Balancing the Technocrats

ISTANBUL – A simplistic (actually, naive) view of markets is that they exist almost in a state of nature, and that the best of all worlds is one where they are free to operate without government interference. An equally simplistic view of democracy is that it is a political system in which periodic competitive elections give the winner the right to govern without constraint.

The reality is far more complex, of course. Markets can function only within an institutional and legal framework that includes property rights, enforcement of contracts, quality and information controls, and many other rules to govern transactions.

Similarly, while competitive elections are essential to any democratic system, a winner-take-all attitude to electoral outcomes, with the victor concentrating power, is incompatible with democracy in the long term. Well-functioning democracies are embedded in complex constitutional and other laws that separate executive, legislative, and judicial power, and that protect freedom of speech, assembly, and peaceful dissent by those who lose elections.

Regulatory institutions – such as bank supervisory agencies and bodies that oversee the telecommunications, food, and energy industries – play a vital role by maintaining the always-delicate balance between free markets and the actions of elected governments and legislatures. The central bank is perhaps the most important of these institutions, for it conducts monetary policy (and sometimes serves as the financial-sector regulator).

The policy and regulatory mistakes that contributed to the subprime mortgage crisis – and thus to the US financial system’s near-meltdown and the eurozone’s travails – have brought the issue of optimal economic regulation and its relation to democracy to the fore once again. In the US, a significant share of the Republican Party favor abolishing not only the Department of Energy and the Environmental Protection Agency, but also the Federal Reserve! In their view, markets and private initiative require no significant regulation. The role of politics is to elect majorities that can abolish regulations and regulatory bodies.

Others around the world similarly oppose regulatory institutions, but for very different reasons. They argue that politicians can regulate and supervise without intermediate bodies that have some degree of autonomy. In their minds, these bodies merely impede and constrain realization of the people’s will.

If an elected government wants a bank to offer cheap credit to a group of enterprises so that they can hire more people, why should a supervisor be able to obstruct this democratic will? If these enterprises are told to hire the governing party’s supporters as an implicit condition of obtaining subsidized credit, that, too, is the expression of electorally legitimized popular will.

©RIPRODUZIONE RISERVATA