When Market Failure Is Government Failure

Hi,

Freedom is a government program. Liberty is the product of regulation.

No, I haven’t gone all Herbert Marcuse on you. Marcuse, you may recall, was the Frankfurt School Marxist who acted a bit like the Monorail salesman of bad ideas. He loved coining seemingly contradictory formulations to denounce capitalism and democracy. He’d talk about “repressive tolerance.” Freedom of choice is oppressive, elections disguise and reinforce servitude. “Free election of masters does not abolish the masters or the slaves.” (I’m not sure they’ve noticed yet, but a lot of the post-liberal types have been rebranding a lot of Marcusian ideas as right-wing insights. Perhaps a good topic for another day.)

But Marcuse had a little bit of a point. Political systems are, unavoidably, in the business of deciding what people are free to do and what they are not. There’s no getting around this point. Think of it this way. The key attribute of the state—everywhere—is its “monopoly on violence,” as Max Weber put it. The state comes into existence by force, and its legitimacy is derived from its ability to protect citizens from violence. 

Of course, it’s not exactly a monopoly the way we often think of monopolies. After all, there are times in life when non-state violence is allowed. In America, there are very few. You can defend yourself against violence. You can be a boxer or wrestler. You can study karate. The key is that, outside of a few voluntary situations and self-defense, you can’t use violence legally. There was a time when some could legally use violence in morally repugnant ways. The key involved declaring that some humans weren’t, legally speaking, fully human. Slaveholders could assault slaves on the grounds that they were property. Men could abuse their wives and kids on somewhat similar grounds. In many countries today, authoritarian governments still recognize such exceptions.

Carl Schmitt, another intellectual who deployed his talents in defense of the indefensible, put his finger on this very point. “The exception is more interesting than the rule,” the Nazi legal philosopher argued. “The rule proves nothing; the exception proves everything. In the exception the power of real life breaks through the crust of a mechanism that has become torpid by repetition.” Or, more pithily, the “sovereign is he who decides on the exception.”

In America, we don’t have human sovereigns—i.e. rulers who decide such things based upon their own arbitrary whims—we have laws. That’s what we mean by the “rule of law.” No president, judge, or bureaucrat may “rule” in defiance of the law.

Even so, the law—even democratic law—defines what we are free to do and what we are not free to do. The Constitution lays out the basics, but it doesn’t restrict what we can do, it restricts what the government can restrict. The Bill of Rights, in other words, lays out what the government can’t do. “Congress shall pass no law that …” etc. Again, I’m no Schmittian, but his point about exceptions being more interesting than the rules is relevant here. We have a very powerful government capable of doing all sorts of things, but our fundamental charter is all about the exceptions to what it can do.

Free societies—as most people understand the term—are not natural. Oligarchy, autocracy, cartelization, corporatism, socialism, strongmanism, tribalism, aristocracy, monarchy, etc.: These are the natural forms of human organization. And the whole point of the American experiment is to keep these things at bay. You can read more about this in Suicide of the West.

Adam Smith’s warning.

I’ve found that conservatives and liberals alike generally understand this point when it comes to things like authoritarianism, civil rights, democracy, and other obviously “political” liberties— even if they perceive threats through a more partisan lens. Each side thinks the other is the obvious threat to the American way, and who has the better argument usually depends on the issue. But there’s a lot more confusion when it comes to markets and economic liberties.

First of all, both the right and the left have an annoying tendency to confuse being pro-business with being pro-free market. Until recently, the left thought being pro-business was usually bad  unless it was under the guise of some corporatist “public-private partnership,” and the right thought being pro-business was good unless it was part of some “public-private partnership.” Today it’s harder to keep score given all of the right-wing complaints about “woke capitalism” and all of the left-wing propagandizing in favor of “environmental, social, and governance” criteria stuff.

But even in the Before Times, conservatives had a tendency—one I often share—to be against regulation as a first principle. Obviously, I think this principle often has much to recommend it. But I’ve come to regard this as the wrong way to think about it. The choice is never between regulation and no regulation, but between good regulation and bad regulation. And even then, implementation matters. You can have the best pro-growth, anti-fraud regulations imaginable, but if they’re not enforced well it doesn’t matter, as Kevin Williamson often points out. Most of the fights about regulation are about politics rather than actual policy. And as Kevin observes, “Politics consists of excitement, high sentiment, and soaring declarations. Governance is boring.”

As I often note, Adam Smith (no slouch there) acknowledged in The Wealth of Nations that it was natural for merchants to try to get around the hassles of the free market and fair competition:  “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.” This passage is often cited by Elizabeth Warren types as proof of the need for strong regulation. And they’re right – sort of.

But Smith then wrote, “It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.”

What Smith was getting at, as Eammon Butler explains, is that the only way such conspiracies can actually work is if “politicians and the law are complicit. [Smith] has in mind the sort of privileges enjoyed by the craft guilds (or ‘incorporations’), which, since the Middle Ages, had guarded jealously their own monopolies, restricted who could join the profession and on what terms.”

The free market creates monopolies from time to time, but as Joseph Schumpeter demonstrated, they don’t last unless government makes them permanent.

In other words, government has to be in the game to ensure fair competition and to make sure that businesses do not conspire against the public. That requires regulation.

Which brings me to the left. 

One of my enduring gripes is the tendency of opponents of free markets to blame free markets for government failures. Enron’s failure was a massive regulatory screw up, but it was widely blamed on the problems of the “free market” and “deregulation.” The financial crisis of a decade ago had many authors, but bad government policy was the indispensable factor. As Niall Ferguson wrote in 2009, “The reality is that crises are more often caused by bad regulation than by deregulation.” 

Progressives take Smith’s warning as gospel and then reject his remedy as heresy.

Consider the New Deal, still the defining paradigm of progressive political economy. It was supposed to save the “forgotten man” from the predations of big business, but at every turn the New Dealers supported, subsidized, and celebrated the big players in the market to the detriment of many little guys. As I wrote in Liberal Fascism: 

The New Dealers invited one industry after another to write the codes under which they would be regulated (as they had been begging to do in many cases). The National Recovery Administration, or NRA, was even more aggressive in forcing industries to fix prices and in other ways collude with one another. The NRA approved 557 basic and 189 supplementary codes, covering roughly 95 percent of all industrial workers.

It was not only inevitable but intended for big business to get bigger and the little guy to get screwed. For example, the owners of the big chain movie houses wrote the codes in such a way that independents were nearly run out of business, even though 13,571 of the 18,321 movie theaters in America were independently owned. In business after business, the little guy was crushed or at least severely disadvantaged in the name of “efficiency” and “progress.” The codes for industries dealing in cotton, wool, carpet, and sugar were— “down to the last comma”—simply the trade association agreements from the Hoover administration. And in almost every case big business came out the winner. In “virtually all the codes we have examined,” reported Clarence Darrow in his final report investigating Hugh Johnson’s NRA, “one condition has been persistent . . . In Industry after Industry, the larger units, sometimes through the agency of . . . [a trade association], sometimes by other means, have for their own advantage written the codes, and then, in effect and for their own advantage, assumed the administration of the code they have framed.” We may believe that FDR fashioned the New Deal out of concern for the “forgotten man.” But as one historian put it, “The principle . . . seemed to be: to him that hath it shall be given.”

The babies and the bathwater.

Which brings us, of course, to baby formula. I opted to start with Herbert Marcuse and meandering eggeheadery because The Dispatch’s own Scott Lincicome has already lucidly laid out the facts about the baby formula crisis. And we each have our respective lanes. As Bob Dylan said, “I’d like to be able to hit a hundred-mile-an-hour baseball. But you have to know your place.”

The crisis is complicated and I don’t want to lay it all on government policy, never mind the Biden administration. But if I have to choose between blaming capitalism or blaming government, then we’re gonna have to put government in the dock. Protectionism is one of the main problems. And while big businesses often lobby for protectionism (as Smith told us they would), government could say, “No.” Another key culprit: corporatist policy worthy of the New Deal. The Special Supplemental Nutrition Program for Women, Infants, and Children (known as WIC—how transphobic to use “women,” by the way), buys more than half of all the baby formula in America and distributes it at massively discounted rates to poor people. I may be a full-throated defender of the free market, but I have no problem with government making sure poor families have access to baby formula. But the question, again, isn’t whether this be done, but how. Getting a WIC contract in a state automatically makes you the dominant provider of baby formula. These contracts are remarkably similar to the medieval guild licenses offered by the crown.

“Bad U.S. policy surely didn’t cause the infant formula crisis,” Scott writes, “but it just as surely made the situation worse than it needed to be. Trade barriers and poorly designed welfare policies helped create a brittle system dominated by a few domestic players—a system that might muddle through in the good times but one that crumbles in the face of a serious shock and struggles to recover thereafter.”

Last, whether you think this government managed system is an example of good regulations or bad ones, there’s still the unavoidable fact that the regulators screwed up. I had only the vaguest idea of how baby formula is regulated in America. But you know who had a really good grasp of the details? The regulators. And when they shut down the Abbott lab months ago—amid a global supply chain crisis—they should have said something like, “Uh oh, this could be bad,” and started to look for ways to head off a disaster. But the Nestors just stayed in their lane.

We’re never going to live in a country where government won’t have a say in making sure that baby formula is safe and available to everyone who needs it, and that’s fine with me. But our temporary failure to do exactly that isn’t a failure of capitalism, as so many people glibly assert. It’s a failure of government to understand that making sure capitalism operates properly is part of its job.