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Government and the Making of Our Markets

A new book argues that markets are political creations -- not natural occurrences -- that we can shape to increase prosperity.

Jobs and economic development are a top priority for every mayor and governor in the country. We all understand that markets, not governments, create jobs and economic development, and nearly all of us think of "the free market" or "free enterprise" as naturally occurring phenomena over which we have little control. Nevertheless, in a sort of awkward dance, we try to "incent" companies to locate in our communities, "revitalize" our downtowns and "redevelop" neighborhoods, and we make investments in stadiums, arenas, aquariums and the like in the hopes that these investments will "stimulate" development.

In his new book, "The Surprising Design of Market Economies," Alex Marshall, a senior fellow at the Regional Plan Association in New York and a columnist for Governing, makes a compelling case that markets "are human creations, some of our best and most important, but creations all the same." Markets are designed by people through government, he writes. Endless variations on market design are possible, and some work much better than others. What are the lessons for mayors and governors from Marshall's work? How might they influence the design of markets in their jurisdictions to increase prosperity?

The book is a carefully constructed, deeply researched set of arguments. Here are three of them.

• Markets are political creations. Like in the old Warren Zevon song, they require lawyers, guns and money. Laws establish a framework in which trading can occur, the police power of the state is required to enforce those laws, and public works — roads, bridges, ports, canals and even the original city markets — provide the "commons" that are necessary for commerce but which no single individual could create. In reality, truly free and open markets do not exist — if there is no structure, imposed by government, there is no market.

• Private property is a creature of the government. Property is whatever the state says it is. At one time people — slaves — were property because our government said they were. And you can only own property to the extent that the state will stop others from taking it from you. I own a house only to the extent that the records at the county courthouse show that I hold a deed or title to the property. The first requirement of commerce is that I can hold on to the fruits of my labor, and I can only do that if authorities will enforce my contracts and defend my right to hold my property. Absent these requirements, economic activity ceases.

• While any discussion of markets inevitably goes straight to competition, markets depend more fundamentally on cooperation and trust. As an illustration, consider a game like pro football. Before competition can occur, the owners cooperate to set up a league, establish a set of rules for the game itself and for league standings and playoffs, and decide how they will share costs and revenues. If there is not agreement to cooperate on the setup and a certain level of trust that everyone else is playing by the rules, the system will break down. As Marshall writes, "Healthy markets rely on trust and deteriorate if trust erodes." In another example, think of the impact of the Libor scandal on the capital markets. In that case, banks in England were trusted to accurately self-report interest rates they were paying on interbank loans. The discovery that some banks were rigging the system to benefit themselves erodes trust and makes the capital markets less efficient.

A mayor or governor who buys into Marshall's arguments will focus on the deep structures that government is responsible for in setting up markets. At a state level, this would be things like laws of incorporation, which create the standard vehicle for private enterprise. At both the state and local level, it would be things like roads, bridges, train lines and sewers, the physical infrastructure that businesses depend on. A government wanting to grow business might have more luck installing high-speed Internet lines than giving away money as incentives. And then there are the basics, such as policing. Professional police forces are part of what both businesses and citizens expect of government: to provide safe streets and workplaces.

Marshall writes that the object of his book is "to start a new conversation, a public conversation. Typically in public discourse, we talk about markets as if the only choices are to submit to them, to regulate them, or to run from them. But we have forgotten that markets are designed, by us! We shape them as much as we do a presidential race, or any important public choice."

Mayors and governors ought to welcome and encourage this. The result of that conversation could be a better way, both more intellectually honest and less awkward, of using their power and the power of their constituents to work toward the greater prosperity we all want.

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