Posts Tagged Libertarianism
John Quiggin recently posted on the “Broken Window Fallacy” (BWF), a parable beloved by libertarians, originating from Frederic Bastiat but finding its most modern exposition in Henry Hazlitt. The basic idea is that while breaking a window will seem to stimulate spending by providing work for a glazier, the money used to employ him could have been spent elsewhere, say by employing a tailor to make a new suit. Therefore, as a result of the broken window the community has only a window (what they started with), rather than both the original window and a new suit. We must look at the “unseen” in order to understand the true economic effects of smashing the window.
Quiggin tries to refute the fallacy thusly:
Implicit in the crowd’s reaction is the assumption that glaziers are short of work. If (as sometimes happens) glaziers have more jobs than they can handle, then there is no extra window – at best, the shopkeepers order simply displaces some other, less urgent, repair. Similarly, for Hazlitt’s riposte about the tailor to work, there must exist unemployed resources in the tailoring industry, so that the shopkeeper’s suit represents an addition to output. If not, the additional demand from the shopkeeper will raise the price of suits marginally, just enough to lead some other customer to buy one less suit. So, the story seems to imply that the economy is in recession, with unemployment across a wide range of industries.
Yet “rais[ing] the price of suits marginally” – such that the person most willing to pay receives the suit – is precisely what libertarians have in mind when they envision a market economy functioning nicely. Under the assumption of full employment and no broken window, the shopkeeper purchases a suit while the glazier is put to work elsewhere creating a new window. Under the assumption of full employment and a broken window, the shopkeeper employs the glazier, meaning that somebody who previously would have employed the glazier goes without, while the tailor is put to work for somebody who likes the suit slightly less than the shopkeeper. Aggregate welfare and wealth is decreased, even if the flow of production is the same.
Quiggin attempts to introduce the assumption of unemployment to counter the standard story:
With these facts in mind, we can tell a different story. Suppose that the glazier, having been out of work for some time, has worn out his clothes. Having fixed the window and been paid, he may take his $50 and buy a new suit. To make the story stop here, we’ll suppose that the tailor is a miser (a vice traditionally associated with the clothing industry, as with Silas Marner), and puts the money under his mattress. So, in this version of the story, the glazier and the tailor are both paid, and the social product is increased by a new window and a new suit.
But the social product is not increased. If the window were not broken, we’d have a window and a new suit. When the window is broken, we have a window and a new suit. The allocation of the suit has changed, but not the total product. Quiggin will never refute the BWF like this, on its own terms, because if you start with the premise that a window gets broken, you will inevitably end up at the conclusion that the world is worse off than before. Once the window has been broken, we have lost $50 worth of window and will have to replace it. Depending on your ethical presuppositions, you might view the redistribution as desirable, and the employment of the glazier as an end in itself, but this is another debate.
And this is the real problem with the BWF: it’s a complete straw man. Noone, anywhere, ever, has claimed that ‘breaking windows’ is a desirable economic strategy, or that it will somehow add to wealth or welfare. True, you can pick and choose your own auxiliary assumptions to add ‘silver lining’ to the story. Given that the window is broken, the fact that the glazier then wants to buy a new suit is better than if he just hoarded the money. Perhaps the new window is slightly nicer than the old one. Perhaps, as a commenter suggested, the shopkeeper has an emergency fund which is “psychologically separate” from his other money, so he still buys both the window and the suit. Or maybe the glazier has an apprentice who benefits from the training when he otherwise wouldn’t, while the tailor does not. We can do this all day but ultimately, the broken window devotes resources which could have been used – even if they were previously idle – to increasing wealth and welfare.
Should we utilise idle resources? The answer to this question needn’t have anything to do with breaking windows. Quiggin, like most critics of the BWF, implicitly recognises this, which is why he stresses that none of what he says “means that it’s a good idea to go around smashing windows during recessions.” So why start with the assumption of a broken window? We could instead tell an alternative story where there is no broken window. The tailor is unemployed, and there is a kid who wants a shirt but cannot afford it. The government prints $50 and gives it to the kid, who buys a shirt from the tailor, increasing the social product without any broken windows. This story is similarly arbitrary, demonstrating the ease with which we can formulate a parable to come to the conclusion we like. But the question of which story’s assumptions (in particular unemployment) are true or not is an empirical matter.
Quiggin, in trying to refute an abstract parable built on arbitrary assumptions by introducing his own, slightly different arbitrary assumptions, is fighting a losing battle. The BWF may or may not be useful for demonstrating a certain point, but it is not a model of the economy and it is not always and everywhere applicable to economic problems. If you are arguing with somebody who thinks repeating ‘Broken Window Fallacy’ at you will settle the debate, you aren’t going to convince them by telling them the ‘Broken Window Fallacy, version 2’. You simply need to stop having the debate in terms of Broken Windows, and start having it in terms of what is actually going on in the economy. Otherwise you’ll be forever trapped at a useless level of abstraction.
Recent posts by Noah Smith, David Henderson and Daniel Kuehn on the relationship between economics, ‘free markets’ and policy in general got me thinking about libertarians and how accepting they should be of marginalist economics, as well as how open they should be to non-marginalist alternatives. It seems to me there is an unspoken bond between marginalist economics and libertarianism (even Austrianism shares some major features with neoclassical economics), and so there may be a tendency for libertarians to have strong priors against post-Keynesian, Sraffian, Marxist, Behavioural, Ecological and other types of economics that dispute this general framework.
Let me note that I’m not accusing libertarians of being generally hostile to heterodox economics – I’m sure there are some who are and some who aren’t. Instead, I’m just warning against such a possibility, and offering some heterodox ideas to which libertarians might be receptive.
Behavioural/post-Keynesian consumer theory: behavioural economics sometimes elicits rebukes from libertarians, as it seems to imply that ordinary people are not able to make decisions rationally, and therefore that policy makers should help them along their way. Naturally, libertarians object to this idea, questioning the experimental methods of behavioural economics, pointing out that policy makers are themselves imperfect, and so forth. I’m not going to comment on the efficacy of these arguments here – sometimes they are fair, sometimes less so. Instead, what I want to point out is that while some behavioural economics implies a role for activist policy, it’s not necessarily the case that a view of consumers which differs from the optimising agent renders the agent somehow irrational and therefore ripe for intervention.
One such example is a version of the mental accounting model, used in post-Keynesian consumer theory, in which consumers organise their budget into categories before making spending decisions. Consumers will not spend money in one category until they have had their needs in a more ‘basic’ or ‘fundamental’ category satisfied, which creates a Maslow-esque hierarchy of spending – starting with necessities such as food & shelter and culminating in yachts & modern art. This means relative price changes do not have as much of an impact on the type of goods bought as implied by the utility maximising model; instead, the amount spent on different types of goods is primarily determined by the consumer’s level of income.
On first inspection, this might seem to imply a tirade against the efficacy of the price system for coordinating preferences and scarcity, as well as a comment on the ‘wastefulness’ of inequality (and perhaps it could be interpreted as such). However, this doesn’t necessarily make the theory generally ‘anti-libertarian’. In fact, one major implication is that placing high taxes on something low in someone’s hierarchy will not have much impact on their spending, and hence ‘sin taxes’ – which are a major expense for the poor – will not reduce their consumption of alcohol/smoking substantially; instead, these things will simply take up more and more of their income (which is pretty consistent with available evidence). This implies that paternalistic tax policies aimed at the poor will generally fail to achieve their aims.
The Market for Lemons (TML): George Akerlof’s famous paper explored information asymmetry, using used car markets as its primary example. Akerlof was trying to understand what buyers do when they face a product of unknown quality, and argued that since they are unsure, they will only be willing to bid the average expected value of a car in the market. However, if the seller is selling a ‘good’ car, its value will be above this average, so the seller will not sell it at the price the buyer offers. The result is that the best sellers drop out of the market, creating a cumulative process which results in the market unravelling completely.
Though theoretically neat and compelling, this ‘seminal’ example of market failure has always struck me as incredibly weak, for the simple reason that used car markets do not actually fall apart. Why? Maybe people aren’t rational maximisers etc etc (for example, in another nod to behavioural economics, it may be that buyers’ irrational overconfidence leads them to go ahead with a purchase, even if it’s statistically likely they’ll get a ‘lemon’). Ultimately, though, I’d argue the answer is that capitalism – or if you prefer, ‘the market’ – is a network of historically contingent institutions and social interactions, rather than abstract individuals trading in a vacuum where outcomes are mathematically knowable. The reason used car markets work ‘despite’ information asymmetry is due to hard-to-establish trust and norms between buyers and sellers, and due to intermediaries such as auto trader, who spring up to help both sides avoid being ripped off. I’ve not seen anyone provide an example of the process TML outlines actually occurring, so I don’t see why it adds to our understanding of markets.
To be fair to Austrians, they have been talking about ‘the market as a social process’ for a long time, and in places have disputed the Lemons Model on similar grounds to the above. Hence they have something in common with old institutionalists, Marxists (to a degree) and perhaps even hard-to-place heterodox economists like Tony Lawson, who argues economics should primarily be a historical, rather than mathematical subject. To put it another way, while heterodox economists typically advocate a move away from marginalist economics to understand why capitalism doesn’t work, such a move may also be necessarily to understand why it does.
Mark up Pricing: Post-Keynesian, Sraffian and Institutionalist economics typically subscribe to the cost-plus theory of prices, which states that businesses set prices at their average cost per unit, plus a mark up. Furthermore, they avoid price changes where possible, preferring to keep their prices stable for long periods of time to yield a target rate of profit, varying quantity rather than price, and keeping spare capacity and stocks so that they can do so. The problem libertarians might have with this is that it implies prices are somewhat arbitrary, do not usually ‘clear’ markets, and do not adjust to the preferences of consumers especially smoothly. However, while these things may be true, they do not mean mark up pricing comes with no benefits.
In my opinion, one such benefit is stability: I’m glad I can rely on prices only changing every so often, and that if there are a lot of people at the hairdressers he doesn’t raise the price to ‘clear’ the market. Furthermore, the fact that firms keep buffer stocks and can adjust quantity instead of price allows them to deal with uncertainty and unexpected demand more easily, making them more adaptable to real world conditions than if they always squeezed every drop out of their existing capacity. While I’m not going to pretend post-Keynesian pricing theory doesn’t imply some anti-libertarian policies (particularly with regards to price regulation), but it’s certainly not a one sided idea, and its policy implications are open to further interpretation.
I generally prefer to refrain from immediately linking everything to policy as I have done above, because, well, there are enough people doing that. However, the examples I’ve given actually help to demonstrate a point about the relationship between economic analysis and policy: theories with premises that seem to imply a certain policy may not once you’ve followed them through to their conclusions. What’s more, the same analysis can seem to imply different policies from different perspectives (at its most extreme, Austrian Business Cycle Theory seems to imply that even a teensy regulation will send capitalism off the rails, which could be interpreted as a damning criticism if you were a leftist). This means calls for pluralism in economics should be embraced by all, even if on the surface some ‘alternatives’ to mainstream economics seem to conflict with one’s world view.
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.
I have only really just started studying Marxism in depth (though I am stopping short of Capital for now). Subsequently, while reading Bertell Ollman‘s Alienation: Marx’s Conception of Man in a Capitalist Society, it once again struck me that (right-)libertarianism is really just lazy Marxism. In many ways libertarianism reads like the first third of Marxism: the area which explores methodological questions and the nature of man. Both libertarianism and Marxism are generally fairly agreeable – and in agreement – in this area, but the former never really fleshes out its arguments satisfactorily. Often I find libertarians, after describing some basic principles (non coercion etc.), make the jump to property rights and capitalism being the bestest thing ever, without fully explaining it.*
I will focus primarily on Robert Nozick and Ludwig von Mises here, as they are the only two libertarians who really explored libertarianism from basic principles of man and his relationship to both nature and economic activity (Murray Rothbard was really an interpretation of Mises in this respect). Overall, I think Nozick and Mises combine to form a fair reflection of minarchist libertarianism.
The state of nature and the nature of man
In Anarchy, State & Utopia, Robert Nozick’s ‘State of Nature’ is one where there is no state (government). He asserts that individuals have rights to protect themselves from aggression, they have rights to the fruits of their labour, and they have the right to cooperate voluntarily, free from deception and theft.
It has always struck me how incomplete Nozick’s exposition of the state of nature is. That man should be a priori free from aggression and entitled to whatever he produces is not really in dispute. What bothers me is that Nozick never really attempts to explore the relationships between different men, between men and society, and between men and nature. For Nozick, an abstract expression of individual rights could be extrapolated up to the whole without much discussion of how things link together. This is especially odd because he demonstrated he was capable of understanding and the limits of such individualism in his incisive critique of methodological individualism. So much the worse for his philosophy that he didn’t apply this thinking to it.
Enter Marx. Marx emphasised that, naturally, man had ‘powers,’ which are the means by which he achieves specific needs. Eating is a power; hunger is the relevant need. Thinking is a power; knowledge is the relevant need. (The former is a ‘natural power,’ common to all animals; the latter is a ‘species power,’ specific to man). By exercising different powers, the individual emphasises different aspects of themselves, and depending on who they are with, which society they are born into, and their available resources, different aspects of the individual will appear to be important, and different conceptions of freedom, happiness, and even the individual himself will emerge.
This may seem like a digression, but in fact it is essential. Once you have established that the abstract individual, when interacting with society, with others, is a very different beast to a lone man in the woods, it leads you down a different ethical path. What becomes important are the interactions the individual engages in, rather than merely the individual himself. It is not enough merely to say an individual should be granted certain rights and that’s that; we have to explore how these rights affect the individual, even by virtue of being defined.
To define every man as an island who cooperates with society and others only through discrete voluntary actions is to diminish the importance of how society and others shape these actions. More than this, it ignores how the rights themselves interact to produce outcomes that may be inconsistent with the principles upon which those same rights, in abstract, were built. Libertarians will likely think I am about to suggest we strip individuals of their rights, but this is not the point. The point is that the rights are not a neutral baseline, and the emergent relations governing these rights could be opposed to individual freedom.
For example, private property is surely the foundation of libertarianism (private property is to be distinguished from possession, btw). But Marx did not think private property, the division of labour, wage labour and capitalist exchanges could ever take place independently; one necessarily implied the other. Any degree of material wealth that qualifies as ‘property’ implies accumulation, which implies producing more than one labourer can manage, which implies employing others, which implies splitting up their tasks into specific, repetitive actions, which implies that what they produce is not necessarily what they need to survive, which implies they must purchase this elsewhere, and so forth. Adam Smith observed this interrelation when he noted that, “as it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the…extent of the market.” I will explore why this may be undesirable from the point of view of individual freedom below, but for now it is sufficient to show that such an emergent property amounts to more than the individual rights from which it originates.
Purposeful action is productive action (which is why capitalism sucks)
Mises claimed man acts to attain certain ends, and only by achieving these ends can he be said to engage in purposive action. If there were no ends to be sought, man would not act; that he acts tells us he has unfulfilled needs. Voluntary exchange gives man the choice and ability to engage in purposeful action with an ever-expanding range of ends at his disposal. The entrepreneur’s role in this is vital, as he channels the purposive actions of many people in the market place, allowing them to attain the ends they seek. This creates an evolutionary process through which man continually realises his chosen ends.
Marx too believed that only man is capable of purposive activity, and this is what separates man from other animals. However, for Marx, the most purposive activity was labour, not consumption. Man engages in productive activity for two main purposes: (1) the end product of his labour and (2) the ability to exercise certain powers of his choosing when labouring, for whichever reason he deems appropriate (efficiency, enjoyment of the task itself, development of skills, etc.). Marx saw capitalism as alienating because in a capitalist system, the individual becomes separated from both the product and the method of production, as well as the time and location in which it takes place.
This separation can be illustrated by an exchange between the worker and the capitalist. The capitalist pays the worker wages so the worker will produce what the capitalist requires him to produce. In this exchange, the worker becomes separated from the product of his labour, producing not what he wants, but what the capitalist requires him to produce. The worker is also required to produce not how he chooses, but at a time, location and in a manner chosen by the capitalist. The worker then uses the wages he earns to purchase other products produced under similar circumstances. The end result under capitalism is that individuals become primarily tied together by what the capitalist guided division of labour demands, rather than by their own autonomous, purposive action. The result is the worker’s alienation from his own labour and also from the products he purchases (this applies to the capitalists too, in a different form; after all, they are on the flip side of the relationship).
So we have two competing narratives here. In one narrative, the individual is merely at the whims of capitalism, while in the other narrative, the individual exercises control over capitalism. Which is more accurate? Ultimately, the question boils down to whether production or consumption is the more purposive activity.
In consumption, the means is exchange, which requires little in the way of personal development or planning, and is brief. What matters most in consumption is the end result: a good or service. Many goods purchased are interchangeable and the act of consumption is relatively brief.** Services are by definition done by somebody else, and generally speaking, the buyer is only interested in the end result (the outcome of a lawsuit; their health; a new conservatory). I’m not suggesting that purchasing goods and services is not useful and does not yield any positive results; I am merely pointing out that as far as man’s self-actualisation goes, as far as purposive action is defined, consumption does not require or achieve much in the way of planning, personal development or uniqueness.
In contrast, during production the individual has both means (productive activity) and an end (the product) in mind when he sets out to act. The productive activity itself cannot be separated from the individual and so the two are inextricably intertwined. Furthermore, productive activity requires and/or results in building up some personal attribute, whether a individual’s capacity to reason, his physical strength and fitness, his perseverance or anything else. Generally these attributes will last beyond the original act of production. The end result is both that the individual achieves some goal he chose, planned and set out to achieve, whatever its exact nature, and that through the process he exercises his individualism by realising certain powers (again chosen by him).
The question for Miseans is how exactly the individual can “discover causal relations” between his purposive productive activity and what he produces if he is not producing what he wants, but doing it under the command of someone else. Mises glosses over the role of the worker in his exposition of purposive action; in fact, he explicitly rejects the notion that labour can be considered ‘action,’ because he considers only ends, rather than means, important for man’s individual development. But are any of man’s actions as rational, as explicitly thought through, as deliberate and purposeful, as labour? For Marx, the tragedy was when labour became a means to an end; Mises merely assumed this was the case.
The heart of libertarianism is the abstract individual, who engages in voluntary actions to attain certain ends, and should be allowed to do this, free from outside interference. But such an abstract philosophy is incomplete and incoherent. In the mainstream, Marx is often projected as disregarding the individual, but in fact, Marx was always highly concerned with the individual. The difference is that Marx’s concern with the individual caused him to zoom out to see the context in which the individual operates, and which aspects of an individual’s character are shaped by the context in which the individual labours. Under capitalism, the most important aspect of purposeful individual action – production – is subsumed, under the command of somebody else, and spurred only by the fact that the work is necessary for the worker’s survival.*** Hence, within his most purposive sphere, the individual is not free to act to realise his own ends through means chosen by him; rather, both the ends and the means are determined by forces outside his control. To me, this doesn’t seem very libertarian.
*To be sure, libertarians do have plenty of fleshed out arguments for capitalism’s efficacy as a system; what I am arguing is that it does not follow from their discussion of man and his nature.
**This has the exception of durables, but how often is the joy of these based on one’s own work on them? Cars, houses and gardens are all the pride and joy of people precisely because they themselves engage in productive activity on them.
***We must remember the context (!) in which Marx was writing. What he says was literally true at the time; in modern liberal democracies the reality is less stark, but the underlying mechanics of working life, and why people work, remain the same.
PS I have used ‘man’ in this post because that is generally what was used by the thinkers I am discussing. I originally tried it with gender-neutral pronouns but it just became confused and more difficult to relate to the original texts.
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.
Tax avoidance intermittently comes into the spotlight in contemporary political debate. The left decry businesses dodging tax as immoral, whereas the right generally disagree. A common view among libertarians is that we must emphasise the difference between tax avoidance and tax evasion. The former is legally minimising the amount of tax you owe, whereas the latter is actually breaking the law to pay less tax. As usual, this means libertarians think they can draw a definitive line as to where policy should be and embrace a purely logical belief system, while their opponents are just moralising. And, as usual, this isn’t the case – turns out libertarians just have a different value system embedded beneath their argument.
The line between tax avoidance and tax evasion is whether or not the methods used are legal. Hence, the only way you can believe tax avoidance is OK while tax evasion isn’t is if you believe law is the appropriate moral benchmark by which to judge whether actions are ‘right’ or ‘just.’ But this is a completely anti-libertarian position: why should the guy with the bigger gun be able to tell someone else what to do? Or the tyrannical majority? Surely laws should be judged based on what they achieve or symbolise, rather than just being accepted because they are laws?
As it happens, I agree with this position; laws can be unjust (apartheid, slavery) and given the opportunity to disobey an unjust law, people should, whether individually or en masse. So if people/institutions are not morally obliged to obey the law just because it’s the law, surely the question of paying tax becomes a judgment call? This puts libertarians right where they don’t want to be: in the hazy world of morality. And the only position I can see them endorsing is that one should pay as little tax as possible.
So, whereas most people’s value systems tell them that if a corporation pays £8.6m over 14 years to a country where it made £3bn in sales over the same period, that’s unfair. Libertarians make out – perhaps because they really believe – that these people are just being emotional and illogical But really the difference is not one of nature, but merely of degree.
P.S. readers may notice a big similarity between this post and my post on Milton Friedman and corporations. In fact, similar problems can be found throughout libertarianism – it seems they do believe strongly in the rule of law with laws they approve of. In this way, many libertarians actually have a strong authoritarian bent.
Milton Friedman is quite a revered figure – among economists, conservatives, libertarians and some leftists – partly, of course, because he was a prolific economist, but also in large part due to his debating skills. He is generally perceived as able to shut down arguments from the left with simple, easy to understand, often amusing one liners. However, I have always found him unconvincing, and here I hope to show why.
There will be, of course, numerous conceptual disagreements which I will try not to discuss in this post: the phony market-government dichotomy, where government is some exogenous entity; the general idea that self interest will lead to the best of all outcomes; the invocation of the mythical ‘free market.’ Nor is the purpose of this post to draw attention Friedman’s major intellectual arguments themselves – though I have already done that with his stance on assumptions, corporate social responsibility, and I suppose by proxy I have commented on his interpretation of the Great Depression.
Instead what I want to do here is show Friedman’s general debating techniques are highly questionable. Many of his arguments rest on an abuse of the reductio ad absurdum. Sometimes Friedman was either ignorant about the evidence or just plain dishonest. Many of the ‘facts’ he cites don’t stand up to even a brief fact check. Here are some examples:
Here, Friedman references the late 19th century land deals as ‘minor.’ One billion acres of land is not minor. Much of this land was taken from citizens directly in the interests of privately owned corporations, and/or involved widespread fraud and corruption. The sheer volume of land seized suggests the deals played a massive part in establishing the railway lines, along with many other industries across the U.S. Would these engines of growth have been built if not for the coercive grabbing of masses of land?
The fact is that even cursory glance at social mobility in the United States puts lie to Friedman’s claims about it being high. Similar results hold for most developed countries, generally only changing as they become more Social Democratic.
In general I’ve noticed Friedman makes repeated vague references to ‘all of history,’* for which he never provides specifics, and which are actually completely at odds with the evidence. I can only conclude that what he says is based not on history but on armchair analysis of what must have happened, based on his own logic. But there is strong reason to doubt this logic – as I have discussed in my previous posts A Brief Anti-Economist History and How Natural is Capitalism, Exactly?, Western Capitalism did not just spring out of nowhere due to the magic of the market.
For example, was Friedman aware of hunting restrictions such as the Black Acts, which brutally enforced limits on peasant activity and so contributed to the initial rise in the industrial workforce? The rise in enclosure acts, which did something similar? Is he aware of the large amount of U.S. tariffs during the country’s rise to prominence, and similar trends in other Western countries, as well as more recently developed countries in Asia? Such historical debates are lost in a sea of sweeping assertions about the efficacy of the apparently omnipresent ‘free enterprise system,’ with narratives that would have Friedman fail a first year history essay.
To be sure, as with all historical analysis, there is always room for discussion, but Friedman’s arguments rest upon one interpretation of ‘facts’ that are usually incomplete or a blatant misrepresentation of what actually happened.
So it’s quite easy to find instances of Friedman presenting questionable evidence to support his arguments. But what about his famous purely logical put downs? Do they stand up to scrutiny? Here is quite a widely watched YouTube clip (always worth noting that the young man is not actually Michael Moore):
The issue raised is whether Ford acted immorally by failing to install some safeguarding blocks in their infamous Pinto cars, which resulted in a large amount of deaths. Friedman suggests the problem is amoral, and simply a matter of price: nobody can place an infinite value on a human life, so whether the car should have been released rests on a monetary trade off. Friedman suggests the young man who posed the question is not interested in principle, only price. In fact this is not true; Friedman simply asserts it and builds his argument from there.
A moment’s thought will suggest that the important principle is not price, as Friedman suggested, but human life, as the young man seemed to think. Consider: if the automobile will kill 10,000 people a year unless the defect is fixed, does it really matter how much it will cost to fix the problem? Surely, if fixing the defect in the automobile is affordable, then the defect should be fixed. On the other hand, if fixing the defect in the automobile is not affordable, then defective car should not be released. However, a profit driven firm necessarily insists that lowering costs by not fixing the defect outweighs saving a certain number of lives each year. Friedman abuses the reductio ad absurdum by taking the issue – where it was clear Ford simply should have installed the boxes – out of context, and focusing on price as the important variable.
Here is another example where Friedman abuses the reductio ad absurdum:
What the man posing the question to Friedman is actually alluding to – in a roundabout sort of way – is a simple concept called the ‘income effect:’ reducing somebody’s income via taxation may well increase the amount they work (and empirical studies suggest it does), hence increasing overall production. Of course, if you increase it to 98% you will impoverish people and destroy the economy, but nobody actually suggested that.
Perhaps some might interpret this as cherry picking. So, finally, here is a full interview with Milton Friedman. I will discuss Friedman’s remarks throughout the interview:
(1) At 2:06, the presenter asks if a place such as Central Park would exist in a ‘pure market’ situation. Friedman fails to answer the question directly, but during his response he blames Central Park’s problems during the 1980s on public management. But Central Park is in fact a public private partnership, where the private firm employs 4 out of 5 of people maintaining the park. Again, Friedman either has no idea what he is talking about or is lying.
(2) At 4:10, the presenter brings up Thalidomide. Friedman’s response contains two problems. First, when he says that the FDA stalls potentially beneficial drugs from being used, he fails to distinguish between a Type 1 error – falsely rejecting, say, a perfectly safe drug – and a Type 2 error – failing to reject an unsafe one. Type 1 is generally considered worse on the logic of ‘convicting an innocent person.’
Second, Friedman suggests that the company responsible for Thalidomide did not make a profit, therefore the market would ‘signal’ for it to go bankrupt. I am not sure whether they made a profit in that particular instance. What I am sure of, however, is that the company is still around today. Again, Friedman references facts that are questionable on even a cursory inspection.
Lastly, when Friedman suggests that the airlines will make sure all of its planes are safe, he neglects the ‘weighing up logic’ we saw in the Ford Pinto video. (I am playing Devil’s Advocate, as I don’t think any sane person would defend current U.S. airport security.)
(3) From the beginning the interviewer asks Friedman about the government setting information requirements on packaging. I don’t really understand how Friedman can make the ‘if it mattered a profit seeking firm would take advantage of it’ argument when the interviewer has explicitly stated that the government had to start to enforce information requirements because private firms were not doing it.
Note also that he doesn’t actually engage with the civil rights act question explicitly.
(4) During the final video the interviewer takes Friedman through every government program and Friedman advocates abolishing the majority of them. What confuses me about this part is that Friedman advocated some of these programs elsewhere – for example in his books. In Capitalism and Freedom, he advocated building infrastructure, a negative income tax, school vouchers, praised antitrust laws and more. This highlights Friedman’s dual roles as a propagandist and serious thinker, as a man who was willing to make sensationalist claims and advocate radical policies just to get attention, even if he didn’t truly believe in them. (Some may suggest Friedman was older and had matured here, but there are examples of him criticising these things he advocated elsewhere when he was younger, too. I also see no justification anywhere, ever, for his surreal last minute ‘abolish the federal reserve‘ position).
I don’t mean to suggest what I have to say is the final word; I merely hope to point out that Friedman was somewhat disingenuous and often used logical sleights of hand to get his point across. His interviewers and opponents rarely seemed to press him on it, and to be honest I never saw him go up against anyone particularly formidable. Furthermore, Friedman’s case highlights how little weight should be placed on verbal debates: one liners that seem persuasive at first can evaporate under close scrutiny; facts can be presented with few checks and balances; questions can be dodged and twisted. Friedman was prepared to argue the more ‘free market’ position merely for the sake of it, and was undoubtedly skilled at this role. But once you unpick some of the arguments and cross-check the evidence, his world view leaves a lot to be desired.
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.