After the Market Mania

The Private Abuse of the Public Interest: Market Myths and Policy Muddles by Lawrence D. Brown and Lawrence R. Jacobs. University of Chicago Press, 151 pages, $15.00

The Case for Big Government, by Jeff Madrick. Princeton University Press, 205 pages, $22.95

The most telling line in Lawrence Brown and Lawrence Jacobs' The Private Abuse of the Public Interest comes on the first page and was not written by the authors. Rather, it is a quotation from former Republican House Majority Leader Dick Armey. "Markets are smart," says Armey. "Government is dumb." This is an enormously illuminating statement. Markets, after all, are not "smart," and smart people do not claim otherwise. Rather, markets are supposed to be efficient. There is a difference. A man who finds himself in a convenience store without sufficient funds for his purchase might decide that the most efficient method of obtaining cash is to rob the register. He might well be right. But he would not be smart. He would not be wisely considering his own future or soberly evaluating the possible consequences of his actions. A Hostess cupcake is not worth jail time.

The market, however, carries no such capacity for self-reflection. It prizes efficiency above all -- at least, insofar as efficiency is reflected in profit. It will squeeze profit from coal and trap heat in the earth's atmosphere. It will sell cigarettes to children and mortgage-backed securities to adults. It will build bombs for dictators and deny medical care to the sick. It will support all manner of economic activity and do so rather mindlessly. And so we must intervene when efficiency contradicts wisdom, or profit does injury to ethics. We must impose intelligence on the market.

Brown and Jacobs' thesis is quite simple: Experience has taught us that we must intervene rather a lot. And so the move toward deregulation and privatization has brought with it a host of compensatory re-regulation and public oversight. The chaos of the market cries out for the rulebook of the government. Public functions become private functions become heavily regulated quasi-private functions. This leads to a rise in "non-fiscal governance," where the government is not purchasing the service but regulating it. "The number of pages of the Federal Register tripled between 1970 and 1975," write Brown and Jacobs, "and grew by a quarter between 1975 and 2000. In 2003, the Federal Register weighed in at a record breaking 75,795 pages." That's a lot of rules.

All this, however, says rather less than Brown and Jacobs imply. Their basic argument is that attempts to shrink government often have the paradoxical effect of enlarging it, but they're not quite able to prove the point. Rather, they prove what everyone but the market fundamentalists already knows: We live in a mixed economy. In some cases, like education, there is government provision of services, and the market exists in the margin. In others, like the transportation industry, there is a free market, with the government curtailing excesses. And in yet others, like health care, there's a mash of different arrangements. Sometimes the market does things well, and sometimes it does things poorly. Worse, Brown and Jacobs don't really offer a general explanation of when the market fails or where private-industry-plus-government-oversight is superior or inferior to simple government provision of services.

Indeed, the book feels as if it's firing shots on an empty battlefield. On some level, it exists in dialogue with Charles Schultze's 1977 book, The Public Use of the Private Interest, which argues that government could more efficiently achieve its ends by wisely structuring private markets to ensure that competition serves the public good. Schultze's ideas were broadly adopted, and now Brown and Jacobs are arguing that the market competes better when wisely structured by the government to serve the public good. That's true, but it's arguably the same point Schultze makes. The difference is that Schultze was speaking to a consensus he considered overly statist, while Brown and Jacobs are speaking to a consensus that has fetishized the market. Fair enough, but in an age of $700 billion bailouts and the effective nationalization of the banking industry, it seems curiously unambitious.

Jeff Madrick's The Case for Big Government is more in tune with its moment. Where Brown and Jacobs are arguing around the edges of yesterday's consensus, Madrick is trying to shape a replacement. As such, his book is a thoroughgoing defense of government's role in the economy, written with the broad perspective of an economic historian rather than a mere policy polemicist. Thus, a book that could have been a thudding discourse on the efficiency of the French medical system instead takes us on a bracing survey of government's role as a driver -- not merely an enabler -- of a growing, fair, economy. We tour the government's ability to solve coordination problems and structure markets so that information flows freely and purchase what the private sector cannot. We run through government's role in eradicating polio, building the highways, creating the higher education system, and mandating seatbelts. "This does not diminish the essential place and wondrous contribution of business," writes Madrick, "but raises the place of government as a full participant in economic history."

Of course, few argue against the proposition that the government had a role in the early days of America. Even the most radical conservative firebrands don't pen op-eds lamenting the Louisiana Purchase. What you tend to hear now is a sort of libertarian futurism: That may have been true then, but now we're in the information age. The knowledge economy. We can watch monkeys fall from trees on YouTube and e-mail while listening to Arcade Fire on our iPhones. Additionally, the economy is globalized.

These tend to be buzzwords masquerading as arguments. It's not exactly clear how these technological transformations consign government to the same trash heap as the Pentium 386 (or, arguably, Windows VISTA -- the more things change, etc.). You could as easily argue that a globalized world makes powerful democratic institutions more relevant, and the turbulence of mobile economic arrangements underscores the need for a stable social safety net. "The Internet is a marvel with widespread consequences for communications, knowledge, politics, and even personal freedom," writes Madrick, "but so were the telegraph, telephone, and the television … the myopic appeal of ‘future shock' is the glamorous and self-important claim that we are now different. We are, however, always different."

Different is not, however, always good. During the past few decades, as government has retreated from the marketplace, wages have fallen or stagnated, while costs of major expenditures such as health care have shot up. In Madrick's view, the rise of free-market ideas and America's anemic, unequal economic performance are directly related. "Look what has happened to America in the last 35 years," he says, "when this ideology was ascendant."

Here, Madrick does not quite prove his case. Conservatism has not distinguished itself in recent years, but it isn't solely responsible for the slowing of the American economy. Some of those buzzwords -- "globalization," in particular -- refer to developments that have played a role in the slowing of the American economy and the decline of good wages for unskilled labor. He also has some odd hobbyhorses, including a clearly complicated relationship with the impact that women entering the work force has had on the role of men (he frequently laments the "self-esteem" men have lost now that they can no longer act as sole breadwinners for their families).

Moreover, it's not obvious that Madrick's proposals would do all that much to solve the fundamental problem of declining wage growth: Funneling another 3 percent of gross domestic product per year toward social spending is a curiously modest proposal for such an intellectually ambitious book.

But it's a start. And it is, at least, the right approach: We have spent much of the past 35 years trying something that has clearly not worked. Schultze had good reason to theorize about the powers of the private interest in service of the public good, but it turned out that the private interest was more concerned with, well, the private interest. That's not to throw the baby out with the bath-water: We need efficient markets. But we also need wise government. And that requires recognizing, as Madrick does, that government has often been used quite wisely, and realizing, as Brown and Jacobs do, that markets routinely prove quite dumb.