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Today’s Wall Street Journal: James Grant on The Illusion of Free Markets. [Ground Control to Major Tom]
Bernard E. Harcourt
James Grant’s book review of The Illusion of Free Markets: Punishment and the Myth of Natural Orderin today’s Wall Street Journalis certainly entertaining, but it side-steps the central argument of the book—namely, that the paradoxical belief in, on the one hand, the efficiency of free markets and, on the other hand, government’s unquestioned competence in the field of policing and punishing, has facilitated the massive expansion of our criminal justice system by reducing resistance to the social and political forces that tend toward more criminalization, longer punishments, and harsher policing. It is precisely this paradoxical logic that provokes deep suspicion and recurring resistance whenever legislators contemplate “regulating” the economy, and yet triggers wide enthusiasm and electoral victory whenever politicians pile on sentencing enhancements, stricter drug laws, and three-strikes statutes.
For sure, James Grant, the author of Mr. Market Miscalculates—has a sense of humor. His idea of "college professors who inhabit Planet Tenure” struck me as hilarious. (I can already hear all my junior colleagues: “Beam me up, Scotty!”). Also, the idea of college professors having a “tribal patois” is another good one. But the most humorous lines in the review, I suspect, are unintentional. And there were some good ones—about our punishment iniquities, about the free market. I’ll start with punishment. It’s actually the last line in the review: “As for the iniquity of the American prison system, the writer to read is Conrad Black.”
“Ground control to Major Tom… Your circuit's dead, there's something wrong…”
Conrad Black? Excuse me, but he’s not really the poster child of punishment excess, is he? Let’s look elsewhere for a minute. African-Americans in America are incarcerated today at astronomical rates. For Whites (men and women), the incarceration rate in 2005 stood at 412 per 100,000 residents; for African-Americans (men and women), the comparable rate was 2,290 per 100,000. This translates into an incarceration rate of 2.3% of all African Americans in this country (as compared to 0.4% for whites). The racial inequity here—that is, the national black-to-white ratio of incarceration—stands at 5.6. For young African-American men between the ages of 25 and 29, the rate jumps up to one in nine. Yes, that’s 11.7% of young black men in prison or jail. Eleven point seven percent. There’s an iniquity. Marc Mauer and Ryan King at the Sentencing Project have revealing state break-downs in their 2007 study on Uneven Justice. I’d recommend that reading to Mr. Grant—as well as the writings of others, such as Loïc Wacquant’s book Punishing the Poorand Michelle Alexander’s book The New Jim Crow.
A second startling line—again, probably unintentional—has to do with the free market. “In America, on Planet Earth, price discovery is that coordinating power” that achieves efficiency, “that wonderful contrivance—not invented but somehow evolved.”
Can you hear me, Major Tom? Can you hear me, Major Tom? Can you hear?
You’d think Mr. Grant missed the chapters on the myth of “natural order.” From the review essay, it almost feels as if the book sets out to refute the first theorem of welfare economics. Not at all. And explicitly so. The book doesn’t argue that the first theorem is wrong. Nor does it argue that the foundational assumptions of the theorem are in any sense incorrect. (Obviously, assumptions can never be wrong, whether on Planet Tenure or on Planet Earth, they are merely assumptions.) What the book does argue, instead, has to do with the interpretation of what the theorem tells us—of what the price mechanism tells us.
Most people (including Mr. Grant, I take it) interpret the theorem to mean that free markets are efficient: that the situation of the competitive market equilibrium is best from an efficiency perspective. The interpretation in The Illusion of Free Markets, however, is very different. It’s that, first, massive government intervention (the kind, for instance, necessary to keep in place the legal structure and institutional mechanisms that make possible a wheat pit at the Chicago Board of Trade) can lead to situations that are considered efficient (or Pareto optimal, on Planet Tenure, or is that Planet Earth?). Second, that there are lots of different ways for the government to structure law and institutions so as to give rise to forms of exchange that we consider efficient or optimal. (For instance, a universe in which we do and another in which we do not allow options or futures trading at the CBOT can both produce outcomes that will not allow for a Pareto improvement). Third, that those forms of massive government intervention often include, as parts of them, what we typically call “command and control” provisions. (So for instance, at an MCC at the CBOT, the price is fixed by the committee before trading; that involves setting a price in order to make possible a market). And therefore, fourth, that the issue is not “free markets” versus “command-and-control” mechanisms of economic organization—nor, less provocatively, “markets versus regulation”—but rather, and very simply, what are the distributional consequences of the different ways of organizing economic exchange.
On this last question, the only important question, the first theorem tells us essentially nothing. Price mechanisms, it turns out, don’t just appear out of nowhere. In the end, it’s a question of framing, really. Mr. Grant is looking at the same Planet—but he just sees a naturally evolved mechanism based on free, voluntary, compensated exchange, when in fact, there is nothing but complex, institutional, man-made mechanisms and structures that make such “free” exchange remotely possible.
When all is said and done, there’s really just one planet. (Though I wish all my younger colleagues swift transport to the Starship). Mr. Grant, I fear, is, well, ...