Which Comes First: Politics or Economics?

Gary Becker writes that the bailout plan should not have included authority for the Treasury to purchase equity interests in financial institutions:

“Inevitably, this leads to government involvement in business decisions and corporate governance. Experience shows that political rather than economic criteria tend to dominate in the pressures exerted by government shareholders on corporate decisions.”

But what about owning non-voting shares? Wouldn’t that ameliorate the problem of government interference? Becker says no:

“Governmental ownership of shares, with or without voting rights, opens up possibilities for much greater mischief than controlling executive salaries. For example, a bank or other company may want to reduce its employment in order to regain greater profitability. The government owners of these shares will be under pressure from congressman and senators who represent districts where employment would be affected to try to rescind or modify these cuts. Even without government ownership, congressmen protest corporate efforts to shift various activities overseas because labor and other resources are cheaper there. Such objections will be magnified when governments have direct equity stakes.”

This distinction between “political” and “economic” considerations, of course, brings us to the topic at hand: if this distinction holds, which has priority?

My way of answering this question is to ask another question: which consideration is normative? And my answer is: the political. The market has nothing normative to say in it of itself: it merely states that under certain conditions (for example, perfect symmetrical information, perfect competition, etc), resources will be allocated in the most efficient way possible. There is no prima facie reason to disagree with this claim, but it is important to note exactly what kind of claim it is: an empirical one. If one were to make a normative claim that a market system ought to be adopted under all circumstances from this empirical claim alone, one would be committing the naturalistic fallacy.

The market does not and cannot justify itself—it is merely a mechanism for producing a certain allocation of resources. What justifies the market comes from outside the market, namely, politics. A king, an aristocratic class, or the people as a whole can decide that the polity ought to adopt a market system, but the market itself cannot make this normative decision. In other words, the justification of the market cannot come from the market; it can only come from politics.

Now there is nothing wrong (in the normative sense) with adopting the market system politically, because its adoption can be justified on utilitarian grounds (i.e., Adam Smith/John Stuart Mills) or on deontological grounds (Rawls). But notice whatever justification is used, that justification does not come from the market itself.

It is absolutely crucial that one keeps this distinction in mind, because too often, the popular rhetoric takes the market as its own justification. This simply cannot be the case: as G.E. Moore once said, an empirical claim cannot generate its own normative justification. The mere fact that something is red does not mean that red is good. Similarly, just because a market tends to generate the most efficient distribution/allocation of resources does not mean that markets are always justified.

The market system, and the institutional framework that enables it to flourish (i.e., property rights, enforcement of contracts, rule of law, etc), does not develop on its own without human effort. Therefore, that effort must be justified somehow, and one must look outside the market to find it.

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