Our book The Captured Economy is small, but it addresses a big topic, which is the confluence of sluggish growth and spiraling inequality. Most of the book gets down in the weeds of regulatory policy, showing the ways that financial regulation, intellectual property protection, occupational licensing, and zoning have redistributed income upward while inhibiting economic dynamism. But underneath all the wonkery is an argument for moving away from the current left-right divisions that have characterized our politics for the last few decades, and toward what you could call “limited big government.”

Our current Democratic-Republican debates collapse two different dimensions of politics that can be usefully pried apart. Ideological conflict focuses on the extent of collective action problems and the appropriate scope of government. Those on the right traditionally argue that collective action problems are relatively small—in other words, that most of what is worth doing in society can best be accomplished privately without government involvement. Accordingly, the proper scope of government is fairly narrow. Those on the left, by contrast, see collective action problems—things like external costs, information asymmetries, free riding, public goods, and merit goods—as widespread and important, and thus believe that government can improve greatly upon purely private outcomes through either regulation or public spending.

While our position is somewhat idiosyncratic in this debate, we come down on the side of wide-ranging and activist government. On matters involving public health and safety, environmental quality, racial and sexual discrimination, money and finance, poverty and social exclusion, education, and healthcare, we recognize a strong role for government.

But governments are not simply frictionless instruments for resolving collective action problems. Some governments, both within the United States and across nations, are better at acting in the public interest than others, are less likely to be captured by special interests than others, and are more able to address public problems in a straightforward and transparent manner rather than through a sprawling mess of disjointed measures that are incomprehensible to citizens. And within any government, there is a wide variety of policy instruments and approaches that are more or less susceptible to these pathologies of governance.

In short, politics can usefully be understood along both a “scope of government” and a “character of governance” dimension. The Captured Economy fits in the space that accepts the normative case for big government, but recognizes that the potential pathologies of governance call for constitutional and other limits on state action that push public policy toward the most effective, public-spirited, and democratically comprehensible forms. In this vision, the most important limits on government are not those that try to constrain the size or scope of government but those that shape the character of state action.

This position may seem odd because advocates of an expanded government role in the economy have often had to battle through powerful constitutional constraints on the state. Conservatives tried to spike the emergence of the modern state through principles like enumerated powers, the nondelegation doctrine, and the like, and thus progressives found themselves in the role of arguing for liberating government from formal constraints at all levels. While we did get some new quasi-constitutional rules in the emergence of the modern regulatory/welfare state (think of the Administrative Procedures Act, for instance), liberals generally found themselves in the position of supporting anything-goes constitutionalism in the realm of social and economic legislation. (On issues of personal freedom and civil liberties, by contrast, progressives have embraced strong constitutional checks on majoritarian democracy.)

We think, by contrast, that big government and some formal constraints on government action, designed primarily to correct for inherent challenges in reconciling big government and deliberative democracy, are two great tastes that taste great together. In particular, we argue for a combination of rules and informal governing norms that establish a very strong bias toward big, simple, transparent forms of government intervention—shoving rather than nudging.

Consider the issue of mortgage finance, which we discuss in our book. Our critique focuses not on the policy objective of encouraging home ownership but rather the means chosen to accomplish that objective. The simple, direct option would have been subsidizing home ownership directly through transparent, on-budget fiscal transfers, like down payment assistance for lower-income households. Instead, policymakers over the course of the past century have elected to subsidize mortgage credit by bestowing special favors on the businesses that provide it—first the savings-and-loan industry (which ended in collapse) and then the mortgage securitization industry (which experienced an even bigger collapse but has not ended)—and subsidizing borrowing through the mortgage interest deduction.

There are obvious political advantages to the path taken: the costs are hidden, so democratic accountability for taxing some to help others is conveniently attenuated. But the economic costs involved in this choice of means have been staggering, as have been the rents that in recent decades accrued to financial firms that cashed in on the securitization boom.

Or consider another issue, financial security in retirement, which we don’t tackle in our book. The United States currently runs two parallel systems. One, Social Security, takes in payroll taxes with one hand and sends out checks with the other. Now, it is certainly the case that it takes in a lot of payroll taxes and sends out a lot of checks. But it achieves its basic goals in a fairly transparent and controllable fashion. We might choose to raise payroll taxes and replace more income in retirement, or raise fewer taxes and replace less income. But the system’s basic architecture distorts private markets as little as possible given the mission it has been given. And while the system is not “means tested” in the sense of only targeting money at the poor, it does have redistributive effects. Finally, the system is immensely popular despite the large taxes that are imposed to fund it—voters have consistently and repeatedly given some form of consent for the system more or less as it is.

Consider, by contrast, our complex system for subsidizing retirement income through 401ks and IRAs. The system is incredibly complex, and few Americans understand how it operates. Its benefits flow in a fashion that redistributes sharply upwards. It fails to help most Americans fund their retirement, but it does subsidize the perpetuation of a very large, mostly actively managed mutual fund industry that charges large fees for which (since investors as a whole cannot, by definition, outperform the market) there is no good justification.

Both systems are big government. But one is simple, relatively transparent, and basically achieves its objectives, while the other is complicated, opaque, and fails to do much to support the retirement incomes of those who need help the most. One way of vindicating public purposes works relatively well, and the other doesn’t. We should therefore think about ways to shift away from policies of the latter kind, by making it more difficult to do policymaking through the tax system.

The concept of limited big government should make us think differently about the desirability of various forms of formal and informal constraints on government. Consider, for example, the case of state development tax incentives. Which is the “big government” position? Is it allowing states to compete to attract firms through a myriad of different handouts (which in the process narrow the state tax base)? Or should there be national rules that severely limit state handouts, rooted in the dormant commerce clause? The second option represents much better governance, is more transparent, and is less vulnerable to capture by narrow private interests. That’s true even if it has the effect of increasing the tax base of state governments.

The examples we’ve cited above are calculated to push libertarians and free-market conservatives out of their comfort zones, but we strive to be equal-opportunity irritants. Specifically, there are a number of areas where progressives need to recognize that big government works best when it works within limits.

As we show in the book, the last few decades have seen an explosion of occupational licensing, largely at the behest of professional groups seeking to increase their status and incomes. Licensing generally has the effect of redistributing upward and increasing prices for consumers, and its effects are especially mischievous in the healthcare sector. But the politics of licensing are generally such that policymakers can rarely resist the siren call of organized interests to provide it—the Olsonian logic of concentrated beneficiaries and diffuse costs is especially strong here. This is not a sign of healthy democracy at work, but of special interests exploiting a weakness in democracy’s DNA. It would be more democratic, in a deliberative sense, to establish higher standards of justification when professions seek to bar entry by law (a move that the Supreme Court is just starting to dip its toe into).

We see another example of this same dynamic in the housing market. In recent decades increasing restrictions on new construction have resulted in grossly inflated housing prices, especially in the nation’s big coastal cities. Since those cities are now our main engines of innovation and growth, discouraging people from moving there has seriously negative consequences for national economic performance as well as opportunities for upward social mobility. Legacy landowners, meanwhile, have made out like bandits: according to Northwestern University economist Matthew Rognlie, the increase in capital’s share of national income has been driven mainly by escalating home prices.

These dysfunctional outcomes flow from a dysfunctional policymaking process. The hyperlocal method of making land-use decisions—in which thousands of different municipalities decide matters typically on a parcel by parcel basis—takes the normal Olsonian dynamics and turbocharges them. In these small-scale, obscure decisionmaking settings, virtually the only interests with the incentive to organize and participate are the immediate neighbors who bear almost all the downsides of development (disruption during construction, increased congestion) and enjoy none of the upsides. Thus has NIMBY (“not in my back yard”) degenerated into BANANA (“build absolutely nothing anywhere near anything”).

This sad state of affairs, which is overwhelmingly a problem of progressive governance in big, blue-state cities, calls out for limits on local control. Moving toward metro-area-wide zoning plans for housing growth, transferring some decisionmaking to state capitals, and even federal constraints (such as by withholding federal infrastructure funds or mortgage-interest deductibility) could improve matters by restricting local authority over development decisions.

In The Captured Economy, we focus on the particular problems of slow growth and high inequality, but our “limited big government” approach is capable of much wider application. We invite readers to consider the book as a contribution to the ongoing effort to develop a “liberaltarian” synthesis that combines the best elements of “classical” and contemporary liberalism. This synthesis upholds the power and importance of core libertarian ideas that tend to be undervalued by progressives: suspicion of centralized power; alertness to the unintended consequences of government policies and the vulnerability of those policies to special-interest capture; and recognition of the immense creative power of competitive markets. But in liberaltarian hands, these ideas are deployed as tools for reforming and improving the modern regulatory/welfare state—not as reasons for dismantling it.

Brink Lindsey and Steve Teles have written an excellent book that outlines several ways in which we can simultaneously help the poor and disadvantaged and increase economic growth by reducing government regulation. Lindsey and Teles also correctly diagnose a major cause of harmful government policies in these areas: widespread public ignorance makes it difficult for voters to effectively monitor complex regulatory policies. Unfortunately, they too quickly reject what is often the best strategy for combating regulatory capture: reducing the size and scope of government. We can also empower people to make better decisions by giving them greater opportunities to “vote with their feet.” Some of the reforms advocated by Lindsey and Teles can greatly expand foot voting.

Lindsey and Teles explain how capture has led to harmful regulatory policies in the fields of finance regulation, intellectual property, zoning, and licensing. In two of the areas analyzed by Lindsey and Teles, zoning and licensing, there is broad cross-ideological agreement among experts. In the case of zoning, most economists and property law experts across the political spectrum agree that government restrictions on building massively drive up the cost of housing for the poor and lower middle class in many major cities. In addition to increasing housing prices, zoning also prevents many lower-income people from moving to areas with greater job opportunities.

There is a similar story to be told about licensing restrictions. As Lindsey and Teles point out, some 30 percent of American workers are now required to have a license to do their jobs. These include such ridiculous cases as the licensing of florists, tour guides, and casket makers, in some states. Onerous licensing restrictions prevent large numbers of people (particularly the poor) from pursuing their preferred occupations, and also artificially inflate prices for consumers, while providing little or no measurable improvement in quality.

How Political Ignorance Facilitates Capture

All four of the issue areas analyzed in the book are highly complicated. It is very difficult for nonexperts to understand them. Given widespread voter ignorance about even far simpler and more prominent aspects of public policy, it is not surprising that most of the public is unaware of how zoning regulations and licensing restrictions impact their lives. As a result, well-organized interest groups are able to capture the policy process, in ways well-described in Lindsey and Teles’ book.

The problem is not that the voters are stupid or that information is unavailable to them. Rather, in most cases it is perfectly rational for them to devote little or no effort to seeking out political information, because the chance that any one vote will make a difference is infinitesimally small. Thus, most voters are “rationally ignorant.” They understandably choose to devote very little time to studying government and public policy, and instead focus on other matters. In addition, they tend to be highly biased in evaluating such political information as they do learn. As former British Prime Minister Tony Blair puts it, “[t]he single hardest thing for a practising politician to understand is that most people, most of the time, don’t give politics a first thought all day long. Or if they do, it is with a sigh…., before going back to worrying about the kids, the parents, the mortgage, the boss, their friends, their weight, their health, sex and rock ‘n’ roll.”

Why Limiting Capture Often Requires Limiting Government

Unfortunately, the authors dismiss what is often the best strategy for fighting ignorance-facilitated capture: reducing the complexity of government by cutting back on its size and scope. Lindsey and Teles argue that we can make government simpler and more transparent without reducing the range of its functions. But this is highly unlikely. So long as local, state, and federal governments continue to spend nearly 40 percent of GDP and regulate nearly every aspect of society, it is inevitable that their activities will be highly complicated and provide many opportunities for interest groups to exploit public ignorance. There just isn’t any simple and clear way to regulate and control so much. And voters cannot effectively monitor more than a small fraction of all this government activity.

Lindsey and Teles point out that regulatory capture can sometimes be curbed if the issue in question becomes the focus of public controversy. But they also note that such cycles of attention are fleeting, as public and media attention quickly move on to the next outrage du jour. The more issues government controls, the less time any one is likely to spend in the spotlight. Cutting back on government intervention in some areas increases the odds that the remaining functions of government will get meaningful public scrutiny.

If, like Lindsey and Teles, we want a simpler, more transparent government that is less vulnerable to interest group manipulation, we need government to be smaller, or at least take on fewer functions. There is no way around this fundamental tradeoff.

In their lead essay, Lindsey and Teles cite Social Security as an example of a relatively good government program that avoids excessive complexity. Social Security does indeed deliver retirement subsidies in a simpler way than some other programs. But it still exemplifies the perils of public ignorance. Along with other entitlement programs, it is a major contributor to our looming fiscal crisis. Reforming entitlements is politically difficult in considerable part because most of the public greatly underestimates the enormous percentage of federal spending that goes to these programs. In addition, politicians and activists have exploited voter ignorance by promoting the false perception that Social Security recipients are just getting back the money they themselves put in.

I am also skeptical of Lindsey and Teles’ claims that we can greatly curb capture by procedural fixes to the legislative process. One of the main ideas they advocate is giving policymakers more and better staff so that they will be less dependent on organized special interests for information. It is hard to believe this would make anywhere near as much difference as the authors claim. Lawmakers don’t need much additional staff expertise to get good information on the perils of zoning, licensing, and other similar policies. A great deal of work on these subjects has already been done by academics and policy analysts. Lindsey and Teles rely on it heavily in their book. Legislators with a genuine interest in getting at the truth can also readily access this literature.

In most cases of regulatory “capture,” the problem is not that politicians are unable to get information, but that they either don’t care much about the truth or at least prioritize ideology and reelection ahead of it. Like partisan voters, they also tend to evaluate new information in a highly biased way.

Making government smaller and simpler does not require the state to be anywhere near as small as a libertarian “minimal state.” But it does mean it will have to control many fewer aspects of our lives than it does today. A smaller state with fewer functions can still do much to help the poor, for example by bolstering their wages through an expanded earned income tax credit. It could also have means-tested retirement programs more limited – and more affordable – than Social Security and Medicare. But it will have to stop trying to control so many aspects of the economy and society.

Empowering Foot Voters

Curbing government power also need not require empowering some elite at the expense of the general public. We can instead empower ordinary people to “vote with their feet.”

People can vote with their feet by choosing which state or locality to live in, or by making choices in the market and civil society. Foot voters have much stronger incentives to acquire and use relevant information than ballot box voters do, because foot voting decisions are likely to actually make a difference to the outcome. That’s why most people make far more effort to seek out information when they decide which car or smartphone to buy than when they decide who to vote for in even the most important elections. The phone or car you choose is highly likely to determine which product you actually end up with. By contrast, you have only a minuscule chance of affecting who becomes president, or even who wins a local or state election. In recent decades, unfortunately, foot voting has become more difficult – especially for the poor – because of the increasing centralization of government policy and the growth of regulatory barriers to migration.

At least two of the reforms advocated by Lindsey and Teles could do much to expand foot voting: cutting back on licensing and zoning. Both are major obstacles to interjurisdictional migration, especially for the poor. The effects of zoning are particularly large. If zoning restrictions in high-productivity jurisdictions with above-average regulatory constraints were scaled down to the level that prevails in the median city, U.S. GDP might be some 9.5% higher, and millions of working-class Americans would have access to job opportunities from which they are currently cut off. Few if any other reforms can do so much to simultaneously help the poor, increase our overall economic growth, and empower ordinary people through foot voting.

We can also empower foot voters by decentralizing government power, thereby increasing the range of issues over which people can make decisions through foot voting, and reducing the associated moving costs. It is easier to move from one state to another than to leave the country entirely, and usually easier to move between localities than between states. Obviously, we cannot decentralize every function of government. But we can do so for far more issues than at present. Historically, foot voting has been a valuable source of opportunity for the poor and disadvantaged. Expanding it is a logical application of Lindsey and Teles’ focus on reducing inequality and breaking down barriers to opportunity.

Lindsey and Teles have written a valuable book that identifies a serious problem. It also proposes a variety of useful reforms for specific issues. But if we want to uncapture the economy in a systematic way, we will have to limit and decentralize government, and empower foot voters.

Brink Lindsey and Steven Teles’ essay – and the book that lies behind it – are part of a broader liberaltarian challenge. Liberaltarianism, as I understand it, looks to use classical liberalism as a set of foundations for a very different understanding of market and state than libertarianism. Rather than starting from the market order as a beau ideal, and programmatically looking to shrink the state, Lindsey and Teles emphasize the benefits of a well working democracy. This doesn’t mean that they are part of the left – but it does mean that the argument between them and the left is likely to be productive.

To really deliver on their ideas, they need to shuck off some of the residual libertarian language that still holds them back. Here, Ilya Somin’s essay – which looks to pull them back into standard libertarianism – is exactly wrong. To really do what Lindsey and Teles want it to do, a democratically mandated state needs to be more radical in its approach. Rather than simply looking to curb regulatory abuses, it needs to reinvent itself, bringing its role in making and remaking markets to the fore.

Somin’s challenge to Lindsey and Teles emphasizes the general argument (going back to Schumpeter at least) that democracy is vulnerable to regulatory capture, since ordinary voters don’t have the knowledge or incentives to understand what is good for them, and politicians don’t have much interest to act in the public good. However, Somin notably fails to address the key problem which animates Lindsey and Teles – that some forms of regulatory capture are far more pernicious than others. Lindsey and Teles document how we have moved from a world in which much of the capture happened sideways, providing benefits to a broad cross-section of society, to one in which regulatory capture is redistributing income upwards to a narrow elite, creating a feedback loop of increasing inequality.

If anything, self-reinforcing inequality would be worse if we moved to the kind of weak state world that Somin would prefer. Indirect feedback loops would be replaced by direct predation. Moreover, as Christopher Achen and Larry Bartels’ important recent book discusses, democratic “realism” need not lead to skepticism about democracy; it can lead as readily to a focus on the key role played by intermediating institutions such as political parties. This is especially true given that markets have systematic information failures too.

Lindsey and Teles’ arguments plausibly fit well with Achen and Bartels’ stress on how actually-existing-democracy would work much better if power relations were more equal. One of the further attractions of Lindsey and Teles’ approach, as their essay suggests, is that the kind of push-and-shove deliberation that you get in real democracies will be better able to process “big, simple, transparent” interventions than complex regulatory frameworks.

However, Lindsey and Teles’ version of liberaltarianism still has too much traditional libertarian DNA. In particular, it uses concepts such as “regulatory capture” and “rent seeking” that are borrowed from libertarian-leaning public choice, treating the underlying problem of regulation as one of “artificial scarcity, in particular government policies that confer special advantages on favored market participants.”

The most telling critical response to Lindsey and Teles’ book is Mike Konczal’s essay at Medium, which takes issue with many of their specific claims, but also suggests that the “rent seeking” framework is misleading. The concept of “rents” only makes sense as a deviation from the ideal of perfectly competitive markets, where rent-seeking is impossible. Konczal argues that getting rid of the “rents” is a meaningless ambition for modern market regulation, which should instead focus on how markets ought be structured in the first place.

If all markets stem from different combinations of state and private regulation, then perfectly competitive markets are a will-o-the-wisp, luring the unwary ever further into an intellectual swamp. Instead of drifting from the path, democratically mandated politicians need to make practical decisions about which particular kinds of regulated markets are in the public interest, and how best to set interests off against each other to prevent power imbalances from overwhelming the public interest.

The good news is that none of this is really incompatible with Lindsey and Teles’ arguments (plausibly indeed, it provides them with stronger foundations). The awkward implication though is that if Lindsey and Teles want to absorb Konczal’s critique, they have to bring out the more radical implications of their framework. If democracy is the baseline, then an abstract ideal of markets cannot be taken as a given, opening up a host of possibilities.

Here, they could build on Nolan McCarty, Keith Poole, and Howard Rosenthal’s 2013 book, Political Bubbles (henceforth MPR), which draws lessons about regulation from the recent financial crisis (a draft of the introduction is available here). MPR, like Lindsey and Teles, are very far from left-wing radicals. However, by extrapolating the logic of a straightforward and commonsense set of arguments, they reach quite radical conclusions.

MPR argue that simple models of regulatory capture don’t really explain why it is difficult to regulate certain areas of the economy, such as finance. Ideology – and in particular “free market conservative” beliefs that government intervention in the economy is necessarily bad and “fundamentalist free market capitalist” beliefs that government itself is the problem – is one important factor that led to the recent financial crisis. So too is the economic self interest of businesses and the politicians beholden to them.

However, informational capture is arguably equally important. As the financial sector becomes more complex, it becomes more difficult to regulate, because the regulators necessarily have to rely on information from the regulated parties to understand what is going on. Here, the dependency goes the opposite way than in traditional rent seeking arguments – it is not that firms are dependent on a regulator to give them favorable treatment, but that regulators are reliant on firms to give them the information they need to even pretend to do their job.

This problem is essentially insuperable if one treats existing market structures as a given, and just look to reform the internal workings of government. Hence MPR’s proposal to cut the Gordian knot:

The recognition of low capacity argues against sophisticated discretionary regulatory management of the industry and in favor of blunter approaches such as banning the most systematically dangerous products and practices or capping the size of financial institutions. Blunter, less complex, and less lengthy legislation would not only reduce opportunities for financial innovators to find loopholes but also focus the attention of regulators.

In other words, where fundamental market structures get in the way of effective regulation, MPR propose to fundamentally change the market, banning dangerous products and preventing financial institutions from getting sufficiently large to do end runs around regulators. Where markets are both impossible to regulate and likely to have pernicious large scale consequences, we are better off without them. While the big actors that make financial markets have many resources, they are also fundamentally dependent on state regulations. This can provide the state with leverage.

If this sounds like a dangerously radical and left wing idea, it is only because the debate has shifted so far towards fundamentalist free market capitalism over the last few decades. The push for change coming from institutions such as Barry Lynn’s Open Markets Institute and politicians such as Elizabeth Warren is radically centrist, not Marxist, looking to correct the power imbalances that are leading to self-reinforcing inequality rather than to bring through revolutionary upheavals.

Lindsey and Teles’ ideas could play an important – perhaps even crucial – role in providing these reformers with a better understanding of their tools and objectives. Yet to do this properly, it needs to fully deliver on its implied logic. What Lindsey and Teles are pushing towards is a kind of politically grounded neoliberalism, which focuses on how to produce and maintain the conditions of rough power equality that might allow neoliberalism to work. That isn’t, obviously, a left wing political project, but it is one that is both potentially useful, and (unlike much currently prevailing ideology about politics and markets) not obviously self-contradictory.

The distribution that matters most in a liberal democracy is not of money, or of status, but of power. A person who can exercise power over the course and content of their own life, and over the shared institutions within which that life is lived, is a citizen. To be subject to the arbitrary power of another is to be, well, a subject. (I write as someone who is both a citizen of the United States of America and subject of Her Majesty Queen Elizabeth II).

One of the most important challenges in liberal democracies is therefore to ensure the “conditions of rough power equality” that Henry Farrell, in his contribution to this series, rightly emphasizes. Classical liberals have historically been in favor of free markets because markets are effective diffusers of power, and in favor of democratic political systems that place considerable power in the hands of voters.

Power diffused is better, then, than power hoarded. But power that is contained within a particular domain is also better than power that spills over from one to another – from money power to political power, for instance. Bertrand Russell, in his 1938 essay Power: A New Social Analysis, argues that “the fundamental concept in social science is Power, in the same sense in which Energy is the fundamental concept in physics.”

Russell believed the key task of social science was to understand how power can be converted from one form to another – and that the key task of politics was to stop it. In their provocative book The Captured Economy, and their opening essay in this series, Brink Lindsey and Steve Teles write in a Russellian spirit. They show how political power is converted to regulatory power and then to economic power. Democratic political systems are used in certain instances to distort market operations in a way that encourages the hoarding, rather than dispersal, of power through market operations. Among their examples are occupational licensing, subsidies to mortgage lenders, and land use regulation.

The market in land provides a perfect example of the captured economy thesis. As Lindsey and Teles show, the increasing complexity and scope of land use regulations have badly distorted the market in favor of those with capital. Add to that the perverse and regressive tax deduction on mortgage interest, and the result is a series of market-distorting regulations, subsidies, and incentives.

As Jason Furman, chairman of the Council of Economic Advisers from 2013 to 2017 writes: “While land use regulations sometimes serve reasonable and legitimate purposes, they can also give extra-normal returns to entrenched interests at the expense of everyone else…Zoning regulations and other local barriers to housing development [can] allow a small number of individuals to capture the economic benefits of living in a community, thus limiting diversity and mobility.”

Lindsey and Teles make the same point in earthier language. “Legacy landowners,” they write, “have made out like bandits.” Local governments in over-zoned, wealthy neighborhoods, if they are to be accountable to their existing voters, are likely to maintain strong defenses against market forces operating on their land. Exclusionary zoning protects the capital of the wealthy (and often their school district too), at the cost of freeing up more land so that housing becomes more affordable in high-growth cities. In a landmark 2002 review essay, “Homes Rule,” in the Yale Law Journal, Lee Anne Fennell says that zoning regulations have become “a central organizing feature in American metropolitan life.”

Fennell is writing in response to the “homevoter” thesis put forward by William A. Fischel. In essence, the idea here is that people who own their homes will rationally seek policies that protect the value of that home. It may be that some places will end up with more expensive homes as a result of such zoning; but in Fischel’s model, this is a good thing, since they will then have to pay taxes that contribute to local services. As he puts it: “the local property tax becomes an unavoidable fee for services rendered,” such that “homebuyers get exactly what they pay for (since they have a choice of many communities’ service packages), and they pay for exactly what they get (since local zoning sees to it that they cannot shirk by building a smaller than average house).”

At a local level, this makes sense. The problem with local control over land is, as Fennell points out, a collective action one, at least if the “collective” is defined as a group bigger than the one within a local government’s jurisdiction. Wealth accrues to the wealthy, but at the expense of worse opportunities for others. There are also issues of distributive justice at stake here. Housing wealth is disproportionately white, in part because of explicitly racist policies in previous decades. Regulations that deepen the wealth divide in housing also further worsen this race gap.

You would think that the use of government power to rig markets in favor of the rich would have conservatives up in arms. But with honorable exceptions, not so much. Many trumpet the value of local democracy, and like Ilya Somin in this series, rely on “foot voters” (close cousins of Fischel’s “homevoters”) to provide the necessary corrective.

To be more direct: Lindsey and Teles help us to distinguish between two kinds of conservatives; the Burkeans who value institutional power above individual power, and the Hayekians who value the liberalizing power of markets.

Markets are social institutions that tend, other things equal, to be power-dispersers. But other things are not equal. Regulation can act to improve markets in this regard, or it can make them worse; in this sense it makes no sense to be a priori “against” or “for” regulation. It will always depend.

In terms of current dominant political divide, both sides have unhelpful biases. Those on the political right tend to err on the side of thinking that government intervention is intrinsically bad for markets; when on some occasions, regulation can improve market operations. Those on the left err in their anti-market instincts, missing how often markets act to widen opportunities and disperse power.

Lindsey and Teles describe their approach as “liberaltarian,” that is, a cross between “liberal” and “libertarian.” Such linguistic creativity results from the loss of the word liberal to the political left at some point between John Locke and John Dewey.

But there is a better label for a political philosophy that focuses on the power of individuals to pursue their own good, that seeks to maximize pluralism and diversity, and that judges both markets and governments (and indeed all institutions) by the extent to which their power it used to liberate and empower citizens. That label? Liberalism.

John Stuart Mill, one of the founders of modern liberal thought (and Russell’s godfather as it happens), wrote in 1859 that “the interference of government is with about equal frequency, improperly invoked and improperly condemned.” Lindsey and Teles, writing from a thoroughly liberal perspective, properly condemn some instances of government interference.

They intentionally focus on a few areas in which the anti-regulatory instincts of market conservatives overlap with the progressive desires of those on the left; necessarily it is an incomplete list. Their work could be seen as illuminating a narrow but important overlap on a Venn diagram of policies from left and right. That is valuable enough in itself. But there is a more ambitious agenda lurking just below the surface of their writing: the potential for a truly liberal framework for shaping and judging policy.

Editors’Note: In a later response, Richard V. Reeves has acknowledged that his characterization of Prof. Somin’s position was erroneous, and it should be considered withdrawn.

Brink and I had a number of hopes for The Captured Economy. We certainly hoped that it would draw greater attention to the policy domains we examine in the book—finance, intellectual property, occupational licensing, and zoning. These are all areas in which there has been a flowering of research in recent years, and we hoped by putting these cases in a larger conceptual frame, that we might help advocates in their efforts to get policymakers to take them more seriously. Time will only tell whether we have been successful in this effort.

More broadly, we wanted to spur those concerned about the growing distortion of the American economy to think bigger than just making the intellectual case for policy reform. These distortions exist because of significant defects in the organization of contemporary American democratic politics. If we want to do something to make the American economy more competitive, therefore, policy advocates need to move from encouraging economic reform to encouraging political and institutional reform. Without such reforms, changes will inevitably happen—if at all—on the margin.

Our friend Ilya Somin recognizes the political sources of the growth of rent seeking, but like most libertarians his solution—radically shrinking the responsibilities of the American state—is not much of a solution at all. Whether Ilya likes it or not, Americans have come to expect a government with a quite comprehensive remit. And more important, there are governments with even greater responsibilities than that of the United States that have far less rent seeking than we do. The key variable is not the size of the state, therefore, but the way power is organized. Across multiple dimensions, we have structured institutions in a way that encourages rent seeking.

That said, I do think that Ilya is on to something when he argues that a government with its fingers in so many pies is one that is less susceptible to democratic control. Elsewhere I have argued that we should be very skeptical of a government that is nudging a little bit everywhere, because such a government will be hard to monitor, hold responsible, or protect from interest group capture. It is better to have a national government that, when it acts, either occupies the field or leaves matters to markets, the states, or localities. We should want a government that shoves, rather than nudges. Such a government would be more comprehensible to citizens, even those with relatively little information, and certainly to their elected officials.

I have a fundamental difference with Ilya in the way that I understand how markets work, one that places me closer to my other friend, Henry Farrell. Governments do not just “intervene” in markets—they constitute markets. Markets always operate within a context of law, regulation, and custom, and their effective performance depends on the quality of the institutional regime. Some form of financial regulation, we argue in The Captured Economy, is absolutely necessary to the operation of modern finance. Because financial regulatory regimes have so many interlocking pieces, we don’t always know that “deregulating” a part of the system will actually lead to a smaller government role overall, or that it will make the system work better.

This is a lesson that libertarians need to learn more broadly, even to advance policies that they generally agree with. My favorite example of this is charter schools. It turns out that the jurisdictions with the best quality charter schools, like New York City and Massachusetts, are not market free-for-alls. They are the places with the strongest chartering authority, with the ability to keep out grifters and remove low performers. They are the places where governments and their philanthropic partners have worked the hardest to build all the supportive institutions that can help markets work, like high-quality information about school quality, rather than leaving it to the workings of spontaneous order. Markets can be very good things, in short, but they are products of the state just as much as they are of private actors.

It is for that reason that I reject Mike Konczal’s reading of The Captured Economy that Henry refers to in his essay. We do adopt some of the neoclassical language of rent-seeking in our book, for the very good reason that it works for the cases we discuss and because it allows us to enter into an ongoing conversation with our interlocutors on the right. But I don’t think that there is anything fundamental at stake between describing the problems we talk about as “rent seeking” as opposed to institutionally embedded inequality. I am as sympathetic as Henry is to the idea that we shouldn’t use perfectly competitive markets as the ideal against which we judge state action. I think we make this especially clear in our chapter on finance, where we say—repeatedly—that there is not and could never be a laissez-faire regulatory regime. The choice is always between different institutionally embedded forms of market organization.

That said, Brink and I are in favor of a form of institutionally embedded market with a strong emphasis on competition and creative destruction. We are worried about the calcification that happens when market incumbents can keep out innovative business models or technologies. But that doesn’t mean we are anarchists. For example, both Brink and I are fans of the improvements in mobility that have been introduced by Uber (if not their creepy management methods). But we did not imagine that the destruction of the taxi monopolies in big cities would usher in an era of transportation anarcho-capitalism. Uber solved a genuinely difficult problem, which was how to organize sufficient political power against that of the taxi monopolies, so that a new business model would not be smothered in the crib. But a sustainable market in transportation will require new forms of antitrust policy, labor regulation, and perhaps even a “public option” for drivers to compete with Uber and Lyft. The period of anarcho-capitalism will be a transitional one, and that is, in my view, a very good thing.

Where we enthusiastically agree with Henry is that making markets work means making politics work. There is no escaping the need for effective democratic politics. Unlike many libertarians, we are not ones for poking holes in the desirability of democracy, holding out hope for some form of supposedly benevolent expert authoritarianism. We have no choice but to make democracy work.

That said, I think we do disagree with many social democrats like Henry, in that we believe that certain carefully designed constraints on democracy are, in practice, liberating. Democracy has the aspiration of empowering the encompassing, long-term interests of the public. But in The Captured Economy we detail the many ways that a government liberated to regulate everything, everywhere can turn into a bazaar for concentrated interests to take over for their own ends. That is not, except in the most polluted sense, what any of us mean by democracy. Unlike Ilya, we do not want (except in a few narrow cases) to rule entire areas of economic life out of bounds for the state. But we do think it makes sense to make some kinds of economic regulation face particularly high evidentiary standards, and to change the geographic or institutional location of decisionmaking to make it less susceptible of capture by concentrated interests. Constraint, we would argue, can be liberating for democracy, and that is true even—perhaps especially—when one has a broad conception of the role of the state.

Finally, in regards to Richard Reeves’ lovely response to our essay, all I can say is—I agree! Liberaltarian is neither Brink’s nor my preferred term. Like Richard, I like good old-fashioned liberalism as my identifier, the liberalism of Mill, Hume, Locke and Tocqueville. I do not think that believing in a muscular state role in the advancement of social justice is in any way in conflict with this proud tradition. But I do think that, at particular times in American history, those on the left have, in fact, turned their back on that liberal tradition. Instead of looking for inspiration on how to build a modern welfare state from these liberals—especially their guidance on institutional design and the cultural and moral preconditions of a free people—too many of those on the left sought to break out of the liberal traditional altogether. Understandably frustrated by the way that constitutional constraints, when wielded by the protectors of entrenched economic power, were used to frustrate necessary reforms, they threw off the idea of any constitutional constraints on the state’s intervention in the economy.

This, I think, was a mistake. Like Richard, I want the future of the left to be more liberal, which means recognizing the productive tension between liberation and constraint—both at the individual level and within political institutions. That tension is something that all of the classical liberals, up through Mill, understood very well. It is something we could all do with relearning. The Captured Economy is our small effort to help with that project.

In his thoughtful response essay to Lindsey and Teles, Henry Farrell devotes some space to criticizing my own earlier response essay. Farrell argues that my emphasis on the need to limit government in order to minimize regulatory capture ignores “the key problem which animates Lindsey and Teles – that some forms of regulatory capture are far more pernicious than others.” In particular, he follows Lindsey and Teles in arguing that “we have moved from a world in which much of the capture happened sideways, providing benefits to a broad cross-section of society, to one in which regulatory capture is redistributing income upwards to a narrow elite, creating a feedback loop of increasing inequality.”

I don’t deny that some forms of regulatory capture are more harmful than others. But both types are facilitated by a large and complicated government that is difficult for rationally ignorant voters to monitor. The role of ignorance and complexity in facilitating capture is a central feature of Lindsey and Teles’ analysis of the four issues they cover in the book, which they consider to be examples of especially pernicious capture. In addition, at least some of the examples of capture that might be described as “sideways” redistribution are still highly pernicious, including for the poorest and most disadvantaged sectors of society. Lindsey and Teles cite the cases of pre-1970s airline and trucking regulation, and severe pre-1965 immigration restrictions, among others. Such policies did indeed have some nonwealthy beneficiaries. But they also inflicted great harm on society by creating deadweight losses. In addition, they disproportionately harmed the poor. For example, by greatly raising the cost of airline tickets and truck transportation, pre-1970s regulations effectively priced the poor out of these markets – a much greater harm than was inflicted on more affluent consumers, who “merely” endured higher prices that they could still pay. Severe immigration restrictions condemned many would-be migrants to lives of poverty and oppression in the Third World. And so on.

Farrell also claims that the sort of “weak state” I favor would just lead to more “open predation” by the wealthy. But this overlooks the fact that a strictly limited state need not be “weak” in the sense of more vulnerable to capture. Much the contrary. By narrowing and simplifying the range of government functions, it could be more transparent to voters and easier for them to monitor – a point I tried to make in my initial response, that builds on Lindsey and Teles’ own analysis of the ways in which intense public focus can make abusive policies harder to get away with. If wealthy elites can only abuse the powers of the state by engaging in “open predation,” that is easier for voters to understand, monitor, and punish than more indirect forms of capture that are easy for nonexperts to miss.

Finally, Farrell cites Christopher Achen and Larry Bartels’ important recent book Democracy for Realists for the proposition that “democratic ‘realism’ need not lead to skepticism about democracy; it can lead as readily to a focus on the key role played by intermediating institutions such as political parties.” But Achen and Bartels in fact show in great detail how partisan bias often actually exacerbates the impact of political ignorance, by skewing voters’ judgment of public policy, and even their perception of basic facts, such as the rate of inflation and unemployment. Particularly in an era of severe polarization, parties exacerbate the negative impact of political ignorance at least as much as they may ameliorate it. For reasons I discuss in more detail in my review of the book, its analysis of voter ignorance (which is actually more pessimistic than my own) reinforces the cases for limiting and decentralizing government, though that is not the authors’ intention. Farrell is, of course, right that markets have important information problems of their own. But rarely are these as severe as those that beset rationally ignorant and highly biased voters. At the very least, government regulation stands a better chance of correcting market failures without creating massive government failures if it is kept within relatively tight bounds that leave fewer opportunities for capture than exist in the sprawling modern state.

I agree with much that Richard Reeves said in his compelling response essay – particularly on the pressing need to curb excessive zoning. Unfortunately, in one passage he seriously misconstrues my own position on the subject. Reeves writes:

You would think that the use of government power to rig markets in favor of the rich would have conservatives up in arms. But with honorable exceptions, not so much. Many trumpet the value of local democracy, and like Ilya Somin in this series, rely on “foot voters” (close cousins of Fischel’s “homevoters”) to provide the necessary corrective.

This is almost the exact opposite of my actual position. Far from relying on foot voters to constrain zoning, my view is that zoning needs to be constrained to make foot voting more feasible, especially for the poor and lower middle class. As I put it in my response essay, “[a]t least two of the reforms advocated by Lindsey and Teles could do much to expand foot voting: cutting back on licensing and zoning. Both are major obstacles to interjurisdictional migration, especially for the poor. The effects of zoning are particularly large…”

I have made similar arguments in greater detail in many previous publications (e.g. here and here). In a 2011 academic article on “Federalism and Property Rights,” I explained why foot voting is less effective at constraining abusive state and local policies that target immobile assets (most obviously property in land) than those that exploit more movable ones.

It is perhaps worth noting that I am far from the only conservative or libertarian policy expert to argue for curbing zoning. Many others have done so, going at least as far back as Bernard Siegan’s important work back in the 1970s. The idea that zoning should be severely restricted is in fact the dominant view among conservative and libertarian economists and property scholars – one that many on the left have come around to comparatively recently. Unfortunately, most politicians and activists in both parties have so far not heeded this growing expert consensus (though that too may be starting to change).

Editors’ Note: In a later response, Richard V. Reeves has acknowledged that his characterization of Prof. Somin’s position was erroneous, and it should be considered withdrawn.

Ilya Somin has many nice things to say about our book The Captured Economy, but his main criticism is that we have pulled up short of confronting the fundamental cause of the problem we examine. Specifically, he argues that the scale of rent-seeking and regulatory capture, the ills we address in our book, is a function of the size and scope of government. The bigger the government and the more wide-ranging its activities, the more private interests will try to coopt government power for their own narrow gain, and the more they will succeed. The only way, therefore, to achieve large and durable victories over rent-seeking is to shrink the role of government dramatically.

Those familiar with Somin’s past work will find no surprises here. Once again, he argues that profound public ignorance about politics and policy dooms big government to pervasive dysfunction. With the general public so clueless about when it is being well served and when it is being fleeced, expansive and highly complex government offers a field day for well-informed insiders intent on serving themselves at public expense.

I used to find such arguments persuasive (here I am taking a very similar tack—27 years ago!). But I no longer think this line of reasoning holds up under scrutiny. Let me briefly explain why.

One obvious objection to Somin’s blanket theory of government dysfunction is that it ignores the enormous variation in the quality of governance—not only across countries, but across policy domains and levels of government within the same country. This variation shows that other factors besides size and scope have a huge influence on how well or poorly government works. Therefore, Somin’s contention that massive reductions in government are necessary to effect big improvements in quality of governance is mistaken.

It gets worse. The overall pattern of variation in government quality actually runs directly counter to Somin’s thesis. That is, there is a positive correlation between the size of government (in terms of levels of spending and taxation) and the quality of economic regulation (as measured, for example, by the economic freedom indices of the Fraser Institute or the Heritage Foundation). In other words, bigger governments are associated with more economic freedom, and less rent-seeking.

This counterintuitive (at least to libertarians) state of affairs highlights the two-sided nature of the problem of government power. “In framing a government which is to be administered by men over men, the great difficulty lies in this,” James Madison wrote famously in Federalist number 51: “you must first enable the government to control the governed; and in the next place oblige it to control itself.” The dangers of bad government, then, come from both sides. A large and expansive government has correspondingly wide scope to harm and oppress; a small government, meanwhile, may lack the resources to prevent private actors from harming and oppressing their fellow citizens with impunity. Somin ignores the second half of the problem.

Consider Gilded Age America, in which the rise of giant industrial enterprises changed the balance of power between the private and public sectors. Corruption was rife, as firms often found bribery of judges and local officials cheaper than observing the law and respecting the rights of others. Pollution, property damage, bodily harm to third parties, unsafe food and workplaces—all were theoretically actionable and remediable at common law and pursuant to the state police power. And yet, with depressing frequency, the authorities were suborned and the wealthy and powerful were free to impose costs on others with impunity. This externalization of costs, and corresponding enjoyment of excess returns, is the other face of rent-seeking. Rents created by thwarting just laws are no less real than those created by promulgating unjust ones.

Economists Edward Glaeser and Andrei Shleifer have hypothesized that the vulnerability of courts to being overwhelmed by large industrial enterprises “made it efficient for American society to increasingly rely on regulation” during the Progressive era. The greater efficiency of regulation, they argue, lies in the fact that it is more difficult to suborn than private litigation:

As the scale of enterprise increased, the damage from industrial accidents rose proportionately, as did the incentive to avoid paying damages. The cost of influencing justice, however, did not rise as fast…. From this perspective, the regulation of markets was a response to the dissatisfaction with litigation as a mechanism of social control of business.

Glaeser and Shleifer’s analysis, while illuminating, is far from the whole story. The story of regulation is rife with gross inefficiencies, propelled by—yes, certainly—rent-seeking private interests as well as great dollops of technocratic hubris. But accepting their analysis as even part of the story is bad news for Somin’s argument. Under certain conditions, at least, a move toward smaller government can make rent-seeking worse, not better.

Somin’s prescription of slashing government functions also has this problem: it stands zero chance of being enacted. The modern regulatory/welfare state isn’t going anywhere. Its major components are overwhelmingly popular, and there is no prospect on any discernible horizon for wholesale elimination of any of those components. Reform, including the elimination of particular rules and spending programs, is on the table. An end to social insurance and safety net policies isn’t; neither is the complete phaseout of health, safety, environmental, and antidiscrimination regulations.

Somin’s insistence that only major rollbacks of government can remedy regulatory capture and rent-seeking is therefore a counsel of despair. If the only effective reforms are politically impossible, then corrosive cynicism about government is easy to fall into. The notion that government is inevitably a disreputable, dysfunctional racket is widespread in libertarian and “small government” conservative circles, and as that notion gets internalized by actual policymakers it becomes a self-fulfilling prophecy. If doing a good job is impossible, why even try? I believe that this dynamic has something to do with the increasing unseriousness of Republicans in Washington about sound policymaking and effective administration.

Without a doubt, the policy status quo is misconceived or poorly executed, or both, on many different fronts. And Ilya Somin and I agree about many of the things that are wrong. Somin’s stress on the importance of public ignorance is a useful corrective to naïve conceptions of democracy; his focus on the perils of government complexity pushes helpfully toward greater reliance on simple, transparent rules and straight-up fiscal transfers; and his support for fostering geographic mobility and interjurisdictional policy competition pushes in the right direction as well. But in all of these matters, the proper application of Somin’s insights is much more modest than he believes.

Yes it’s true the policy status quo is a mess. But it’s also true that the citizens of today’s advanced democracies live in, on balance, the best governed societies in human history. And so the path toward improvement lies in building on the real accomplishments of the modern regulatory/welfare state, not calling for its dismemberment. Put down the saw; take up the scalpel.

Mea culpa. In my first response, I badly misstated Ilya Somin’s position, falsely equating his “foot voters” with Fischel’s “homevoters.” I described them as “close cousins.” In fact, they are no relation at all. They are, rather, rivals. Somin believes that onerous zoning regulations (a favorite tool of homevoters) get in the way of the kind of market-driven movements made by foot voters. My apologies.

The subsequent exchange between Somin and Lindsey has been fascinating. Somin takes a purer libertarian view. He suggests that any government apparatus is almost inevitably at risk of being captured. The way to avoid government being captured is to get rid of government, as far as possible. Lindsey, by contrast, has come to believe that first, regulations can be designed in such a way as to minimize the risk of capture, and that second, we are highly unlikely to abandon regulations altogether. Somin wants to roll back the regulatory state. Lindsey wants to reform it.

I do not propose to adjudicate here between these positions. But they face a similar political problem. Whether the goal is to reform or remove regulations, a big obstacle has to be overcome: the solid wall of upper middle-class resistance. I am writing today from Berkeley, the affluent San Francisco suburb, where an argument is raging over a proposed change to zoning laws. California State Senator Scott Wiener has introduced SB827, described as a “Transit Zoning Bill.” If the bill becomes law, it will override local zoning restrictions and permit new housing built up to eight stories tall near major transit hubs. By linking new development to transit, the Bill aims to ameliorate concerns about traffic congestion and parking.

The bill represents a potentially important step towards a saner zoning policy. It is not universally popular, however, especially in parts of Los Angeles or in liberal Berkeley. Local leaders and influencers have reacted strongly. SB827 has been described as “a declaration of war on every urban community in California.” The influential editor of The Berkeley Daily Planet, Becky O’Malley says it is time “to put the war paint on.”

Loosening restrictions on local zoning laws would be good for the country, good for the economy, good for the environment, and good for middle class and working-class Americans. The trouble is, it won’t necessarily be good for the mostly well-off people who benefit from those restrictions; or at the very least, they don’t think it will be good. The value of their home may not rise quite as quickly. Their neighborhoods may be a little busier. Their local public schools may be a little more economically diverse.

One can hope that more of these people will come to voluntarily dampen their self-interest, just a little, for the collective good. Perhaps one day the YIMBYs will outnumber the NIMBYs in the upper middle class. But we should not hold our breath. Some of the power of local government will have to be curbed in the interests of freeing up the market in land. Watch SB827 with interest.

Both Brink Lindsey and Steve Teles have devoted a large part of their response essays to addressing my criticisms of aspects of their project. I am grateful for their valuable contributions to the discussion. But I remain unpersuaded on the central point in contention between us: whether limiting government power is an essential element of a strategy for combating “capture.”

Lindsey and Teles contend that the existence of nations that combine large governments with relatively low levels of capture suggests that the limitation of government power is not necessary to greatly reduce capture. Unfortunately, the evidence they cite for this proposition is not very impressive.

International comparisons on capture are extremely difficult. But looking at the nations most comparable to the United States – long-established Western democracies – it does not appear that they do significantly better than the United States at preventing capture. Many European nations with relatively large governments – most notably France, Germany, Italy, and Spain – are also notorious for harmful policies that favor special interests. For example, severe employment regulations benefit unions, current employees, and some firms, but also lead to extensive long-term unemployment, especially for the young and poor. European agriculture policy is notorious for massive special-interest subsidies that artificially inflate food prices, also disproportionately harming the poor. Some countries, including Britain, have zoning restrictions that impede mobility and raise housing prices even more than those in the United States do. And this list could easily be extended.

Lindsey cites evidence indicating that there is an inverse correlation between “capture” and government spending. But the data he is referring to actually show that there is an inverse correlation between government spending and regulation. This does not prove that having a larger government doesn’t increase the risk of capture. At most, it shows that there may be tradeoffs between two different types of government intervention: spending and regulation. Some argue that the latter is more susceptible to capture than the former. But even if this is true, it does not follow that the former is not also problematic. Moreover, it is likely that most of the correlation Lindsey points to is driven by the fact that many poor nations with dysfunctional economies have high levels of regulatory intervention (that is one of the reasons why they are poor), but also they have too impoverished a population to be able to extract more than a small fraction of GDP in tax revenue from it.

Lindsey’s argument does point to the following interesting scenario: it is theoretically possible that the government could spend a lot of money but confine the spending to a narrow range of functions. We would then have a government that is large in size but small in scope. Such a government might be less dangerous and less prone to capture than what we actually have: a government that is large in both size and scope. It might also be preferable to a government that spends less money but regulates and controls a wide range of activities. The possibility of a big-spending government with a narrow range of functions is worth greater consideration than we can give it here. But, in the meantime, we should not forget that actually existing government both spends and regulates on an incredibly wide range of issues.

Lindsey argues that his position is supported by the experience of the late 19th century Gilded Age, when there was extensive political corruption even though government was small by modern standards. It is not clear that Gilded Age corruption and capture really was so extensive by modern standards, or even by comparison with other governments at the time. The study Lindsey cites on corruption actually shows that it declined substantially during the Gilded Age, particularly during the early part of it, in the 1870s. But to the extent that capture did occur on a substantial scale, the explanation is actually consistent with my theory. During the late 19th century, state and federal governments began to take on a range of new functions, such as engaging in extensive regulation of railroads, utilities, and other large enterprises. As Yale political scientist Samuel DeCanio shows in an important recent book on the period (which I reviewed here), many of these interventions were either deliberately conceived by interest groups for the purpose of regulatory capture or at least exploited by them after the fact; he also explains how – much like the modern instances of capture documented in Lindsey and Teles’ book – the business interests and allied political elites were able to exploit voter ignorance and the complexity of regulatory policy to get away with it. This finding cuts against Edward Glaeser and Andrei Shleifer’s conjecture (relied on by Lindsey) that the shift towards regulation by bureaucratic agencies occurred because they were less vulnerable to capture than courts. Actual Gilded Age interest groups seeking to capture the political process made the exact opposite calculation; bureaucracies would be easier to capture.

It was the new, more complicated functions of government that were the ones most often captured in the Gilded Age, not the more traditional functions of preventing violence, protecting property rights, and the like. Of course government was still relatively small by modern standards. As a result, no instance of Gilded Age capture resulted in harm on anything like the scale of that caused by more extensive modern regulations, such as zoning restrictions that cut millions of people off from valuable job and housing opportunities.

Government actions against African-Americans (subject to the beginning of Jim Crow segregation) and Native Americans (many of whom were forcibly confined to reservations) did of course, inflict far greater harm than any regulatory capture. With respect to these groups, state and federal governments exercised far more comprehensive control than over almost any part of the population today. These atrocities were less the result of capture by narrow interest groups than a consequence of government doing the bidding of ignorant and prejudiced majority public opinion. The latter is often an even greater menace than the former, and provides additional reasons for keeping the powers of the state within tight bounds.

Teles contends that the dangers of capture can be reduced if the government relies on relatively simple “shove” forms of regulation rather than more complicated “nudges.” I share much of Teles’ skepticism of nudging. But it doesn’t follow that shoves are better. Whether the government relies on nudges or shoves, any effort to regulate a wide range of complicated markets and social interactions inevitably requires making difficult, nuanced tradeoffs, and addressing a variety of complicated issues. To take two of the examples in Lindsey and Teles’ book, there is no clear, simple, and transparent way to micromanage land use across a wide area (as current zoning policies do in many cities), or to set up licensing rules for hundreds of different professions. Of course, government could potentially take a crude, blunderbuss approach to these matters that ignores variations in local conditions and other subtleties. Even if that somehow reduces capture by increasing transparency, it is likely to cause even greater harm in other ways.

Both Teles and Lindsey emphasize that significant reductions in the size and scope of government, even if desirable, are simply politically infeasible, and therefore should be rejected as a “counsel of despair” (as Lindsey puts it). They are too quick to dismiss the possibility of shrinking the state. It is indeed unlikely that we can constrain government as much as libertarians would ideally prefer, certainly not in the near future. But it is possible to reduce it to much lower levels than is the case today.

Such countries as Ireland, Canada, and New Zealand have managed to achieve major reductions in spending and regulation during the last thirty years, and all three, in recent years, outscore the United States in the rankings of economic liberty published by the Cato Institute and the Heritage Foundation (the United States now ranks only 11th in the former ranking, and 17th on the latter). International comparisons suggest that the United States has plenty of room for improvement, and that we are far from having the smallest government that can possibly be achieved under modern conditions. And, of course, what has been achieved elsewhere may not represent an absolute limit either.

The claim that reducing the size and scope of government is infeasible is also at odds with much of the agenda Lindsey and Teles advocate in their excellent book, in which they recommend major reductions in zoning, licensing, some forms of financial regulation, and government protection for intellectual property. If this program were fully implemented, it would by itself qualify as a substantial reduction in the size and scope of government. If it is feasible to do all these things, we should not be so quick to dismiss the possibility that some other forms of government intervention can also be reduced, or at least decentralized to lower levels of government in order to empower foot voters. Decentralization may have considerable political potential in an era where the public increasingly trusts state and local governments more than Washington on a variety of issues.

None of this denies the obvious fact that the short-term political environment is extremely daunting for efforts to scale back government. Both major political parties are moving in the wrong direction on that score. But, of course, the same can be said for most of the procedural reforms that Lindsey and Teles advocate. There is little immediate political enthusiasm for them either, and a good deal of potential opposition from influential interest groups is likely to arise when and if these ideas actually gain traction.

Any substantial reform of the current regulatory system faces serious political obstacles. But there is no reason to think that significant limitation and decentralization of government power is less feasible than the procedural reform elements of the Lindsey-Teles program – especially when it comes to the many important points on which the two actually overlap. Moreover, the limited-government agenda has at least one notable advantage over one focused on technocratic procedural reform: it is more likely to energize and inspire activists, intellectuals, and at least some ordinary voters. It is easier to get people enthusiastic about liberty, “getting the government off our backs,” and (to put a more left-liberal slant on it), empowering the disadvantaged to control their own lives, than to rally them to the cause of improving regulatory procedure.

If you position yourself between the two great ideological camps, you will inevitably get whipsawed by pressure from both sides. Just as Ilya Somin urges us to move toward the libertarian embrace of small government, Henry Farrell calls on us to take further steps to the left. In a previous response I declined Somin’s invitation; now it’s time to extend my regrets to Farrell.

According to Farrell, “Lindsey and Teles’ version of liberaltarianism still has too much traditional libertarian DNA. In particular, it uses concepts such as ‘regulatory capture’ and ‘rent seeking’ that are borrowed from libertarian-leaning public choice.” I grant that these specific terms are more commonly used by libertarians than progressives, and as used by libertarians they have, unsurprisingly, acquired a distinctly libertarian gloss. Nevertheless, I reject the contention that the underlying concepts are any more libertarian than they are progressive. In both their provenance and their current application, these concepts are the common patrimony of all liberals regardless of whether they lean left or right.

Although the term “regulatory capture” is associated with the libertarian-leaning George Stigler, academic interest in the phenomenon didn’t start with him.[1] Back in the 1950s, political scientists studying the independent regulatory commissions—including Marver Bernstein and a young Samuel Huntington—concluded that they were being run in the interest of the regulated industries. By the time Stigler wrote his heralded “The Theory of Economic Regulation” in 1971, he noted ruefully that criticisms of the Interstate Commerce Commission for “pro-railroad policies” were now “a cliché of the literature.”

Academic interest in regulatory capture prior to Stigler wasn’t confined to centrist political scientists. In addition, revisionist historians of the left—led by Gabriel Kolko with his 1963 book The Triumph of Conservatism—contested the prevailing interpretation of the rise of regulation as the triumph of the public interest. “Regulation itself was invariably controlled by leaders of the regulated industry,” Kolko wrote, “and directed toward ends they deemed acceptable or desirable.”

Moving from academia to activism, the “New Left” disenchantment with the administrative state could be seen in Ralph Nader’s creation and leadership of the consumer protection movement. When, writing with Mark Green in 1973, Nader observed that “our unguided regulatory system undermines competition and entrenches monopoly at the public expense,” he was directly anticipating arguments we make in The Captured Economy—and nobody would argue he was doing so from a libertarian perspective.

If we pull back from the relatively recent past, we see that concerns about regulatory capture and rent-seeking are as old as the study of politics. Those specific terms weren’t used, of course, but the underlying concern with the misuse of public power for private or narrow group gain is perennial. “The true forms of government, therefore, are those in which the one, or the few, or the many, govern with a view to the common interest” Aristotle wrote in his Politics over two millennia ago; “but governments that rule with a view to the private interest … are perversions.”

Likewise, the concept of rent doesn’t have an intrinsic ideological valence. Yes, libertarian public choice economists highly critical of activist government have focused on rents, or excess private returns, created by activist government. But, as I just discussed, it is entirely possible to combine warm support for activist government with concern that it can be misused to inflate private returns. Furthermore, as I pointed out in my reply to Ilya Somin, rents can also be created by market failures that go unremedied by government. And a focus on reducing that kind of rent-seeking will tend to lead one away from strongly libertarian policy preferences.

Farrell usefully identifies two distinctive ideals that animate concerns about the privatization of public power: the ideal of free markets, and the ideal of democracy. He sees these ideals as in conflict, and it’s clear which he prefers: for him the libertarian market ideal is a false god, or at least a lesser one. He praises our hybrid liberaltarian approach for at least recognizing the importance of the democratic ideal. But he urges us to go further, to prioritize democracy strongly over markets—as the headline of his essay puts it, to join with the left in “saving democratic institutions from corrupting markets.”

Sorry, I’m not moving. I don’t see any need to choose sides, or prioritize one ideal over the other, because I don’t see any deep conflict between the two. Rather, I see interdependence and convergence.

Farrell and his fellow progressives are correct to point out that markets—that is, modern markets capable of coordinating the activities of vast numbers of strangers across both great distances and long time horizons—are institutional creations, not natural, spontaneously occurring phenomena. Markets, therefore, have to be constituted by politics. Accordingly, the health and vitality of the economic sphere depends on the health and vitality of the political sphere. A well-functioning market economy is more likely in a well-functioning democracy.

Libertarians err when they elevate disembodied, pre-political markets as their ideal: they are, in effect, assuming a can opener. But progressives make a similar mistake when they idealize disembodied democracy—that is, democracy not anchored in a market economy. For the fact is, modern democracy was born and developed in strongly market-oriented societies, and it has yet to find a secure and durable home in any rival model of social organization. In particular, there is a strong association—and, I would argue, a causal connection—between the modern economic growth that capitalism makes possible and the spread of political and civil freedom. Democracy expands and deepens when market economies are thriving (e.g., the decades after World War II, the 1990s); democracy retreats when market economies stumble (e.g., the 1930s, today).

Accordingly, although the boundaries between the public and private spheres are always contested and always shifting, the market ideal and the democratic ideal must coexist and reinforce each other if either is to flourish. And promoting that coexistence and mutual reinforcement is best accomplished by focusing efforts on where the two ideals converge: namely, their shared condemnation of using public power for private gain.

In both the economic and political realms, the prevalence of regulatory capture and rent-seeking is a measure of institutionalized corruption. In the ideal market economy, the rules of the game are set so that the desire for private gain is channeled into bettering the lives of others. And in the ideal democracy, the mechanisms of government are devised so that the clash of contending opinions and interests is converted into policies that serve the common good. To the extent that capture and rent-seeking prevail, the invisible hand of capitalism degenerates into the grasping hand of crony capitalism, and the lofty pursuit of the public interest devolves into a feeding frenzy of special interests.

Let me refine this point a bit. If we are talking specifically about rent-seeking, the convergence between healthy markets and healthy democracy is in their relative absence of a particular type of rent-seeking, namely the regressive kind that we write about in our book and that is the dominant kind in our contemporary political economy. When the rich and powerful use the political process to entrench their own advantages, economic dynamism is undercut and democracy is perverted. In these situations, libertarians and progressives, each for their own reasons, are united in their condemnation.

But rent-seeking needn’t necessarily be regressive: rents can also redistribute downwards to the benefit of workers or consumers (see, e.g., collective bargaining legislation, minimum wage laws, rent control, universal service requirements). In these situations, there is a tradeoff between economic efficiency and at least some conceptions of equity. This is one stretch of the perpetually contested boundaries between the public and private sectors. Libertarians and progressives will predictably split on these issues, and the type of people you might describe as liberaltarian will often be found on both sides. As for me, my strong preference is to keep redistribution out of the regulatory code as much as possible. In general, I believe that fiscal transfers are more effective and have fewer downsides than downward-redistributing rents.

Having addressed this complication, let me return to the larger point. Although it is analytically useful to define separate economic and political ideals and note the tensions between them, in fact the two depend on each other and reinforce each other. One way to think about the liberaltarian position, then, is to see it as elevating the commitment to this living, integrated ideal—democratic capitalism, also called liberal democracy—over allegiance to either of its components. In the real world, there are no disembodied markets, and there is no disembodied democracy. There is only the messy reality of democratic capitalism, rife with blurred boundaries and slippery slopes. Our job is to make it work better. And that job is much more likely to be done well if partisans on both sides recognize they have their own, distinctive reasons for contributing.

Note

[1] This paragraph and the three ensuing ones draw heavily on the excellent essay by William J Novak, “A Revisionist History of Regulatory Capture.”

In his response essay, Richard Reeves helpfully steers our attention to the inequality that both underlies and flows from disparities of income, wealth, and status: inequality of power. The power to direct the course of one’s own life, free from the arbitrary power of others: this is the central promise of liberal democracy. To make good on that promise, a truly liberal politics must work to ensure that power remains broadly diffused. (And if Reeves’s way of using the world “liberal” would just catch on, the jerry-rigged “liberaltarian” could be consigned to the neologistic scrap heap.)

A special threat arises when economic power is translated into political power, which is then channeled back to entrench and augment economic power—and on and on in a vicious circle. This is the doom loop of oligarchy, and The Captured Economy offers a warning that such dynamics are now under way in the United States. Indeed, they are sufficiently far along that economic dynamism has been noticeably throttled and trust in governing institutions badly battered.

Which raises the question of why. Given that rent-seeking is endemic to democratic capitalism, why is its distributional thrust now so overwhelmingly regressive? In the era of activist government that ran from the New Deal to the Great Society, rent-creating policies could be found in abundance, but their effect was usually to redistribute income downward or sideways. Why is that kind of government intervention less common today, and why are policies that create enormous windfalls at the lofty peak of the income distribution so much more widespread?

This is not a question we sought to answer in The Captured Economy, but it’s been on my mind a lot since the book came out. And I can’t escape the conclusion that the decline of unions is an important part of the answer. Not unions as agents of collective bargaining, but unions as political actors. Organized labor exerted a powerful influence on behalf of government policies to help workers and the less well-off, and it was a strong source of support for the Democratic Party and its general orientation toward the economic interests of the working class. (For some empirical evidence on the political impact of unions, see here and here.) As the percentage of workers represented by unions has nosedived, so has unions’ political clout. Since nothing has emerged in their stead to play a similar political role, it is unsurprising that policymaking has become relatively more responsive to the interests of the well-to-do.

I have come to this conclusion reluctantly, as I believe that American-style collective bargaining had overwhelmingly negative effects on the industries where it took hold and I strongly disagree with many of the economic policy positions championed by Big Labor back in the day (trade protectionism and restrictions on immigration in particular). But writing The Captured Economy (and, in particular, learning from Steve in the process) has convinced me that imbalances in representation (not only because of Olsonian organizational symmetries, but also as a result of the decisionmaking venue and differentials in “policy image”) are at the root of many policy dysfunctions. It’s really hard to get policymaking to track the broad public interest if participation in the process is dominated by narrow interests on one side of the question.

Accordingly, I’m increasingly interested in figuring out some way to improve the representation of ordinary workers and citizens in the policymaking process. A proposal by Benjamin Sachs of Harvard Law School for “unbundled unions” that focus only on political activity (as opposed to collective bargaining) is an intriguing effort to push in this direction. Perhaps there are better answers, but I no longer have any doubt that the question is important.

I knew when I wrote my first essay that it would stir debate and likely vex the average Cato Unbound reader. But people here have given as good as they’ve gotten - since the seminar is close to ending, here are some responses.

First, thanks to Ilya for his engagement on the topic of states, power, and markets. I still think that like other libertarians who have engaged with the recent political science literature, he greatly overstates the case against democracy and understates the case against markets.

Ilya disputes my suggestion that Chris Achen and Larry Bartel’s book is both an argument for democratic realism and a case for more equal democracy. In his reading they describe in

great detail how partisan bias often actually exacerbates the impact of political ignorance, by skewing voters’ judgment of public policy, and even their perception of basic facts, such as the rate of inflation and unemployment. Particularly in an era of severe polarization, parties exacerbate the negative impact of political ignorance at least as much as they may ameliorate it.

For sure, Achen and Bartels have a lot to say about partisan bias. However, this hardly exhausts their discussion of parties. They strikingly emphasize that parties and interest groups can work well – but under conditions of political equality. As they describe it (p.321-322) the challenge is to understand group politics in power terms:

If voters are to have their interests represented in the policy-making process, then, interest groups and parties have to do the work. And the organizations representing different interests have to have power in the policy-making process proportionate to their presence in the electorate. The rich, the well-placed and the well-organized cannot have extra power to advance their interests. Too often, as we have seen, naïve reformers have imagined that the pseudo-democratization bestowed by plebiscites would solve these problems cheaply and easily.

To the contrary, spelling out the simple normative perspective of equal power in the context of an honest description of the policy-making process makes it only too clear how far we have to go to become seriously democratic. It also makes clear how hard the conceptual task will be of devising the right institutional arrangements, and how bitterly those reforms will be opposed by the groups that profit from the current inequalities and ensuing injustices.

This is worth quoting at length because it makes it quite clear that Achen and Bartels have a quite different political agenda than their libertarian admirers. They surely believe that advocates of democracy ought recognize its warts, that current justifications of democracy are flat out wrong (here, I think they overstate their case, though they land some good blows), and that certain naïve versions of democratic reform are likely to founder or be actively counterproductive. But they specifically and explicitly argue that serious democracy – by which they mean contention among groups and parties in a situation of real equality – can have salutary benefits. Their book is, more than anything else, a call for building better understandings of democracy that start from the cognitive psychology of real human beings, and the inescapable role that groups play in structuring politics and public opinion. This is why I think that it presents a very interesting complementary set of arguments to Brink and Steve’s book and vice versa. Both talk in useful ways to the relationship between power, equality, and democracy. Another valuable interlocutor, whom Achen and Bartels single out as one of the few political theorists to take these questions seriously, is Nancy Rosenblum (whose book on partisanship was the subject of another Cato Unbound seminar a few years ago).

This understanding also presents a significant implicit challenge to Ilya and to other libertarians who appeal to the benefits of markets over democracy. We have the beginnings of democratic realism – but not of market realism. Cosma Shalizi’s case against the libertarian two-step is pungent and direct:

On the one hand, the sanctity of private property and private contracts is held to be a matter of inalienable natural right, guaranteed by the fundamental facts of morality, if not a basic part of Objective Reality; capitalism is the Right Thing to Do. On the other hand, much effort is devoted to arguing that unfettered laissez-faire capitalism is also the economic system which will produce the greatest benefit for the greatest number, indeed for all, if only people would just see it. Natural right therefore coincidesexactlywith personal interest. A clearer example of wishful thinking could hardly be asked for. It’s not hard to see what function this plays, rhetorically.

Markets too are fallible social entities involving fallible human beings. As Cosma notes (and as Arrow himself more or less concurred), Arrow-Debreu efficiency proofs are of mathematical rather than practical interest. Hayekian justifications place a far greater informational load on the price mechanism than it can possibly bear. And actual markets are more plausibly characterized by strategic than competitive logics. If woman is “free to choose,” it is under circumstances not of her making. Markets can be wonderful things – but they are not the universal panacea that many libertarians claim.

Economists like Richard Thaler who have looked to establish a more cognitively realistic understanding of human beings have drifted away from markets and toward loose paternalism. Few economists indeed have tried to take groups and parties seriously (Mancur Olson is the only really good one I know about, though this may merely reflect my own ignorance of the field). None, as best as I know, have done much to bring the two together.

This brings me to my disagreement with Brink. First I obviously agree with his basic claim that democracies and markets can and should co-exist (the title of my original post wasn’t chosen by me, but by the Cato Unbound editor, who justifiably wanted to stir things up a bit). But that is quite compatible with my argument. What I am asking is whether markets should be the measure by which we look to assess the benefits and drawbacks of other forms of organization. If we start with rent seeking, we are using markets as a measure, since the notion of rents precisely refers to the additional benefits that an economic actor can secure above those that they would get under perfect market competition. It is, of course, true, that “the misuse of public power for private or narrow group gain is perennial,” but the way in which we choose to conceptualize, study, and try to correct it is not. Should we look to return to perfectly competitive markets? Or alternatively, should we look to more equal democracy? There are very different accounts in public choice economics and democratic theory (see, for example, Mark Warren’s work on corruption), which would suggest very different remedies.

Another, closely related point is that sophisticated arguments for democracy do not imply democracy all the way down. It would be a thoroughgoing nuisance if we had to put the prices to a vote every time we bought vegetables in the supermarket. Instead, as Knight and Johnson argue, we should think of democracy as a “second order” system of decisionmaking. In some spheres of interaction, markets may be the best solution. In other spheres, regulation. In other spheres again, voting, or voluntarism, or non-binding consultation. Rather than trying to apply democracy everywhere, we should use it as the second order means of deciding whether it is best to apply markets, or voting, or regulation, or whatever, in a particular setting.

This marks a sharp difference from market-focused libertarianism. Democracy is, in the end, collective choice made through a system of voting or whatever, plus coercion. Market libertarianism instead emphasizes individual choice as the ultima ratio. One can reach either outcome plausibly from classical liberal foundations. One can also point to the ways in which democracies require individuals to make the choices, and individual choice depends on collective frameworks. But in the end, there is an important disagreement here, and liberaltarians/liberals (or maybe we should just call them ‘new classical liberals’) are going to have to choose, sooner or later, whether to jump in the one or the other direction.

Finally, Steve. Despite our political differences (Steve is a moderate, I am a solid leftwinger), our ways of thinking about the world have a lot in common – e.g. our shared dislike of nudging. Hence, we probably don’t have nearly as much to disagree about as we might– which is no fun at all. Steve does push back on one question, suggesting that:

we detail the many ways that a government liberated to regulate everything, everywhere can turn into a bazaar for concentrated interests to take over for their own ends.That is not, except in the most polluted sense, what any of us mean by democracy. Unlike Ilya, we do not want (except in a few narrow cases) to rule entire areas of economic life out of bounds for the state. But we do think it makes sense to make some kinds of economic regulation face particularly high evidentiary standards, and to change the geographic or institutional location of decisionmaking to make it less susceptible of capture by concentrated interests. Constraint, we would argue, can be liberating for democracy, and that is true even—perhaps especially—when one has a broad conception of the role of the state.

As a pragmatist, I agree in broad principle – so long as these constraints are themselves the product of democratic consideration, and open to reconsideration when they go substantially awry. To the extent that they are not open to some kind of reasonable democratic consideration, not so much. The likely end result then is government by judges, who have authority to interpret the constraints in ways that they may find more or less ideologically congenial, with all of the accompanying deformities that plague the politics of American courts right now.

One interesting example of how such restraints might be handled differently is my native country, Ireland. Here, as in the United States, there is a written constitution. However, it is possible to amend it via popular referendum.

In recent years, a combination of sortition (random choosing of citizens by lot) and expertise has led to a series of recommendations about constitutional reform. These recommendations then go to the legislature, which has the power of rejection, but also has to take them seriously (given that they have the legitimacy of public opinion). The Parliament can then move enabling legislation for a constitutional referendum, which completes the circuit by allowing people to vote on the proposed reform.

This seems (at least to someone with my values, and likely the values of many libertarians too) to work pretty well. It avoids many of the problems of radical plebiscitarianism but also makes it tougher for politicians to block reforms that people really want. This is why Ireland – a country notorious in my young adulthood for its religious conservatism – voted emphatically in favor of marriage equality in a popular referendum. It is also the driving force behind the forthcoming referendum on the legalization of abortion. Pragmatically, of course, it may turn out not to work well in future situations. Figuring out how to make democracy work is a never-ending challenge of adjustment.