Economists on the whole think markets are useful tools. A closer look, though, reminds us that markets — and economies — depend on a collection of social and political institutions to work well. It’s not “free markets” we want, but honest, open, competitive markets, and it takes a lot to get there. It’s not hard to imagine that Argentina, Russia, and Zimbabwe are less prosperous than they could be because their institutions are less effective.
I just ran across a wonderful quote from Kenneth Arrow, my pick for greatest 20th-century economist. He’s speaking about these institutions and notes the essential irony in markets needing, in a sense, the absence of markets to work well (edited for continuity):
The price system must involve the concept of property. [But] property systems are not self-enforcing, they depend upon a constellation of legal procedures. The judges and police may indeed be paid, but the system itself would disappear if on each occasion they were to sell their services and decisions. Thus the definition of property rights depends precisely on the lack of universality of private property and of the price system.
In a sense, good governance is a necessary requirement of an effective market system, but governance, as Arrow has noted elsewhere, is arguably the more difficult part of the two to get right.
Note. The quotation comes from page 357 of “Gifts and exchanges.” Link free from a university ip address. If that fails and you’re really interested, send me an email.