research, public infrastructure,
plus structurally imperfect sectors of the economy like telecommunications,
they quickly add up to more than half of society's total product.
The issue is not whether to temper market verdicts, but how.


Even realms that are close to textbook markets can actually be
enhanced by extra-market interventions. Consider your local supermarket.
The pricing and supply of retail food is mostly unregulated, and
fiercely competitive. Somehow, the average consumer's lack of
infinite time to go shopping, and less-than-perfect information
about the relative prices of a thousand products in several local
stores, exactly allows the supermarket to earn a normal profit.

Supermarkets connect the retail market to the agricultural one.
The supermarket also provides part of the local market for labor
and capital. Though cashiers and meat cutters are not the most
glamorous of jobs, the supermarket manages to pay just enough
to attract people who are just competent enough to perform the
jobs acceptably. If supermarket profits are below par over time,
the price of its shares will fall. That also operates as a powerful
signal—on where investors should put their capital, and on how
executives must supervise their managers and managers their employees.

Though there may be occasional missteps, and though some supermarkets
go bankrupt, the interplay of supply and demand in all of these
submarkets contributes to a dynamic equilibrium. It results in
prices that are "right" most of the time. The supermarket
stocks, displays, and prices thousands of different highly perishable
products in response to shifting consumer tastes, with almost
no price regulation. Supply and demand substitutes for elaborate
systems of control that would be hopelessly cumbersome to administer.
No wonder the champions of the market are almost religious in
their enthusiasm.

But please note that supermarkets are not perfectly efficient.
Retail grocers operate on thin profit margins, but the wholesale
part of the food distribution chain is famous for enormous markups.
A farmer is likely to get only 10 cents out of a box of corn flakes
that retails for $3.99. Secondly, even supermarkets are far from
perfectly free markets. Their hygiene is regulated by government
inspectors, as is most of the food they sell. Government regulations
mandate the format and content of nutritional labeling. They require
clear, consistent unit pricing, to rule out a variety of temptations
of deceptive marketing. Moreover, many occupations in the food
industry, such as meat cutter and cashier, are substantially unionized;
so the labor market is not a pure free market either. Much of
the food produced in the United States is grown by farmers who
benefit from a variety of interferences with a laissez-faire market,
contrived by government to prevent ruinous fluctuations in prices.
The government also subsidizes education and technical innovation
in agriculture.

So even in this nearly perfect market, a modicum of regulation
is entirely compatible with the basic discipline of supply and
demand, and probably enhances its efficiency by making for better-informed
consumers, less-opportunistic sellers, and by placing the market's
most self-cannibalizing tendencies off-limits. Because of the
imperfect information of consumers, it is improbable that repealing
these regulations would enhance efficiency.


Now, however, consider a very different sector—health care. Medical
care is anything but a textbook free market, yet market forces
and profit motives in the health industry are rife. On the supply
side, the health industry violates several conditions of a free
market. Unlike the supermarket business, there is not "free
entry." You cannot simply open a hospital, or hang out your
shingle as a doctor. This gives health providers a degree of market
power that compromises the competitive model—and raises prices.
On the demand side, consumers lack the special knowledge to shop
for a doctor the way they buy a car and lack perfectly free choice
of health insurer. And since society has decided that nobody shall
perish for lack of medical care, demand is not constrained by
private purchasing power, which is inflationary.

Health care also offers substantial "positive externalities."
The value to society of mass vaccinations far exceeds the profits
that can be captured by the doctor or drug company. If vaccinations
and other public health measures were left to private supply and
demand, society would seriously underinvest. Society invests in
other public health measures that markets underprovide. The health
care system also depends heavily on extra-market norms—the fact
that physicians and nurses are guided by ethical constraints and
professional values that limit the opportunism that their specialized
knowledge and power might otherwise invite. [See Deborah A. Stone,
"Bedside Manna," page 42.]

The fact that health care is a far cry from a perfect market sets
up a chain of perverse incentives. A generation ago, fee-for-service
medicine combined with insurance reimbursement to stimulate excessive
treatment and drive up costs. Today many managed care companies
reverse the process and create incentives to deny necessary care.
In either case, this is no free market. Indeed, as long as society
stipulates that nobody shall die for lack of private purchasing
power, it will never be a free market. That is why it requires
regulation as well as subsidy.

Here is the nub of the issue. Are most markets like supermarkets—or
like health markets? The conundrum of the market for health care
is a signal example of an oft-neglected insight known as the General
Theory of the Second Best. The theory, propounded by the economists
Richard Lipsey and Kelvin Lancaster in 1956, holds that when a
particular market departs significantly from a pure market, attempts
to marketize partially can leave us worse off.

A Second Best market (such as health care) is not fully accountable
to the market discipline of supply and demand, so typically it
has acquired second-best forms of accountability—professional
norms, government supervision, regulation, and subsidy—to which
market forces have adapted. If the health care system is already
a far cry from a free market on both the demand side and the supply
side, removing one regulation and thereby making the health system
more superficially market-like may well simply increase opportunism
and inefficiency. In many economic realms, the second-best outcome
of some price distortion offset by regulation and extra-market
norms may be the best outcome practically available.

Another good Second Best illustration is the banking industry.
Until the early 1970s, banking in the United States was very highly
regulated. Regulation limited both the price and the quantity
of banking services. Bank charters were limited. So were interest
rates. Banks were subject to a variety of other regulatory constraints.
Of course, banks still competed fiercely for market share and
profitability, based on how well they served customers and how
astutely they analyzed credit risks. Partially deregulating the
banking and savings and loan industries in the 1980s violated
the Theory of the Second Best. It pursued greater efficiency,
but led to speculative excess. Whatever gains to the efficiency
of allocation were swamped by the ensuing costs of the bailout.


The saga of banking regulation raises the question of contending
conceptions of efficiency. The efficiency prized by market enthusiasts
is "allocative." That is, the free play of supply and
demand via price signals will steer resources to the uses that
provide the greatest satisfaction and the highest return. Regulation
interferes with this discipline, and presumably worsens outcomes.
But in markets like health care and banking, the market is far
from free to begin with. Moreover, "allocative" efficiency
leaves out the issues that concerned John Maynard Keynes—whether
the economy as a whole has lower rates of growth and higher unemployment
than it might achieve. Nor does allocative efficiency deal with
the question of technical advance, which is the source of improved
economic performance over time. Technical progress is the issue
that concerned the other great dissenting economic theorist of
the early twentieth century, Joseph Schumpeter. Standard market
theory lacks a common metric to assess these three contending
conceptions of efficiency.

Countermanding the allocative mechanism of the price system may
depress efficiency on Adam Smith's sense. But if the result is
to increase Keynesian efficiency of high growth and full employment,
or the Schumpeterian efficiency of technical advance, there may
well be a net economic gain. Increasing allocative efficiency
when unemployment is high doesn't help. It may even hurt—to the
extent that intensified competition in a depressed economy may
throw more people out of work, reduce overall purchasing power,
and deepen the shortfall of aggregate demand.

By the same token, if private market forces underinvest in technical
innovation, then public investment and regulation can improve
on market outcomes. Patents, trademarks, and copyrights are among
the oldest regulatory interventions acknowledging market failure,
and creating artificial property rights in innovation. As technology
evolves, so necessarily does the regime of intellectual property

In my recent book, Everything For Sale, I examined diverse
sectors of the economy. Only a minority of them operated efficiently
with no regulatory interference. Some sectors, such as banking
and stock markets, entail both fiduciary responsibilities and
systemic risks. In the absence of financial regulation, conflicts
of interest and the tendency of money markets to speculative excess
could bring down the entire economy, as financial panics periodically
did in the era before regulation.

Other sectors, such as telecommunications, are necessarily a blend
of monopoly power and competition. New competitors now have the
right to challenge large incumbents, but often necessarily piggyback
on the infrastructure of established companies that they are trying
to displace. Without regulation mandating fair play, they would
be crushed. The breakup of the old AT&T monopoly allows greater
innovation and competition, but if the new competition is to benefit
consumers it requires careful ground rules. The 1996 Telecommunications
Act, complex legislation specifying terms of fair engagement,
is testament for the ongoing need for discerning regulation in
big, oligopolistic industries.

Similarly, in the electric power industry, where new technologies
allow for new forms of competition, the old forms of regulation
no longer apply. Once, a public utility was granted a monopoly;
a regulatory agency guaranteed it a fair rate of return. Today,
the system is evolving into one in which residential consumers
and business customers will be able to choose among multiple suppliers.
Yet because of the need to assure that all customers will have
electric power on demand, and that incumbents will not be able
to drive out new competitors, the new system still depends on
regulation. A regime of regulated competition is replacing the
old form of regulation of entry and price—but it is regulation

Regulation, of course, requires regulators. But if democratic
accountability is a charade, if regulators are hopeless captives
of "rent-seeking" interest groups, if public-mindedness
cannot be cultivated, then the regulatory impulse is doomed. Yet
because capitalism requires ground rules, it is wrong to insist
that the best remedy is no regulation at all. The choice is between
good regulation and bad regulation.

In the 1970s, many economists, including many relative liberals
such as Charles Schultze, began attacking "command-and-control"
regulation for overriding the market's pricing mechanism. Instead,
they commended "incentive regulation," in which public
goals would take advantage of the pricing system. What Schultze
proposed in the area of pollution control, Alfred Kahn commended
for electric power regulation and Alain Enthoven proposed for
health insurance. But what all three, and others in this vein,
tended to overlook is that incentive regulation is still regulation.
It still requires competent, public-minded regulators. And because
technology continues to evolve, regulation is not merely transitional.

The 1990 Clean Air Act created an innovative acid rain program
that supplanted "command-and-control" regulation of
sulphur dioxide emissions with a new, "market-like"
system of tradable emission permits. But before this system could
operate, myriad regulatory determinations were necessary. Public
policy had to specify the total permissible volume of pollutants,
how the new market was to be structured, and how emissions were
to be monitored. This was entirely a contrived market. So was
the decision to auction off portions of the broadcast spectrum.
Though hailed as more "market-like" than the previous
system of administrative broadcast licensing, the creation of
auctions required innumerable regulatory determinations.

Unlike airline deregulation, in which the supervisory agency,
the Civil Aeronautics Board, was put out of business, the Federal
Communications Commission and the Environmental Protection Agency
remain to monitor these experiments in incentive regulation and
to make necessary course corrections. Airline deregulation has
been at best a mixed success, because there is no government agency
to police the results and to intervene to prevent collusive or
predatory practices.

Similarly, if we are to use incentives in sectors that have previously
been seen as public goods, such as education, issues of distribution
inevitably arise. How public policy allocates, say, vouchers,
and how it structures incentives, cannot help affecting who gets
the service. The ideal of a pure market solution to a public good
is a mirage.

The basic competitive discipline of a capitalist economy
can coexist nicely with diverse extra-market forces; the market
can even be rendered more efficient by them. These include both
explicit regulatory interventions and the cultivation of extra-market
norms, most notably trust, civility, and long-term reciprocity.
Richard Vietor of the Harvard Business School observes in his
1994 book, Contrived Competition, that imperfect, partly
regulated markets still are highly responsive to competitive discipline.
The market turns out to be rather more resilient and adaptive
than its champions admit. In markets as varied as banking, public
utilities, and health care, entrepreneurs do not sicken and expire
when faced with regulated competition; they simply revise their
competitive strategy and go right on competing. Norms that commit
society to resist short-term opportunism can make both the market
and the society a healthier place. Pure markets, in contrast,
commend and invite opportunism, and depress trust.


A review of the virtues and limits of markets necessarily takes
us back to politics. Even a fervently capitalist society, it turns
out, requires prior rules. Rules govern everything from basic
property rights to the fair terms of engagement in complex mixed
markets such as health care and telecommunications. Even the proponents
of market-like incentives—managed competition in health care,
tradable emissions permits for clean air, supervised deregulation
of telecommunications, compensation mandates to deter unsafe workplace
practices—depend, paradoxically, on discerning, public-minded
regulation to make their incentive schemes work. As new, unimagined
dilemmas arise, there is no fixed constitution that governs all
future cases. As new products and business strategies appear and
markets evolve, so necessarily does the regime of rules.

The patterns of market failure are more pervasive than most market
enthusiasts acknowledge. Generally, they are the result of immutable
structural characteristics of certain markets and the ubiquity
of both positive and negative spillovers. In markets where the
consumer is not effectively sovereign (tele-communications, public
utilities, banking, airlines, pure food and drugs), or where the
reliance on market verdicts would lead to socially intolerable
outcomes (health care, pollution, education, gross income inequality,
the buying of office or purchase of professions), a recourse purely
to ineffectual market discipline would leave both consumer and
society worse off than the alternative of a mix of market forces
and regulatory interventions. While advocates of laissez faire
presume that the regulation characteristic of an earlier stage
of capitalism has been mooted by technology, competition, and
better-informed consumers, they forget that the more mannered
capitalism of our own era is precisely the fruit of regulation,
and that the predatory tendencies persist.

Contrary to the theory of perfect markets, much of economic life
is not the mechanical satisfaction of preferences or the pursuit
of a single best equilibrium. On the contrary, many paths are
possible—many blends of different values, many mixes of market
and social, many possible distributions of income and wealth—all
compatible with tolerably efficient getting and spending. The
grail of a perfect market, purged of illegitimate and inefficient
distortions, is a fantasy.

The real world displays a very broad spectrum of actual markets
with diverse structural characteristics, and different degrees
of separation from the textbook ideal. Some need little regulation,
some a great deal—either to make the market mechanism work efficiently
or to solve problems that the market cannot fix. Someone has to
make such determinations, or we end up in a world very far from
even the available set of Second Bests. In short, rules require
rule setters. In a democracy, that enterprise entails democratic

The market solution does not moot politics. It only alters the
dynamics of influence and the mix of winners and losers. The attempt
to relegate economic issues to "nonpolitical" bodies,
such as the Federal Reserve, does not rise above politics either.
It only removes key financial decisions from popular debate to
financial elites, and lets others take the political blame. A
decision to allow markets, warts and all, free rein is just one
political choice among many. There is no escape from politics.


The issue of how precisely to govern markets arises in libertarian,
democratic nations like the United States, and deferential, authoritarian
ones like Singapore. It arises whether the welfare state is large
or small, and whether the polity is expansive or restrained in
its aspirations. Rule setting and the correction of market excess
are necessarily public issues in social-democratic Sweden, in
Christian Democratic Germany, in feudal-capitalist Japan, and
in Tory Britain. The highly charged question of the proper rules
undergirding a capitalist society pervaded political discourse
and conflict throughout nineteenth-century America, even though
the public sector then consumed less than 5 percent of the gross
domestic product.

The political process, of course, can produce good sets of rules
for the market, or bad ones. Thus, the quality of political life
is itself a public good—perhaps the most fundamental public good.
A public good, please recall, is something that markets are not
capable of valuing correctly. Trust, civility, long-term commitment,
and the art of consensual deliberation are the antitheses of pure
markets, and the essence of effective politics.

As the economic historian Douglass North, the 1993 Nobel laureate
in economics, has observed, competent public administration and
governance are a source of competitive advantage for nation-states.
Third-world nations and postcommunist regimes are notably disadvantaged
not just by the absence of functioning markets but by the weakness
of legitimate states. A vacuum of legitimate state authority does
not yield efficient laissez faire; it yields mafias and militias,
with whose arbitrary power would-be entrepreneurs must reckon.
The marketizers advising post-Soviet Russia imagined that their
challenge was to dismantle a state in order to create a market.
In fact, the more difficult challenge was to constitute a state
to create a market.

Norms that encourage informed civic engagement increase the likelihood
of competent, responsive politics and public administration, which
in turn yield a more efficient mixed economy. North writes:

The evolution of government from its medieval, Mafia-like character
to that embodying modern legal institutions and instruments is
a major part of the history of freedom. It is a part that tends
to be obscured or ignored because of the myopic vision of many
economists, who persist in modeling government as nothing more
than a gigantic form of theft and income redistribution.

Here, North is echoing Jefferson, who pointed out that property
and liberty, as we know and value them, are not intrinsic to the
state of nature but are fruits of effective government.

The more that complex mixed markets require a blend of evolving
rules, the more competent and responsive a public administration
the enterprise requires. Strong civic institutions help constitute
the state, and also serve as counterweights against excesses of
both state and market. Lately, the real menace to a sustainable
society has been the market's invasion of the polity, not vice
versa. Big money has crowded out authentic participation. Commercial
values have encroached on civic values.

Unless we are to leave society to the tender mercies of laissez
faire, we need a mixed economy. Even laissez faire, for that matter,
requires rules to define property rights. Either way, capitalism
entails public policies, which in turn are creatures of democratic
politics. The grail of a market economy untainted by politics
is the most dangerous illusion of our age.

Related Resources

"The Vanity of Human Markets: An Interview with Robert Kuttner," by Wen Stephenson, Atlantic Unbound, February 25, 1997.

"Rethinking Capitalism, " by Marcia Stephanek, Salon, February
10, 1997.

Robert Kuttner discusses his book, Everything For
, and the
threats to democracy posed by an extreme free-market ideology.

"The Invisible Fist," by Charles Handy, The Economist, February 1997.
Management writer and social philosopher Charles Handy advises that Everything for Sale "ought to be compulsory reading for all politicians."

Everything For Sale


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