Recently I stumbled upon this article from the renowned development economist Dani Rodrik, which eloquently made the case that markets don’t just magically work all by themselves:

[There is] a serious misunderstanding of how markets really function. Raised on textbooks that obscure the role of institutions, economists often imagine that markets arise on their own, with no help from purposeful, collective action. Adam Smith may have been right that “the propensity to truck, barter, and exchange” is innate to humans, but a panoply of non-market institutions is needed to realize this propensity.

Consider all that is required. Modern markets need an infrastructure of transport, logistics, and communication, much of it the result of public investments. They need systems of contract enforcement and property-rights protection. They need regulations to ensure that consumers make informed decisions, externalities are internalized, and market power is not abused. They need central banks and fiscal institutions to avert financial panics and moderate business cycles. They need social protections and safety nets to legitimize distributional outcomes.

I think Rodrik is spot on here. (I am a longstanding Rodrik fan and a former student of his, though I’m skeptical on some of his other research conclusions.) In our common conversations about how markets should work we often establish a false dichotomy between two extremes: lawless unfettered capitalism vs central planning. As Rodrik reminds us (and Adam Smith more than 200 years ago, for that matter), markets can not function properly without the role of government in laying the groundwork.

I would go a step further and say that markets need more than just government institutions to work properly. They also need moral institutions: honesty, fairness, compassion, commitment to family, generosity, etc. These are the bedrock principles of the Baha’i Faith and every religion, and each faith exists for the purpose of raising the level of each “institution” among human society. Unfortunately the economics research on this subject is pretty sparse. I think there are several reasons for this, one of which is that previous research trying to link cultural norms to economic outcomes has been proven wrong or even racist (like Weber’s “Protestant ethic” or the “Hindu” rate of economic growth). Another major reason is that these things are just difficult to quantify.

Nonetheless, I would like to see economists like Rodrik, who are brilliant in recognizing the importance of public and social institutions, to place a similar emphasis on moral institutions.  Maybe in that case the role of religion in economic outcomes might gain more appreciation, given religion’s curiously powerful role in raising the level of these institutions.

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