Some Responses on The Captured Economy

Brink and I had a number of hopes for The Captured Economy. We certainly hoped that it would draw greater attention to the policy domains we examine in the book—finance, intellectual property, occupational licensing, and zoning. These are all areas in which there has been a flowering of research in recent years, and we hoped by putting these cases in a larger conceptual frame, that we might help advocates in their efforts to get policymakers to take them more seriously. Time will only tell whether we have been successful in this effort.

More broadly, we wanted to spur those concerned about the growing distortion of the American economy to think bigger than just making the intellectual case for policy reform. These distortions exist because of significant defects in the organization of contemporary American democratic politics. If we want to do something to make the American economy more competitive, therefore, policy advocates need to move from encouraging economic reform to encouraging political and institutional reform. Without such reforms, changes will inevitably happen—if at all—on the margin.

Our friend Ilya Somin recognizes the political sources of the growth of rent seeking, but like most libertarians his solution—radically shrinking the responsibilities of the American state—is not much of a solution at all. Whether Ilya likes it or not, Americans have come to expect a government with a quite comprehensive remit. And more important, there are governments with even greater responsibilities than that of the United States that have far less rent seeking than we do. The key variable is not the size of the state, therefore, but the way power is organized. Across multiple dimensions, we have structured institutions in a way that encourages rent seeking.

That said, I do think that Ilya is on to something when he argues that a government with its fingers in so many pies is one that is less susceptible to democratic control. Elsewhere I have argued that we should be very skeptical of a government that is nudging a little bit everywhere, because such a government will be hard to monitor, hold responsible, or protect from interest group capture. It is better to have a national government that, when it acts, either occupies the field or leaves matters to markets, the states, or localities. We should want a government that shoves, rather than nudges. Such a government would be more comprehensible to citizens, even those with relatively little information, and certainly to their elected officials.

I have a fundamental difference with Ilya in the way that I understand how markets work, one that places me closer to my other friend, Henry Farrell. Governments do not just “intervene” in markets—they constitute markets. Markets always operate within a context of law, regulation, and custom, and their effective performance depends on the quality of the institutional regime. Some form of financial regulation, we argue in The Captured Economy, is absolutely necessary to the operation of modern finance. Because financial regulatory regimes have so many interlocking pieces, we don’t always know that “deregulating” a part of the system will actually lead to a smaller government role overall, or that it will make the system work better.

This is a lesson that libertarians need to learn more broadly, even to advance policies that they generally agree with. My favorite example of this is charter schools. It turns out that the jurisdictions with the best quality charter schools, like New York City and Massachusetts, are not market free-for-alls. They are the places with the strongest chartering authority, with the ability to keep out grifters and remove low performers. They are the places where governments and their philanthropic partners have worked the hardest to build all the supportive institutions that can help markets work, like high-quality information about school quality, rather than leaving it to the workings of spontaneous order. Markets can be very good things, in short, but they are products of the state just as much as they are of private actors.

It is for that reason that I reject Mike Konczal’s reading of The Captured Economy that Henry refers to in his essay. We do adopt some of the neoclassical language of rent-seeking in our book, for the very good reason that it works for the cases we discuss and because it allows us to enter into an ongoing conversation with our interlocutors on the right. But I don’t think that there is anything fundamental at stake between describing the problems we talk about as “rent seeking” as opposed to institutionally embedded inequality. I am as sympathetic as Henry is to the idea that we shouldn’t use perfectly competitive markets as the ideal against which we judge state action. I think we make this especially clear in our chapter on finance, where we say—repeatedly—that there is not and could never be a laissez-faire regulatory regime. The choice is always between different institutionally embedded forms of market organization.

That said, Brink and I are in favor of a form of institutionally embedded market with a strong emphasis on competition and creative destruction. We are worried about the calcification that happens when market incumbents can keep out innovative business models or technologies. But that doesn’t mean we are anarchists. For example, both Brink and I are fans of the improvements in mobility that have been introduced by Uber (if not their creepy management methods). But we did not imagine that the destruction of the taxi monopolies in big cities would usher in an era of transportation anarcho-capitalism. Uber solved a genuinely difficult problem, which was how to organize sufficient political power against that of the taxi monopolies, so that a new business model would not be smothered in the crib. But a sustainable market in transportation will require new forms of antitrust policy, labor regulation, and perhaps even a “public option” for drivers to compete with Uber and Lyft. The period of anarcho-capitalism will be a transitional one, and that is, in my view, a very good thing.

Where we enthusiastically agree with Henry is that making markets work means making politics work. There is no escaping the need for effective democratic politics. Unlike many libertarians, we are not ones for poking holes in the desirability of democracy, holding out hope for some form of supposedly benevolent expert authoritarianism. We have no choice but to make democracy work.

That said, I think we do disagree with many social democrats like Henry, in that we believe that certain carefully designed constraints on democracy are, in practice, liberating. Democracy has the aspiration of empowering the encompassing, long-term interests of the public. But in The Captured Economy we detail the many ways that a government liberated to regulate everything, everywhere can turn into a bazaar for concentrated interests to take over for their own ends. That is not, except in the most polluted sense, what any of us mean by democracy. Unlike Ilya, we do not want (except in a few narrow cases) to rule entire areas of economic life out of bounds for the state. But we do think it makes sense to make some kinds of economic regulation face particularly high evidentiary standards, and to change the geographic or institutional location of decisionmaking to make it less susceptible of capture by concentrated interests. Constraint, we would argue, can be liberating for democracy, and that is true even—perhaps especially—when one has a broad conception of the role of the state.

Finally, in regards to Richard Reeves’ lovely response to our essay, all I can say is—I agree! Liberaltarian is neither Brink’s nor my preferred term. Like Richard, I like good old-fashioned liberalism as my identifier, the liberalism of Mill, Hume, Locke and Tocqueville. I do not think that believing in a muscular state role in the advancement of social justice is in any way in conflict with this proud tradition. But I do think that, at particular times in American history, those on the left have, in fact, turned their back on that liberal tradition. Instead of looking for inspiration on how to build a modern welfare state from these liberals—especially their guidance on institutional design and the cultural and moral preconditions of a free people—too many of those on the left sought to break out of the liberal traditional altogether. Understandably frustrated by the way that constitutional constraints, when wielded by the protectors of entrenched economic power, were used to frustrate necessary reforms, they threw off the idea of any constitutional constraints on the state’s intervention in the economy.

This, I think, was a mistake. Like Richard, I want the future of the left to be more liberal, which means recognizing the productive tension between liberation and constraint—both at the individual level and within political institutions. That tension is something that all of the classical liberals, up through Mill, understood very well. It is something we could all do with relearning. The Captured Economy is our small effort to help with that project.

Also from this issue

Lead Essay

  • Brink Lindsey and Steven M. Teles have largely made their peace with “big government.” They insist, though, that not all big government is good, and they draw on libertarian insights to criticize government action that tends to concentrate wealth and power in the hands of a few. The political mainstream can learn much about doing even big government better, and ironically, some of that insight comes from those who have been most skeptical about big government itself - libertarians.

Response Essays

  • Ilya Somin argues that in our attempts to free the economy and deliver prosperity to more people, there is no substitute for limited government. Government has not only captured the economy; it holds people where they are by making it more difficult to live and work in new places. This reduces economy dynamism as well as limiting individuals’ choices. Human mobility is a key part of the puzzle, he argues.

  • Henry Farrell urges libertarians to give up on the idea of rent seeking. There is no such thing as an unregulated market, so “rent seeking” ends up meaning something like “state action I happen to disfavor.” This will not do, he says, and he urges decisive interventions, particularly in financial markets, to save the neoliberal state. This he characterizes as a mix of market institutions and democracy. Democracy is the part in peril, he argues, not markets.

  • liberal. Though it is out of fashion and more often found a term of abuse today, liberal politics works to ensure that citizens share power broadly, and that no one can wield arbitrary power over another. Reeves suggests that we need even more of this kind of liberalism.