What The Free Market Can't Fix

What do global warming, AIDS research, fast-track negotiating authority, and the recent financial-market gyrations have in common? They all reflect unresolved questions about how to govern a globalizing economy. Seemingly, we've at last reached the self-governing nirvana of free-market economics texts. Technological change overwhelms government's capacity to regulate. Globalism outruns the writ of any single nation. The marriage of information technology and liberated markets supposedly obviates government's need for stabilization policies. The age-old balancing act between state and market is archaic; the market won. But consider these issues in turn:

-- GLOBAL WARMING. Most of the world's climate scientists say global warming is a real and serious threat. Market forces won't solve the problem, because markets treat pollution as a costless byproduct and underprice it. "Free-market" advocates are promoting a complex scheme of tradable emission rights. But this "market" doesn't exist in nature; it must first be constructed--by government diplomats and regulators. And these emissaries must resolve complex policy questions: how much overall pollution to allow; how to allocate the initial stock of tradable permits; whether to have waivers or subsidies for poor countries; and whom to empower to police the system. Here, globalization demands more statecraft, not more market.

-- AIDS RESEARCH. The prestigious New England Journal of Medicine (for which I occasionally write) is embroiled in a thorny dispute over AIDS research, with one faction of scientists, championed by the head of the National Institutes of Health, Nobel laureate Dr. Harold E. Varmus (whom I greatly admire). The immediate issue is whether U.S.-funded researchers should subject people in poor countries to double-blind studies that would be considered unethical in the U.S. Specifically, should women who are HIV-positive be given placebos as part of a research study, when there are known treatments that decrease the chances of their passing the virus to their children? The broader issue is whether the world needs a single standard for medical research, and whether rich countries should help finance available treatments that poor ones can't afford. Again, these are inescapable dilemmas for public policy. The global aspect, far from rendering the issue moot, only complicates it.

-- TRADE ISSUES. For every question there is an answer that is simple, unequivocal, and usually wrong. In this case, fast-trackers want freer trade generally, more regional free-trade areas, and permanent most-favored-nation (MFN) status for China. But should we turn a blind eye to massive state subsidies overseas that disadvantage U.S. producers who play by free-market rules? Do we pretend that slave labor conditions elsewhere are none of our business? Do we ignore disrespect for U.S. intellectual-property rights by nations who want to sell us their products? And who governs this whole affair? The fledgling World Trade Organization simulates a world trade court, but it lacks U.S.-style due process. And these issues of ground rules and governance are unavoidable. Magical incantations about the genius of laissez-faire are of no help.

-- FINANCIAL MARKETS. This is the highest-stakes game of all. The recent turbulence reminds us that globalization brings with it contagion. Emergent markets have the dynamism, but neither the resilience nor the mature institutions of governance of U.S. capitalism. The morning after the latest Black Monday, The Wall Street Journal editorial page, temple of market-worship, could only aver: "When businessmen invest and do deals across many borders, they must cope with an array of currencies--and promises made by the countries that back those currencies.... Mr. Greenspan needs to provide at least some small suggestion of hope that somebody in Washington knows that an interconnected economy and interconnected markets need a reliable system of money."

Well, yes. But Alan Greenspan is not exactly the personification of the invisible hand. The Federal Reserve did not come into being because a clever set of entrepreneurs decided there was a market for a central bank. The Fed is a government agency, created by statute and charged with public purposes. The International Monetary Fund and World Bank are also public agencies, if embryonic ones, wedded to fiscal orthodoxy. Capitalism offers immense dynamism, but markets do not regulate themselves. No policy is also a policy. Globalization does not invite an era of laissez-faire, but a thornier set of questions about governance.