Markets and States are Complements

February 20, 2018

Adam Rubenstein interviewed Steven Pinker for the Weekly Standard

 

Pinker is promoting his new book where, among other things, he continues his practice of criticizing the left as an intellectually-honest and thoughtful member of the left. 

 

I recommend the article in its entirety, but here's a neat little excerpt where Pinker deconstructs a particularly unhelpful way we tend to talk about states and markets at the popular (and too often the scholarly) level:

 

AR: You write that “globalization helped the lower and middle classes of poor countries, and the upper class of rich countries, much more than it helped the lower middle class of rich countries. Of the claim that only the rich are doing well, while everyone else is “stagnating or suffering,” you write “most obviously, it’s false for the world as a whole: the majority of the human race has become much better.” How should American domestic politics reflect this fact: That our planet, however grim it may look, is fairly prosperous? Are conventional, free-market economics actually working?

 

SP: This is an acute dilemma. If you are a morally serious person—whether a humanist or a Judeo-Christian, who believes that all human lives have equal value—then policies that lift billions of people out of crushing poverty at the expense of millions of Americans who are laid off from factory jobs are a moral no-brainer. But of course it would be political suicide for an American politician to consider this tradeoff for millisecond. Still, there are other America-centric reasons to favor globalization: cheaper goods for hundreds of millions of American consumers; bigger markets for American exporters; and the greater stability of a richer world, with fewer migrants, epidemics, and insurgent movements.

 

As for free-market economics, it depends on what you mean by “conventional.” We know that markets make countries freer, richer, and happier compared to totalitarian central planning, but we also know that the habit among both the hard left and hard right to equate capitalism with anarcho-capitalism (no regulation, no social spending) is wrong. You can be in favor of free markets with regulations, just as you can be in favor of free societies with criminal laws. Even the freest of free marketeers has to acknowledge that markets don’t provide a decent living to those with nothing to offer in exchange, such as the young, old, sick, and unlucky, and they also have to acknowledge that markets alone fail to protect public goods that no one owns, such as the atmosphere. Not surprisingly, all wealthy capitalist countries have extensive social spending and regulation. And as a Canadian I can confirm that free-market societies with greater social spending and regulation than the United States are not grim dystopias sliding down a slippery slope to Venezuela, but are rather pleasant places to live, with greater happiness and longevity, and less violent crime, abortion, sexually transmitted diseases, and educational mediocrity.

 

Of course, the "free market" is itself an institutional arrangement that requires a state to act in certain ways and forebear in others. It is a rule configuration for the:

  • protection of private property,

  • promotion of voluntary exchange, and

  • enforcement of contract obligations.

 

We make a rebuttable assumption that individuals are best suited to make decisions about the allocation of scarce resources. Natural law and consequentialist arguments can be advanced to defend this assumption, but the assumption (a) grows out of a historical-legal tradition rather than a theoretical exercise, and (b) is subject to various exceptions and provisos which grow out of experience, e.g. regulations of nuisance. The same logic that permits the regulation of common law nuisance can be extended to encompass environmental regulation and similar spillover effects of productive activity. It can even be extended to preclude activities regarded by the community as destructive of human dignity--we are, after all, more than merely social atoms in a social void.

 

Our system must have rules about how private claims to objects of value are to be established and adjudicated and what specific obligations these claims imply. Small personal items in one's possession seem simple enough, but what about intangible property such as Pinker's book? What about the considerable leap we make when we permit a deceased person to dictate what happens to the things of our world from beyond the grave???

 

We make a rebuttable assumption that voluntary exchanges are mutually beneficial to the parties--why else would they each choose the exchange?--and that the proliferation of such exchanges increases total social welfare. If two parties are subjectively better off at the conclusion of an exchange, then society at large gets incrementally richer every time one occurs.

 

Our system must have rules about what constitutes a voluntary exchange. "Voluntary" has long been held to imply that exchanges be free of force and fraud. To that list, we also tend to add the requirement that all parties have capacity, i.e., the cognitive faculties to credibly consent. The concept of capacity can be and has been extended yet further. In complex exchanges some parties might be much more sophisticated than others. Moreover, organizational actors--such as large financial firms--may have considerable bargaining power relative to any individual market participant. In exchanges characterized by substantial informational or bargaining asymmetries, we may wish to limit the extent to which one party can leverage such advantages against a weaker partner. Again, these requirements have grown out of long experience and can be defended on natural law or consequentialist grounds. The boundaries of these rationales are fuzzy and require judgment. But an argument against them on the grounds that they are fuzzy proves too much. The rules that govern human relations are inevitably fuzzy because they deal with the vagaries of human life.

 

Once we assume that voluntary exchanges are socially beneficial, we may want to go beyond merely facilitating their voluntariness to promoting their proliferation. Complex, non-contemporaneous exchanges between parties that operate at arms-length may happen less frequently than desired if there is not some mechanism to overcome the deficit of trust. Thus, we may wish to provide some commitment device that preserves the terms of an exchange and limits opportunistic breaches where the obligatory performances are complex and/or extended in time. Courts, via the mechanism of contract, may serve as third-party neutral guarantors.

 

The crucial thing to note with each of the moves we have just made is that each implies a role for the state. The freest of free markets requires judgment about what rules should control and what mechanisms should be employed. These determinations grow out of a legal tradition that is neither purely natural law or consquentialist in orientation. They grow out of practical human judgment in the context of social life. 

 

There are several further implications. First, the organic nature of the arrangements we have made and the success we have had under them should give us pause before abandoning them for "light and transient causes." Pursuit of theoretically ideal arrangements can become the enemy of the good.

 

Second, organic products are often improved by rational examination and conscious tweaking. No generation yet has proven infallible, and institutions were not handed down from Heaven. They are the product of historically-nested, diffused exercises of human judgment, and are susceptible of improvement.

 

American progressives need to recognize, among many things, that we cannot make rational improvements if we do not adequately appreciate what works in our inherited institutions and why it works. As Pinker demonstrates with considerable evidence, human life has already improved dramatically over the last couple hundred years. Moreover, when contemplating further improvements, we should compare our present arrangements not to some theoretical ideal but to concrete, plausible alternative arrangements.

 

 American conservatives need to recognize that conservatism is not in itself a principled or thoughtful position--it is a reaction. As Hayek once observed:

 

The position which can be rightly described as conservative at any time depends, therefore, on the direction of existing tendencies. Since the development during the last decades has been generally in a socialist direction, it may seem that both conservatives and liberals have been mainly intent on retarding that movement. But the main point about liberalism is that it wants to go elsewhere, not to stand still.

 

Folks who know the pedigree of their institutions recognize that what they have inherited is the ongoing experiment of their forebears--the project continues. We must not bury our talent in the ground for fear of losing what we have.

 

Both sides need to recognize that the supposed antagonism between markets and states is a decidedly unhelpful frame for analysis. All activity of the state is predicated on wealth generated by the market--the healthier the market, the more services a state can provide. The very operation of the market is structured by the state acting in various ways and forbearing in others. These are arrangements--arrangements imply purpose and the settlement of expectations. We should fully appreciate how well current arrangements work and be circumspect about upsetting expectations that arise around them. But we should also be willing to exercise judgment about how they might be altered as "shall seem most likely to effect [our] Safety and Happiness." 

 

 

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