You Got Government in My Markets! You Got Markets in My Government!

It seems some folks try to have it both ways when talking about “the market.” They are right to remind us that “the market,” so beloved of free-market types, does not simply exist in a state of nature. Much of the extended market order is enabled — even constituted — by rules that define property and regulate the terms of exchange. Many of these rules are created and/or enforced by government. If markets were “out there” in the wild, just being all efficient and stuff, the poverty of humanity down through history would be completely vexing. This is just neo-institutionalist economics 101, and I'm down with it.

In particular, the American economy is so far from textbook laissez faire that it is well-nigh-impossible to find a breakdown in market institutions that does not have some bit of government policy as a chief contributing cause. As I said in an earlier post on a similar theme, “The American economy is in fact a byzantine amalgam of market and state institutions enmeshed in a thicket of regulation.” So when part of it goes KAPUT it's cheap to blow ideological notes on the trumpet of market failure, especially if you're the sort of person who likes to go on and on about how advanced markets cannot even exist except within the framework of government law.

If you doubt the centrality of the government side of this, let me give you James Pethokoukis:

The more you look at the history of the housing-spawned credit crisis, the more you notice Uncle Sam popping up, Zelig-like, in every scene. Fannie Mae and Freddie Mac were government-birthed entities that decided to buy securities tied to subprime loans. And it was government officials on Capitol Hill, the recipients of millions in campaign donations from the F&F lobby, who decided not to rein in those entities. You had the government ' s Community Reinvestment Act nudging banks to make unsound loans. Government banker Alan Greenspan pushed interest rates too low for too long earlier this decade, creating an extreme financial situation that made the crazy Wall Street strategies look temporarily reasonable. And for decades, government has pushed higher homeownership as a national goal, via F&F as well as through the tax code, siphoning off resources that might have been better devoted to other economic sectors.

And now, folks like Barney Frank pretend government just showed up on the accident scene moments ago like an innocent passerby who wonders aloud, “Anyone here know what happened? Anyone?” I mean, how can we try to prevent future financial crises, or least minimize their damaging effects, if we delude ourselves on the causes of the current one?

We're seeing the apocalyptic failure of some huge markets. Yes, those markets have failed. And those markets are what they are because government made them what they are. We need better markets, and therefore we need better government. I can't say exactly what that means at this point, but surely Sarah Palin can.