The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [105]
“Government” in short is a phrase we use for the compulsory arrangements that make it possible for people to live in large societies. The nation-state is the predominant model of government, but there are supranational arrangements too—for example, the United Nations, the European Union, and a plethora of specialized bodies like the World Trade Organization and International Telecommunications Union.
There is vigorous disagreement about all aspects of these basic functions of government, about how they should be structured, about matters of detail. But even the most ardent “free marketeer” would accept the need for a minimum set of basic government functions. It’s usually referred to as the “night watchman state.” Many people, most probably, believe that rather more than the night watchman minimum is needed. In fact, once you get away from the extreme positions, there is wide spectrum of views about what the role of government should be.
All other economic institutions, including markets, exist within that context. The division of work within the household is shaped by the opportunities for paid work outside, and by laws such as those banning child labor. The activities of businesses—how many people they hire, the wages paid, the dividends they pay, features of the products or services they sell—are shaped by the law. Indeed, the boundary of a business—its decisions about what to produce in-house and what to buy in as supplies or outsource on the open market—depends on the costs and benefits of these different ways of transacting. Among the transactions costs will be laws and regulations, but there are others such as asymmetries of information. So, for example, tasks that are complicated or that can’t be monitored easily because of an absence of information will tend to be carried out in-house.
The finer-grained one’s focus is on an economy, the more apparent it becomes that the specifics of geography and history, culture and habit, shape a unique and intricate pattern of relationships. The boundary between a business and the markets in which it transacts will be fuzzy. Bits of businesses are bought and sold, supply chains shift around—and although this might be because a new road opens or a competitor launches a better product, it might equally well be because the purchasing manager of one company moves to another city because of his wife’s job. Surprisingly often the people buying and selling in a market transaction will know each other.
This line of argument points to two conclusions. The first is that markets are social institutions. Few are completely anonymous—fully electronic markets on computer may be one example, and big stores in big cities another. Although they are much more anonymous than alternative types of economic transactions, markets still involve human relationships. James Buchanan, one of the originators of public choice theory, put it this way: he noted that the focus in economics tends to be on choices by individuals, whereas seeing the economy through the lens of contracts between people is equally illuminating.8
Another conclusion is therefore that the “market versus government” opposition is not a fruitful way to think about what institutional framework for the economy is best, and we should also consider households, firms, and perhaps other organizational types such as co-ops or residents’ associations. Kenneth Arrow said: “Truly among man’s innovations, the use of organization to accomplish his ends is among both his greatest and his earliest.”9 The literature of institutional economics is rich with examples of how collective arrangements of many kinds evolve in different contexts. Two key aspects of the context are the regulatory framework and the availability of information and in particular asymmetries of information—things that some people do know and others can’t know. This is an area of research for