BrianGarst.com

Sometimes questions can escape obvious answers despite being pondered by our greatest thinkers. How did our universe come into existence? What happens when we die? Which came first: the chicken or the egg? Can markets exist without government?

Ok, we all know that last one shouldn’t be there. The answer, surely, is obvious: markets most certainly can exist without government. But this is not so obvious to Fareed Zakaria:

This crisis should put an end to false debates about government versus markets. Governments create markets, and markets can exist only with regulation. If you want to be truly free of regulation, try Haiti or Somalia. The real trick is to craft good regulations that allow markets to work well. No regulatory structure will be perfect, none will eliminate risk, nor should they. At best they can tame the wildest gyrations of the market economy while maintaining its efficiency.

Government creates markets? They can only exist with regulation? This is hyperbolic nonsense.

Markets are created by free and voluntary exchange, not governments. Without government the fisherman would still exchange some of his catch for clothes from the tailor, and to suggest otherwise is pure folly.

There is no doubt that the rule of law provides the best environment for markets to function.  Zakaria, however, misconstrues the meaning of “regulation” and confuses it for rule of law. Those who, as a rule of thumb (there are always exceptions), find regulation prohibitive to the best functioning of markets are not calling for an abolition of government, as Zakaria implies. Nor do Haiti and Somalia accurately represent what a market without regulation would look like. It is entirely dishonest for him to point to these as examples of unregulated market outcomes, as if the only alternative to busy-body bureaucrats deciding all manner of economic decisions is ethnic cleansing and a total breakdown of law and order.

There certainly are situations in which government can be used to unleash the power of the market. Common market failures can often be improved with government rule-making, but to claim that government creates markets is to suggest that the grease on the wheel creates motion.