Dani Rodrik writes:
But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed. Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.
The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.
Markets are the essence of a market economy in the same sense that lemons are the essence of lemonade. Pure lemon juice is barely drinkable. To make good lemonade, you need to mix it with water and sugar. Of course, if you put too much water in the mix, you ruin the lemonade, just as too much government meddling can make markets dysfunctional. The trick is not to discard the water and the sugar, but to get the proportions right. Hong Kong, which Friedman held up as the exemplar of a free-market society, remains the exception to the mixed-economy rule – and even there the government has played a large role in providing land for housing.
Dani Rodrik's powerful mind has packed in a lot of insight here; but he also suppresses valid dissent, and suggests that the social-democratic view is more coherent and compelling than it really is. Just because governments do meddle even in most of the advanced economies doesn't mean they should. Rodrik musters the most legitimate arguments available, but they're not unanswerable.
1. "Governments must invest in transport and communication networks." I argue in Principles of a Free Society that streets are not quite rightly understood as government-provided public goods; rather, they are places where many non-exclusive transit rights overlap. Of course, toll roads are possible, and private enterprise can lay broadband. It was private enterprise that build the railroads in the 19th century, sometimes but not always with government support.
2. "Counteract asymmetric information, externalities, and unequal bargaining power." Externalities are only a partial exception to noninterventionism, since the best solution is to turn them into property-rights issues, and whether the government actual does any good, on net, when it tries to handle them any other way is questionable. Asymmetric information is not a problem a government can often deal with, since the information that private sector agents don't have that makes the market not work well is often not available to the government either; beyond that, it's a question of interpreting contracts. "Unequal bargaining power" sounds like a way to put regulation of natural monopolies-- sometimes good-- under the same heading as government protection of union rights-- virtually always bad. These exceptions to free markets have a little force, in theory, but are usually abused, and most of their appropriate applications fit a noninterventionist policy anyway.
3. "Moderate financial panics and recessions." A pretty strong case has been made by macroeconomists in the last half-century, and especially by Milton Friedman, that this should consist of nothing except managing the money supply.
4. "And respond to popular demands for safety nets and social insurance." Why, pray tell? Because markets are "not self-legitimizing?" But that begs the question. Some voters use political power to take away the property of other voters and give it to themselves. It does not follow that they should, or even that they might not be persuaded not to, by, say, Milton Friedman. My own view is that the moral case for a welfare state within a rich country is morally bankrupt, and when combined with immigration restrictions is positively iniquitous; in fact, it is the chief injustice in our world; and I would claim that this conclusion is robust to the choice of philosophically defensible meta-ethical assumptions.
Rodrik wants to take part of the case for free markets and stuff the rest of it back in the box. He has a tenable case for doing so, but far from compelling.