Everything about the economy is a distortion

John Cassidy had a piece a few days ago at the New Yorker about class warfare in America. Buried in the piece, he makes a point that really deserves underscoring:

The argument of free-market economists that productivity determines wages and profits is mistaken. Productivity determines the over-all size of the pie. How it is distributed depends on a variety of factors, including relative bargaining strength, international competition, labor laws, and the results of elections. Economics and politics aren’t separate spheres.

Unfortunately, people seem to think that laissez-faire capitalism is the default economic form, and that everything else about any given economy is tacked on to that form. This view doubtlessly comes from the residual impact of Lockean natural law ideas about property ownership. Of course, this view is a complete farce.

There is nothing about the nature of the universe that requires human beings to construct systems of property ownership, contract rights, and market exchange. All these systems are socially constructed, and are the result of government laws and police enforcement. As such, there is nothing natural or default about the income and wealth distributions they generate. Those distributions are the consequence of intentional social policy and government “distortions” on human behavior.

Just as the government invention of property ownership and contract rights shape the path of the economy towards certain distributions, so too do other government inventions that are more classically understood as doing so. For instance, when government invents union rights, that helps shape the bargaining power of various economic actors, as well as the way the benefits of production are distributed. Importantly, these distortions and the distributions that result from them are no different from the distortions and distributions that come from laissez-faire policies. All of them involve socially constructed economic rules that steer production and distribution in a certain direction.

There is no default economic form free of distortions. Every single thing about the economy — even down to property ownership itself — is a consequence of government policy choices and behavioral distortions. Despite how it is usually presented, the debate is not between those who favor economic distortions and those who oppose them. The debate is between those who prefer certain sets of distortions and those who prefer others. This ridiculous game we play where we pretend there is a natural, default economic form, which is then disturbed by government action, is completely and totally ignorant.