With the failure of Republican economic ideology writ large across the headlines of our newspapers and the stock market, a vacuum of economic policy theory seems to be emerging. This failed ideology asserted, essentially, that regulations are a barrier to the natural formation of markets, that markets are themselves entirely natural, and as such, markets were the unique solution to the problems of resource and asset valuation, production and distribution. The Democratic response to this failure has been largely negative, that is, that it has emerged largely as a negation or denial of one or all of these basic propositions.
However, the negation of a theory is not itself a theory. But while the empirical falsification of the Republican theory does not, by itself, suggest the correct theory, examination of how the theory failed may give us such evidence to enable us to modify or replace the principles of this theory, and determine the general goal governmental economic policy should promote.
The first principle and the third principle rely, in their own ways, on the truth of the second principle, that markets are entirely natural. If this principle can be undermined, then principled reasons for rejecting the first and third principles can be discovered. What does it mean for something to be natural? One sense, we can quickly reject, is that something non-natural is supernatural. This, I think we can reject as being rather nonsensical. Any appeal to the supernatural is fundamentally an appeal to an irreducible mystery, the claim that there is something about the supernatural object that will forever elude the understanding. No one who wants to seriously claim that markets are not natural will be entertained for long if he claims that it is because they are supernatural.
Another way to claim that markets are not natural is to claim that they are artificial in the original sense, they are artifacts of human effort and contrivance. Now, you might think that this is quite obvious, and that the task of undermining Republican economic ideology is done. After all, what are markets, except social settings where human beings can trade their resources and assets with one another? The entire thing is human effort and contrivance. But there is a more subtle sense of natural and artificial that may be at play here. Consider the design of a hammer. It's shape and size, amount of decoration, presence of a handle, etc, will all depend on the task you need it for, the materials you have on hand with which to make it, its social significance (is it a ritual object?), and so forth. It's design and form is immensely variable, and yet, the clarity with which we apprehend its purpose, despite such variability in design, shows us that such a design is entirely artificial, i.e., the result of intentional human effort and design. Now consider the way in which you blink when a mote of dust hits your eye, or how you put one foot in front of the other when you walk. Do any of us think that these occurrences are the result of intentional human effort and planning, or are they just what naturally occurs? I would maintain that these things are natural, as strongly as I maintain that the shape of the hammer, even its existence, is an artifact. It may be that markets are natural in that same way, that the creation of these social settings and the trading with one another are as natural to us as breathing. And some evidence exists which suggests this to be the case, namely, that some of our primate relatives engage in trading, and have socially acceptable times and places where such trading occurs.
So what is the danger of thinking that market are natural? One of the greatest dangers is that because markets are natural, they are immune from normative or moral evaluation. The lion naturally hunts and eats the antelope, and often the antelope endures horrific suffering before dying as a result of this natural situation. Sometimes, the lion fails, and she and her pride suffer and die as well. But we decline from offering moral approbation or criticism of this situation precisely because it is natural. We do not work to educate lions as to the harm they are causing the antelope by such brutal methods of harvesting, nor persuade the antelope into sacrificing their weakest or oldest members to feed the lions. When a dust mote falls into my eye, I am not made more virtuous by blinking, nor do I deserve any condemnation if I fail to blink. If markets are likewise natural, then their effects are as the effects of a hurricane or earthquake when they are bad, and as the effects of a rich growing season when they are good. They cannot be avoided and they cannot be changed or negotiated with.
And there is a further reason for thinking that the belief that markets are natural is disingenuous. This is because Republican ideology does not promote just any sort of market. They do not support forced trades where the force is non-natural. That is, they support free markets. And this is the third sort of "natural" that we might think applies to markets. Markets are "natural" when the trading taking placed within them is not coerced by non-natural forces. However, if this is what Republicans mean when they think that markets are "natural," this is a far cry from thinking that such markets naturally arise. For one thing, there are quite strict requirements that must be met for an exchange to be considered "free" or not unnaturally coerced. In the first place, both sides of the exchange must get some benefit from the exchange. No con-artists allowed, and no trading things that have no value just to be trading. Second, the amount of information available to both sides of the exchange must be quite significant, amounting to knowing how much would be gained from other potential trades that could be made instead throughout the entire market. Third, the actors must be rational. They must use the information in the appropriate ways, and not get run around with psychological fallacies. They must be able to accurately assess the benefits they will get, and the value of what they are trading. Indeed, these requirements are so strict, it is difficult to see how they could arise naturally.
If we allow that markets may be called "natural" in this sense, then we are using "natural" as a moral evaluation of markets. No market can meet these restrictions completely, but they may be evaluated by how greatly and to what extent they do meet them. More "natural" markets are thought to be better, on this account, than less "natural" markets for two reasons. On the individual level, freedom from unnatural causes to trade means that no person or social organization is forcing you to make any trades. You get to make your own choices about what you want and what you're willing to trade for it. On its own, this is probably the greatest individual good, from the subjective perspective, conceivable. On the social level, Adam Smith's theories assure us that rational traders in a "natural" market like the one described above will distribute resources in the optimal way, according to whatever metric you wish to use, from ongoing sustainability, to the promotion of future wealth building, to adequate and virtuous distribution of resources.
The problem is that these "natural" markets are not natural at all, they are ideals, and they can only be approximated at best in practice, and only in certain resource distribution domains. For these free markets to promote the social good in the way it promises, it must be possible to construct the market to more closely approximate the ideal. But these are not markets free from regulation, rather, they are loaded with it. They are loaded with regulations that ensure access to information, subsidies and submarkets for education relevant to making choices in that market domain, rules to define and promote competition between and real choices for producers, distributors and consumers, rules about what can be traded and to whom. Most pernicious, are those con-men and fraudsters, who are always looking for a way to set up shop inside a legitimate market, and begin trading magic beans for the real wealth people have worked and bled to create, but also those cumulative effects, the forces that each of us exert on one another in sometimes very remote and distant ways, forces that must be fought with regulation to keep the trade free.
And in some cases, it must be admitted, that humans are not naturally well suited to the establishment of "natural" markets. Sometimes, markets fail, even as they attempt to approach Smith's ideal. The causes of these failures can be discerned as well, and here, the fault lies sometimes with us, and sometimes with what we want to trade. One way in which we can fail to meet the ideal of rationality is as result of our lifespans. Our most productive years rarely last more than 40, and it is even rarer to find someone with a coherent project through all that time, to matter how great the benefit. Those that have, and who have succeeded, are the icons of history, but the projects themselves were public and social, on a par with a governmental project today. The benefits of such activity as reconstructing our infrastructure lie far in the future, and its benefits are diffuse enough to prevent any individual actor from undertaking this project alone, even if she had the resources at her command to succeed. Such activity, which is to our rational benefit to pursue, but whose benefits are remote, and whose initial cost is high, will never appear rational to individual traders of such short life spans, but must be imposed upon them by a collective social authority.
Other failures involve externalities in the trade. When I purchase gasoline for my car, I do not bear the full brunt of the costs of that choice. The carbon dioxide and other pollutants that are emitted, while on an individual level are insignificant, combined with the similar effects of others' similar choices, have costs that are quite high to the health and climate conditions of those I will never meet. But here, a more natural market cries out for creation, one which caps emissions, and where emission permission slips are traded, and where the wealth created from such exchanges and the taxes and fines that enforce the cap can be used to pay back the costs to those whose health and industry has been damaged as a result of them.
Finally, we must be aware that these "natural" free markets are not immune from more fundamental criticism. The speculative leap that "natural" markets will result in the socially optimal distribution of resources, though not offered without reason, is far from demonstrated. For one thing, we know from history, and from the inexorable logic of the free market demand for ever increasing productivity, whether from technological innovation, or by cutting wages and increasing hours, that those who earn their consumption money from wages will forever get the short end of the economic stick. Market innovations, and sometimes technology, can reverse this trend for a time, but absent this providence, wages in an overall free market will decline. One of the things this requires is that we not regard the labor market as one which can be "naturalizable," that is, approximated to an ideally free market of the sort Smith describes, or, if we do wish to naturalize the labor market, we must provide another source of income for many of the members of our society.
In conclusion: Free markets are good! Free markets don't happen by magic. Free markets require regulations to be free. While free markets are good, they are not enough. Government infrastructure programs for long term good, being proactive in creating and regulating new markets to internalize externalities and a robust social safety net are required.