Markets and Democracy Go Together

If you position yourself between the two great ideological camps, you will inevitably get whipsawed by pressure from both sides. Just as Ilya Somin urges us to move toward the libertarian embrace of small government, Henry Farrell calls on us to take further steps to the left. In a previous response I declined Somin’s invitation; now it’s time to extend my regrets to Farrell.

According to Farrell, “Lindsey and Teles’ version of liberaltarianism still has too much traditional libertarian DNA. In particular, it uses concepts such as ‘regulatory capture’ and ‘rent seeking’ that are borrowed from libertarian-leaning public choice.” I grant that these specific terms are more commonly used by libertarians than progressives, and as used by libertarians they have, unsurprisingly, acquired a distinctly libertarian gloss. Nevertheless, I reject the contention that the underlying concepts are any more libertarian than they are progressive. In both their provenance and their current application, these concepts are the common patrimony of all liberals regardless of whether they lean left or right.

Although the term “regulatory capture” is associated with the libertarian-leaning George Stigler, academic interest in the phenomenon didn’t start with him.[1] Back in the 1950s, political scientists studying the independent regulatory commissions—including Marver Bernstein and a young Samuel Huntington—concluded that they were being run in the interest of the regulated industries. By the time Stigler wrote his heralded “The Theory of Economic Regulation” in 1971, he noted ruefully that criticisms of the Interstate Commerce Commission for “pro-railroad policies” were now “a cliché of the literature.”

Academic interest in regulatory capture prior to Stigler wasn’t confined to centrist political scientists. In addition, revisionist historians of the left—led by Gabriel Kolko with his 1963 book The Triumph of Conservatism—contested the prevailing interpretation of the rise of regulation as the triumph of the public interest. “Regulation itself was invariably controlled by leaders of the regulated industry,” Kolko wrote, “and directed toward ends they deemed acceptable or desirable.”

Moving from academia to activism, the “New Left” disenchantment with the administrative state could be seen in Ralph Nader’s creation and leadership of the consumer protection movement. When, writing with Mark Green in 1973, Nader observed that “our unguided regulatory system undermines competition and entrenches monopoly at the public expense,” he was directly anticipating arguments we make in The Captured Economy—and nobody would argue he was doing so from a libertarian perspective.

If we pull back from the relatively recent past, we see that concerns about regulatory capture and rent-seeking are as old as the study of politics. Those specific terms weren’t used, of course, but the underlying concern with the misuse of public power for private or narrow group gain is perennial. “The true forms of government, therefore, are those in which the one, or the few, or the many, govern with a view to the common interest” Aristotle wrote in his Politics over two millennia ago; “but governments that rule with a view to the private interest … are perversions.”

Likewise, the concept of rent doesn’t have an intrinsic ideological valence. Yes, libertarian public choice economists highly critical of activist government have focused on rents, or excess private returns, created by activist government. But, as I just discussed, it is entirely possible to combine warm support for activist government with concern that it can be misused to inflate private returns. Furthermore, as I pointed out in my reply to Ilya Somin, rents can also be created by market failures that go unremedied by government. And a focus on reducing that kind of rent-seeking will tend to lead one away from strongly libertarian policy preferences.

Farrell usefully identifies two distinctive ideals that animate concerns about the privatization of public power: the ideal of free markets, and the ideal of democracy. He sees these ideals as in conflict, and it’s clear which he prefers: for him the libertarian market ideal is a false god, or at least a lesser one. He praises our hybrid liberaltarian approach for at least recognizing the importance of the democratic ideal. But he urges us to go further, to prioritize democracy strongly over markets—as the headline of his essay puts it, to join with the left in “saving democratic institutions from corrupting markets.”

Sorry, I’m not moving. I don’t see any need to choose sides, or prioritize one ideal over the other, because I don’t see any deep conflict between the two. Rather, I see interdependence and convergence.

Farrell and his fellow progressives are correct to point out that markets—that is, modern markets capable of coordinating the activities of vast numbers of strangers across both great distances and long time horizons—are institutional creations, not natural, spontaneously occurring phenomena. Markets, therefore, have to be constituted by politics. Accordingly, the health and vitality of the economic sphere depends on the health and vitality of the political sphere. A well-functioning market economy is more likely in a well-functioning democracy.

Libertarians err when they elevate disembodied, pre-political markets as their ideal: they are, in effect, assuming a can opener. But progressives make a similar mistake when they idealize disembodied democracy—that is, democracy not anchored in a market economy. For the fact is, modern democracy was born and developed in strongly market-oriented societies, and it has yet to find a secure and durable home in any rival model of social organization. In particular, there is a strong association—and, I would argue, a causal connection—between the modern economic growth that capitalism makes possible and the spread of political and civil freedom. Democracy expands and deepens when market economies are thriving (e.g., the decades after World War II, the 1990s); democracy retreats when market economies stumble (e.g., the 1930s, today).

Accordingly, although the boundaries between the public and private spheres are always contested and always shifting, the market ideal and the democratic ideal must coexist and reinforce each other if either is to flourish. And promoting that coexistence and mutual reinforcement is best accomplished by focusing efforts on where the two ideals converge: namely, their shared condemnation of using public power for private gain.

In both the economic and political realms, the prevalence of regulatory capture and rent-seeking is a measure of institutionalized corruption. In the ideal market economy, the rules of the game are set so that the desire for private gain is channeled into bettering the lives of others. And in the ideal democracy, the mechanisms of government are devised so that the clash of contending opinions and interests is converted into policies that serve the common good. To the extent that capture and rent-seeking prevail, the invisible hand of capitalism degenerates into the grasping hand of crony capitalism, and the lofty pursuit of the public interest devolves into a feeding frenzy of special interests.

Let me refine this point a bit. If we are talking specifically about rent-seeking, the convergence between healthy markets and healthy democracy is in their relative absence of a particular type of rent-seeking, namely the regressive kind that we write about in our book and that is the dominant kind in our contemporary political economy. When the rich and powerful use the political process to entrench their own advantages, economic dynamism is undercut and democracy is perverted. In these situations, libertarians and progressives, each for their own reasons, are united in their condemnation.

But rent-seeking needn’t necessarily be regressive: rents can also redistribute downwards to the benefit of workers or consumers (see, e.g., collective bargaining legislation, minimum wage laws, rent control, universal service requirements). In these situations, there is a tradeoff between economic efficiency and at least some conceptions of equity. This is one stretch of the perpetually contested boundaries between the public and private sectors. Libertarians and progressives will predictably split on these issues, and the type of people you might describe as liberaltarian will often be found on both sides. As for me, my strong preference is to keep redistribution out of the regulatory code as much as possible. In general, I believe that fiscal transfers are more effective and have fewer downsides than downward-redistributing rents.

Having addressed this complication, let me return to the larger point. Although it is analytically useful to define separate economic and political ideals and note the tensions between them, in fact the two depend on each other and reinforce each other. One way to think about the liberaltarian position, then, is to see it as elevating the commitment to this living, integrated ideal—democratic capitalism, also called liberal democracy—over allegiance to either of its components. In the real world, there are no disembodied markets, and there is no disembodied democracy. There is only the messy reality of democratic capitalism, rife with blurred boundaries and slippery slopes. Our job is to make it work better. And that job is much more likely to be done well if partisans on both sides recognize they have their own, distinctive reasons for contributing.


[1] This paragraph and the three ensuing ones draw heavily on the excellent essay by William J Novak, “A Revisionist History of Regulatory Capture.”

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.