The current disruptions are causing an awful lot of people to get confused between woods and trees. There’s the usual conflation of capitalism and markets into a single thing: one which at present must be demonised. Voices such as ours which distinguish between the two and often argue that markets need to be protected from capitalism (or at least the desires of capitalists to engineer themselves into positions of monop- oly or sony) are getting drowned out in the shrill cries that the entire system must be overturned. That’s why I draw your attention to this excellent essay by Daron Acemoglu.
Our second too-quickly-accepted notion is that the capitalist economy lives in an institutional-less vacuum, where markets miraculously monitor opportunistic behavior. Forgetting the institutional foundations of markets, we mistakenly equated free markets with unregulated markets. Although we understand that even unfettered competitive markets are based on a set of laws and institutions that secure property rights, ensure enforcement of contracts, and regulate rm behavior and product and service quality, we increasingly abstracted from the role of institutions and regulations support ing market transactions in our conceptualization of markets. Sure enough institutions have received more attention over the past 15 years or so than before, but the thinking was that we had to study the role of institutions to understand why poor nations were poor, not to probe the nature of the institutions that ensured continued prosperity in the advanced nations and how they should change in the face of ever evolving economic relations.
Something that bears repeating endlessly: markets are all regulated in some manner or another, our important question is who is going to do the regulating and how are they going to do it? Is it going to be some set of general principles, like “property rights”, or social institutions? Is it going to be the market participants themselves? Or perhaps a set of not particularly wise or omniscient bureaucrats who face even worse incentives than the former? Or, horrors, politicians who face an even worse set of incentives?
I also like the point that we shouldn’t be studying poor countries to find out why they are poor: that’s pretty much the natural state of mankind, scraping in the soil with a stick. What we want to be looking at is the thing that is different: what is it that makes rich places rich? It is, after all, the creation of that mysterious thing, wealth, which we’re trying to explain, not its absence.
Yes, it would be nice to find a magic bullet to banish our current woes but we really do need to remember that these are the trees. The woods are that we’ve got an economic system, some form of a liberal free market order, which has achieved something for the first time. The sustained rise in living standards for the mass of the population. Actually, that’s not just the wood, that’s the entire forest that we need to keep our eye on at the moment. No other system that we’ve ever tried in human history has been able to achieve that so lets not cut that forest down to get at a few trees that have been causing comparably minor problems.