by Steven K. Vogel*
What if we thought of marketcraft (market governance) as a core government function comparable to statecraft? And what if we sought to optimize market governance rather than to minimize government intervention? I submit that this simple reframing would generate analysis of market dynamics and prescriptions for government policy that deviate fundamentally from the conventional “free market” wisdom.
Consider market reform, for example. The pervasive language of liberalization, privatization, and deregulation implies that market reform is primarily a process of removing constraints. But liberalizing markets does not mean liberating them. In reality, empowering markets is a process of building institutions, not one of removing constraints. It requires more state capacity, not less. It means more regulation, not less.
Let’s begin with market reform in the post-Communist world. We have now experienced several decades of debate over the nature of the transition from a planned economy to a market economy, often caricatured as a contest between shock therapy and gradualism. The crux of the debate hinged on whether market reform was primarily a matter of dismantling the old command system or one of building the institutions to sustain a market economy. The latter view has now prevailed, both in the realm of scholarly analysis and in that of real-world experience. But if we had viewed market transition as a matter of marketcraft, then shouldn’t this have been obvious from the outset? Couldn’t we have avoided a lot of fruitless debate and some devastating policy errors?
Or consider market reform in developing countries. Again, we have traversed several decades of debate over the fundamental nature of the problem and the appropriate solutions, sometimes depicted as a contest between the Washington Consensus and a more institutional perspective. And the latter view has now prevailed, after a protracted battle, countless flawed policies, and untold human suffering. But shouldn’t we have figured this out a bit sooner?
And what about market reform in the advanced industrial countries? While we have discovered that market reform requires building institutions in post-Communist and developing countries, we have been slow to recognize that the same logic applies to rich countries as well. Ironically, we are less attuned to the institutional character of market reforms in our own countries because they already have a fairly well developed institutional infrastructure. But market reform means enhancing this institutional infrastructure in the rich countries, just as it does elsewhere.
The term we most commonly use to describe market reform in rich countries – deregulation – nicely illustrates the confusion. The term is typically used to depict a decrease in government regulation and an increase in market competition, as if there were a natural association between the two. But enhancing competition most often requires more regulation, not less. In network sectors, for example, incumbents are not likely to voluntarily cede their market power. So the government has to fabricate competition via regulation. In telecommunications, for example, governments crafted competition via asymmetric (i.e. anti-incumbent) regulation, requiring incumbents to lease their lines to their competitors.
In the rich countries, as elsewhere, insufficient attention to the institutional nature of markets has fostered policy errors, with devastating results. The causes of the global financial crisis are complex, multidimensional, and intertwined, yet the essence of the story boils down to a massive failure of marketcraft. Federal Reserve Chairman Alan Greenspan made this case rather poignantly, if inadvertently, with his famous recantation in testimony to Congress in 2008. “Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially),” he conceded, “are in a state of shocked disbelief.” Pressed by Committee Chairman Henry Waxman on whether his laissez-faire ideology contributed to decisions that he regrets, Greenspan replied, “What I am saying to you is, yes, I found a flaw. . .”
The U.S. authorities committed fundamental errors of marketcraft in the lead-up to the financial crisis. They gave financial institutions greater freedom to engage in risky behavior without strengthening regulation and oversight. They chose not to regulate derivatives in the late 1990s, partly because they viewed derivatives as instruments within an isolated market of sophisticated investors, and partly because they feared that regulation would destabilize financial markets. They put too much faith in the ability of market players to self-regulate. And they failed to appreciate the degree to which the U.S. mortgage-backed securities market had become plagued with misaligned incentives.
But marketcraft can do good as well as evil. After all, marketcraft produced the information revolution. The U.S. government funded the research that produced much of the relevant technology, and provided early-stage capital for many of the most successful high-tech firms. U.S. institutions, and the Silicon Valley ecosystem in particular, fostered the innovative start-ups that played a key role in commercializing the Internet, with innovations in devices, computing, transmission, and services. Antitrust policy played a less obvious but equally critical role by preventing vertically integrated firms like IBM and AT&T from dominating the emerging information technology sector. And this in turn enabled the open innovation characteristic of the digital economy. And regulatory reform brought lower communications costs, including flat-rate local service, which allowed startups to offer value-added services and household consumers to experiment with new applications at a reasonable cost.
These two examples – the financial crisis and the information revolution – illustrate the enormous stakes in the game of marketcraft. I am not suggesting that marketcraft is the same thing as statecraft. But I am contending that marketcraft has profound implications for economic performance, social welfare, and national power. So we should want to get it right.
Marketcraft will be even more critical going forward. The marketcraft realm is growing as a share of what governments do, and as a core element in how governments enhance or undermine the welfare of their people. Some of the core items on the marketcraft agenda – financial regulation, intellectual property rights, and the governance of the digital economy – are among the most consequential policy issues today.
* Steven K. Vogel is the ll Han New Professor of Asian Studies and a Professor of Political Science at the University of California, Berkeley. This article is based on his new book, Marketcraft: How Governments Make Markets Work (Oxford, 2018). Vogel is also the author of Japan Remodeled: How Government and Industry Are Reforming Japanese Capitalism (Cornell, 2006), Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Cornell, 1996), and co-editor (with Naazneen Barma) of The Political Economy Reader: Markets as Institutions (Routledge, 2008).
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Thanks for the interesting article, we have included it in the blog feed on the Moral Markets website (http://www.moralmarkets.org/blog/), we’ll also add the book to our bookshelf (http://www.moralmarkets.org/resources/books/) soon.