Governance & Markets

Most people in the world live in a market economy. They buy and sell foods, clothes, gadgets, stocks, and so on, considering prices. Governments could instead decide to dictate every citizen’s economic activity, but it is now clear that such a totalitarian regime does not work. Why? It is important to understand the fundamental reasons.

Nonetheless, for a market economy to function properly, basic rules need to be established by the government or related professional associations, as well as the judicial system. At the very least, property rights need to be established, and more generally, a rule of law needs to be ensured. Here, what kind of laws and rules are necessary?

Regarding international activities such as exporting and importing automobiles, without the existence of a world government, how can we be assured that the transactions will go through? In particular, some countries sometimes retaliate against each other to block free trade, which is, in principle, beneficial to all people worldwide. What is a way to control such international disputes?

The dispute resolution is important as an escalation of such retaliations could trigger a war. In this regard, how should international bodies be governed? In particular, how can the voices from developing countries and those from advanced countries be reconciled? These are known as issues of global governance.

Furthermore, some market activities require active public engagement, particularly when one individual’s or a firm’s market behavior causes others significant distress. Typical examples include water pollution from chemical factories, the overfishing of endangered species like eels, CO2 emissions contributing to global warming, and social unrest stemming from pervasive poverty. Even for these types of situations, policies need to be carefully examined so that the government would not take strong controls over citizens’ activities.

There are also numerous non-market transactions, particularly within a firm, including labor services and intermediate goods. How should shareholders or managers manage a firm daily to conduct these non-market transactions efficiently? In the long run, how should we run a firm under specific rules and practices (i.e., corporate governance)?

Another important issue is how to implement appropriate policies based on the knowledge acquired so far. Once social scientists find out the optimal design to address each of the issues represented by the above-mentioned problems, politicians should ideally establish related laws and rules to implement the specified design. To be legitimate, elected politicians should approve laws and regulations democratically.

However, how can democracy be established and maintained? Even under democracy, do politicians always vote for the best design that social scientists devise? If not, then the question arises: how should the political system be improved?