by Bernard E. Harcourt. Cambridge, Mass.: Harvard University Press, 2011. 336 pages. Hardcover $29.95. ISBN 9780674057265.
reviewed by Michael C. Macchiarola, Distinguished Lecturer, City University of New York.

pp. 33-37

The economic turbulence of the last several years has proven deeper, wider and more persistent than few ever expected to encounter – let alone in a world that long ago embraced the wisdom of the free market as the efficient allocator of resources. More than a means of distribution, by the dawn of a new century, we had grown increasingly comfortable with the market as the embodiment of natural order – the mechanism by which the world achieved and maintained a “stable, orderly, self-sustaining form of equilibrium in the absence of government intervention” (p.240). As balance is tested with a force and frequency that expands by the day, we would be wise to understand the philosophies on which “equilibrium” relies.

While the studies of the events pushing the global economy to such a precarious place continue in earnest, many academics have paused to take measure. In fact, the Great Recession has offered the perfect occasion for a critical reexamination of many of the philosophies now deeply embedded in our worldview. Bernard E. Harcourt’s The Illusion of Free Markets: Punishment and the Myth of Natural Order offers one such evaluation. In that regard, the timing could not have been better for his interesting and lucid inspection of just how we have become conditioned to expect the market to dispense the natural order. Timing is the least of Harcourt’s advantages, however, as he challenges the reader to look beyond a reflexive endorsement of the universal categories that dominate today’s discourse in favor of a disciplined inspection of underlying philosophies. More than that, Harcourt’s work establishes the links in the evolutionary chain of a worldview that resists government intrusion into the wisdom of markets, on the one hand, yet encourages maximum government engagement in enforcing law and order, on the other.

The quality of Harcourt’s work could stand on its own in any era. And, his well written volume will prove to be a timeless contribution. Its value to today’s reader, however, cannot be overstated. The Illusion of Free Markets provides the intellectual backdrop for many of today’s most interesting economic policy debates. And, whether they know it or not – and one doubts that most do – today’s actors borrow heavily from the ideas of the past.

For Harcourt, the market “freedoms” we trumpet are illusory. “Free markets” are more a contrivance, reinforcing a convenient narrative that market outcomes are talent or merit based, and somehow more natural. Harcourt maintains that it is the state itself that “actually facilitates and makes possible the new order” (p.241) and he offers ample evidence that legal, social and professional regulation abound in even our freest markets. In this regard, Harcourt’s description of the level of intervention in an enforcement action on the Chicago Board of Trade – the “epitome of the free market in the Western world” – is eye-opening (p.17). For Harcourt it follows that today’s efforts should concern how best to regulate and not whether to regulate. [*34]

The Illusion of Free Markets effectively traces the roots of our contemporary affinity for an unapologetic free market philosophy. While few would argue with the notion that all markets require regulation of some kind, the choices in structuring, applying and enforcing those regulations are meaningful. In Harcourt’s analysis, the free market has found a dangerous companion in the state’s coercive powers that result from an insistence on law and order. He asserts that when a free market philosophy and state muscle are applied in tandem, a “neoliberal penality” results, where state intervention enforces a stifling mechanism by which a market deemed “free” actually chooses its own winners and losers.

As Harcourt describes, today’s devotion to market-efficiency traces its lineage to the Physiocrats of the eighteenth century. For Francois Quesnay and his contemporaries, governmental intervention in the markets was seen as “oppressive and interfering with the autonomous functioning of an economic system governed by natural laws and natural order” (p.27). Echoes of Quesnay’s famous prescription to Louis XV – that all he had to do to improve the economy was nothing – can be traced through the writings of Adam Smith and resonate with many today. In Quesnay’s view, the police function was best kept extra-market, and those resisting the market’s natural ordering function would be punished, and punished severely. As Harcourt describes it, the “idea of natural order helped shape a vision of the economic sphere as an autonomous, self-adjusting, and self-regulated system that could achieve a natural equilibrium spontaneously and produce increased wealth” (p.29). Adam Smith did not require the “perfect liberty” that Quesnay desired. For Smith the invisible hand embodied the notion that “self-interest and the natural desire of all men to improve their own condition would still provide the engine for economic growth in the absence of perfect liberty” (p.85).

An argument alive and well today – and one that Harcourt characterizes as “seemingly eternal” – concerns the proper role of government administration. Jeremy Bentham’s presumption against market intervention found root in two observations. First, for Bentham, the average private butcher, baker or candlestick maker would know more about his craft than a government expert. More colorfully, “government is incompetent in economic matters and its authority must be limited to the greatest extent possible” (pp.113-114). Second, for Bentham, private individuals would pursue their own personal interests more effectively than the government on their behalf. In other words, “giving individuals the greatest freedom to pursue their own self-interest will not only result in the greatest advantage for themselves, but will also produce the greatest happiness and advantage for society as a whole” (p.113). If Bentham’s economic prescription for government was “do no harm,” his penal recipe was, in Harcourt’s words, “all hands on deck” (p.119). And, Bentham’s greatest contribution might be found in his extension of the rationality of the [*35] economic system into the realm of punishment. Whether devising his panopticon to provide surveillance at the lowest possible cost or offering a recharacterization of criminal sanctions as a menu of prices, Bentham’s ideas laid the perfect predicate for the Chicago School that dominates today’s thinking on all things law and economics.

The birth of the modern law and economics movement can be traced directly to Ronald Coase’s “The Problem of Social Cost.” Coase’s breakthrough was that, in a world without transaction costs, efficient outcomes could be achieved by individual negotiation. And, government’s role is best aimed at implementing efficient outcomes by determining how rights would be assigned in a negotiation between firms and individuals absent such frictions. Harcourt offers a fine explanation:

“Coase’s overall message to government administration was clear: if transaction costs are low, do nothing because free-market transactions will produce the most efficient outcome; and if transaction costs are high, ‘commonly’ do nothing and ‘curtail’ your interventionist tendencies because it is too hard to assemble the necessary data, the calculations are intractable, and government tends to be inefficient.” (p.125)

Coase’s Theorem represents the progeny of Bentham’s non-interventionist default and the Physiocrats' natural order philosophy. In more technical jargon and accompanied by hypothetical utility functions, Coase encourages the familiar refrain of “natural mechanisms of market exchange over state intervention” (p.126).

Friedrich Hayek’s “spontaneous order” also ratified the idea of a non-interventionist role for the state in economic affairs. For Hayek, “social theory begins with – and has an object only because of – the discovery that there exist orderly structures which are the product of the action of many men but are not the result of human design” (p.128). By the time the Physiocratic view of natural order infused the thought of the middle of the twentieth century, the affinity for markets qua markets was refined and nuanced. The depth of a market, its competition and the quality of its participants informed whether it was “efficient” and worthy of a laissez faire regulatory approach. Even with the efficiency overlay, it is not difficult to establish the intellectual link to Milton Friedman’s description of the Chicago School as espousing the “belief in the efficacy of the free market as a means of organizing resources, for skepticism about government intervention into economic affairs, and for emphasis on the quantity theory of money as a key factor in producing inflation” (p.131).

The Chicago School’s outright embrace of the “efficiency” of markets soon found its way across the quadrangle to the University of Chicago Law School where, in the hands of a few lawyer-economists, “efficiency” became the goal of legal rules measured by their [*36] ability to obtain the “equilibrium position obtained in a perfectly competitive market” (p.142). Gary Becker’s observation that crime’s demand curve was downward sloping completed the intellectual progression that moved the rationality of markets into the penal sphere.

In the end, for Harcourt, the elevation of the market represents a dangerous sleight of hand. And, such a reverence for the market’s ability places its resulting distributions beyond the reach of those who would question its outcomes, even when, as noted, those outcomes result from political choices masked as "natural". Equally unfortunate – but less interesting and more strained as an argument, at least to this reader – is Harcourt’s assertion that the unbending insistence on this market form has resulted in the massive expansion of the penal sphere and mass incarceration. For Harcourt, the idea that the government is incompetent in all tasks but policing lies at the heart of our drift toward mass incarceration. Yet, correlation and causation require two very different burdens of proof. And, Harcourt does not offer nearly enough evidence to support the latter

Harcourt offers the reader an interesting tour. As a result of his work, his colleagues at the University of Chicago are left a lengthy list of topics worthy of further analysis. Harcourt’s work suffers from its own omissions, however. Notably absent from The Illusion of Free Markets is any meaningful framework for comparing the quality of individual rules and regulations. All regulation cannot be of the same quality. For example, laws aimed at providing a stable and predictable playing field for actors in an economic tournament must be seen as of a certain virtue. In contrast, those rules designed simply to bring the blunt force of government to bear in favor of a friend or against a foe simply cannot be as worthy. Yet, Harcourt fails to adequately make distinction. And today, it is the prevalence of the less noble type that seems the most disturbing development of all.

Ultimately, the importance of Harcourt’s work is found in its ability to question an assumption that had been taken for granted by the turn of this century. His illustrations highlight the simplicity of a worldview that leaves all things for a self-regulating market to decide. As one reads, it is easy to recall the old riddle – how many University of Chicago economists does it take to screw in a light bulb? None is the answer. The market will take care of it!

Harcourt makes the point effectively. All markets require some regulation to function. In the end, however, his work leaves unexamined the important question of the growth of what he calls the neoliberal penality - why today’s government has a seemingly insatiable appetite for choosing outright winners and losers in a system that belies a free market more with each passing day. Whether bailing out one bank and not another, reordering bankruptcy priorities, favoring “good” industries over “bad” through the tax code or direct subsidies, or granting selective waivers, the federal government’s transgressions seem to be less about punishing those who fail to abide the market’s ordering. Instead, [*37] government action seems increasingly hands-on in dictating the results of that order.


Coase, Ronald. 1960. "The Problem of Social Cost," Journal of Law and Economics 3 (October): 1-44.

Copyright by the Author, Michael C. Macchiarola.

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