Bundling Economic Institutions

The right-wing’s basic move is to pretend that the economic institutions they prefer just exist ex nihilo. From that pretension, they then remark that they are merely against government involvement in the economy. Because they pack into the phrase “the economy” all of their preferred government-constructed economic institutions (property, contract, corporations, and so on), this rhetorical move reduces down to the claim that they are against the things they are against. It’s vacuous.

If you can get a right-winger past this tautological stage, their next move is often to remark that they just want limited government. They want the government to construct a whole slew of economic institutions (the “rules of the game” in Milton Friedman’s parlance), but they want to keep those things to a minimum.

This approach has two really major problems. First, you can always make the government more limited by sacrificing an institution conservatives do not want to sacrifice. Take a conservative’s dream set of government economic institutions and then remove contract law from it. Wouldn’t this new set of institutions be more limited? That they would prefer to construct contract law rather than have a more limited government reveals that relative limitedness is not actually motivating anything. What’s going on is they want the state to construct the institutions they like, but not the ones they don’t like. Limitedness has nothing to do with it.

Second, this quest for limited government usually employs an additive approach to measuring the size of government, but this ignores the extent to which societies reasonably bundle economic institutions. By bundling, I mean that a government might determine that we need institution X and institution Y together to achieve our overarching goal of Z. Complaining about institution Y on the basis that its existence makes government less limited acts as if you can analyze these two institutions in isolation, as if they are not part of a coherent set. It will also run into the problem of figuring out where one institution ends and the other begins, which is probably more a fiction of our categorizing imagination than anything deeply real.

For example, suppose we are at time 0 and there are therefore no institutions or rules or anything. We are sitting around and trying to figure out how we want to construct this economic/social/political system (which are hopelessly intertwined). That is, we are trying to set up the rules of the game.

In this time 0 place, someone offers up the idea that we create a corporate law to create legal fictions called corporations. That person argues that creating entities that have asset partitioning and limited liability and perpetual existence would be good for economic production.

Then someone else pipes in and says that this institution would also have a ton of negatives. By allowing huge concentration of assets into mega-corporations, it would open up serious bargaining imbalances between capital and labor. Their organizational structure might generate huge inequalities of income, with executives being paid massive sums and workers almost nothing. The entities may become so big and flush with cash that they can dominate the political process. Due to the asset partitioning, they might create tons of damage that they never have to compensate victims for because they could just go bankrupt. They could lie about their financial health, costing their shareholders huge amounts of money when the corporation goes crumbling. And so on.

One rather simplistic way to resolve this argument is to look at all these considerations and decide whether we will create corporations or not through an up or down vote, maybe through some kind of cost-benefit analysis. But a more sophisticated way to handle this is to consider whether we can create a bundle of economic institutions that allow us to get the good things about corporations while avoiding the bad things. That bundle might look like this:

  1. Invent corporations. (corporate law)
  2. Increase the bargaining power of labor. (labor law)
  3. Create a tax-and-transfer system to reduce income disparities. (social insurance)
  4. Prevent corporate mergers that eliminate competition. (anti-trust law)
  5. Prevent corporate donations to political campaigns. (campaign finance law)
  6. Require quarterly public disclosure of financial health. (securities law)

For the most part, whether we should have securities law or anti-trust law seems to be settled. Bundling those institutions with corporate law never seems to raise the ire of people saying they want limited government. The other three — social insurance, labor law, and campaign finance law — do. The likely explanation is because limitedness is not a real motivator here and the right-wing just has certain Just Deserts distributive intuitions that they think these institutions run afoul of.

But putting that aside for a moment, you certainly will run into these limited-government right-wingers who will say the problem with, say, corporate law plus social insurance is that it is less limited than just corporate law. Consequently, limitedness demands that we eradicate social insurance. This is the additive move. The problem here is that it analyzes these institutions as if they just exist in some silo, when in fact we are bundling them. We tolerate corporations as an institution only because we have bundled institutions that check its negative consequences. Plucking off the offsetting institutions acts as if each institution operates in and can be analyzed in isolation of all the others.

Because institutions are bundled together to create an overall edifice or institutional cocktail, you can’t do this. It is like saying a three-legged stool would be more limited if you removed one of the legs. We don’t have one institution and then another institution and then another institution. We have a system of institutions that must be analyzed in its coherent totality.