The Illusion of Free Markets

Review Note on “The Illusion of Free Markets. Punishment and the Myth of Natural Order” by Bernard Harcourt, Harvard University Press, 2011

The Illusion of Free Markets by Bernard Harcourt is an intriguing book.  The author is a Professor of Law and Political Science at the University of Chicago and the book is dedicated to some of the most famous names of the Chicago school of Law and Economics, namely Gary Becker, Ronald Coase, Richard Epstein and Richard Posner. But this is no eulogy of the Chicago orthodoxy; quite the opposite. It should be read as a trenchant critique of the basic tenets of this school that has played such an important role in political and economic affairs over the last half century. One wonders what the relationship between Harcourt and his colleagues is like but apparently all is well on that front, according to a Harcourt interview in Harpers’ Magazine.
Harcourt intends this book as a prolegomenon to a more serious discussion of dominant models of social and economic organisation. In Harcourt´s words, this discussion can only start in earnest when the myth of the “free market” as a natural order is debunked and laid to rest.  The argument developed by Harcourt is that the myth of natural order rests on two pillars: first, the economic sphere should be left to its own devices, free from regulation and government intervention. Secondly, government intervention is both necessary and efficient in the penal sphere. In other words, government should stay out of the economy but go heavy on law and order.  This strangely dichotomous approach to the role of government is highlighted by the book´s subtitle “Punishment and the Myth of Natural Order”.
The argument developed by Harcourt takes us back to the 18th century and to a range of influential theorists from François Quesnay and the Physiocrats, to Cesare Beccaria, Adam Smith and Jeremy Bentham.  Indeed, the first six chapters of the book can be read as a whirlwind tour of the history of ideas that inspired the Chicago school.  There is much original historical research here and a fine weaving of arguments showing how different theorists conceived the role of government in the economic and penal sphere.  Harcourt is at great pains to show that interpretations of early works, namely those of Cesare Beccaria, have missed more subtle and nuanced approaches to law and economics.  The contact and influence amongst these theorists – e.g. between Beccaria and the Physiocrats or between Quesnay and Smith – shows there is no linear evolution culminating in the contemporary Chicago school approach to law and economics.
The Chicago school is briefly depicted in chapter 6. This is hardly a full blown account of the emergence of Law and Economics at Chicago although the copious annotations provide the reader with a gentle steer towards earlier works on the subject. Harcourt presents Coase´s theorem as the linchpin of the Chicago School, the intersection of two radically different intellectual traditions embodied by Jeremy Bentham and Friedrich von Hayek. The Coase theorem is elaborated at length in “The Problem of Social Cost” published in 1960 in the Journal of Law and Economics – itself, a product of the Chicago Law and Economics programme. The target of Coase´s article was the conventional approach to welfare economics represented by Arthur Pigou at that time.  Indeed, the first part of the article is dedicated to showing the limitations of Pigou´s approach and explaining how the problem of one party causing harm to another, had to be conceptualised in a broader context. Harcourt draws the conclusion that Coase sides with “laissez faire” approaches to regulation since he believes that in a world of zero transaction costs, markets will produce the most efficient outcomes. If transaction costs are positive, Coase appears to suggest that government interventions are problematic since it is far too difficult to assemble all the necessary data and perform the required calculations necessary for intervention to produce an efficient outcome. Whether or not one concurs with Harcourt´s summary of Coase´s seminal article, it is hard to disagree with the notion that there is a presumption of orderliness in market exchange that Coase is unwilling to extend to state intervention.
More importantly, Harcourt contends that the Coase theorem joins at the hip two very different intellectual traditions, namely natural order in economics and the need for ordering in social affairs represented by government intervention in the penal sphere. The latter is called “neoliberal penality”, a term Harcourt associates with Richard Posner and defines somewhat cryptically as: “Criminal activity is best understood as an end run around the market and criminal law is therefore best understood as that which prevents this kind of market evasion” (p. 147).
The key argument is that the early language of the Physiocrats, emphasising natural order in economic affairs, has been superseded by a terminology of market efficiency and transaction costs clad in scientific language, virtually with no break in the underlying logic. The potentially diverging influences of Bentham and Hayek are brought together in the twin beliefs that natural order reigns in economic affairs and neoliberal penality should rule the legal sphere. In sum, Coase’s theorem transformed the quasi-religious belief of the Physiocrats in the natural order of markets into a scientifically credible and politically neutered theory of market efficiency.
The latter part of the book (chapters 7 to 10) is dedicated to the rise of mass incarceration in the US since the 1980s, coinciding with Ronald Reagan´s rise to power and the slow ascent of neoliberalism. It is debatable whether these three chapters add anything substantive to the main argument of the book. They can be read as a longish appendix to Harcourt´s earlier work or the springboard to another set of arguments regarding social exclusion, inequalities and approaches to crime over the last three decades. These are important topics that are probably best addressed in a separate tome.
In the final analysis, Harcourt is clear that many of the dichotomies we have taken for granted – e.g. natural order vs. policing, free vs. regulated markets – need to be ditched altogether rather than repositioned in a revised history of ideas. These dichotomies stand in the way of loftier aims such as a proper public debate on the distributional consequences of different forms of social and economic organisation.
In conclusion, this is an important book that largely succeeds in deconstructing the web of assumptions that pervade conventional wisdom on the role of government in socio-economic affairs, as seen from a North American perspective at least. The latter point is worth stressing. Harcourt may be less tied to a North American context than most American academics – he has a significant output in French – but the targets and the contexts of most of his arguments are quintessentially American. And the Chicago School is not shy about proclaiming its global ambitions for the next fifty years. The historical evidence amassed by Harcourt and the way this evidence is marshalled to show continuity, cleavages and precariously welded joints between 18th and late 20th century ideas, is impressive – even if it takes a hyper-attentive reader to follow some of the finer threads woven by Harcourt, because his narrative moves so speedily in time and space.
The timing of this book is felicitous too, both from a current affairs and intellectual standpoints. From an intellectual standpoint, this book fits well with recent works that have attempted to plot the rise of neoliberal thought (see e.g. The Road from Mount Pèlerin) and shed light on widely used metaphors in economics and politics (see e.g. Erasing the Invisible Hand). The weight of contemporary affairs on intellectual developments is also being felt – as Harcourt himself notes, some of the exponents of the Chicago School such as Richard Posner have suddenly felt the need to dissociate themselves from  some of the tenets of the school that Harcourt so closely associates with them.  There is little reason to believe in pious conversions where there is only token engagement with the foundations of the Chicago orthodoxy. The health warning that this book is no more than a prolegomenon appears to be fully justified.  Wither the Chicago School, but what next?