------ EH.NET BOOK REVIEW ------
Title: The Illusion of Free Markets: Punishment and the Myth of Natural Order

Published by EH.NET (April 2011)

Bernard E. Harcourt, /The Illusion of Free Markets: Punishment and the Myth
of Natural Order/. Cambridge, MA: Harvard University Press, 2011. 328 pp. $30
(hardcover), ISBN: 978-0-674-05726-5.

Reviewed for EH.Net by Daniel J. D'Amico, Department of Economics, Loyola
University (New Orleans).


/The Illusion of Free Markets/ is a fascinating attempt to understand public
policy. There are both effective and ineffective responses to social
problems. Human welfare requires interpreting complex social phenomena and
affecting social change. To be fooled by an illusion is to be guided by a bad
map.

Neoclassical models of political economy distinguish between markets and
governments. Markets are presumed efficient when producing and allocating
resources, but in some institutional environments, where property rights are
poorly defined and information asymmetric, said to fail. Governments are
presumed necessary and sufficient to solve market failures. Society suffers
when either problem is misdiagnosed and/or either solution incorrectly
prescribed. Bernard Harcourt thinks markets have been overrated. Histories of
penology and economic thought help correct this.

The market versus government dichotomy dates to the classical school, when
economists thought in terms of natural law. Markets were called natural
because the price system is self-adjusting and socially coordinative. Neither
shortages nor surpluses persist because prices change on the margin.
Self-interest guides social welfare "as if by an invisible hand." While
economists favor markets because they produce and distribute tangible wealth,
Harcourt is concerned that they under account social costs. In particular,
natural law has supposedly borne complex consequences upon American criminal
justice.

Markets were heavily regulated during the time of the classical school.
Detailed codes of conduct governed all manner of commercial trade. Harcourt
observes that Adam Smith and other classicals used the term “policing” to
refer to both commercial and criminal regulations. Harcourt prefers
Foucault's focus upon discipline over economists' hard dichotomy.
Historically, both markets and governments regulated behavior. Both were
backed by physical punishments. The market was as disciplinarian as the
state.

Harcourt is concerned, and rightly so, with features of American criminal
justice. It appears racially biased, excessively severe and uniquely modern.
He argues that these are the theoretical consequences of applied natural law.
His historical narrative suggests that as the commercial realm was
deregulated, disciplinary resources were directed into the penal sphere.
Markets were presumed to be self-regulating, which drove a conceptual schism
between lawful market behaviors and unnatural criminal actions. Theorists
underrecognize the costs of social change invoked by deregulation because
they presume the market natural. Today's penal excesses are the presumed
result of a growing network of anonymous contracts. Harcourt's message: the
notion that markets are free from coercion is an illusion, both yesterday and
today. Privatization and deregulation are insufficient policy solutions to
mass incarceration.

Harcourt's comments are a welcome update to neoclassical orthodoxy, which has
failed to give an explanation or policy reaction to mass incarceration. If
one looks -- as Foucault would suggest --  at different enforcement
techniques (physical punishment versus torts and fines) used within the
different legal spheres (criminal versus civil); or if one looks at the
historical specialization of those techniques across those legal spheres, one
notices the world is a very different place than it used to be.

Today the market versus government distinction parallels the civil and
criminal law. Contract enforcements are maintained by the civil law. Criminal
laws are enforced by incarceration. These separate legal spheres were not
always distinct, nor were their enforcement resources specialized. Originally
there was no criminal law. Physical punishments, such as arrest and jailing,
facilitated market exchanges and resolved civil disputes; afterwards a
separate criminal law developed. Then physical punishments became more
reserved to enforce against crime.

Harcourt argues the doctrine of natural law ushered this process, and led to
problematic criminal justice outcomes. Alternatively, Foucault's historical
perspective compliments an Austrian and Public Choice framework of political
economy. Neither markets nor governments should be presumed to resolve each
other's failures. The efficient-market hypothesis and traditional public
goods theory both risk misguidance by illusion. Enforcement technology is an
important focus in so far as it affects the production and distribution of
knowledge and incentives.

Austrian political economy emphasizes the distribution of economic knowledge
throughout society. Governments differ from markets in how they produce and
distribute economic knowledge -- who, what, how, when and where to make and
distribute goods. Public Choice political economy emphasizes the incentives
that affect rational choice. Bureaucracies produce systematically different
incentives than do for-profit markets.

An Austro-Public Choice political economy insists upon the behavioral
assumptions applied to governments and markets being symmetrical. Neither
market nor government decision-makers are perfectly informed nor perfectly
incentivized to accomplish goals. The subsidy and administration of criminal
punishments yesterday and today appear not to be an exception.

Harcourt interprets history as a slight against the characterization of
commerce as non-coercive. Foucault says markets are disciplinary. Though not
emphasized by Harcourt, the inverse also seems true. The history of physical
punishments within the market sphere weakens the characterization of
governments as particularly necessary for optimal criminal punishment.
Presuming criminal punishment a public good may be just as illusionary.

When markets wielded physical punishments they appeared constrained from
excess by the self-interests of disputants. Conflicts among traders were
self-sorted for profit seekers. Punitive threats made compliance with
financial and service court rulings more appealing. Contract violators were
inclined to settle and civil plaintiffs sought tangible compensation for
loss.

Contemporary criminal justice problems coincide with expanded market
economies and decentralized government in the market sphere. An Austro-Public
Choice perspective must reference how changes in knowledge and incentives
yield such outcomes. On net federal government has grown, as has its role
within the criminal justice system in conjunction with mass incarceration's
disconcerting results.

Physical punishment has become relegated to the enforcement of criminal law.
Though contrary to Harcourt's narrative, driven by the segregationist logic
of natural law, this can be seen as driven by the self-interests of market
and government actors. While market traders sought low cost and
quantitatively predictable methods to resolve conflict, government
capitalized as the monopoly provider of physical enforcements.

Today's greater quantities of physical enforcement are not deployed to
enforce civil contracts or tort compliance. Drug and immigration violators
occupy most new prison space, unlikely prohibited by contract law. Rather
than necessary and sufficient, democracy has proven ineffective to correct
the racial, generational, gender, and substance-abuse disproportionality of
criminal sentencing. Policy makers have little incentive to change such
policies and ordinary citizens lack the necessary knowledge to implement
institutional reform.

Daniel J. D'Amico is the author of "The Prison in Economics: Private and
Public Incarceration in Ancient Greece," in /Public Choice/. He is currently
engaged in a long-term research project focused upon the political economy of
mass incarceration.

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Geographic Location: General, International, or Comparative
Subject: Government, Law and Regulation, Public Finance, History of Economic
Thought; Methodology, Markets and Institutions
Time: General or Comparative