Those of us who love liberty and fear the state support “deregulation.” We want to unwind the bramble of regulations constraining the dynamic entrepreneurial economy. But we have not thought enough about how to unwind the unwieldy regulatory apparatus of the current system. It is one thing to show how a “truly free market” would work. It is quite another to show how to get from the current regulatory mess to something we are happy call a “free market.”
Most economists agree, for example, that licensing restrictions for physicians serve doctors better than patients. There is less agreement on what to do about it now that we have it. Simply lifting all restrictions immediately seems likely to create a “transition period” in which quacks and charlatans would prey on innocent patients. The market would eventually work out mechanisms to ensure that we all get good care, but how much harm would be done in the “adjustment period” of the economist’s blackboard model? We need to unwind it, but we don’t know how.
The California electricity crisis of 2000 and 2001 gives us a real-world cautionary tale. As Nobel laureate Vernon Smith has explained, the problem was not so much “deregulation” as badly designed deregulation.
Vernon Smith has shown us how to design markets. The process begins with blackboard theory. You work out the right design for your market relying only on economic theory. Then you “test-bed” your design in the experimental economics laboratory. Your design will probably be a flop in the lab, but that failure will teach you how to improve it. Once you have finally worked out a design that makes sense on paper and works in the lab, you are ready to give it a test run out there in the real world.
Adjustments based on experience may still be necessary, but your lab-tested design will be functional and relatively easy to perfect. If you design the market, it may work. If you do not, the market will fail.
Transition Russia illustrates the dangers of undersigned deregulation. The collapse of the Soviet system let to a kind of “free market,” but one that had not been designed in advance. The result has been a “demographic disaster” marked by declining life expectancy. You might object that Russia did not have a “true” free market any more than Stalinism was “true” socialism. But if you don’t design liberty, that’s the risk you run.
Which brings me to my plea. I would ask my fellow lovers of liberty to do less complaining about the evils of state control and more designing of markets and of the other institutions of a truly free society. My work on improving forensic science in the criminal justice system is an example outside the usual context of “deregulation.” (See here and here.)
Our social system evolved as a mixed system in which the state played an active, if often unfortunate, role. What would have happened without the dead hand of the state did not happen. Thus, we have a social system in which people do (because they must) rely on the state for services that would have been provided privately if the system had grown up without an activist state. Such services include more than “welfare.”
They include, for example, systems for signaling quality of physicians. They include all the services that well functioning markets would provide if only we would let them. Simply pulling the plug now would throw lots of people into a difficult spot not of their own doing, which is neither fair nor good. We need to think more rigorously about how to back off the interventionist state. We need to design the institutions of a free society because we did not let them grow up naturally in the past. What would have grown did not. Now we need liberty by design.
A strange thing happens if you get serious about liberty by design. Old divisions between moderates, minimal statists, and anarchists begin to fade away. Our designs for liberty will be implemented by replacing current systems with our designed system. The process of replacement is necessarily a political process and therefore, in the US, a democratic one. Designs for liberty become designs for political reform. The set of designed systems that will replace the current system is a state-sponsored reform. It becomes a matter of taste whether we declare the state to have been removed or reformed. And that’s a good thing. The point is not whether we do or do not have “intervention” or a “true free market,” whatever those empty terms might mean. The point is whether we have liberty, justice, and prosperity. We can have them, but only by design.