Posts Tagged Free markets and their discontents
I have a new article in Pieria, arguing that the image of mainstream economists as rabid free-marketeers is not entirely without foundation:
There is quite a disconnect between mainstream economics as seen in the public eye and as seen by economists themselves. A lot of media criticism of economics – and the Guardianseems to be going mad on this recently – paints mainstream economic theory as supporting a ‘free market’ or ‘neoliberal’ worldview, possibly in cahoots with the elites, and largely unconcerned with human welfare. Economists tend to switch off in the face of such criticisms, arguing that the majority of them, along with their theories, do not support such policies…
…Yet I think there is a good argument to be made, not that mainstream economics necessarily implies particular policies, but that it is easily utilised to push a certain worldview, based on which questions it asks and how the answers are modeled and presented. This worldview is what the public and journalists all too frequently encounter as ‘economics’, which is why they often conflate neoclassical with neoliberal ideas.
An interesting question – which I do not explore in the article, but have written about before, as has Peter Dorman – is the disparity between ‘econ101’ rhetoric and what economics actually implies. ‘Economics’ in the public image is generally used to justify counterintuitive or unpalatable ideas like the minimum wage and austerity, even though arguing unambiguously for them – particularly the latter – is a position that is actually quite ignorant of ‘economics’ as a field.
Do I blame economists for this? Partly: I think economists should be more worried about their public image, whereas you often get the impression they are more concerned with being enlightened technocrats than anything else. However, politicisation isn’t unique to economics (consider climate change denial or evolution/religion), so it’s a bit unfair to single out economists in that sense. Having said that, 99% of scientists in the former fields are united against the pseudo-scientific caricatures of them in the media, whereas economists are far less able to convey a clear message to the public. In short, perhaps economists should figure things out amongst themselves before they rattle off lists of policy proposals based on their models.
Anyway, enjoy the piece!
Now, I suppose, is as appropriate a time as any to discuss the policies generally known as neoliberalism/free market economics: tax and spending cuts, union busting, deregulation, privatisation and free trade, and how they have fared in practice. Unsurprisingly, those on the right defend neoliberalism’s record. However, successes have been over exaggerated, while in cases of clear success, a closer look reveals policies which are anything but ‘neoliberal’. I’ll take a brief look at some countries or sets of countries which are commonly purported to show the success of these policies: the US & UK, Chile, Hong Kong & Singapore, and Scandinavia. I believe that in none of these instances do we get a clear example of neoliberal policies succeeding economically.
The US and UK had similar narratives during their transition to neoliberal policies. After a period of stagflation, a ‘strong’ politician (Ronald Reagan and Margaret Thatcher, respectively) rose who was willing to enact drastic reforms. The narrative here can be exaggerated – pro market reforms (eg deregulation under Carter) and economy-wide trends (the decline of manufacturing) preceded these two governments. Nevetherless, utilities were privatised, unions were weakened, direct taxes (mostly top tax rates and corporation taxes) were slashed, and various regulations were either cut down or replaced with a more ‘neoliberal’ model. Obviously some ‘free market’ purists will always claim it was not enough, but it was a substantial move in the neoliberal direction, and as such we should have seen clear benefits.
Economic growth under these two governments was decidedly average. If we measure from peak to peak in the business cycle to average out fluctuations, per capita growth under Thatcher comes out at 2.44% (1978-88), while Reagan comes out at 2.3% (1979-90). If we just measure the years they were in office, the respective figures are 2.05% and 2.77%. Whichever way you paint it, growth was not far from its 2.5% trend.
In fact, in both countries the ups and downs of the economy surely had more to do with monetary policy than anything else. Interest rates went as high as 17% in the UK and 19% in the US; around 1983 they had more than halved, dropping down to about 8%; following this GDP started to recover. Insofar as policy goes, the conventional story that neoliberal policies rescued their respective countries is a half truth at best. Thatcher benefited from an oil boom which helped her to fund her various preferred programs (including the Falklands War, which helped buy off discontent). Reagan’s policy of cutting taxes but increasing military spending during a recession was effectively Keynesianism. Ultimately, there is little evidence that the headline reforms were responsible for the overall performance of the economy in either country.
Singapore & Hong Kong
These two countries have certainly had impressive peformances over the past few decades, overtaking most developed countries for GDP per capita. For this reason, they are often touted as free market success stories. This is misleading in a couple of ways.
The narrative about the success of any policy in Singapore and Hong Kong is complicated by the fact that they have some obvious advantages over everywhere else, no matter their policies (within reason). First, they are port cities, which means that unless there are serious political problems, they will be a conduit for a large degree of trade no matter their economic policies. Second, they are city states, which reduces administrative and transaction costs, both in the public and private sectors. Third, Hong Kong does not have to fund a military due to protection from China, which helps to explain its low tax rates.
In any case, the two countries are anything but a paragon of the ‘free market’ in action. In Hong Kong, the government owns all of the land. In Singapore, the government owns about 60% of the land, heavily regulating its usage, while government-linked corporations produce up to 60% of GDP. Both countries have public health care, transportation and education, public housing programs and safety nets, and Singapore owns public utilities while Hong Kong regulates them tightly.
Clearly, whatever the success of these countries is caused by, it is not simply ‘free markets’.
The story painted usually painted about Chile is that it went from a poor country to one of the richest in Latin America after ‘free market’ reforms were put in place by the dictator Augusto Pinochet following the 1973 coup d’etat. What actually happened (from a policy perspective) was much more of a mixed bag, combining both neoliberal programs with long-standing state directed ones.
Key industries remained either directly in the hands of the state (such as copper and oil) or in receipt of subsidies, advice and management, and training through the government organisation CORFO (such as forestry and fishing). These state-directed industries experienced massive growth and fueled an export boom, which drove the economy for decades to come. It is true that some industries, such as banking, were privatised and deregulated, but this was far from a success: it produced a financial bubble, which collapsed in 1982, reducing GDP by 14%, back down to where it was in 1970. Only 5 out of the 19 banks that had been privatised remained, (reluctantly) bailed out by the government, which also had to reinstate capital controls and other interventions. Furthermore, once democracy was reinstated in the 1990s, governments moved leftwards and embarked in significant, successful poverty reduction programs.
This is clearly at odds with the idea of Chile as a free market success story. In fact, I’d go so far as to say that in the case of Chile, success was clearly concentrated in areas with obvious state intervention, while failures were concentrated in those without.
Scandinavian countries are a synonym for economic success, faring well in GDP per capita, but even better in overall standard of living indexes. So it is no surprises that both sides of the debate claim them as their own. The claim is more perplexing when coming from the right, however, since it requires them to effectively claim that countries which are clearly social democracies are not social democracies. It is generally asserted that beneath the high tax rates, these countries are ‘economically free’, which roughly translates as lightly regulated. So are they?
Disregarding such nonsensical indexes as Heritage and heading for the more credible OECD, we can see that Scandinavian countries have average to low strength regulatory frameworks by the standards of developed countries:
In case you were wondering, there is no clear correlation between this index and GDP growth.
While, with the exception of Sweden, the Scandinavian countries have below average regulation indexes, if this were causing their success then surely the US, UK and Spain would be doing well, too? Perhaps low regulation must be combined with a strong safety net and public services to work. More likely, the Scandinavian countries are unique and have specific institutions that cannot necessarily be emulated elsewhere, something I’ve argued before.
In fact, that last point is true of every country. The path to development and sustained growth is different for every country, and the recipe for growth cannot be captured in vague platitudes about a ‘free market’, completely devoid of context. I expect that there exist countries where neoliberal reforms are appropriate, but these are far outweighed by one where they are not. The people best suited to decide which reforms are appropriate are those who live in and understand the country, not outsiders with a one size fits all model that they see as a neutral template. This was clear even in Chile, where the national military were reluctant to abandon the state-driven model on which they had always relied.
I expect those who support neoliberalism might look at this article and conclude that countries would do even better if only those last pesky statist policies were removed. But this is a superficial perspective. Why were the state-supported industries much more successful than the privatised ones in Chile? Why do Scandinavian countries do well with high tax rates and big welfare states, when many countries with similar strength regulatory frameworks and smaller welfare states do much worse? Why does every purported ‘free market’ success story collapse under close inspection, and why are there no clear real world examples of the ideal being implemented and working? Until I can see such a case I will remain unconvinced of the virtues of the elusive free market.
This is a compilation of my objections to the main arguments of right-libertarians (or propertarians) done as an FAQ (based on the fact that my FAQ for economists was pretty popular). I hope here to persuade libertarians that things are more complicated than their framework, neat as it is, implies. Whether it will succeed is another question.
Writing these arguments revealed an interesting recurrence: once the libertarian framework is picked apart, the debate collapses back to where it’s always been. The various binary distinctions libertarians make (voluntary/coercive, government/market, positive/negative liberty) fall apart upon critical inspection, and we then have to take things on a case by case basis in the fuzzy world of morality, trade offs and so forth. It strikes me that the libertarian framework tries to provide easy answers, to side step this debate.
What do you have against liberty? Why do you statists always try to rationalise ways to control our lives?
Slow down! If everyone who criticises you is automatically the bad guy, that doesn’t leave much room for productive debate, does it? For what it’s worth, I’d characterise libertarians as those who are so skeptical of the state that they think it should only protect the most powerful, but that’s no reason to dismiss them as the bad guys before we’ve even started. But more on that later – for now, just try not to assume I am Stalin reincarnated.
But libertarianism is about liberty. What justification do you have for infringing on liberty?
Again, this attitude leaves open the actual question of whether libertarianism really does improve individual liberty. Libertarians generally distinguish between positive and negative liberty, where positive liberty is the freedom to command resources to realise certain ends, while negative freedom is the extent to which one is (or isn’t) constrained by other moral actors. Since a low degree of positive freedom is, unfortunately, imposed by nature, the only things humans as moral actors can do is ensure we don’t restrict people’s negative liberty.
However, this distinction is functionally meaningless. A starving man at a shop cannot take food because he will be arrested or at least kicked out – he is constrained by another moral actor. The libertarian might reply that property rights helped create that resource, so the starving man is no worse off than he would have been without property rights. The my first response to this is “so what?” It doesn’t change the functional relationship between the starving man and the food, and begs the question of whether we can harness the resource-creating power of property rights to create more just outcomes. Or just let the guy have some food through redistribution.
Taxes are theft! Why do you think you can steal from people?
First, it would be easy to turn the question of wealth creation raised in the last section around on libertarians and ask exactly how the government can be said to ‘steal’ resources that its own actions created. A large amount of innovation has its roots in government research and development, and many of the institution upon which capitalism is built are state-backed. These are the facts; going into unverifiable counterfactuals about how things would be better with ‘less’ government is just speculation. The moral question of whether government should ‘intervene’ is undermined by the fact that it already has.
Even more importantly, the pretax income distribution cannot necessarily be thought of as some amoral ‘baseline’ into which the government ‘intervenes’. The enforcement of property rights, contracts and the prevention of force, fraud and theft does not avoid significant political decisions. For example, implied contracts are an incredibly tricky area of law; so are intellectual and environmental property rights, where the nature of the property itself raises difficult questions. Ownership of some things (votes, people, identities) is generally prohibited, as are certain contracts (slavery, murder-suicide pacts, anything entered into by children/the mentally ill). Political decisions about these issues, and many more like them, will involve value judgments, historical path dependence, and sometimes be somewhat arbitrary. And this will all influence patterns of production, distribution and exchange. There is no neutral ‘baseline’ distribution, and there is no way of keeping politics out of distribution. A similar argument can be made about individual choice.
But if distribution results from voluntary actions, then what is the problem?
There are a few major problems I have with the ‘voluntarist’ perspective:
First, saying that existing actions are ‘voluntary’ takes the existing social structure as a given. I was born in the UK, and I ‘voluntarily’ opted to go to university; if I had been born in certain areas of China, a libertarian would argue that I ‘voluntarily’ consented to working in a sweatshop. But obviously my actions are dependent on the circumstances in which I found myself, and an argument to change those circumstances is independent of whether people’s actions are deemed ‘voluntary’ in any given situation. (This is short of banning things, physically restraining people and so forth).
Second, there is the binary distinction between ‘voluntary’ and ‘coerced’ action, which leads to a lot of problems. Using it, I could argue that nobody in the developed world is really ‘forced’ to obey the law, because they could move country. Obviously it would be silly to say this: one can’t expect people to uproot themselves from their family, friends, location and career, so functionally people do not have much choice about obeying laws. Another example of the limitations of the libertarian line of argument is that one could use it to frame the decision not to obey the law as a ‘voluntary trade off’ between, say, prison and the alternative.
A better way to think of the distinction between voluntary and involuntary action is as a spectrum. We might consider the degree to which someone’s action is voluntary as how much it is influenced by factors outside the persons/objects involved in the immediate decision. Under such criteria, few actions can be considered truly ‘voluntary’; there are always outside influences on decisions, however small or large. At the less significant end of the spectrum we might have travel costs; we might then go through peer pressure, then, for workers, the threat of poverty. We would end up at something like the threat of being killed or tortured. The extent to which actions are voluntary must be considered on a case by case basis; we cannot just make a binary distinction and apply one size fits all based policies on this basis.
The third voluntarist argument I take issue with is the Nozickean justice principle most libertarians implicitly or explicitly respect. It is based on the idea that if voluntary actions led to a situation, that situation must be just. This problem is perhaps best illustrated within one of Robert Nozick’s own thought experiments: the Wilt Chamberlain example (as it goes, this is also a situation where one could accurately describe the agent’s behaviour as purely voluntary). Nozick suggests that if everybody at a basketball game volunteered to pay Wilt Chamberlain a small amount of money, the end result would be a vastly unequal income distribution, but since everybody had donated ‘voluntarily,’ there would be no problem regarding the justness of the outcome.
But while it is true that everybody at the basketball volunteered to donate their own money, it is not true that they agreed to anyone else donating money, and it is certainly not true that they all agreed to everyone collectively donating a fortune. The principle is actually based on a subtle switch from individually voluntary choices to collectively voluntary ones, one which doesn’t hold up to scrutiny. The libertarian may reply that the choices of others are none of my/other’s/the state’s business. But if the inequality has pernicious effects (which is a separate issue) then it is very much everyone’s business. Since the voluntarist principle cannot be applied collectively, we are back to discussing the effects of inequality. This disparity between individual choices and collective outcomes is the reason we have voting, political movements and so forth to help.
Politics? Don’t you know any public choice theory? Democracy is a sham!
Well, modern democracy is probably a sham. But overall, public choice theory is simply refuted by the evidence, something that people do not note nearly often enough. Political scientists have known – and empirically confirmed – that voters and politicians mostly act in what they perceive to be the public interest, rather than for selfish gains. This isn’t to say that there is no truth to public choice theory, but evidence suggests it is more appropriate to model politicians and voters as public servants who are buffeted by special interest than as selfish maximisers who occasionally stumble upon a beneficial policy. The result is that democracy is far more effective a tool for translating collective interests into policy than libertarians might suggest.
But government action, democratic or not, rests on the initiation of force. When is that ever justified?
The special status libertarians accord to ‘force’ falls apart even on its own terms. For the fact is that most laws are not actually enforced by force, but by credible threat of force. These are, by definition, two different things. I know that if I try to go into a night club without permission, the bouncers will stop me or drag me out. This isn’t the same experience, and doesn’t have the same moral implications, as them actually dragging me out when I do run in. The relationship between the individual and the law can also be applied to laws libertarians approve of: to argue that credible threat of force is the same as force is to argue that people are constantly the object of coercion due to what they can and can’t do because of other’s property rights. Overall, the reduction of all laws to someone forcing you to do things at gunpoint is a stretch to say the least.
However, this is not the only problem with the focus on ‘force’. Even if we take the word ‘force’ at face value, it is irrelevant, because which laws we decide to use – where ‘force’ is justified – rest on theories of justice, and of who owns what and why. Taxation is only ‘initiating force’ if you believe you own your pretax income; if you don’t, it is evading tax that is an act of aggression. Hence the discussion collapses into theory of justice, distributive or otherwise.
Regardless of force, governments cannot know better than individuals/the market. So why should they intervene?
The framing of governments versus markets is largely a false dichotomy. I have already noted the inevitable political decisions that go with even what libertarians consider their baseline institutions. Beyond this, there are laws such as immigration, limited liability, laws that define shares and protect shareholders, laws that define companies, and so forth. These so-called ‘interventions’ do not require a government to ‘know better’ than any one individual; they were defined to have a systemic impact that cannot be enforced by any individual or group of individuals. Furthermore, the question of where we draw the line between ‘intervention’ and ‘the market’ is up for debate. Or it doesn’t really exist.
Even if the government backs the institutions required for markets, it sucks wealth out of the economy to do this. Hence, it should do as little as possible, right?
Saying ‘governments can’t create wealth’ is a sweeping, largely vacuous statement based on a superficial zero sum view of taxation as being ‘extracted’ from the private sector. In fact, taxation is just one prong of a symbiotic relationship that exists between the private and public sectors. If we take the definition of wealth as the creation of valuable resources, it’s clear that, say, teaching and infrastructure ‘create wealth.’ We’ve already seen just how large a source of wealth the government can be through its funding of research and development. Furthermore, many state-backed institutions are historically a prerequisite for substantial wealth creation to take place at all. Again, obscure, selectively interpreted examples like Medieval Iceland, or speculative counterfactuals about what things would be like without the government are ahistorical wishful thinking. Give me a clear example of capitalism as we know it coming out of nowhere and I’ll give you the time of day.
That reminds me – you seem to be primarily referencing minarchist libertarians. What about anarcho-capitalism?
Anarcho-capitalist, as far as I’m aware, have yet to answer exactly what a landowner is if not a de facto state. A state is defined over a particular territory, and (theoretically) has control over what happens in that territory. Ownership is also defined as having control over an object; in the case of land, this quite clearly leads to each land owner effectively being a sovereign state, however small. People do not have a ‘choice’ of whether they exist on land, and nobody created land, so there is no justification for those with ‘the biggest gun’ controlling it, while those without land are at their whims.
The extremely unsatisfactory response that, for some reason, everyone would respect the libertarian ideal and not engage in force, fraud and theft is really just wishful thinking. I can’t help but wonder what libertarians would say if a socialist made a similar argument about people suddenly becoming angels under socialism. Similarly, any response that centered on how landowners would be competitively inclined to do Good Things could equally be applied to states, so would be an exercise in special pleading.
OK, maybe you’re not Stalin. Do you have anything else worthwhile to say?
Probably not, but just in case, here are some more of my posts on libertarianism:
See here for more on the flawed positive/negative liberty distinction.
See here for a discussion of the problems with seeing ‘government’ as a homogeneous, all-encompassing entity.
See here for my criticism of libertarian’s perceptions of individual choice.
See here for a more detailed discussion of the faulty government/market dichotomy.
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.’
One of the features libertarianism (propertarianism) shares with neoclassical economics is that it tends to take the existing economic system as a given, and proceeds to analyse from there. The result is that much of what follows could be labelled as question begging: incidence of market failure do not merely beg the question ‘how can we fix this?’ but also ‘why are there so many of these?’ Questions over ‘human nature’ become questions of ‘how humans behave under capitalism.’ Neoclassicism’s failure to address any questions about capitalism as a whole is a major flaw, and libertarianism – sharing, as it does, many intellectual similarities with neoclassicism – carries over this flaw. The result is that libertarian analysis, even when cogent, fails to ask truly difficult questions.
Public Choice Theory
A major area where this is obvious is public choice theory. Libertarians will cry “don’t use government healthcare! It will simply benefit special interests!” Meanwhile, Marxists will scratch their heads and instead argue that the problem is not public healthcare in and of itself, but the fact that under capitalism, asymmetries of wealth create (and reinforce) asymmetries of power, and those with the most money are able to corrupt public programs for their own gain.
Ultimately the question is: who is the source of corruption, the corrupter or corrupted? While no one can deny that hatred for feckless politicians is surely deserved, blaming them strikes me as not really addressing the problem. Why do we see continual corruption, across countries and across time? The ultimate source of the vested interest is, of course, the vested interest! Remove the interest and the problem disappears. Remove the politician and another will take their place (most likely selected by, funded by, or in cahoots with the interest). Remove the state and the already wealthy/powerful interest can simply take care of the problem itself.
I have also commented that libertarian analysis in this area stops short of the revelation that the same arguments can be applied to all aspects of the legal system, including the corruption of ‘force, fraud and theft.’ Once you put capitalism into your frame of reference, the problem becomes why exactly these violations of liberty, rights or what have you would emerge on such a large scale under a particular economic system (it begins with p).
Libertarians – as well as other schools of thought – believe value is inherently subjective, perceived only in the eye of the beholder, and so forth. This is, in fact, what Marx thought of use-value:
A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference.
Of course subjective valuation is at the heart of consumption and other decisions. The difference is that Marx extended his analysis: he linked use-value to exchange-value and differentiated the two; he explored the relationship between use-value and the commodity; he defined the “social form” of wealth as separate to its use-value. Libertarians, on the other hand, being lazy, simply stopped at use-value, equated it to exchange-value, and built their entire theory around this single interpretation.
This is a big topic so I’m not going to claim to have explained both human nature and the history of capitalism in subsection of a post. What I will claim is that libertarians are almost certainly wrong.
The problem here is that they reason backwards from our current institutions and define all of history as either a diversion from, or tendency to, our current state. Humans were always greedy and selfish; it wasn’t until the various ‘unnatural’ barriers to trade were removed that this tendency was allowed to flourish. ‘Markets’ can be found throughout history, continually pushing at the barriers created around them; again, once they were unleashed, humanity developed. Here is Marx saying the same:
Economists have a singular method of procedure. There are only two kinds of institutions for them, artificial and natural. The institutions of feudalism are artificial institutions, those of the bourgeoisie are natural institutions. In this they resemble the theologians, who likewise establish two kinds of religion. Every religion which is not theirs is an invention of men, while their own is an emanation from God. When the economists say that present-day relations – the relations of bourgeois production – are natural, they imply that these are the relations in which wealth is created and productive forces developed in conformity with the laws of nature. These relations therefore are themselves natural laws independent of the influence of time. They are eternal laws which must always govern society. Thus, there has been history, but there is no longer any. There has been history, since there were the institutions of feudalism, and in these institutions of feudalism we find quite different relations of production from those of bourgeois society, which the economists try to pass off as natural, and as such, eternal.
Anyone who has taken history will know that they try to pound this tendency (ethnocentrism) out of you in your first classes. The fact is that western capitalism, like all of history, is a result of specific historical circumstances. Why was Britain one of the first to develop? It was surely in large part due to the resources, military and political power it gained from its empire; a similar argument can be made for the U.S. and its ‘treatment’ of the Native American people. As well as empire and slavery, there are other specific historical coincidences that might explain the rise of Europe. For example, there’s an argument to be made that the only reason the large supplies of silver extracted from Latin America did not obliterate Spain and Portugal in a sea of inflation was because China soaked up the demand with its introduction of the silver tax in 1581. Such arguments are, of course, up for debate. What is not up for debate is that historical context is irrelevant in discussing the rise of capitalism.
Similarly, while I do not subscribe to a strong version of historical materialism (personally I think it seems to lead to an infinite regression), there is obviously a lot of truth in the fact that people’s conditions determine how they behave. An English peasant would have had different beliefs and mannerisms to a member of the feudal class. More strikingly, certain sections of the Inuit refuse to say ‘thank you’ because it implies that you have done someone a favour, rather than simply your duty as a human being. Some civilisations used similar terms for ‘ripping someone off’ and ‘profit.’ Would we have the same attitude toward profit if we used the same word for it as ‘ripping off?’ Surely not.*
Expanding the scope of libertarianism to include property and capitalist relations – as well as their history – would start to raise some interesting questions, such as ‘why do we stop a poor person from eating by force?’ (try to take something from a shop without money and you’ll see what I mean). In fact, I expect a really critical look at capitalism from the perspective of individual freedom would simply collapse propertarian libertarianism into either Marxism, or, even more likely, anarchism (the latter being the true origin of the word ‘libertarian‘).
*These claims come from David Graeber’s Debt: The First 5000 Years.
Here are a few historical facts that I consider to be both true and contrary to what most economists (and libertarians) think. All have substantial historical evidence behind them, whereas I find the opposing case generally relies on just so stories. All 3 cast considerable doubt on pro-capitalist stories about trade and development. (I would use bullet points but wordpress seems to be in a mood. You’ll have to imagine them):
Rich countries did not get rich through free trade, but through the use of protectionism and other state interventions such as capital controls and subsidies. This includes but is not limited to: the UK, US, Germany, Japan and Scandinavian countries. Furthermore, more recently developed countries got rich by doing something similar, and in the case of the Southeast Asian ‘Tigers,’ the intervention was even more explicit, with state employees working inside the infant industries. There are a couple of exceptions such as the Netherlands, but even in their case their initial rise was characterised by large state backed monopolies in order to overcome transaction costs. Finally, supposed bastions of free trade such as Singapore and Hong Kong are both characterised by various public provisions, and Singapore has a large GSE sector. The go to accessible source on this is Ha-Joon Chang, though others are also available.
Money did not arise as a solution to the ‘double coincidence of wants,’ a highly improbable concept that begs a lot of questions (such as ‘how exactly does the cow farmer get all his inputs?’) Money primarily arose as a form of credit, and this was intertwined closely with social relations and kept communities bound together. Credit only became ‘exact’ once it was enforced by force rather than social pressure, and evidence suggests the use of coins and notes primarily followed the introduction of taxation. Before this, the overwhelming majority of barter was rare and between different tribes/nations, and often accompanied by feasts, sex and violence (sometimes all at the same time!) The primary source on this is, of course, David Graeber. I have not seen a convincing critic, though not for want of trying (‘it might have happened even if there’s no evidence!’ and ‘but debt is just delayed barter’ respectively).
Peasants did not freely move from their land into 12+ hour days in factories because it was ‘better than the alternative.’ In many cases they had their land taken by foreclosure acts and their hunting severely restricted by game laws. Prior to the industrial revolution they had plenty of problems – they were particularly susceptible to disease and famine – but evidence suggests they had a far greater degree of leisure and control over their working conditions than wage labourers. Michael Perelman’s book gives an in depth treatment of this, and similar arguments can be found throughout marxist writings.
The conclusion is clear, and something I have said before: western capitalism is neither harmonious nor natural. It is a product of specific historical circumstances, some of which were incredibly brutal. Any libertarian who accepts this (and some do) – presuming they adhere to a broadly Nozickean conception of justice – should take a deeply skeptical stance of everything that followed (e.g. the modern world). In fact, most libertarians should probably be revolutionaries.
P.S. This post is partially inspired by Robert Vienneau’s similarly formatted post on economist’s misinterpretation of the history of thought, worth a read.
Me on twitter:
There are two types of people: those who read Hayek and Bastiat and think 'wow,' and those who think 'meh.'—
Unlearning Economics (@UnlearningEcon) October 14, 2012
I am primarily referring to their two well-known (on the internet, anyway) essays, The Use of Knowledge in Society, and What Is Seen and What Is Not Seen. Libertarians and conservatives consider them seminal, perhaps even irrefutable rationales for a private market economy, while leftists generally don’t consider them that important.
I shouldn’t be interpreted as saying people who aren’t impressed by Hayek and Bastiat’s essays are smarter or more perceptive; I just think one’s attitude towards these two essays reflects the libertarian-left divide. I’ll try to explain why as a leftist, I found them underwhelming – perhaps good starting points, but little more.
Bastiat’s essay made a good point at the time: when we look at government spending, we need to remember that it comes from somewhere, and consider the ‘unseen’ effects of taxing. The story he uses to demonstrate this is one where a window is broken and the community observes that the money paid to fix it generates income. This, however, ignores that the money paid to fix it could have been used to, say, buy shoes from a shoemaker, and a result the community could have had it all: the window, shoes and the income. The broken window was therefore a net loss, even though it appeared to generate income.
Bastiat is right within the confines of his own examples, but really the real world throws up so many confounding factors that there is no need to invoke him in contemporary debate. Even when ‘Broken Window’ effects take place, Bastiat himself is not necessary.
People consider Bastiat relevant when discussing tax and spend – if you take money from one place and put it into another, you cannot only observe the positives of where you spend it; you must look at the negatives at the source of tax. But generally these things are considered separately anyway, and negative effects are incorporated into the analysis.
Taxation can have a negative impact on output, but it can also have a positive impact: if the taxed were going to save their money; if an activity is tax-deductible; if we are taxing economic rents, and so forth. If there are going to be negative effects, we can discuss them, too, but this generally revolves around elasticities, dead weight loss income versus substitution effects, and so on. I am not here to debate which of these effects is stronger: the point is that we have moved beyond Bastiat.
Similarly, arguments about stimulus/spending generally revolve around the claim that there are unemployed resources. The ‘crowding out‘ argument – that government spending will displace private sector spending that would have happened otherwise – retains Bastiat in some sense, but really it too has moved beyond him. What we need to discuss – sometimes empirically – are liquidity preference, multipliers, unemployment and the like. Again, there is no need to invoke Bastiat’s essay.
Hayek’s essay centres around the point that, since knowledge in society is highly dispersed among individuals and groups, the best way to coordinate this is through a price system. Individuals buy and sell at certain prices which reflects their knowledge of demand, supply, technology and whatever else. Thus the market system helps to coordinate and bring together dispersed knowledge in a way a single central planner or group of central planners could not do.
The essay does have something of an unsupported feel to it – Hayek’s idea that prices reflect knowledge (and not, say power) is never really justified. Having said that, it is overall a good rationale for a market economy, specialisation and the division of labour as a way to distribute resources.
My major problem is how one-sided his essay is. It would have been greatly strengthened if he’d acknowledged the limits of markets in coordinating dispersed knowledge – for example, that people have disparate knowledge opens the door to fraud, which is pervasive in both small and large quantities. That most people do not know the conditions, location or process by which their goods were produced is actually a justification for a lot of regulation: ensuring people have information about their products, or feel safe that somebody else has ensured they are not being deceived. Hayek does not mention fraud at all.
Furthermore, Hayek retains the phony markets versus governments dichotomy. In his essay there are basically two entities: private folk with dispersed knowledge, who are good, and ‘the government’ – apparently a massive leviathan with its own homogenous set of knowledge – that interferes with this process. But the government, too, is fragmented: the local policeman in a small town shares roughly the same knowledge as its inhabitants; similarly, a regulator will probably know something about the field they are regulating. Note that this is not necessarily an ideological point: that regulators have similar knowledge to the regulated opens the door to regulatory capture. But again, Hayek and his followers do not explore this issue.
Finally, Hayek completely disregards the democratic process in his arguments (if you think saying ‘Public Choice Theory‘ refutes democracy please do not comment). It is far to say that private individuals have a degree of influence over the actions of public enterprise, whether through voting, petitions, protests or what have you. In some ways, democracy brings together dispersed knowledge and wants too, even if it may be, as with markets, imperfect. (Incidentally, local knowledge is actually a good argument for worker democracy, something Chris Dillow is fond of pointing out.) Hayek explores none of this, but if he did his essay would be stronger no matter the conclusions.
In fairness, I may be commenting more on how Hayek’s essay is used rather than his original intent, as it was written during the rise of central communism. But my points apply to many of his modern followers. Perhaps something similar could be said for Bastiat, who did at one point offer limited support to public works programs during recession.
In summary, my problem with these essays is not that they are ‘wrong;’ Bastiat is right, but no longer relevant, and Hayek is roughly right, but incomplete. In the case of Bastiat I see no further need to invoke him, even though we may remember the essence of his point; with Hayek, I feel his essay would be far more respectable had he explored the implications of local knowledge a little more. At any rate, this is something that his proponents should be doing, rather than holding his essay up as pure truth.
It’s been a while since I did my last free market double standards post, which received some flak. To be honest, I think some of the criticisms were fair. Having said that, I don’t search for these contradictions just to wind up libertarians (though that can be a desirable side effect); generally they are quite obvious once you look past the way the right frame the debate.
I think the nature of many right wing arguments lends itself to contradiction: the shape shifting free market, which seems to mean something different to everyone; the nature of reactionary arguments, which causes people to make bizarre claims about proposed policies (see 5). Many right wingers also, despite themselves, end up supporting Republican candidates, which of course lends itself to all manner of contradiction (18).
I’ve also got some more economic theory ones in here. In particular, I’ve noticed economists ask some tough questions about new models, seemingly forgetting the various responses they have to the same criticisms of their own models (or if they don’t have responses, forgetting to apply these apparently pertinent criticisms to their own models). There are no links when I consider a point to be well established.
Anyway, enough preamble – let’s commence:
1. Libertarians emphasise that people didn’t consent to the state. They do not ask questions about whether people consented to the existing property distribution.
2. Mises and other libertarians thought socialism is about supposedly superior men running the world, which is wrong. Mises also said:
You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.
in a letter to Ayn Rand (p. 996).
3. NGDP targeting proponents will generally reference the Lucas Critique during discussions of modern macro. However, I have yet to see one apply the critique to NGDP targeting, when it is actually incredibly pertinent.
4. NGDP targeters defend supposed incidences of Central Bank’s inability to control NGDP (like 2008) by arguing that the CB must announce a policy rule for it to work, but simultaneously hold up Israel and Australia – where the CB has done no such thing – as examples of NGDP targeting working.
6. Austrians generally present businesses as smart and forward looking, but their business cycle theory effectively asserts business decisions will be wildly thrown off by temporary short term interest rates changes.
7. Milton Friedman emphasised that regulatory capture would create a lot of problems, but also suggested looking at the amount of regulations, rather than their actual enforcement, as a guide to the ‘level’ of regulation. So he simultaneously endorsed the bizarre idea that regulation is a dial we can turn up and down, and the idea that it’s really more complicated than that.
8. Milton Friedman argued that businesses have no social responsibility, but should not engage in fraudulent behaviour, and “stay within the rules of the game.” Which is a form of social responsibility.
10. Anarcho-capitalists are against the state, preferring insurance companies to provide what are commonly known as ‘public goods.’ They also have no trouble with monopolies. So if an insurance company that uses force is the only game in town (and owns all the land), how is that different from a state?
11. According to libertarians, if you can possibly leave a job, your freedom cannot be impinged during the job. Of course, many of us are free to leave our countries but libertarians still complain about coercive legislation.*
12. Libertarians are often resistant to the applicability of behavioural economics. Yet companies use behavioural insights in advertising and marketing to expand profits, something that’s usually a sign of efficacy in a libertarian world.
13. Libertarians generally oppose fraud in abstract, but many have the same knee-jerk reactions against prosecuting any specific instance as they have to most questioning of business practice.
14. David Smith (and other austerity defenders) tried to pin the decline in UK output on bank holidays. But this implies a day contributes a significant amount to output, so during every working day the economy must have boomed!
15. Again, austerians such as David Smith can’t decide whether to defend austerity by insisting it’s working (see 14) or whether it isn’t happening at all.
16. Economists complain a lot about sticky wages causing unemployment. But as of yet, I have yet to see one volunteer for a pay cut!
18. Greg Mankiw’s textbook analysis of the financial sector implies asset bubbles do not have a major effect on the real economy. But he also attributes Clinton’s boom to the internet stock bubble, implying the exact opposite.
19. Generally economists argue they shouldn’t be expected to make accurate predictions about the future. But when one of Steve Keen’s specific predictions did not come true, they took it as grounds to dismiss him (btw, bonus points for reading that entire thread and staying sane).
20. Economists, though few endorse a ‘hard’ version of Friedman’s methodology, will generally reference a derivative of it when pushed. However, when criticising alternative models, they raise questions about their internal mechanics.
What is original in the book is not true; and what is true is not original.
*Note also that Hayek roughly endorsed my position on this, but AFAIK he never drew attention to the workplace.
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 force, fraud 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.