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Arnold Kling presents a brief history of state-finance relations. Whereas modern economics assumes a market economy and explains the use of money as a tool to make it work better, Kling argues that, in his "skewed view" of financial institutions, the use of money developed well before the market:

According to the skewed view, there was never a state of nature in which financial institutions roamed free in the wild, to be later tamed by regulators. Instead, financial institutions were fundamentally institutions of government. Entrepreneurial finance is a modern development, and its separation from government may always be tentative.

Skewed? I thought that this was mainstream. The emergence of "the market" as a distinct entity is extremely recent in terms of human history. If you had asked a peasant in 16th century about the market, he/she would have pointed you towards the stalls selling produce in the town square. The whole concept of shifting power from the state to market forces would have been nonsensical.

This is why, prior to Adam Smith and his contemporaries, economics (or political economy, as it was then known) did not exist as a field of study. How could it? Every aspect of what we would now label economic activity was deeply intertwined with social, political and power relationships.

Of course, it still is. Marx and his followers represent one version of this story, but there are many variations to choose from. Oxford and Cambridge still offer courses in PPE (Politics, Philosophy and Economics) because they recognize the necessary overlap. This makes the attempt by modern academia to separate political studies from their economic counterparts all the more frustrating.

Not only are the Wall St./Main St. dichotomies annoying, they're misleading. If anything, the recent financial turmoil has reminded everyone of the importance of treating "the state" and "the market" as complementary, not adversarial, components of our social structure. And in case there was any doubt: Rory and I started the IPE Journal to explore this relationship and try to make some sense out of it all.

How are we doing so far?