I have great respect for libertarians. There commitment to individual liberty and their understanding that free markets really do work are admirable. I also share their desire for voting reform and I admire anyone willing to stand up to the two Party duopoly that we have in the United States. Because I am "socially liberal" yet a strong supporter of free markets and individual liberties, I am often suspected of being a libertarian, or as someone who could be converted to libertarianism. Likewise, I am certainly not an Objectivist, and I don't care who John Galt is.
I've also found it very frustrating to talk to libertarians. Whether that is my communication failure or theirs is not important. I do feel that I have a better shot at explaining myself to them and others if I write out my arguments. I have three basic arguments which I will discuss below (1) Optimality versus fairness, (2) Where Government really does know best and (3) Public goods and externalities.
I fully agree that the less we interfere with individuals exchanging things of value to them the better off everyone is. Any time we collectively constrain someone's economic choice, we are taking value out of the economy. I do not fall for the trick of calling government spending "investment". We should see it as spending. And so in these respects, I am with the Libertarians. Where we part company is that I think that government spending and constraints on trade are sometimes justified, despite their costs to the overall economy. Some of these issues will be dealt with in the Public Goods section, but here I will deal with more fundamental issues.
Libertarians and I fully agree that the more efficient markets are the better off the total gain for the economy will be. But there is an other feature of efficient markets. The more efficient a market becomes, the more very small differences in talent, ability, hard work and luck can lead to very large differences in outcome.
To construct an example, lets suppose that demand for recordings of opera was as high as demand for carpenters. It obviously isn't, but let's pretend until I can come up with a better example. Now when someone buys an opera recording from a particular artist, that artist can be just about anywhere on the planet. Also, the technology is such that the artist can serve 10 million customers almost as easily as serving 1,000. Now compare with the carpenter. The carpenter is constrained by time and geography to only serve customers in a particular region, and by time so that there more customers he serves the harder it is to serve additional ones. That is, there are technological barriers to trade between carpenters and their customers in ways that there aren't for opera recording artists. The opera recording market is much more efficient. That efficiency is great for the recording artist and for the consumer. While a consumer of a carpenter's service is constrained to local carpenters, and the best carpenters are still limited to the number of customers that they can physically serve in a given time period. So the carpenter market is not so efficient.
The efficiency of the opera recording market it such that every consumer will be able to get recordings of the very best on the planet at very little money more than say getting the recordings of the tenth best artist on the planet. The hundredth best is unlikely to make a living at selling recordings, and the thousandth best is completely invisible. Remember, that we are still pretending that demand is as high for opera recordings as it is for carpentry. Even in that fantasy world only the top few recording artists would survive in recording. Now contrast with the carpenter. The hundredth best carpenter or thousandth will still be able to get by very nicely, even recognized as a local star. The difference between these two markets is only that one is far more efficient than the other.
I am not saying that we need to subsidize opera, or that we should seek inefficient markets. I am just pointing out that as markets get more efficient even very small differences in talent or luck can lead to huge differences in outcome. The thousandth best opera recorder will still be an extremely talented individual who has worked very hard. The same is true of the thousandth best carpenter. But in the more efficient market, the small difference in talent between number 1000 and number 1 has huge consequences, while in the less efficient market the same difference in talent leads to less extreme differences in outcomes. I'm using this to illustrate the fact that in more efficient markets, small differences in the skill, talents and luck of the producer can lead to huge differences in outcomes for the producers. In less efficient markets, the outcome differences will be less. So as markets become more efficient, income differences will grow.
Whether one is a winner or a loser in such a system, will be determined by only small differences in skill and luck. Income will not be even close to being proportional to skill. The flap of a butterfly wing in a distant land may be all the difference between riches and starvation. Now for me and for others with egalitarian tendencies, this is beside the point. It doesn't matter to us whether people's poverty is a result of their own failings or not. But I am addressing Libertarians here. And so I am trying to highlight that fact that in efficient markets, failure will be extremely disproportionate to failings.
Quite simply, I don't want to live in a society in which the differences in standards of living are so great. I don't feel it's fair. I am hoping that with what I've argued above, Libertarians will agree that it could be a great unfairness. Now some people might try to argue that huge income differences are a problem beyond the notion of fairness. That is, some might argue that we need to keep these in check to forestall massive violence. Maybe that's true, but for me I like to think that it is really a sense of the fairness of the society I wish to live in.
And so on fairness grounds alone, I believe that there we should have some compulsory redistribution from rich to poor. I agree that this is a net cost to the economy, that it creates a governmental entity handling a lot of money, and so is vulnerable to political manipulation, misuse, and corruption, and that it distorts incentives. I do not treat such spending as an "investment". It is an over all cost. But it is a cost we have to pay to reduce some of the unfairness and to help other members of our society.
This leaves open the question of how much cost we should bear in order to gain what kinds of reductions in income inequality. Consider two extremes, one is that we accept only a miniscule cost and achieve almost no reduction in inequality. The other extreme is that we take on crippling economic costs to nearly eradicate inequality. Obviously, for most of us, choice will be far from either extreme. We recognize that we have to make a meaningful difference, but we'll only impoverish everybody if we stifle the economy. The amount of that redistribution should be a question for national debate. We shouldn't pretend that it is an investment that will somehow pay itself back; we should recognize it as a cost and a drain. But we shouldn't pretend that the results of efficient markets on people's standards of living reflects a healthy society either. Probably no two people will agree on the exact amount and the exact nature of this compulsory redistribution, but that is what the democratic process is for.
A central thesis of classic and neo-liberal thinking is that individuals are in the best position to make choices that affect them. And even if they sometimes make poor choices, that is better then the dangers of establishing some elite which should restrict their choices. And I agree with this. Although I conceitedly think that most people make lots of bad choices, the alternative of someone like me making those choices for them is abhorrent. As I said at the start, I have many libertarian sympathies.
Sometimes, however, there are systematic, demonstrable tendencies for people to make systematically bad choices that effect everyone's future and can reasonably be corrected for. One example is savings. People simply do not save enough when given the free choice of how to divide up their earnings for spending and savings. In the US we have a highly flawed system of compulsory savings (the social security system). Even though I may wish for the system's complete overhaul or replacement, the compulsory savings aspect of it must remain.
Another example is the tendency for people to buy snake oil. That is, people will spend time and money on health remedies that have no proven effect. And so we have laws that require that anything sold as a medicine, not only be demonstrated to be safe, but also also demonstrated to be effective. These laws do constrain trade. We, as a society, deny the would be buyer and seller of the opportunity to engage in their transaction, a transaction which both would prefer to engage in. There is a great deal wrong with the FDA, but I fully support its mission of ensuring that those things sold as medicines have been demonstrated to be safe and effective.
Just because I've come up with two examples where it appears that government knows best, does not mean that I'm saying that we can abandon the principle of letting people make their own choices. It just means that there are cases where the evidence for people systematically making poor choices is so overwhelming and a governmental remedy is available that restrictions on free exchange should be seriously considered. It is never a decision to be taken lightly, and should be reserved for clear cases.
So where do we draw the line? Once we accept that in some cases government knows best doesn't that open the flood gates to patronizing and harmful levels of regulation? If we leave it up to the government to decide whether it clearly knows best, won't that lead to an ever expanding set of regulations? These are real concerns that mustn't be ignored. But neither should these concerns prevent us recognizing and acting in those cases where such regulation is needed.
We can't draw a clear and principled line between where intervention is justified and where we should just let people make their own mistakes. But we can't draw a clear and principled line between the colors green and blue, yet still we can talk about things that are blue and things that are green. Just because a boundary can't be well defined, doesn't mean that we should ignore the clear cases.
There is a concern that once in principle we acknowledge that sometimes government knows best and is justified in intervening, that government won't stop there. But the response shouldn't be an absolute rejection of this sort of government intervention, but an attempt to remain vigilant. Over the past three decades, we've seen a great deal of deregulation. That proves that some times governments can choose to surrender regulatory power and pass choice back to the people. By remaining we can counter the tendencies of government to constrain individual choice, while still enabling constraints on trade where needed.
What make markets work their miracles (and for anyone who doubts that they do, you just need to recognize that the increase in the standards of living over the past couple of centuries is the result of free-market capitalism), is that what is good for two people willingly engaging in some transaction to the advantage of both of them is also a net gain to society as a whole. In other words, greed really is good. Libertarians (and neo-liberals) note is that the more we leave individuals free to engage in the transactions they wish to, the better for everyone. Everyone, including Libertarians, recognize a class of exceptions to this. The disagreement only about the prevalence, cause, and seriousness of the exceptions. Libertarians argue that the cause of many of the exceptions are the result of property rights not being clearly defined where they could be. The disagreement, again, is how often that is the case.
The most common example people give is national defense. Individual households are not in a position purchase (or not) defense individually. An army that defends my neighbors also defends me. There is a thriving market for home security and monitoring services, but that system would never work in terms of national defense. We want the defense to happen long before a bad guy steps on to our own private property. So for this and other public goods we have a compulsory payment system. Under normal circumstances that compulsory payment system is taxation, though it seems to have been largely replaced by public borrowing. But that is a matter for some other rant.
Closely related to public goods, are what economists call externalities. This is where some third party (usually the public at large) pays a cost for the transactions of others. Pollution is the classic example. If Alice buys a product from Bob, but Bob pollutes the common environment, then neither Alice nor Bob pays the full cost of the transaction, but there are costs to the public as a whole. Again, in these cases, actions of government are to either limit the activities or tax it. Libertarians have a point when they say that externalities are typically the result of ill-defined property rights. Who owns the air that may be polluted? But, as with the air, there simply are cases where it would be outrageously impractical to establish such rights.
Libertarians do not deny the existence of public goods and externalities, they just feel that most can be fixed by clearing up property rights, and the ones that end up requiring taxation or regulation are few and far between. Where I differ from Libertarians, is that I see these as not-uncommon.
Like so many policy debates, particularly in America, this can be seen as a debate between conflicting principles. For the Libertarian the coercion of government must be brought to an absolute minimum, with its primary job is to enforce property rights. Everyone will agree that it is all a matter of balance. What is the proper balance between collective good and individual economic liberty?
The problem with seeking a proper balance is that one might not exist. It may be that the minimal curtailment of individual liberty to maintain the smallest acceptable level of the common good is already too much curtailment. Compulsory savings is a massive intrusion into what people can do with their money. But it also appears to be necessary. There simply is no perfect balance. It's not that we are seeking a fine line between too much and too little regulation; that fine line may not exist at all. Often the best choice we can make is a bad choice, with perfectly predictable negative consequences.
But what makes finding the least bad balance almost impossible is when people adhere to one principle, believing it solves all, and claiming that that one principle trumps any conflicting one. The abortion debate in the US is the clearest example of that. Each side in the debate have valid principles which conflict. But each argues in absolutes. Their principle negates the other and are uncompromisible. But additionally, Libertarianism is not merely an uncompromisible principle, but it is an ideology. Its followers believe that a very broad range of problems can be analyzed and solved using their systems. To the followers of ideologies any putative solution which does not strictly adhere to the ideology is necessarily inferior. They have a formula for solving the world's problems, and if only enough people would listen we could move toward that Utopia. I, on the other hand, just don't think that the problems and solutions are that simple.
Libertarians are people who have come to understand the power and beauty of free-markets to make people's lives better. I do believe that the world would be a better place if more people understood that. But libertarians have taken that understanding down the road to ideology. They have lost sight of the fact that things are just messier, and that concerns which sometimes conflict with their principles may sometimes be valid too.
Version: $Revision: 1.4 $
Last Modified: $Date: 2005/08/02 20:46:20 $
First Established: 2005/07/28