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Free Market Economies, Rule of Law and Public Intervention

Anno XXXII, n. 140, maggio-agosto 1997
Centro Einaudi


Testo disponibile solo in lingua inglese.
This paper analyses the main features of a free-market system in which uncertainty may be reduced but not eliminated, and government intervention is legitimate only when it derives from a clear principal-agent link between policy-makers and a vast majority of the population. More specifically, the system requires a tight constitutional framework so that incumbent policy-makers can be removed whenever they engage in rent-seeking activities and violate the principal-agent contract. The paper explains why government agents usually manage to acquire power as well as authority. As a consequence, free-market principles are violated and individual property rights are transferred to an extent which goes beyond the level some individuals are prepared to accept. Although governments still draw their legitimacy from the people, the principal-agent link is weakened and a free-market model is replaced by a mixed economy. Constitutional engineering may help to slow down the involuntary transfer of power from individuals to governments but cannot stop it.