Markets Can Be Natural

In Chapter One of his book, Economics without Illusions (2009), Joseph Heath argues that markets cannot exist merely on the basis of self-interest. Referring to the prisoner’s dilemma and collective action problems, Heath argues that the “free rider problem” clearly undermines the three foundations of the market: property, exchange, and contract. “Why plant your own crops when you can steal from your neighbor? Why pay for your purchase when you can renege after you have taken delivery? Why perform services at the price you have agreed upon when an opportunity arises to demand more?” (34). This part of the argument, as far as I am concerned, is solid. I will not take issue with it here.

Heath then argues that the market requires the state to uphold the integrity of property, exchange, and contract. The state solves collective action problems by (a) imposing taxes on self-interested market agents who enact the free-rider problem and by (b) committing itself to enforcing property, exchange, and contract. However, in order to apply such an argument to the real world, he must assume that (1) many, if not most, market agents–in reality–are merely self-interested. Moreover, he must assume that (2) most, if not all, government agents–in reality–are *not* merely self-interested. Both assumptions are dubious.

With regard to market agents, Heath himself writes, “Of course, this is not how things work in the real world. In the real world, people make credible commitments–both promises and threats–all the time” (35). Heath nevertheless overlooks the possibility that, if market agents, in the real world, can and do make credible commitments, then–in the real world–at least some market agents are not merely self-interested. Therefore, at least some market agents in the real world can and do enforce the rules of the market independently of the state. It also seems more realistic to assume, prima facie, that actual markets exist because market agents self-enforce the rules of the market rather than merely because government agents exogenously enforce the rules–because exogenous enforcement would be prohibitively expensive if all or even most market agents required it. Perhaps this is why, back in the day, economic models assumed *enlightened* self-interest. Ultimately, it is at least conceivable–let’s say, for example, along Kantian lines–that all agents could self-enforce the rules of the market independently of the state. After all, this is how Kant derived his perfect duties of respecting property (“do not steal”), being honest (“do not lie”), and upholding promises. It may well be utopian to assume the possibility that all market agents could self-enforce the rules of the market independently of the state, but that possibility is far more realistic than assuming the possibility of universal altruism or of entirely selfless agents of the state.

Whether most or merely some market agents are merely self-interested in the real world is, of course, an empirical question. Likewise, whether government agents are *not* merely self-interested in the real world is an empirical question. Joseph Heath’s argument that the market requires the state is therefore merely an academic exercise unless it confronts the empirical question.  He realizes this intuitively, so that even though the midpoint of his argument falls below, the conclusion rises above: “The scope of state action and the appropriate level of taxation cannot be settled at the level of political ideology; they now depend upon the answer to empirical questions concerning the occurrence and severity of collective action problems and the effectiveness of government in resolving them” (39).