Attributing the robust state of modern economies to the “free” market is like saying that Arabian stallions, champion Rottweilers, and freshly-picked sweet corn are the result of mutation.
Would you and your family rather live with a wolf, or Good Dog Carl?
That’s the thought I come away with after reading Lane Kenworthy’s chapter on “The Efficiency of Constraints” in his book In Search of National Economic Success: Balancing Competition and Cooperation (1995).
Kenworthy’s been getting a lot of well-deserved attention in the econoblogosphere lately. But I wonder if any of those bloggers have read his books. I really wonder if any of the mainstream economists are reading his books. I really really wonder if Obama’s advisors are reading his books.
I’ll get back to that. But first, The Big Idea. After quoting Smith’s seminal “invisible hand” passage, Kenworthy says:
The reason actors engage in economically beneficial behavior, according to the [neoclassical] theory, is not that they have unlimited freedom of choice, but that they must choose within a particular set of constraints—the constraints imposed by market competition. ... It is this constraint, rather than freedom of choice, that is the crucial efficiency-generating mechanism in a capitalist economy.
In other words, extolling the “free” part of free markets is like getting all drippy about mutation without selection. More Kenworthy:
The issue is not free choice versus constraints, but what type of constraints produce economically productive activity.
Natural selection—in this case the constraints imposed by the natural
and human environment and by other free-market agents—is a powerful
force. But Kenworthy asks, quite reasonably, whether it is always more
efficiency-producing than artificial selection (a.k.a. human-directed
selection, a.k.a....breeding). In many cases, the visible hand of
government creates more efficient markets.
Free-market advocates tend to ignore the reality that market-generated constraints often act directly against the formation of efficient markets. To choose what is perhaps the most obvious example: competition creates huge incentives for market participants to make sure that all information is not known. Disclosure regulations address that inefficiency, and result in the kind of robust open markets we see today in prosperous countries. Kenworthy gives three more (detailed and well-analyzed) examples in his chapter.
Even Adam Smith doesn’t assert that market constraints have some a priori claim to superiority. Says Kenworthy, quoting Smith,
...an individual who “intends only his own gain” is
“led by an invsible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
“Nor is it always.” “Frequently.” Cherry-picked, it verges on a mealy-mouthed endorsement. Smith, in his wisdom, is not nearly so categorical as his latter-day disciples.
Kenworthy’s attention to constraints—market-imposed and otherwise—strikes me as a profound insight, cutting straight to the heart of the laissez faire philosophy that has increasingly dominated mainstream economics in recent decades. But the idea has not been taken up or even considered, apparently, by mainstream economists—or really by anyone else aside from Kenworthy’s colleague Wolfgang Streeck (who Kenworthy credits with inspiring his chapter in the first place).*
This might be partially Kenworthy’s fault. He’s pretty much invisible on both RePEc and SSRN—the big publication/author databases for economics and social science, respectively. Each service turns up one of his papers and none of his books, and he doesn’t even appear on RePEc’s author list. A few hours’ work posting papers and personal info could get him a lot more attention, readership, and—the gelt of academe—citations.
Kenworthy also has the profound disadvantage of being a clear and cogent writer who’s accessible to (truly interested) laymen and policy wonks. His work is largely unpolluted by gratuitous academese. (You need to know some stats to understand and judge his arguments, but nothing more than an inquisitive soul can pick up on Wikipedia.)
These issues aside, I also wonder whether his chosen fields of sociology, political
science, political economy, etc.—sideshows in the eyes of mainstream
economists—cause those economists to think little of his work or simply
be unaware of it—undeservedly so, because his work consists of
unremittingly rigorous, top-of-the-game economic analysis. And it’s
empirical analysis (well-informed by theory)—actually trying to
tease out how real-world economies work and what we can learn from them.
Not surprisingly, Kenworthy has a lot more than one good idea. National Economic Success has a boatload. Ditto his latest, Egalitarian Capitalism: Jobs, Income and Growth in Affluent Countries (2007). This post is already altogether too long, so I’ll leave it to other posts—and other posters—to delve into those ideas.
Austan Goolsbee, are you listening?
* Streeck’s key 1997 article, “Beneficial Constraints: On the Economic Limits of Rational Voluntarism,” doesn’t seem to be available online.