Market Solutions to Public Policy Problems

Dr. Tom G. PalmerCentre for Civil

Society22.July.2015

What is a Market

What is the relationship between government and

the market? First:

Distinguish Government State The Market

“What is a State?”

“a state is that human community which (successfully) lays claim to the monopoly of legitimate physical violence within a certain territory, this ‘territory’ being another of the defining characteristics of the state.”

Max Weber, “Politics as a Vocation” [1919]

Max Weber (1864-1920)

From Roving Bandits to Stationary Bandits

Mancur Olson (1932-1998)

“If the leader of a roving bandit gang who finds only slim pickings is strong enough to take hold of a given territory and to keep other bandits out, he can monopolize crime in that area – he can become a stationary bandit.”

--Mancur Olson, Power and

Prosperity

A State is an Organization of the

Political Means

Franz Oppenheimer (1864-1943)

The “economic means” and the “political means”:

“There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one's own labor and the forcible appropriation of the labor of others.”“The state is an organization of the political means.”

--Franz Oppenheimer, The State

Do States Maximize Gross Domestic Product (GDP) or Capture the “State

Accessible Product” (SAP)?

“The ruler…maximizes the state-accessible product, if necessary, at the expense of the overall wealth of the realm and its subjects.”

“the state-accessible product had to be easy to identify, monitor, and enumerate (in short, assessable), as well as being close enough geographically….”

--James C. Scott, The Art of Not Being Governed (2009)

What is a government? The institution – meaning the procedures and

the organization – whereby we create and enforce rules of behavior. Examples include: Boards of directors,

Condominium Associations, Temple Boards, etc.

Remember: providing rules and providing enforcement of rules are two different functions and they need not be provided by the same organization

Examples of Government: Medieval “Communes” –

Independent Cities “Stadtluft macht

frei, nach Ablaufe

von Jahr und Tag.”

“City air makes you free, after the lapse of a year

and a day.”

Merchant Law The Lex Mercatoria

Law produced, not by rulers or states, but by merchants

The foundation of all contemporary international business law

We all make law when we make contracts: “Individuals make the

law insofar as they make successful claims.” Bruno Leoni

What is a market

economy?

“The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf; but everybody's actions aim at the satisfaction of other people's needs as well as at the satisfaction of his own.”

“[M]onetary economic calculation is the intellectual basis of the market economy. The tasks set to acting within any system of the division of labor cannot be achieved without economic calculation. The market economy calculates in terms of money prices.”

Ludwig von Mises, Human Action

Exchanges on markets are “non-tuistic.” Non-tuists are not interested in the interests of those with whom they interact. This sort of motivation is neither egoistic nor altruistic.

Philip Wicksteed, Commonsense of Political Economy

How are they related? Markets require rules and

mechanisms for enforcement: Property, contract, liability, etc. Courts, bailiffs, collection agencies, etc.

States can provide those rules But are states necessary for such rules

to be provided and enforced? That is an interesting question to discuss later….

States can also violate those rules systematically and with great violence

Property Creates the Foundation for Voluntary Cooperation

• Property sets the rules of interaction– Property rules are not

changed for this or that person, but are common for all

– The most important property we have is our property in our own persons…our right to be

ourselves: 自 由

• Property Defines the Baseline for Improvement • Improvements are measured

against a baseline– If we do not freely exchange,

you keep what is yours and I keep what is mine

Property Rights Avoid the “Tragedy of the Commons”

• “If I don’t catch the fish, someone else will…..”

• If everyone thinks that, then all the fish are caught and there are none left..

• Property rights help us to conserve resources

• Property rights create incentives to maximize the value of one’s assets – known as the “capital value”If my cattle don’t eat that grass…

Someone else’s willEach takes more than is sustainable and there is no grass left

• Knowing what you may do and what I may do, what is allowed and what not, allows us to cooperate peacefully to attain our ends.

Legally Secured and Voluntarily Transferrable Rights Provide a Secure Foundation for Social Cooperation

Key characteristics of property

• Respect for Property– In One’s Person (Personal liberty and bodily integrity)– In One’s Freedom (Presumption of liberty; right of exit)– In One’s Estate (One’s objects and goods)

• Property in estate is characterized by the “Three D’s”– Definable– Defendable– Divestible

• Corollaries of property solutions: – Equality before the Law– The Rule of Law

Sometimes a Market Failure

• Is a failure to have a market– Because of a failure to define property rights– Because of a failure to defend property rights– Because of a failure to provide a judicial system

that allows transfers of property rights at low cost