Okay, here’s number eight in my ongoing series, Nine Reasons Why The Free Market is a False Concept. Reason number eight is Water, and all it represents, which includes public works or infrastructure. If you keep reading, you’ll hear me say what it means to “define infrastructure upwards.”

Imagine yourself in New York City in 1835, the largest and most prosperous city in the country. But if you want a drink of water, you buy it, if you are rich, from a “tea man,” who fills your container from a barrel of water he ports around on the street. You probably don’t risk using a decrepit private water system of hollow logs under the streets. Most people use one of the few public wells, which are polluted, or draw water directly from a dirty stream or pond. There are no sewers, so when you use the toilet, your waste goes into the ground where it blends with the water you will later drink. Devastating epidemics happen every few years.

New York City opened its public water system in 1842. It was a big effing deal. The polity had debated building one for a half century. As today with health care, it was a long and rancorous debate and tortured history. This history includes the fact that in the late 1790s Aaron Burr, before he became vice-president and before shooting Alexander Hamilton, had derailed a previous attempt by the state legislature to create a public water system. Burr got the legislature to grant him a franchise to create a private water system. It was not a very good system even for the rich, because Burr spent most of his energy using a small clause in the bill to create a bank, The Manhattan Company. It is one of the forefathers of Chase Manhattan Bank. When the city and state legislature tried to create a public water system, it was more difficult because it meant buying Aaron Burr’s heirs and partners out. Building the 1842 system from the Croton Reservoir meant constructing an aqueduct the Romans would have envied, including the arched High Bridge. But despite all the difficulties, when the system opened it was an immediate success and the arguments against it dropped away.

Why? Because not only was the city a better place to live, it was a better place to do business. It’s easier to shop or sign a contract if you aren’t as worried about catching typhoid or cholera. The public water system gave New York City a business advantage. Soon, every city had one. Although some were run by private companies, they all followed the principal of clean water for all.

Those who argue that government is some sort of parasite on the healthy body of the market should recognize more the role of government in building what used to be called “public works.” Water, sewers, roads and more are the physical infrastructure that economic actors depend on. That we take it mostly for granted shows it works really well.

Coincidentally, the New York Times columnist Nicholas Kristoff today discussed the role of public services in making a nation more prosperous. It was in the context of The United States ranking relatively low in many quality of life issues, which in turn he said hurt the nation’s business environment.

The history of water shows how we move from private to public. I believe our nation has progressed by converting more and more private responsibilities to public responsibilities. And that this holds true around the world. Society progresses, to mangle an axiom from the late Sen. Daniel Patrick Moynihan, by defining infrastructure upward.

To repeat myself from post number seven, Adolph Wagner got it wrong. The bigger an economy is, the more complex it is, and the more state spending it requires on all types of “infrastructure” to keep it functioning. It’s not an economy that supports infrastructure (meaning schools, roads, water systems, social security, fire protection, libraries, courts and so on); it’s infrastructure that supports an economy. Over time, we have progressed by converting more and more private responsibilities to public ones. This is turn allows the private sector to become more complex in a virtuous circle.

Generally speaking, the larger the economy on a median or per capita basis, the larger percentage of the economy government has. Today even a parsimonious country like the United States has in modern times spent about 35 to 40 percent of its Gross Domestic Product on state, local and federal government. Before World War I, it was in single digits, in percentage terms. Other countries have gone through similar evolutions.

From my ongoing series. 

Having hundred or thousands of uniformed men (mostly men), ready to stamp out crime or unruly behavior, makes it easy not to know or remember that this is a relatively recent thing. London, under minister Robert Peele, invented the first professional metropolitan police force in the 1820s. These men became known as “Bobbies,” a reference to the first name of their creator. New York City followed suit in the 1840s and 1850s, but not without debate. Badged, uniformed men walking among the citizens were seen as a thread to its status as a citizen’s republic, and at least once the police force was created and then disbanded. During one incarnation the men wore only badges, not uniform. Read more in Chapter 15, Police and Prisons, in my book The Surprising Design of Market Economies.

Before that time, cities generally had only night watchmen, who might occasionally stroll but often just stood in one place and shouted out the hour. Having a permanent, quasi military force on the lookout for wrong doers was a big step, and one with a dark side. Civil unrest and public protests became much more difficult with an ever present police force, as New Yorkers learned during labor demonstrations in the 1870s, and more recently during the Republican National Convention here under Mayor Bloomberg.

Could you have a contemporary market economy without police protection? Maybe, but it would be much more difficult.

That we generally take for granted police protection leads me to discuss Adolph Wagner was wrong in what has come to be known as Wagner’s law. Wagner said that at societies get richer, they tend to spend for more public services for themselves. This leaves out that the relationship also works the other way around. Societies spend more on public services, which makes it possible for them to grow richer. Public investments in schooling, public water and sewer and a police force make possible a more complex economy. New York City found this out in 1841, when its first public water system opened up. A city where you have little risk of dying of cholera is a much better place to do business. You can read more about Wagner’s Law and why it’s mistaken in my book, just out in paperback, The Surprising Design of Market Economies.

War is the original sin of markets. Because a political state is necessary for markets, and political states form themselves through war. At least I have great trouble thinking of one that didn’t. Norway may be an exception. It peacefully split off from Sweden at the beginning of the last century.

War, or said more politely Defense, is one of the nine reasons the Free Market is a false concept because it’s hard to buy and sell when the Huns or the Canadians are riding horses or tanks through your living room. More importantly, even if a free market existed, it would do a lousy job providing security. There is a market failure there. We enjoy security collectively. If we decided that everyone would be responsible for their own security, we would have a Hobbesian state of nature, not the ability to walk down the street without worrying about getting whacked.

War and defense are obviously huge subjects. I did not spend much time on them in The Surprising Design of Market Economies because the subjects are so huge. Suffice to say that commerce cannot be separated from war. We need security in order to trade things simply. More morally troublesome, we war in order to seize markets or establish them. Mafia gangs fighting over turf to sell heroin or olive oil is comparable to nations warring over territories. What’s happening in the Ukraine right now, with Russia and the European Union pulling at this land mass and people, with a gas line going through it, is an example of this.

We continue here, in my ongoing series, Nine Reasons Why The Free Market is a False Concept. I’m adding one reason a day. Here goes Reason Number Five.

In the Middle Ages, it was common when disputes arose or allegations of criminal offenses to do something called “The Ordeal.” Most were variations on this kind of thing: you grasped a red hot stone for a required length of time. Then if you were able to do that, your burned hand was bandaged up. In three days, it was unwrapped. If the wound was infected, you were guilty. If not, you were innocent or telling the truth.

Such was the law. But centuries passed, and the law progressed. Sort of.

In England in the 1800s, there still existed the “Bloody Code,” which made capital offenses of just about everything, including what today would be called petty theft. In Ireland in the 1840s, then part of Great Britain, being caught outside after curfew was punished by being banished to Australia, which usually meant for life, given the distance.

I know there are some libertarian theorists who postulate you could have a sort of private market-place of laws and thus no government-made law, but these are pretty much academic exercises. Once you concede we need a government of laws, then the question is what kind of laws? This is no mere minor point to the so-called free market. It’s not as if there is one set of laws available or optimal. There are tens of thousands of laws, and tens of thousands of choices. And making something a law doesn’t make it fair or just.

Those who contemplate the so-called “free market,” whether from a point of support or of opposition to it, usually skip over this step of laws. The free market is a false concept because there can be no markets without laws, and what kinds of laws you have determine what kind  of market or markets you have.

In my book The Surprising Design of Market Economies, Chapter Three goes into law, including Common Law. Common Law is the mass of laws that have built up over the centuries in England and the United States in the courts and is not written down or passed by a legislature. It is judge-made law, or case-made law. It is undemocratic, I say, because it puts perhaps the largest body of law outside the domain of the elected legislatures, who we think of ask “making law.” I bring it up here because it is yet another land on the landscape of markets, something to be wrestled with when asking and answering the question: what kind of markets do we want?

In honor of the great story this morning by Shaila Dewan in the New York Times, I’m pushing up in my order of attention an institution that Shaila focuses on and is a another reason the Free Market is a false concept: Cooperatives.

Cooperatives show the free market is a false concept because co-operatives are wonderful ways to organize an economy, or as part of an economy, yet they are nowhere in the  standard free-market models of economics. Yet there is nothing fascistic or communistic about co-operatives; they are simply one of the many institutions or market structures an economy can include. Co-ops are an example of successful experimentation with market institutions, one that produces fairer and more stable returns. It’s an example of the type of experimentation we should always be doing with markets and economies. How can we make institutions and markets that produce better, fairer results?

In my book The Surprising Design of Market Economies, in Chapter Four, I travel to Minnesota, what some call the land of cooperatives, and profile how co-ops work there. It’s not unusual there for someone to be born in a cooperatively owned hospital, work on a farm that sells its products through a co-op, and receives telephone, electrical service, internet service and bank loans through co-ops. When this individual dies, he can be buried through a cooperatively owned funeral home. Particularly in health care, as in the large co-op Health Partners in Minnesota, co-ops have a wonderful way of cutting through or short circuiting the usual process of higher and higher costs for worse and worse care. Yet even in Minnesota, I learned, probably most citizens are ignorant of co-ops. Even if they do receive services through a co-op, they don’t realize it.

What exactly is a co-op and why is it in some ways better than a conventional corporation? Well, to really learn why, read my book and in particular Chapter Four. But in brief, it’s because co-ops are a kind of democratic capitalism. In co-ops, people vote, not money. If you own part of a co-op or do business through a co-op as a member, you have the same vote as the next person, whether you sell or buy (in a co-op you can be on either side of this fence) a million widgets or a  dozen. Money does not have a voice. In most co-ops, there are no outside investors, or if there are outside investors, they have non-voting shares.

These crucial rules, along with others that I won’t go into here, keep the organization working in the interest of the small producers or workers as well as the larger ones. They also keep from happening what usually happens in a business environment, is that the larger producers gobble up the smaller producers, and turn the smaller producers into employees of the big producers.

Co-ops are used successfully particularly in the agricultural world, and include really big corporations, like Land O’Lakes, which is makes really good butter and other products and is a co-op. (Actually, it’s a cooperative of co-ops. More than a thousand smaller co-ops elect the board and manage the company that is Land O’Lakes.)

It’s illustrative to compare a farmer who sells his milk or butter to Land O’Lakes, and to a farmer in Virginia or Arkansas who sells his chickens to Perdue or hogs to Smithfield. The first farmer is an owner and his fortunes rise or fall with the company as a whole, and he or she has a relatively stable life, if that can be said about a farmer. The second farmer, who sells chickens to Perdue or hogs to Smithfield, is increasingly akin to a serf, an outside “consultant” who finds his prices, wages and working conditions dictated by a big company he has no say in.

There’s no reason we couldn’t have successful chicken or hog-raising co-ops. I think the main reason we don’t is cultural. Minnesota and Wisconsin, the land of co-ops, had a large share of Scandinavian immigrants, who have a history of co-ops and of working together. The South, where I hail from by heritage and where Perdue and Smithfield are based, had a large share of Irish, English and Scottish immigrants, who are known for their rugged individualism, not working together. There were also African-Americans brought against their will. None of these formed a successful breeding ground for co-ops.

While farming is ripe for co-ops, they can be used successfully in virtually any business.  I have long thought that software would be a prime area for co-ops. A few software writers could pool their resources, and sell their services through the co-op. This would be a “producer co-op,” which I tend to focus on. Land O’Lakes is a producer co-op. But there are also worker co-ops, where workers own the business they work at, and buyer co-ops, like your local organic food co-op, where customers own the store they buy products from, and collectively set its prices and receive its discounts. There are co-ops that mix all three of these roles. It’s a big world, and I’m glad to see it getting attention. Sheila’s story this morning is the first mainstream publication I have seen pay attention to it. I hope it’s the first of many such stories.

Finally, another area ripe for co-ops is the delivery of broadband service, through fiber optic networks. There are many electrical co-ops, which managed, with the help of FDR and Congress in the 1930s, to bypass the big private power companies and set up their own electrical companies, where the households and businesses own the company that supply them with electricity. The same thing could happen, and to some extent already is happening, with broadband. Here’s a column I wrote about it in Governing Magazine.

This is such a big topic that I may devote some other space here in the blog – or you can read the book, The Surprising Design of Market Economies! But here goes. And this is the third in the ongoing series, One a Day: Nine Reasons the Free Market is a False Concept.

Question: what does Apple corporation and the City of London have in common? Or Time-Warner and New York City? Answer: they are all corporations, created by government. Among their differences is that the City of London and the City of New York are centuries old, while Apple and Time Warner are of more recent vintage.

To state an obvious but still lesser known fact: Corporations are created by government. Whatever rights and powers corporations have is because their parent, a government, gave it to them, through their charters.

For many centuries governments only created corporations to establish public bodies, such as cities, universities and monasteries. Then government began creating corporations like The Virginia Company or the East India Company, for exploration and profit, but still in what was thought was public service. Each corporation required a separate vote by a legislature. The ability to create private corporations by right, without a vote of a legislature, was a big change that occurred in the mid and late 19^th century. But government still holds the reigns, through the charters that corporations receive.

To those who believe they admire private business and look down upon government, I hope to show that this position does not make logical sense. The businesses they admire are often corporations, which means that a government somewhere created them. It’s certainly very difficult to imagine contemporary capitalism without them.

What I would like, and talk about in my book, is to have a more public conversation about what kind of corporations we have, what their rights and privileges should be, and what their purpose should be. I hope my book The Surprising Design of Market Economies is a first word in this conversation.

Can you imagine a modern, market economy without public education for all? I can’t. We can quibble about whether we should have charters, traditional city-run, federal support or not, or even vouchers or not, but no one I know is arguing to withdraw the right to have an education at public expense, and to withdraw the requirement that children to be educated. As with my reason number one (Roads: i.e. transportation), schooling has become a basic mission of government, as American as apple pie. We argue about how we do it, not whether.

Twas not always thus. Like most things we take for granted, we now have general public education for all only because of a hard, long political fight. As I tell about in chapter 17 in The Surprising Design of Market Economies, education for all was a slogan during the revolution. But it would be more than a half century before Pennsylvania passed in 1834 the Free School Act, the first in the country. And it was very controversial. As with health care now, many argued that they should not have to pay for someone else’s child’s education. And most churches were against it, who viewed education as their turf. But what was called “common schools” were eventually created. Massachusetts, as one might expect, was a leader. But it would be into the 20^th century before every state had common schools and required all children to attend.

So what does this have to do with the free market as false concept? Because the market does not educate everyone. The public does. And a modern economy would not function adequately without general education. As one Harvard business professor said, public schooling is a giant supply side subsidy to business, because they don’t have to worry about teaching their employees to read and write (usually.)

Now onto Reason Number Three . . .

In a blatant attempt to generate buzz for my latest book, The Surprising Design of Market Economies, just out in paperback, I’m going to do a numbered list, the kind that BuzzFeed excels at. I’m going to describe nine reasons why the free market is a false concept. And to further the suspense, I’m going to do one new reason every few days, until I have nine.

Nine is an arbitrary number. Could do 11, or 14 or 27. But nine allows me to hit the high points.

I will start from the outside in, going from reasons that are less important to most important. And here’s why the subject is so important to me:  my book posits that government creates markets, and calls for a more public and democratic conversation about their creation. Standing in the way of this conversation is a big brick wall called “the Free Market,” which must either be knocked down or climbed over.

So without further ado, here we go.

 Reason Number One that the free market is a false concept:

Roads. From the National Road that Congress authorized soon after the country’s founding, to the average pot-holed street that a county or city builds and takes care of, roads have been central to life in these United States, and indeed, in almost every country. And with roads, there has from the beginning been an acknowledgement that business can’t do the job by itself; that only government can build a system that can be open to all, and connect to a maximum of places with a minimum of inefficiencies. Sure there have been some private toll roads, but they have worked, and this is rare, only in places where access is limited and users have little choice but to take the tolled route. So going back to at least ancient Rome, where the state built thousands of miles of good paved roads around its empire, governments have made it a priority to build linear connections on the ground between places. The market, to use a term I don’t support, does not do it. Instead, governments build roads, and that creates markets.

Roads is a good stand in for all transportation, which government has long been at the forefront in. Government in the United States has taken the lead in canals (the canal era in the early 19^th century), trains (the immense subsidies, grants and rights given to private companies in the mid to late 19^th century), air travel (cities and states built airports all over the place) and ports (many major ports are publicly built and owned.) Transportation is crucial to markets, and if government is crucial to transportation, then what does that say about markets ability to stand on their own?

Now onto Reason Number Two: . . .

As of a few days ago Russia has effectively seized Crimea and, after a highly criticized referendum that resulted in reportedly 90 percent plus of the population voting to rejoin Russia, it appears that Crimea (The Crimea?) will in short order be a part of Russia again.

I’m no expert on foreign policy – let me metaphorically say that a few dozen times to qualify my remarks — and particularly not on the former Soviet Union. But why is this such a bad thing? There seems to be some subtext that is not being stated that is responsible for sanctions being put into place by both The United States and The European Union. What exactly are we protesting so strenuously against?

Both sides seem to agree that Crimea was part of Russia until Nikita Kruchschev signed it away to Ukraine in the 1950s on a whim; that most people in the Crimea speak Russian, and probably do want to be a part of Russia, even if referendum was a joke and even if there are a minority that don’t.

There have been protests about violating international procedures, but that can be applied to a dozen big events in the past few years, ranging from our invasion of Iraq to Ukraine deposing its president. Beyond the legalities, what’s important morally are do results and events coincide with some rough degree of fairness.

The Russians are clearly employing force through tanks and soldiers. But what Westerners don’t seem to see is that keeping the Crimea in a political union, the Ukraine, is also an act of force, if the citizens of Crimea don’t want to be there.

I’m sure my own history as a southerner by birth and ancestry shapes my point of view. A century and a half ago, my great grand parents were part of a people who attempted to leave the union, and were forcibly made to stay. This has never sat right with me. How is forcing a people to stay in a political union, “government by the people, of the people and for the people?”

There are practical reasons to accept the new order in Crimea.

Ukraine would be better off without it. Without this pro-Russian populace, Ukraine could join Western Europe more overtly and craft more liberal policies that would put it into the orbit of Western Europe more. I’m reminded of how the North, during the Civil War, was able to pass the railroad act, a homesteading act and various internal improvement acts, once the South was out of the Union. While the South opposed these policies, they were good policies for the North and arguably much of the rest of the country, and without the South, the country was able to move forward with them.

As I said, the fate of Eastern Europe is hardly a subject I’m an expert on but in the interest of public discussion I get these thoughts down here. If you want to reply, send me comments via twitter, since my website isn’t accepting comments right now.

Quite a while ago now, I interviewed David Gunn, then head of Amtrak. In one memorable moment, Gunn detailed the relationship between what be have on the ground – roads, rails and such – and the skill of the workers who make and maintain them. It’s a link that we often forget about. I’m posting a link to the one part of the interview that ran in the newsletter I used to edit, Spotlight on the Region of the Regional Plan Association, where I’m still a Senior Fellow. (The other part ran in the May 2004 issue of Planning Magazine.) The archives of the newsletter have got a bit jumbled I fear, as websites and such has gotten updated so I’m putting a link to the interview here and above. I happened to run across it recently.