THE ROOTS OF MARKETS AND WEALTH

Those of you who have been following my program and reading this blog know that I sent out the manscript for my book, tentatively titled, The Roots of Markets & Wealth: The Indispensable Role of the State in Making Markets Work. I say "tentatively" because it looks like I'll be changing the title, at the request of the publisher. It turns out what I wrote fits right into this market meltdown mess. What I post below is a snippet from Chapter 1, "Milton Friedman Got it Wrong ... Politics is at the Heart of American Capitalism."

To set up the excerpt below, what I'm saying is that we are a nation that prides itself on the separation of powers concept. I've selected the passage below because the bailout proposal put forth by Secretary of Treasury Paulson eviscerates this principle. If you haven't been following the news, Secretary Paulson and the Bush administration have put together a $700 billion bailout that says the plan can't “be reviewed by any court of law or any administrative agency.”

We all know what happened the last time the Bush administration asked for a blank check (in war). I especially like the section below because it's clear bailouts and "trust us" weren't something Adam Smith & the Founding Fathers thought were good ideas ...

ADAM SMITH’S “LAWS OF JUSTICE” AND THE FEDERALIST PAPERS
As we will see in Chapter 2, market opportunities for everyone are difficult to achieve ... and are not something that “just happen.” Opportunities grow when government removes the stagnant blood of political privilege. Opportunities are created when we seek to eliminate stifling social practices that prohibit certain groups from participating. Opportunities multiply when policy-makers seek out and defeat market conspiracies. Opportunities grow when the state moves against favorable legislation that lowers competition. Finally, opportunities emerge when the quest for advantage and power in markets – which is very similar to the search for power and advantage in politics – is tamed by both constitutions and the law.

But these proactive approaches to government aren't always acknowledged. To avoid taking our opportunities “for granted” (see Milton Friedman) it is imperative that society accept that government oversight and regulations are necessary for markets to function smoothly. The reasons for this are simple, and two-fold.

First, if there was anything Adam Smith believed would undermine the market and the logic of the invisible hand, it was the unearned acquisition of resources (and he wasn’t talking about assistance to the poor here). We can understand this by looking at the state’s historic role in transferring funds, granting subsidies, and protecting specific industries. While prefacing his discussion on the importance of the “laws of justice” Adam Smith argued that deliberately shifting a “greater share” of resources to an industry “than would naturally go to it” would retard “the progress of society toward real wealth and greatness.” Specifically Smith wrote:

Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.

But, as we know, there are undue subsidies, protected industries, and tax obligations that are not absorbed equally across society. There’s also the prospect that private players will not provide the goods and services they say they will. It’s one of the reasons Adam Smith believed that proprietors of private roads (who charge tolls) should be placed “under the management of commissioners or trustees.”

These are the dynamics Adam Smith worried about. He understood that the quest for advantage and power in politics has a parallel world in markets. To insure the laws of justice were not violated it was the duty of the state (i.e. “the sovereign”) to protect the “system of natural liberty.” This would occur only if the state made an effort “to protect every member of the society” – to the extent possible – “from the injustice or oppression of every other member” in it. Smith was arguing that, while it is good to believe in natural liberty, the state has to confirm the conditions that make it work. Put another way, when it comes to the harmony creating forces of the market, it is good to “trust, but verify.” This is where warnings and caveats on human nature from The Federalist Papers become important for us.

As many might recall, The Federalist Papers were a series of articles prepared by John Jay, Alexander Hamilton, and James Madison to try and convince the states to ratify the new Constitution (most understand that James Madison did most of the writing). They are also considered philosophical masterpieces. Among the many observations made, the articles warned about the dangers of allowing small groups, or factions, to run roughshod over a weak central government. The real danger for the new nation was that small powerful groups might be able to capture the levers of a corrupt or weak government, and then place their narrow interests above those of the nation. The subtext here is of equal voltage to the larger argument. Specifically The Federalist Papers warned a young nation of human frailties and about the dangers inherent in the individual quest for power.

In Federalist #10, for example, Madison bluntly tells us that, “If men were angels, no government would be necessary.” For our purposes this tells us that we would not need government if those pursuing wealth and profit were angels. But they are not. In spite of Milton Friedman’s optimism, there is little to indicate that markets are immune from the emotions and biases that dominate the human condition. Advantage seeking, jealousies, ego, poor judgment and the search for power get the best of us. This is why the concerns Adam Smith had with reference to the laws of justice and natural liberty are warranted. Simply stated, while the pursuit of wealth may drive people to work hard, the prospect of wealth and power also drive us to violate the laws of justice.

It is not a stretch to argue the individual search for power through commerce and wealth – like the search for power through government and authority – push people to conduct themselves in a manner that is not commensurate with the actions of angels. This is why both our political and economic world requires institutional checks and balances. This helps explain why Adam Smith believed that among the duties of the state, the need to “verify” that the laws of justice in markets were not violated was among them. These concerns were not lost on James Madison ...

- Mark

Note: At the end of the day, not only have the neo-conservatives and the Bush administration violated the laws of justice Adam Smith believed were so important but, with with the restrictions proposed by Paulson's bailout plan, the Bush administration is now advocating that we toss out the separation of power principles the Founding Father's put in place.