The Self-Regulating Market requires state intervention

Tim Lee makes a couple of points about what he sees as the puzzling connections between free trade and protectionism, and he stumbles across the point I’d made earlier to one of Jerry Brito’s comments, (yes, the comment that Jerry can’t respond to, and therefore must censor) It’s a simple point that Karl Polanyi made in his excellent book The Great Transformation: that the self-regulating market requires state intervention, both for it’s creation and for its maintenance . So the creation of a self regulating market in copyrighted goods requires state intervention to create and maintain that market. But Tim, being a libertarian, can’t read or understand Polanyi, so he’s confused about why those who support free trade also support certain market interventions:

This is a fascinating question. One of the things I find really interesting about the 19th century political debate is that the opposing political coalitions were more sensibly aligned, perhaps because people had a slightly clearer sense of what was at stake. My impression (which may be wrong in its details) is that the free traders tended to be liberals and economic populists. They clearly understood that protectionism brought about a transfer of wealth from relatively poor consumers to relatively wealthy business interests. In the opposing coalition were a coalition of business interests and xenophobes making fundamentally mercantilist arguments about economic nationalism.


Karl Polanyi covers this period in his book The Great Transformation. His perspective is a little different.

First, Polanyi notes that those opposing the liberal agenda there were the defenders of the old order, ultimately derived from the feudal social structure, as well the working urban proletariat. Their interests never coincided and their visions of an alternative to the dominant liberal creed were so very different, it is not surprising that they never formed a united opposition. It is true that once the middle class realized that free trade meant cheaper food they were temporarily won over to its cause. But there were a few others who realized how disastrous free trade would be in the long run.

Second, Tim Lee, as all libertarians do, makes a whole series of informational exclusions about what comes along with liberalism. For example, it cannot be an accident that Great Britain, during the time of the ascendancy of liberal ideals, also maintained a very large colonial empire. Ultimately, adherence to the dogma of the self-regulating market requires state intervention to ensure that the prices of labor, land, and money are all controlled only by economic factors internal to that self-regulating market. When social, environmental, religious or national policies interfere with the operating of that self regulating market, state intervention is required. Case in point: US invasion of Iraq. When political ideals interfere with the functioning of the self-regulating market, state intervention is also called for by supporters of the market. Case in point: the DMCA. From this view, the fact that those who support the self-regulating market also support strong imposed patent, copyright and trademark laws is entirely consistent and unsurprising.


The bottom line is: you cannot separate the economic functioning of society from its broader social, political, environmental, national and social contexts, as liberals are wont to do. Human society just cannot be distilled into neatly separate fungible categories. They are all connected. Failure to come to grips with this reality is why libertarianism can only be maintained by making excluding whole categories of information.

Thus the following confusion on Tim’s part:

Today’s free trade debate is much weirder, because there are enough businesses who want to export things that significant parts of the business community are for freer trade. On the other hand, the liberals who fancy themselves defenders of relatively poor consumers find themselves in bed with predatory industries like sugar and stell that have been using trade barriers to gouge consumers. And the “trade” debate has increasingly come to be focused on issues that don’t actually have much to do with trade, whether it’s labor and environmental “standards,” copyright and patent requirements, working retraining programs, cross-border subsidies, etc.

Again, some of those issue (environmental and labor standards) most emphatically are related, that is directly connected, to trade policy. Especially environmental issues, because enacting tough pollution laws in USA does no good at all if a company can just move the factory to China, where there might be little regulation, and the power would come from a coal-fired plant. This is an example where the self-regulating market has come up against a hard stop: there is a limit to how much pollution that the biosphere can absorb, and therefore the self-regulating market alone will not be able to set the price for land.*

I find it significant that in Polanyi’s framework the coalescing of different interests in support of the self-regulating market is predictable, while Tim Lee, coming from a liberal/libertarian background, find those alliances puzzling.

I suspect part of what’s happening is that in the United States, at least, consumers are so rich that they really don’t notice the remaining costs of protectionism. A T-shirt at Target might cost $10 instead of the $8 it would cost if there were no trade barriers with China, but this is such a tiny fraction of the average American’s budget that they don’t really care. Likewise, if the domestic price of rice or flour were to double, a significant number of Americans wouldn’t even notice. In contrast, in the 19th century, we were still poor enough that a 10 or 20 percent increase in the price of basic staples might be the difference between being able to afford meat once a week or having to skip meals once in a while to make ends meet. We may now be rich enough that we can afford to be politically clueless.


It’s not the costs of protectionism but the costs of free trade that consumers are starting to notice. The instability of the credit markets which seems to have lead to a much wider economic downturn will further educate consumers on the social and political fall-out from free trade. Unfortunately, that education will be painful. But that’s what happens when we decide that an economic system can be so freely shorn from any social context: instability. That instability increases as the self-regulating market’s free inputs become priced quickly, and the actions of the market participants are not circumscribed by any social rules because their economic and social networks are so divergent.

It’s going to be a wild ride, and could well look a lot like the 1930’s. Then, when instability of financial markets and the realities of the national nature of money were both ignored by the liberals, there occurred the rise of fascism across nearly all of Europe during the 1930’s. I think Polanyi is right when he ascribes the rise of fascism across so many countries to a common cause rather than than local idiosyncratic factors.

The price of rice and flour have more than doubled in some countries, by the way, and that is unsustainable and not without political consequences. The obvious consequence is the immediate death of the neo-liberal creed in all but a very few very rich countries. In those richer countries, the death will perhaps not be as immediate, but it is it is inevitable nonetheless. It’s not a matter of intervention or non-intervention any more, but what the character of that intervention will be. It’s not when or if but how.



* (I am using land in the same sense that Polanyi did, where land means essentially all of nature. Incidentally, Tim switches his use of the word ‘liberal’ in one case meaning the classical sense and in the other clearly having the current day meaning.)

The Self-Regulating Market requires state intervention

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