From James Galbraith and RWER #84 . . . there are no markets without governance and government and regulations. More precisely: just as Adam Smith pointed out that the division of labor depends on the extent of the market, so the extent of the market depends on the reach of the state – on its capacity to provide security, a framework of law and justice, and to regulate effectively in the public interest. Without each of these, many if not most modern markets could not exist in their actual form. Examples are legion. How well would cars function in cities without streetlights and stop signs? Would passengers fly in commercial aircraft in the absence of air-traffic control? Would homemakers buy and eat fresh raw vegetables if they did not have reasonable confidence of non-contamination
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from James Galbraith and RWER #84
. . . there are no markets without governance and government and regulations. More precisely: just as Adam Smith pointed out that the division of labor depends on the extent of the market, so the extent of the market depends on the reach of the state – on its capacity to provide security, a framework of law and justice, and to regulate effectively in the public interest. Without each of these, many if not most modern markets could not exist in their actual form.
Examples are legion. How well would cars function in cities without streetlights and stop signs? Would passengers fly in commercial aircraft in the absence of air-traffic control? Would homemakers buy and eat fresh raw vegetables if they did not have reasonable confidence of non-contamination by hepatitis and heavy metals? Would appliances and electronic equipment sell so well, if there were no assurance that they would not electrocute their owners, too often? Would banks survive without deposit insurance? Even with insurance, how stable are they when the regulators and the supervisors are taken away? To be sure, nothing is entirely safe. But in each and every instance, some level of public presence alters the economic landscape, permitting businesses and entire industries to flourish that would otherwise be much smaller, if they existed at all.
Since the origin of political economy in the 18th century, economists have placed the productive unit – the farm, the workshop, the factory – at the center of their worldview. They have treated the rest – the infrastructure, public health, social insurance, schools and universities and the regulators – as a support system, a conceptual periphery to the productive core. In fact, as the experience of strategic bombing in Germany showed, modern factories are largely outgrowths of the infrastructure – social and physical; if they are destroyed but the infrastructure remains – as was the case in post-war Germany – the factories grow back quickly, like puffballs after a rain.
Regulation is the key institutional and political component of infrastructure. Regulation sets and enforces standards on matters that the consumer cannot easily see: the phyto-sanitary condition of food, the reliability of machines, their efficiency in the use of resources, the safety and environmental soundness of the production process, the level of wages and the quality of working conditions. The “factors of production” that so bemuse economists – human capital, physical machines and technology – are easily moved, by airplane, ship and optical fiber, from a rich country to a poor one. Physical infrastructure requires a sustained act of resource mobilization and the application of design and engineering skill. This is hard.
But regulation is harder still. To regulate effectively requires the full spectrum of scientific knowledge combined with operational capacity and enforcement, and all of that combined with autonomy from the resentful, evasive and potentially corrupting subjects of the regulatory process. Regulation is a delicate balancing act. It requires a democratic legal process on one side but also a free and fearless scientific and engineering estate on the other – one whose judgments are capable of commanding respect, and are in fact respected. The successful achievement of this balance – where it has been achieved at all – is practically a preserve of the richest countries – acquired painstakingly and easily squandered. read more