The Constitutional Market

FREIBURG: In one obvious way, the state and the market are mutually exclusive. Resources and rights controlled by the state are removed from the arena of private transactions called the market. Until now the postcommunist transition focused on shifting resources and rights from the public to the private.

But in another, equally obvious, way the state and market are partners, not antagonists. Only the state can provide the institutional superstructure for a properly functioning market. An indispensable part of the transition lies in transforming the sclerotic, overgrown socialist state into one that provides this support for free enterprise. For a society’s ability to create wealth depends, critically, on the "rules of the game" which it adopts; that is, on institutions that determine the ways in which economic activities are carried out. Here an irony intrudes: under socialism private markets were crushed by the state; under capitalism, markets function well only when the state provides a nourishing legal/institutional environment.

So the market is not merely the absence of state control, but requires a set of appropriate rules in which transactions take place. Stripping property and other rights from the state will not necessarily allow the former socialist economies to develop efficiently. The robber barons’ capitalism rampant throughout much of the postcommunist world is abundant proof of this.

A recent Nobel laureate in economics, Douglas North, describes the type of state the postcommunist countries now require as a double-edged sword. By providing and enforcing suitable rules of the game, and so deterring private predations conducted through fraud and coercion, the state acts as a facilitator of commerce. It thereby encourages the production of wealth. This side of the state/sword must be kept sharp, with the state effective in performing its tasks as protective state and guardian of the law.