Liberals and the Free Market

3 Jun

Will Wilkinson wrote a much linked to piece the other day that argues a real “liberaltarianism” wouldn’t look too different than the writings of Friedrich Hayek, Milton Friedman, and James Buchanan, which are not too far afield from the political commitments of “welfare liberals” (my term).  He concludes by saying:

So that’s where I’m at. An old-fashioned market liberal who thinks Hayek, Friedman, and Buchanan get it right, and who thinks Rawlsian welfare liberals should be able to recognize themselves in these thinkers.

For the most part, I think this is true, especially since both libertarians and liberals have reached a kind of intellectual rapprochement; liberals have come to accept Hayek’s insights about decentralization (as Matt Zeitlin pointed out) and libertarians like Wilkinson recognize that not every welfare state will descend into totalitarianism, based on the observation that many European countries with large welfare states didn’t actually descend into totalitarianism.

But I think part of what keeps me in the “liberal” column economically (besides particular moral and political commitments) is something this response Larry Summers gave in an interview:

[…]there are two kinds of offsetting errors that in a way lead me to be dismissive of people’s analysis.  One is the motive analysis that assumes that whatever the market produces will be for the best, that denies, if you like, that the phenomenon of a wasteful bank run where a healthy institution is felled by lack of confidence and that somebody needs to do something to coordinate to produce a better outcome.  The kind of analysis that denies that as a possibility and simply believes as an ideological matter that if you interfere in the market it will be worse.  I don’t find those types of analyses helpful.  I suppose the other type of analysis that I don’t find to be helpful are ones that commit the opposite error.  Something bad happened.  Therefore, the government should have a plan to stop it, and if only we had a better government the problem would not have taken place.

I believe markets can and do fail or that they produce outcomes that we’d rather not have (as Tyler Cowen has pointed out, its sometimes sad when we have markets in everything).  But they’re more efficient and often more neutral than any sort of directed institution or order that we could develop, which would come with its own host of attendant problems. But when it comes to policy, I have no a priori feelings about a market or government answer.

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One Response to “Liberals and the Free Market”

  1. Beelzebufo June 3, 2008 at 6:03 pm #

    It may be worth noting, although Dr. Summers would probably only grudging admit it, that it was an infrequent event for a bank to collapse due to a bank run (and it would have been an ailing bank to begin with) until the Federal Reserve was created and banks were no longer allowed to restrict the withdrawls that customers made. I believe Friedman covers this topic at length in Free to Choose, Ch. 3.

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