Posts Tagged Governments and Markets

The Fantasy of a Pure Market

The government/market dichotomy is pervasive in contemporary political and economic debate. Many decry proposed ‘interventions’ into capitalism on the grounds that they are costly, politically motivated interferences that are vulnerable to capture by special interests. They assert that the ‘free market system’ should be allowed to operate free from outside interference: redistribution, regulation or public provision.

At the heart of this view lies some sort of neutral laissez-faire state, beyond which any ‘intervention’ is deemed unnatural. The ideal minarchist libertarian state would enforce property rights and contracts, and prevent force, fraud and theft. People could own what they acquired through ‘voluntary’ exchange; they would be free to do what they wanted with their property. I find libertarians rarely explore their preferred institutions much deeper than this, and build many of their arguments on the distinction between ‘markets’ and ‘government.’ However, on close inspection, the boundary between the two becomes blurred.

Complications with the Libertarian ideal #1

The nature of property rights is not at all obvious. Generally, a property right is thought to be a relation between a  person and an object, one that is respected by other persons in society. Owning something means that one is free to do what one wants with the thing: trade it, destroy it, display it, consume it or give it away. It also means that nobody else can do the same without your consent. But such a simple relation cannot be uniformly applied to everything that might be considered ‘property.’ The nature of the object or concept in question changes how the property right is defined.

Property cannot be autonomous, because doing ‘what you want’ with something that is autonomous is deemed abusive. Ownership of children or other people is therefore deemed problematic. Even in the cases where libertarians approve of ownership of, and trade in children or slaves (yes, they do), they would surely limit what could be done with, or to, said persons while they were owned. Similar boundaries concerning ownership can be observed with animals. Here the ownership is not problematic in and of itself, but it is still not the case that one can do whatever one wants with an animal, which could easily be abusive.

Another issue arises when the very nature of something is that it is person specific and so cannot be given away or traded. Court cases, votes, identities and credit histories are not appropriate candidates for trade, because that contradicts their definition. If court cases could be traded, this would quickly undermine the legal system. A less extreme case is when something, though tradable and ownable, is deemed too important to be at the whims of the owner. Even those who approve of a market in organs would surely not approve of a rich man buying them all and putting them into a blast furnace.

Property is a human construct, and the fact is that many aspects of nature do not respect clearly defined property boundaries: seeds, air and water all flow freely across them. Hence, problems can arise from dumping waste into a river or emitting it into the air; or from seeds from certain plants being transferred across land boundaries; or from sound and light pollution. The ‘invasion’ of property with more clearly defined boundaries by things that do not respect them will inevitably result in legal conflicts. How these cases are resolved will help shape subsequent laws that develop.

Property is also subject to changes as technology and politics evolve. A relatively recent development is environmentally motivated property rights, used in an attempt to prevent pollution. Relevant decisions such as how many carbon/fishing permits are handed out, and how much they are sold for, impact the workings of the economy. Newer still is intellectual property. Consider the case of digital photographs – if one uploads a photo to the internet, has one released it for any use whatsoever? Do the limits depend more on the nature of the photo itself than whether one has supposedly ‘voluntarily’ released it? Or what if someone else took the photo? There is no easy answer to such questions.

Complications with the Libertarian ideal #2

The other side to the libertarian ideal is the liberty of contract. Contracts are mutually agreed on actions or exchanges subject to certain conditions, or payments, from each side. Surely, libertarians ask, everyone should be free to negotiate the terms of their own contracts, and the state should only enforce such ‘voluntary’ decisions?

Such a presumption obviously precludes the mentally ill, or children (who are also precluded from purchasing certain items). Where the boundary for these is defined is an open question, in a constant state of flux as new mental illnesses are discovered, or as children become more educated, or as populations age and older people must be included in such considerations.

However, even for mentally competent people, the fact is that discussing a contract for every good or service one receives would be highly costly and quite possibly computationally impossible (i.e. it would take more time than there is). So norms develop. You don’t sign a contract every time you go into a restaurant: you know the deal, and so do the workers and owners. Shops are expected to provide receipts so that people can keep track of their transactions. Many jobs – particularly low paid and or short term ones – do not involve contracts at all. These are implied contracts, and figuring out what exactly has been consented to – what it is reasonable to infer from observed behaviour – is incredibly tricky.

Even when one does sign a contract, it is impossible to foresee every eventuality that might occur, particularly with long term contracts. So contracts are almost always, necessarily, incomplete. Employment is the best example of this. If your boss asks you to get them a pen, do you retort ‘that wasn’t in the contract?’ Of course not: it’s simply a reasonable request given social norms, the nature of the job and so forth. On the contrary, if your boss asked you to strip, that would not be deemed reasonable in a court of law, despite it not necessarily being in the contract that such behaviour was not permitted (or even, perhaps, if it was in the contract but was not clearly stated or expected given the nature of the job).

Even beyond the nuances of property and contract law, there are additional laws such as immigration restrictions, limited liability, laws that define companies and protect shareholder’s interests, all of which many consider a fundamental part of capitalism. Furthermore, accepting the logic behind, say, limited liability, forces one to conclude that protecting people from their risks can be good for an economy, and similar arguments can be extended to consumer protection, get out clauses in contracts, and even safety nets. Decrying all such interventions is a pretty hard position to defend.

I could give endless examples. The fact is that defining property, contracts and the supposed ‘core’ of capitalism is neither straightforward nor simple, and inevitably involves value judgments and arbitrary decisions with winners and losers. The nature of capitalist – or any system’s – institutions depend on culture, demographics, income distribution (who can afford the best lawyers), the historical context upon which past laws were formed, and much more. And such decisions will inevitably have winners and losers and therefore will affect present and future patterns of production, distribution and exchange.

Whither Free Markets?

These complications put the idea that there is such a thing as a ‘free market’ in its place (there isn’t). However, there is a partial response I have seen: how ‘free’ a market is can be judged in a relative sense. A market that is more or less regulated can be judged as further from or closer to the idea, even if said ideal is unattainable or impractical. But whether or not something is within the minarchist ideal of property & contract law does not tell us how big an impact it has on an economy. For example, something as widespread as ownership of land, or decisions regarding employment contracts, would have enormous impacts on the economy. Decisions surrounding property and contract law are as significant as any other, perhaps more so. The relative ‘freedom’ of a market cannot be judged in such simplistic terms.

There is also the question of whether market freedom is defined by the amount of rules that are in place. Sports generally have rules, many sensible, some arbitrary, some confusing to many. But does it automatically follow that sports players are not as ‘free’ to play the game as they would be in absence of the laws? Laws such as limited liability mean an entrepreneur is more ‘free’ to start a business. The 1980s changes in anti-trust law made it less about sustaining competition and more about ‘consumer welfare,’ which gave rise to greater concentrations of market power and control over key variables such as price by corporations (prices are, in fact, not magic but often set by administrators). Are these markets more ‘free’ than ones characterised by a greater degree of choice and competition?

As a side note, I am aware of the existence of anarcho-capitalists, who advocate no laws whatsoever. In this case I’m not really sure what they’d classify somebody who owned land, and had absolute rights over that land, other than some form of government. The only response I’ve seen to this is the ridiculously naive argument that people/corporations would only use ‘reasonable’ measures to remove people from their property. In other words: everybody would obey some sort of libertarian ideal, despite it not being enforced.

I won’t draw any normative prescriptions from this framework here, but suffice to say I feel it takes the rug out from underneath a lot of libertarian arguments against ‘intervention.’  There is no neutral baseline against which we can judge said ‘interventions,’ and none are immune from value judgments, arbitrary decisions and difficult questions in a legal system with limited resources. None of this is to say that the specific cases I’ve identified aren’t up for debate, but that’s the point: libertarianism is in many ways an attempt to escape political questions and leave everything up to the market. But as I have shown, every law or social institution raises difficult questions that can only be resolved through political debate, through court cases and are dependent on various conditions that vary across time and space. The question becomes less about whether ‘market outcomes’ are inherently just, and more about debating just outcomes without being plagued by the arbitrary concept of ‘the market.’

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A Couple of Criticisms of Libertarianism

I have a couple of thoughts on libertarianism that I can’t manage to squeeze a whole post out of. So, well, here they are.

Institutionalised law breaking

A major problem I have with the (minarchist) libertarian approach to law enforcement is that it fails to take repeated and systemic violation of laws into account. Libertarians, generally speaking, think that the state should prevent ‘force, theft and fraud‘, but they don’t seem to think this through: these three things are incredibly pervasive and do not only occur as isolated incidents that can be prosecuted on a case-by-case basis. When discussing problems with capitalism, libertarians seem to presuppose a virtually infallible police state where all the problems with regulatory capture melt away and any violations of these three are ‘outside’ the libertarian ideal.

The libertarian blind spot on this point can be seen in Milton Friedman’s view on corporations. Corporations have no social responsibility, except to maximise profit whilst ‘playing by the rules.’  But Friedman failed to realise that, like the regulations he disapproved of, corporations are happy to work around whichever ‘rules of the game’ happen to be in place. Moral considerations tend to melt away under competitive conditions, when things become ‘just business.’ Corporations have long history of forcefraud and theft, and as abstract entities these things simply don’t factor into their considerations. In a system based on private accumulation, they will use their profits to corrupt the legal system, hijack public funds, get the best lawyers, and make their operations as opaque as possible to avoid prosecution, no matter the charge. None of this is a bug of capitalism; it is a feature.

Fraud in particular is an incredibly common phenomenon, and characteristic of any market system – even grocery stores regularly mislabel products to trick consumers into buying more than they otherwise would. At a higher level, there are occurrences like the LIBOR scandal and general fraud surrounding the crisis. Furthermore, the Leveson Inquiry has revealed quite how many resources society has to pour into uncovering past wrongdoing by corporations. It is far more sensible to advocate various transparency standards and requirements that prevent these things from happening in the first place.

The consequence of this is that many regulatory agencies are actually compatible with libertarian aims for what is needed for a functioning market economy. Libertarian counters about regulatory capture simply beg questions about capitalism itself, questions which they surely don’t want to get into.

Governments versus markets, yet again

All too often, I see libertarians respond to a purported problem with markets by saying ‘well government has that problem, too.’ But this is a superficial treatment that can be used as a cookie cutter for any issue, without actually exploring it.

Sometimes we might identify a problem and ask how the government can alleviate it – e.g. information asymmetry can be partially dealt with by various transparency standards. However, more often the correct debate is not ‘x is a problem, what can government do about x’, but ‘x is a problem that causes y - what can government do about y?’

For example, The Radical Subjectivist asks what governments can do to eliminate uncertainty. The answer is: not a lot! Of course they can’t alter the fundamental fact that the future is unknowable. But this doesn’t really get us anywhere; what we really need to ask is what uncertainty leads to. And according to Keynes’ theories, it leads to a rate of interest that is too high to precipitate full employment; it also leads to the use of rules of thumb and waves of optimism and pessimism in financial markets. So policymakers should act to lower the rate of interest, and also stop trade when financial markets become too heated. Notice that at this point the issue we were originally discussing - uncertainty – has become largely irrelevant.

This can be seen particularly with libertarian economist’s reaction to behavioural economics. They respond by saying policymakers have the biases too (and the even more pathetic response that the people who study the biases also have them). But any real treatment of a particular bias will reveal that they create systemic problems that can be identified and remedied through alternative means – for example, Type 1 and Type 2 thinking apply to all people, but somebody who is using Type 1 thinking can easily be exploited by somebody using Type 2 thinking. This is a big problem when signing contracts and requires that people are protected when doing so. The same person who writes the law (and writes the book about the bias) will have the bias. But this doesn’t impede their ability to deal with it on a systemic level.

Of course, it is entirely possible that government cannot do anything about problem ‘y’, or that it would be too expensive, intrusive or what have you. It’s also true that policymakers themselves will suffer from certain biases that will affect their decisions making. But libertarians cannot dismiss every purported problem with markets by suggesting that it also applies to government – this does not engage the specific issue at all, but is a superficial attempt to escape important challenges to their reasoning.

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The Neverending Battle Against the Dichotomies of Libertarianism

Entering debates with libertarians has become somewhat tiring, as I seem to have to start every debate by explaining why they approach issues from an inherently biased perspective, using loaded terms and framing the debate in what I regard as a completely incoherent manner.

Many of these problems amount to false dichotomies: governments versus markets; positive versus negative liberty; distinctions between actions done under credible threat of coercion and those done ‘voluntarily’. Generally, the problem is that libertarians ignore certain institutions that they deem natural or desirable, and build their dichotomies under the implicit assumption that anything they perceive to be an ‘intervention’ is the opposing side of the argument.

While there may be some merit in retaining these dichotomies for formalistic discussion and analysis, they do not work well as a functionalistic approximation of what ordinary individuals experience day to day – which, after all, is what libertarianism is predicated upon.

For example, take positive versus negative liberty, where positive liberty is defined as having the resources to fulfil your desires, and negative liberty is defined as being restrained from doing this by another moral agent. For libertarians, the second is often the most – or only – important consideration here.

The distinction between positive and negative liberty is, functionally speaking, false. Why? Consider two people: a rich man who wants to buy a plane, but can’t because taxes have just been increased, and a penniless man who wants to buy an apple, but can’t afford it. For libertarians, the rich is the one who is constrained by the law and ‘coercion’. But reconsider the poor man – what is stopping him from getting an apple from a shop without any money? If he goes into the shop and tries to take the apple, he will, ultimately, be arrested. He is constrained by the law, the same as the rich man.

It could be said that property and contracts work in a similar way to taxes and laws. Property uses the law to constrain people’s access to certain resources; tax does the same. Contracts use the law to make people perform certain actions and restrain them from others; the law does the same. Of course, libertarians would respond that restraints according to property are the result of voluntary transactions, and that contracts are also entered voluntarily, so the various constraints and obligations are more justified.

Firstly, even assuming no injustice, property distribution results from a large amount of individual and collective decisions. While it might be said that those involved in the decisions have consented to the new distribution, it doesn’t follow that those who had no say in them – most notably the unborn – have consented. Most still face legal constraints on their access to resources that they had no part in creating, and many suffer as a consequence.

Secondly, if the alternative to entering a contract is starvation, the contract cannot truly be said to be ‘voluntarily’. Even if we assume full employment, it will never be favourable to an employer – due to competition for efficiency – not to maintain some discipline at their workplace. The fact is that – as it logically impossible for everyone to be a capitalist – a large amount of the population rely on working under hierarchical conditions to survive.

I should note that I’m not implying taxes and laws are exactly the same as contracts and property, only that their enforcement is functionally similar. Introspectively, it would be pretty unreasonable to argue that people’s lives don’t involve having their access to certain resources restrained, and also being forced to perform certain actions that they’d probably rather not, generally in exchange for various benefits. It would also be unreasonable to say that these constraints and compulsions only originate from taxes and (regulatory) laws, rather than private contracts and property.

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Libertarians and Homogeneous Government

Something that often strikes me about libertarians is that they seem to see the government as a single, homogeneous mass that must be combated in its entirety. The percentage of GDP spent by the government is often cited as an indicator of how ‘big’ government has gotten, and it is thought that combating this will help reduce the evils of government in general.

However, ‘the government’ is not a unified entity; it’s a web of different and sometimes conflicting interests that are fragmented across space and time. There is no reason to think that stymieing some of its activities will have an impact on the others – for example, most libertarians object to the military industrial complex and the war on drugs, but then view social security or public healthcare as part of the same beast, and think that it is contradictory for leftists to object to the former and want to expand the latter. Quite clearly, however, the latter has very little impact on the former – you are dealing with completely different sets of interests, departments, locations and laws.

This can also be seen in the libertarian view of government as something that comes along and ‘corrupts‘ capitalism; the expansion of welfare and education is seen as part of this. But this makes no sense – the corrupt forces that give us patent law, bailouts and other corporate welfare are completely different to the democratic forces that give us health and education. In neither case does  an entity called ‘the government’ come along and act in its own interests; in both cases groups of people utilise the tool of legislation for their own gain. The difference is that in one case this gain goes to a significant number of people whereas in the other it goes to a few. But it is fallacious to equate both just because of the presence of the state.

I have said before that class is a far superior tool for analysis than the somewhat incoherent ‘government’ and ‘market’ that debate has been boxed into. Seeing ‘governments’ as the same across space and time and as homogeneous entities – ones that can be combated by a single metric like the percentage of the economy for which they are responsible – allows very little room for meaningful analysis. This is because the activities of governments are a reflection of the societies they represent, rather than an outside interference dictated by a uniform entity. To paraphrase Scott Sumner, ‘never reason from an action of the state’ – that law or program has been demanded by a group of interests, or the need for it has been brought to light by certain events. In order to understand the activities of government, you have to place them in political context.

Ultimately, the ‘state’ doesn’t actually exist – it’s a web of different classes and individuals using the tool of legislation to advance their own interests, either through representatives or more directly through lobbying and political movements. Libertarians appear to think that cutting back any of this spending has an impact on all of it, but what we actually need to do is ensure that the interests of relatively few people do not have a disproportionate impact on the state’s activities – unfortunately, this is not currently the case.

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