In an unpublished paper entitled "The Paradox of Freedom - Austrian Thought and the Crisis of Liberalism," I argue as follows below. In this preface-comment, I refer to the quote by Armen Alchian, in the second paragraph below.
Political Overload versus Irreducible Politics
In arguing that markets need politics to be viable, I recommend that we differentiate between
illicit or inefficient political blockages to the market order such as rent control, let us call it "political overload,"
the fact that economic activities are always embedded in and permeated by outcomes from political action, which circumstance one might call "irreducible politics,"
as when, say, a new market (in securities or fish) is established, requiring innumerable political decisions: who is to be admitted to it - as supplier, as consumer, as arbiter etc - which rules are to be adhered to, by whom, who is entitled to ratify any such rules and so on.
The distinction between "political overload" and "irreducible politics" is important. Unlike Armen Alchian seems to insinuate below, it is not true that there is a unilateral, ongoing, and irreversible displacement of economics by politics - political errors such as rent controls do get revoked, and large areas of economic activity are constantly kept free from political blockage.
Markets Depend on Outcomes of Political Contestation
At the same time, the very feasibility of markets depends on the outcomes of political contestation, which is not only true for the detailed structure of, say, a stock exchange (which may be favoured by securities firm A more than by securities firm B) but also for the return of a rent-controlled housing sector to a situation where market forces have more room to operate (a situation which may have become possible only because ways have been found to negotiate new legislation concerning the obligations and duties of landlords and tenants.)
So, we had better discern
market roll-back via dysfunctional "political overload"
inevitable and seminal constitution of markets by acts of "irreducible politics."
Good markets depend on "irreducible politics," and they are damaged by "political overload."
7.1 Why Markets Are No Substitute for Politics
A market transaction presupposes not only that two parties have recognised a mutually advantageous trading opportunity, but also that there is no internal or externally imposed conflict between them that inhibits exchange. A market transaction does not create concordance between the trading parties; rather it presupposes the compatibility of their respective interests and the possibility of peaceful exchange. Market transactions are not a means to overcoming conflict, instead they are being engaged in to take advantage of mutually complementary benefits already present, when no conflictive circumstances prevent them from transacting with one another. By contrast, elections, for instance, though in principle they may register (not create) unanimity, i.e. complete concordance, are preponderantly a procedure resorted to in the face of conflict and disagreement, and are intended to serve as a means of mitigating rivalry. Political scarcity occurs when concordance is scarce. Elections are one of the means tried to attenuate the inconvenience, nuisance, or blatant danger of unresolved disagreement in a group of people. In a large class of cases, when we are faced with political scarcity, we cannot help but apply non-market procedures. These may be rather imperfect, but comparing them to a spurious ideal is not helpful. Politics is about managing rivalry and compromise. Markets are about bringing together perfectly fitting interests. Politics and the state are more fundamental than economics in that they are instrumental in controlling more factors vital to individuals and humankind than can be achieved by “well-behaved” market transactions. The options for economic behaviour are set by politics and the state.
Writes Armen Alchian:
“I know of no way to reduce the prospective enhancement from greater political power-seeking, but I do know ways to reduce the rewards to market-oriented capitalist competition. Political power is dominant in being able to set the rules of the game to reduce the rewards to capitalist-type successful competitors. It is rule maker, umpire, and player … But I have been unable to discern equivalently powerful ways for economic power to reduce the rewards to competitors for political power!”
Economic Reason versus Political Reason
I am no longer sure I can accept the apodictic tone of Alchian's conclusion. As if there had never been an election dominated and decided by the electorate's economic preferences (in favour of greater market orientation). Moreover, while e.g. the advantages of short-term populism may provide a strong incentive for politicians to disregard economic rationality, government has also strong motives to foster or preserve its economic base.
The political infrastructure of a free society is intended to and capable of resisting encroachment through "political overload." Thus, I know of cases, where firms were able to get politics to revoke legislation that would have killed a market or made its inception impossible.
And, of course, not every market that gets established is a good thing or free from unseen repression (of competitors and better market arrangements etc). In areas where private firms negotiate the political framework of a market (say, by defining a worldwide standard for certain electronic gadgets), there is no intrinsic advantage in being a non-public entity as far as political conflict is concerned. There are plenty of "private" reasons to wish for a standard different from that favoured by one's competitors. Also, as Adam Smith would readily confirm, privately established "markets," are subject to insalubrious temptations to collude or harm outsiders or the public in other ways.
And then, there is the wide field of pluralistic indeterminacy, the fact that we must come to final policy outcomes in the face of irreconcilable differences among the many concepts defining economic desiderata. "Keynesians" argue that "Neo-Liberals" seriously harm the public by non-intervention in markets, adhering thereby to a wider definition of markets that incorporates hallmarks which the "Neo-Liberals" disapprove of, and vice versa, with "Neo-Liberals perceiving Keynesian "Public Goods" as "Public Bads" and Keynesian "markets" as "non-markets."
Under any circumstances, we will be confronted with diverging visions of "the right economy," no matter how free a society is - in fact, the freer a society, the more likely is widespread dissension.
In that sense, dealing with economic disagreement, so as to establish and sustain a common base for tolerance and legitimacy, is prior to economic insight, which is subjective and partisan. We cannot establish a total consensus on the right economic policy, but we can make us all coexist reasonably well in the absence of such a consensus, which is an important precondition for a society with reasonably free markets, and by itself represents a political achievement that is required before any variant of more or less free markets can be enforced.
8. SO1 Subset of SO2
The spontaneous order of free markets (SO1) does not cover all evolutionary adaptations serving to deal with challenges arising from human interaction in large communities. It is a different sphere of spontaneous order (SO2), precisely the area ignored by Hayek as an object of research into self-generating order that provides the substratum in which SO1 is embedded. Markets are a derivative of SO2, the spontaneous order of politics and the state, in which conditions may or may not evolve that are sufficiently peaceful and tolerant of the individual to allow for voluntary and mutually beneficial transactions of the type constituting free markets.
It is an illusion to think that markets create peaceful reciprocity; functioning markets always presuppose a political order that does well at managing political scarcity.
Within SO2 competitive processes develop to deal with contentious issues that can not be settled through the means of market exchange, especially regarding
• the cultural validity and political prevalence of rival values, objectives, and interests, as well as
• the manner in which diversity and divergence of these fundamental convictions are to be managed so as to minimise violence and strengthen trust in a community in sufficient measure to make free markets and a civil society possible.