Free Market Morality, or Hale and Polanyi!

Ben Shapiro and Ross Douthat recently traded some illuminating thoughts, largely about latter’s new book, The Decadent Society.¹ About half way through their conversation, as both discuss the extent to which we should tinker with free markets, Shapiro offers the following:

“I’ve suggested that . . . free markets are good in that they are inherently moral — meaning that you own property as an individual human being, it’s a Lockean argument essentially . . . that as an individual you have a right to the property that you create, that people do not have a right to take that away from you in the name of broader communal interests.” ²

Shapiro’s first claim — that markets are inherently moral — has captivated many over the years, with uncanny persistence. It’s worth considering why.

Part of its endurance, I suspect, is fueled by progressive attacks that don’t meet free market defenders on their own turf. The progressive case against free markets is that because outcomes are clearly unjust, the system cannot possibly be “inherently moral.” When kids these days say capitalism is “bad,” they are not making some convoluted argument that Locke was wrong and, by golly, we ought to strip people of their property. They are just saying that they don’t like the outcomes capitalism generates.

Libertarians, on the other hand, are not outcome focused. They are way upstream and frame the moral case for unalloyed markets from the perspective of a system architect. They say: having a system where people keep what they build, without the state interfering willy nilly, seems moral (at least in a Lockean sense).

So, we end up in a bit of a pickle. Progressives ding the free market for its unconscionable outcomes; libertarians parry by emphasizing that those outcomes are produced by a system with a rather benign premise.

Now, let’s bracket whether markets, in practice, track the libertarian utopia. It’s not clear Shapiro thinks they do, and Douthat goes to great pains to demonstrate that they don’t (e.g., today’s deep linkages between corporate monopolies and government render “free markets” more of pipe dream). But what of Shapiro’s claim that markets, in theory, are inherently moral? That claim has a distinct historical provenance and is worth confronting. In doing so, we will (with trepidation) be joining libertarians on their own turf.

There are many good ways to rebut Shapiro’s claim. Here, I will recount two especially fruitful ones. To assist, I enlist the help of two wonderful thinkers, Robert Hale (1884–1969) and Karl Polanyi (1886–1964). Both attack the market from different angles. Hale was concerned with the legal (and therefore decidedly willed) nature of market institutions, while Polanyi’s critique was deeper and more gripping and wrestled with the psycho-social decisions internal to free market arrangements. Both, I think, wrest markets from Shapiro’s accommodating hands.

Shapiro’s Premise and Why We Should Care

Before diving in, we should clarify Shapiro’s premise. Shapiro does not tease out exactly why he thinks free markets are “inherently moral,” but his language provides some hints.

For one, Shapiro seems to say, there is moral goodness in a system that allows people to do as they please and retain the fruits of their labor, unburdened by a state that would step in to assert “communal interests.” Free markets are just such a system. Further, free markets rightfully relegate the government to a singular role: enforcing property rights.

So, it seems like Shapiro’s premise is: free markets are moral because the government is absent, so no one is “forced” to do anything and people can build and retain at their pleasure.

Now, we might wonder what good can come from an assault on Shapiro’s libertarian dogma. After all, most conservatives are not go-go libertarians; many believe the state has a legitimate role to play in setting a social minimum and shaping the rules of the game.

But, still, getting some Republicans to agree to social insurance is like squeezing blood from a rock. Why is that? I would venture that many conservatives are philosophically in tune with Shapiro, even as they intermittently bless the welfare state. In other words, Republicans are iffy with safety nets because they largely agree with Shapiro’s claim. That claim has deep roots in the Republican consciousness, and its iron-fisted clutch on the conservative mind makes calls for increased government oversight appear as they do to a libertarian: as hideous attempts to use state power to deny people of their hard-earned property. Progressive reforms, then, often collide with an impenetrable philosophic preference for light-touch regulation (or, better yet, self-regulation).

So, undercutting Shapiro’s premise may seem like a semantic exercise. But, taken seriously, it is an exercise with massive returns. With that, we can proceed.

Hale and the Legal Conditioning of Economic Life

Hale, in classic Legal Realist fashion, took nothing for granted. The essence of his free market salvo was simple: markets are shaped by legal institutions that are anything but “natural.” As a result, the state, far from “intervening” in the market, creates the market.

Take private property, that indispensable building block of free markets. Private property rights, Hale noted, are a relatively recent invention. Such rights were notably absent for most of human history, and examples abound of societies that ran smoothly, one might even say beautifully, without a property rights regime.³ It was only a few centuries ago, in 18th century England, that the enclosure movement (which privatized the commons) hit full steam.

Now, lest we be accused of going for the jugular, our purpose is not to topple the foundation of modern capitalism. Rather, this is just to say that private property rights are a quintessentially human invention. A legal fiction of sorts. Establishing property rights was a political choice, not the outgrowth of some natural, pre-political, age-old preference to appropriate things for gain.

So, Hale began by pointing out that free markets rely on a state that, yes, intervenes to construct a property rights regime. Shapiro, of course, would not quite see it that way. Like most conservatives, he sees a clear difference between the creation of property rights (which he takes for granted as natural) and more “ugly” forms of state intervention, like the imposition of a minimum wage. In other words, Shapiro would have some serious thoughts for us on what “counts” as intervention. And, indeed, what should “count” as intervention? What kind of intervention taints the market such that it can no longer sustain the “free” mantle?

Here’s where Hale’s contribution was at its most vital. He delivered his point by way of a story. We have a protagonist. He must eat to survive. In a slightly prosaic passage, Hale continues:

While there is no law against eating in the abstract, there is a law which forbids him to eat any of the food which actually exists in the community — and that law is the law of property. It can be lifted as to any specific food at the discretion of its owner, but if the owners unanimously refuse to lift the prohibition, the non-owner will starve unless he can himself produce food. And there is every likelihood that the owners will be unanimous in refusing, if he has no money. There is no law to compel them to part with their food for nothing. Unless, then, the non-owner can produce his own food, the law compels him to starve if he has no wages, and compels him to go without wages unless he obeys the behests of some employer. It is the law that coerces him into wage-work under penalty of starvation — unless he can produce food. Can he? Here again there is no law to prevent the production of food in the abstract; but in every settled country there is a law which forbids him to cultivate any particular piece of ground unless he happens to be an owner. This again is the law of property. And this again will not be likely to be lifted unless he already has money. That way of escape from the law-made dilemma of starvation or obedience is closed to him. It may seem that one way of escape has been overlooked — the acquisition of money in other ways than by wage-work. Can he not ‘make money’ by selling goods? But here again, things cannot be produced in quantities sufficient to keep him alive, except with the use of elaborate mechanical equipment. To use any such equipment is unlawful, except on the owner’s terms. These terms usually include an implied abandonment of any claim of title to the products. In short, if he be not a property owner, the law which forbids him to produce with any of the existing equipment, and the law which forbids him to eat any of the existing food, will be lifted only in case he works for an employer. ⁴

Property rights, then, are unavoidably constricting. But can we put them in the same category as other kinds of state intervention? Or do property rights belong in a bucket all by themselves, as untouchable creatures of the state?

Hale thought that free market proponents were making a distinction without a difference. The key is in disentangling what it means for the government to “force” people to do things (i.e., coercion). Properly conceived, Hale pressed, coercion should be seen as background constraints on the universe of socially available choices, not as a gun to the head. And if we look closely, the kind of “coercion” we see in a property rights regime is analytically identical to the kind we see in more “intrusive” forms of regulation. The choice, then, is not between a free market and a regulated market; the choice is simply how much regulation we’d like to have.

Take a minimum wage mandate. Properly construed, Hale insisted, such a law does not compel an employer to transfer a portion of its wealth to workers. Rather, the government “merely states that if the employer chooses of its own free will to employ a given worker, it must pay at least the minimum wage.”⁵ That is, a minimum wage law simply contracts the universe of the employer’s legally available choices by one.

Property rights function in exactly the same way. They do not compel workers to relinquish their labor. Rather, they state that if a worker wants to earn a wage, he must provide labor in return. The same is true for employers. Property regimes do not force them to surrender their capital. But if employers would like to hire labor, then they must provide payment in return.

Put differently, just as the law of property requires workers to give up their labor if they are to earn a living, so a minimum wage requires employers to offer a specified wage if they would like to hire workers. The two are are analytical equivalents. Not only are property rights coercive — they are coercive in the same way as a minimum wage mandate is. Of course, you are free to support property rights and not a minimum wage. Hale would just ask that you not do so on the basis that (1) the latter is “ coercive” while the former is not or that (2) the latter is “natural” while the former is not. (1) is not true when we define coercion correctly, as background constraints on the universe of available choices. (2) is not true when we recognize that property rights are a product of the state.

What are the consequences of Hale’s move? Hale’s point was not that, because we can put property rights on the same analytic plane as other forms of economic management, that coercion doesn’t matter. To the contrary, he thought coercion — its character and ubiquity — mattered immensely. His mission was more subtle and common to the Legal Realist project: showing that we are dealing with differences of degree, not kind.

What differentiates property rights and minimum wage laws is not that one is coercive and the other is not. The space between them is purely a matter of degree. Some forms of state intervention are more coercive-in-fact than others. Experience, Hale underlined, is what matters. For instance, employers may not experience property rights as very coercive, whereas workers might experience them as very coercive. On the flip side, employers may experience minimum wage laws as coercive, whereas workers might not. As a society, Hale counseled, we must have some normative theory to decide what quantity and distribution of coercion is acceptable. But coercion itself is an irremovable feature of free markets — because those markets, even Shapiro concedes, must have property rights — so our normative theory cannot be that we should stamp out all forms of state power.

How does this all bear on Shapiro’s claim? Well, Shapiro is drawing an arbitrary line. When Shapiro talks of “free markets,” he’s talking about markets with one, very obvious form of coercion (property rights) and nothing else. But conferring property rights with immunity — pretty much saying that they don’t “count” as intervention — while condemning all other forms of intervention is, as we have seen, incoherent.

So what becomes of grand proclamations that “free markets are inherently moral”? Shapiro’s premise is that free markets are moral because the government is nowhere to be seen; people are not coerced into doing anything and are left to their own devices. But that premise cannot possibly pass muster, because Shapiro himself rejects it. After all, Shapiro’s version of the free market plainly tolerates some state meddling (i.e., the enactment of property rights through the state). More important, in the free market, people are coerced into doing things (via property rights), and coercion via property rights is exactly the same in kind as coercion that Shapiro unequivocally rejects, like minimum wage laws.

In short, if Shapiro has problems with a government that “forces” people to do things, then he should be against both property rights and minimum wage laws. If he is for the former and against the latter (as he is), he needs to present a theory of why. His current theory falls short, because it relies on (1) labeling property rights as “natural” and (2) implicitly viewing them as un-coercive. Hale’s analysis deftly rebuts both points. Property rights, Hale stressed, are a legal craft, one that is not only coercive, but coercive in the same way as a minimum wage law.

Hale’s analysis hurtles towards one piercing conclusion: we can’t credit the moral desirability of the free market to its absence of government (i.e., lack of coercion), because such coercion is the very essence of the free market.

Polanyi and Free Market Treatment

Karl Polanyi’s tack is much lighter on its feet. An economic sociologist, Polanyi was preoccupied with the psycho-social architecture of modern markets. Whereas Hale was keen on unveiling the market’s legal aura, Polanyi was on to something more raw: the way market relations encourage a particular psychological orientation towards our fellow human beings.

In his most notable work, The Great Transformation, Polanyi sketched out what markets looked like in their cradle, amidst the vast disruptions of the Industrial Revolution. Those disruptions, Polanyi asserted, were not evidence of a linear movement towards a self-regulating market. Instead, industrialization was invariably accompanied by social protections that sought to tame market excesses. As Polanyi put it, in a Halean key, “Regulation and markets, in effect, grew up together.”⁶

“Free” markets, though, were a different beast. They scorned regulation. And, in doing so, Polanyi thought, they created three “fictitious commodities”: land, labor, and money. Polanyi explains,

The crucial point is this: labor, land, and money are essential elements of industry [i.e., the free market]…But labor, land, and money are obviously not commodities; the postulate that anything that is bought in sold must have been produced for sale is emphatically untrue in regard to them. Labor is only another name for human activity which goes with life itself, which in turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally…is not produced at all, but comes into being through the mechanisms of banking or state finance.⁷

Let’s focus for a moment on labor, which is perhaps Polanyi’s most affecting example. A free market, without an iota of social insurance, requires that labor— or, as Polanyi notes, human beings — sell their services into the market not just to make a living, but to survive. In other words, unfettered markets broadcast a simple message: sell your labor or suffer the penalty of starvation. Polanyi was aghast at such a message:

To allow the market to be sole director of the fate of human beings…would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused, without affecting also the human individual who happens to be the bearer of this peculiar commodity. In disposing of man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to that tag.⁸

Now, Polanyi is not saying that people shouldn’t have to earn a living. Rather, he is saying that free markets express a very precise value judgment on the part of its architects: that human existence should hinge on the price that one’s labor fetches in the market and nothing else. Under this paradigm, human beings are worth nothing more than their exchange value — so much so that we’re willing to risk lives if that value can’t sustain survival, let alone the good life.

Polanyi’s language has a faint Marxist flavor, but his focus was not on the “commodification” or “exploitation” of labor. Instead, Polanyi was concerned with how free markets shape our thinking. In buying into free markets, he thought, we make a profound gamble: that, somehow, the so-called equilibrating forces of competitive markets will ensure full employment at a living wage. Free markets demand blind faith in economic “science,” which sets forth the laws of supply and demand, which in turn guarantee that idle resources (i.e., human beings) are conscripted into quality jobs. Put differently, we should hope that competitive markets “clear” such that no one is left behind. Polanyi objected that such an expectation was at odds with reality. In actual economies, Polanyi observed, free markets result in all sorts of bad phenomena: involuntary unemployment, jobs that hardly pay a subsistence wage, and the like. Economics, after all, is not a science.

But more than encouraging blind submission to economic science, free markets, Polanyi feared, induce people to measure their worth — and that of their brothers and sisters — in market terms and market terms alone. How can free markets do anything else? They link survival to the going price for labor. If that price is not sufficient, for whatever reason, then free markets would have people perish. To believe in a free market, Polanyi suggested, is to believe that it is right to treat human life — and by extension, human meaning and aspiration — as an accessory to the market, a commodity to be “shoved about indiscriminately.” It is to believe that human beings are solely their exchange value.

But this cannot possibly be right. Labor “embodies purpose and value extraneous to the market.”⁹ Human beings are more than an economic concept. We “cannot be left on a shelf” waiting for the “natural laws” of supply and demand to deal us a good hand.¹⁰

Can we relate Polanyi’s critique to Shapiro’s premise? Shapiro likes free markets because they are short on coercion. Polanyi turns that claim on its head. Not only do free markets force workers (or capitalists) to take to the market to earn a wage (or return), they must rely on the market to survive. The state has no life boats. In this arrangement, as Polanyi frames it, “the laws of commerce [are] the laws of nature and consequently the laws of God.”¹¹

But Polanyi, in a way, goes beyond Shapiro’s premise, which is perhaps ill-suited for his critique. What free markets do, Polanyi concluded, is a form of psychological intervention. Such intervention is usually quite unremarkable; daily, the world of ideas pushes the human will in various directions. But Polanyi thought free market axioms were morally problematic and would lead us straight off a cliff. In using the ever-clever “labor” label, those axioms reduce human substance to an economic spectacle, one properly left to the market’s whims. Humans beings, however, are multi-dimensional creatures. Free markets, Polanyi asserted, made a mockery of that truth, only to furnish “fictitious commodities” to cover up the smoke and mirrors.

We can take Polanyi one step further. To assess the moral stature of anything, we should take into account all relevant factors. It would make no sense, for instance, to conclude that chocolate cake is a “good” thing because it tastes good, while ignoring that too much chocolate cake might give you quite the paunch. Both qualities — taste and nutrition — are relevant to an assessment of whether chocolate cake is truly “good.” Shapiro, however, reveres one aspect of free markets — the “build and retain” aspect — while ignoring another aspect that directly bears on its moral stature — its chilling diminution of human beings. If one of those two aspects is morally wrongheaded, Polanyi would say, then the free market cannot survive scrutiny.

Fielding Some Objections

Shapiro would likely have a few arrows left in his quiver. Most of his countermoves, I think, would be reserved for Hale.

For starters, Shapiro might claim that property rights have chronological precedence to the state. The right to ownership, Shapiro would say, is a privilege that is fundamental to human life, not something bestowed by a benevolent state. And “those rights that individuals possessed prior to the formation of the state and that they did not expressly relinquish as part of the social contract, they necessarily retained.”¹² This line of thought has a certain theoretical charm, but Hale would likely be nonplussed. After all, even if property rights existed prior to the state, that does not change how they function in real life. Natural or not, Hale’s analysis shows that the kind of coercion they exert is functionally identical to, say, a minimum wage law. Feuds about whether property rights are “natural” might make for lively faculty lounge conversations, but, Hale insisted, they play no role in assessing the market’s moral nature.

Shapiro may also complain that neither Hale nor Polanyi confront the most important part of his claim: that free markets are moral because people get to keep what they build. The problem here, Hale explained, is that it’s not obvious that free markets let people “keep what they build.” Shapiro’s free market, for example, fails to uniformly meet that principle, as Hale’s protagonist, who must abandon “any claim of title to [her] products” to earn a wage (i.e., she is not permitted to retain the fruits of her labor), would attest.

But Hale’s reasoning cut deeper. He recognized that what lies underneath Locke’s (and Shapiro’s) “build and retain” mantra was more elemental: that people should receive benefits proportionate to their efforts. Ultimately, we want a social and economic system where people are given what they “deserve” — no more and no less. It is quite obvious, Hale saw, that free markets do not guarantee such an outcome.

For example, even in Shapiro’s theoretical headspace, free markets permit the accumulation of unlimited amounts of private property. As a result, when someone with lots of property (i.e., wealth) bargains with someone with very little property, the former party has more power and will (in theory and in practice) use that power to extract a favorable bargain. Theory tells us that that bargain will not reflect what would have happened if everyone “received benefits proportionate to their efforts.”¹³ Instead, the party with more bargaining power will get more than she “deserves.” In such a case, the government, Hale thought, might be justified in asserting “broad communal interests” — Shapiro’s bogeyman — to level the playing field. Interestingly, the communal interest would be that people should be rewarded in proportion to their sacrifice, a notion that Shapiro purportedly supports.

Take the example of a prospective fast-food worker bargaining with McDonald’s in a free market. Both wield Hale’s coercive power. The worker has the power to withhold her labor should McDonald’s not offer a wage, while McDonald’s may withhold payment unless the worker surrenders her services. Who, Hale might have asked, has a greater degree of coercive power? McDonald’s is a large multi-national corporation with a sizable rainy day fund, while the worker is an unskilled laborer living paycheck to paycheck. McDonald’s can afford to hold out — there is an endless supply of unskilled laborers should this worker take her chances elsewhere. Should our worker hold out, however, she might slide into poverty, with no state cushion. McDonald’s has the upper hand and will strike a bargain that accounts for its superior leverage. In such a world, the outcome will not satisfy Locke’s sacrifice-reward ideal, but stems from, among other things, the bargaining power of each party.

Indeed, Hale devoted a large part of his career to figuring out what degree of government intervention would be consistent with a society where people are given rewards in line with their sacrifice. But, as an initial matter, he determined that free markets do not automatically get us there. Naked commands to let people “do what they want” do not, Hale concluded, serve as a bulwark against unjust results.

In the end, free markets have much to recommend them. They are excellent coordination machines; when they are competitive, they yield breathtaking innovation; and they, by and large, direct resources to efficient uses. But we can celebrate these features without resorting to Shapiro’s claim that free markets are “inherently moral.” Both Hale and Polanyi help us see why such a claim skates on thin ice.

Free markets are, Hale detailed, hammered out through a deliberate political process. The output of that political process, no matter how “free,” is irrepressibly coercive. Our task, Hale proclaimed, is to figure out how to distribute coercion in a way that comports with our intuition that people should reap what they sow. In a deeper sense, though, we would do well to unmask the psychological damage that free market fundamentalism inflicts. Polanyi saw this damage — and its human cost — as the most searing indictment of free markets imaginable.

[x] This post was inspired by Duncan Kennedy’s classic essay. See Duncan Kennedy, The Stakes of Law, or Hale and Foucault!, 15 Legal Studies Forum 327 (1991).

[1] The conversation between Shapiro and Douthat can be found here.

[2] Time stamp here.

[3]Karl Polanyi detailed some of these examples. See Karl Polanyi, The Great Transformation 45–58 (Beacon Press 2001).

[4] Robert L. Hale, Coercion and Distribution in a Supposedly Non-Coercive State, 38 Political Science Quarterly 470, 472–73 (1923).

[5] Barbara H. Fried, The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement 49 (1998).

[6] Polanyi at 71.

[7] Polanyi at 76.

[8] Polanyi at 76.

[9] Joy Patton, Labour as a (Fictitious) Commodity: Polanyi and the Capitalist ‘Market Economy,’ 21 The Economic and Labour Relations Review 77, 82 (2010).

[10] Patton at 82.

[11] Polanyi at 122.

[12] Fried at 76.

[13] A competing theory, marginal productivity theory (that everyone is paid the value of their services), would counsel otherwise. Here, the reader must decide what theory is more believable, and which one better tracks reality. Marginal productivity theory, Polanyi would say, is part and parcel of a mistaken ideology that posits that economic “science” magically rewards everyone in proportion to their value.