Markets and the Government

I read the articles by President Obama and Paul Seabright today.  They speak to the relationship between a market economy and the government.  The remaining three quotes are by very good economists on the same topic; they are presented in alphabetical order.

President Barak Obama.  Wall Street Journal, “Toward a 21st-Century Regulatory System.”

For two centuries, America's free market has not only been the source of dazzling ideas and path-breaking products, it has also been the greatest force for prosperity the world has ever known. That vibrant entrepreneurialism is the key to our continued global leadership and the success of our people.

But throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse.

Paul Seabright, Foreign Policy,  “The Imaginot Line.”

There are important lessons to be learned from the [financial] crisis. But we'll learn them better if we realize that the intellectual and political architects of the system that failed us were not naive at all, but immensely clever and subtle; it was their cleverness and subtlety that undid them. And that is bad news for all of us, for naivete can give way to learning, but cleverness has no obvious higher state.

Daron Acemoglu, ("The Crisis of 2008: Structure Lessons for and from Economics,").

A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime. It is our collective choice to manage the greed that many in our society inevitably possess. Economic theory provides guidance in how to create the right incentive systems and reward structures to contain it and turn it into a force towards progress.

F.A. Hayek, “The Fatal Conceit.”

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Raghuram Rajan and Luigi Zingales, “Saving Capitalism From the Capitalists.”

We do not believe that capitalism is fundamentally flawed, because we believe that markets can be given the political support to remain free. Much of this book has been about why that support is necessary: markets cannot flourish without the very visible hand of the government, which is needed to set up and maintain the infrastructure that enables participants to trade freely and with confidence. But who has an interest in pushing the government to support the market? For even though everyone collectively benefits from the better goods, the services, and the equality of access that competitive markets make possible, no one in particular makes huge profits from keeping the system competitive and the playing field level. Thus, everyone has an incentive to take a free ride and let someone else defend the system. A competitive market is a form of public good (a good, like air, that is useful but hard to charge for), and somewhat paradoxically, collective action is needed for its maintenance.

Given its dependence on political goodwill, democratic capitalism’s greatest problem is not that it will destroy itself economically, as Marx would have it, but that it may lose its political support. Capitalism’s biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action.