Preventing Markets from Self-Destruction: The Quality of Government Factor

Abstract

Four interrelated arguments are presented to form a theory about the relation between the logic of markets, social efficiency and the quality of government. The first is that competitive markets with a certain set of characteristics are the most efficient organizational form for creating a utilitarian based economic efficiency for the production of most goods and services. The second argument is that in order to reach this utilitarian based social efficiency, markets need large and complicated set of institutions, formal as well as informal. Since such institutions will in the long run make all market agents better off, they are labelled efficient institutions. The third argument is that it is unlikely that such institutions will be created endogenously by market agents. Moreover, if such institutions have been created, we should expect market agents to try to destroy them. Based on insights from various approaches (institutional economics and research on neo-corporatism, clientilism, and corruption) there is no reason to expect that efficient institutions will evolve by any selection mechanism that is generated from the sum of agency that exists in markets. The conclusion reached is that if left to themselves, markets are inherently selfdestructive. The fourth argument is that markets can only reach social efficiency if the agents that reproduce the necessary efficient type of institutions act according to a logic that is different from the logic that market agents use when operating in the market. This operational logic is the ethical dimensions of what should count as quality of government.