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By Root 1685 0

enable demand and supply to be matched better in future. That’s just as true of education, working through the labor market, and the incentives people have to study if wages for qualified workers are high, as it is of the shoe market. Without the market economy we’d be much poorer in every sense of the word. We’d have less money, less choice, less opportunity. One of the main reasons developing countries stay poor is that markets there can’t develop, often due to government policies preventing them. Economic development is the spread of markets in place of the more ad hoc and personal economy of household production or barter.

SOCIAL MARKETS

Markets are therefore both essential and enhance our welfare, for all the reasons always given by conventional economics. But markets are not value free. On the contrary, actual markets in actual economies embody the social norms and underlying values of the societies in which they operate. It is also a mistake to think about markets and the state as opposites. Markets need an effective state to operate well, and a healthy state will in turn depend on a thriving market sector of the economy. One of the reasons global financial markets failed so catastrophically is because of a lack of effective governance. Financial markets were heavily but poorly regulated, in fact regulated to serve the interests of financiers.6 This was possible partly because of the myth that markets operate in a vacuum, independent of society. The myth disguised the truth that no well-governed economy should have private businesses deemed by the government “too big too fail,” as so many banks were regarded in 2008–9. The big banks had usurped political power. Effective regulation requires an acknowledgement of underlying political, social, and cultural values

So it’s a mistake to demonize “markets” in an abstract way. Instead, what’s needed now to help address the issues of Enough set out earlier in this book is an emphasis on the need for both markets and state interventions to embody shared values and social norms. Building from underlying values to social norms and shared beliefs will lay the foundations for building more effective formal economic institutions, as I will discuss in the next chapter.

Governments and markets are usually seen as mutually exclusive ways of organizing the economy. While it’s understood that modern economies are mixed, with a significant government share in all the activities that add up to GDP, markets and public sector activities are thought of as occupying different and contrasting domains. After all, this was one of the main fault lines of the ideological battle between communism and capitalism. Under communism, the state planned economic activity, set targets for the output of different goods and services, and allocated materials to factories and people to work. Under capitalism, these decisions were decentralized and coordinated through markets and the price signals that emerged from the confrontation of demand and supply. This abstract perspective is all the sharper when we think about “free markets,” the benchmark for policy reforms in many countries during the 1980s and beyond.

This opposition between government and markets is false. Both are a type of economic institution, designed to organize our life in large social groups. They are among an array of other types of institution, including households and businesses, and indeed there are different types of “government” organizations and “markets” too. None of these institutions could exist and function outside a basic political framework, usually the nation-state, which provides—with varying degrees of success—a legal framework, including the law of contract and employment laws, protection of property, policing and enforcement, security, standards for weights and measures and other technical features, and a monetary standard, and also sets the macroeconomic context. Indeed, the very concept of property, without which no economic activity from barter onward could occur, is shaped by the state—as Thomas Jefferson