Another hit for the Ron Paul fans: A second incoherence of libertarianism

When libertarians[1] hype the “free market,” they aren’t saying we should maintain something we already have. They wish to free a market which is presently unfree. And what makes it unfree is, on the whole, government interference in and regulation of it.

Some arguments for this view are strictly moral: Persons have a “right” to dispose of their own property as they wish; it is wrong in principle to disrupt this. Such arguments aren’t much concerned with whether this principle creates a better world or solves any pressing human problems. And some libertarians stop with these arguments.

But other libertarians—those this essay will address—are more “consequentialist” in mood. They argue that keeping the state out of the economy will yield a host of broadly beneficial effects.

At the core of this theory is the old story of “supply and demand” : When producers and consumers interact in an economy, it creates a certain quantity of supply and demand for any given product. This dynamic is expressed in the product’s price. High prices encourage more production from producers (and new producers to set up shop), but discourage consumption. When prices get too high, consumers will abandon the product for cheaper alternatives, signaling producers to lower the price. Lower prices will cause less fit producers to go out of business, unable to turn a profit, but will encourage consumers to buy again. The cycle continues until supply matches demand—“equilibrium” is achieved.

The government can only get in the way of this process. It is not a proper economic actor—that is, it is moved by impulses other than the supply and demand signals that drive producers and consumers. It can favor or hinder economic competitors without itself having to compete. It can act without fear of “market discipline”—going out of business if it makes a wrong move. Taxes, tariffs, price fixes, production incentives, quotas, buyouts, embargos, etc., affect supply and demand “artificially,” and throw off the whole tendency to equilibrium.

But if the state stays out of the game, a number of good things—collectively known as “market efficiency”—will happen: Economic growth and productivity will be enhanced, as producers sell all they make, maintain profits and have enough to keep reinvesting. As money itself is a product (lenders, financiers, are the suppliers of it), profits (returns) on investment will increase just like profits on any other product; and the “price” of money—expressed in interest rates—will remain low as with any other product. Investment will increase as the low price and high return increases demand. Since overproduction of goods is a cause of economic crisis—leading to production cutbacks and unemployment, and when too much money is lent, inflation—freeing the market will lend greater stability to economies.

This is also a theory of economic development. The market selects for the most productive investments, and there is no reason why any nation with resources, workers and consumers could not be the site of these. Governments of developing nations scare away investment by sanctioning labor unions, fixing prices and wages, and demanding rent and other concessions from foreign producers. When left to “move itself,” capital will flow as it will, and is just as likely to flow to these nations as anywhere else.

Critique of “consequentialist” libertarianism:

(1) The proportionality interpretation

So what to make of this story? First, there is more than one way to interpret libertarian claims about the economy. One is to say that market efficiency will increase in direct proportion to reduction of state intervention in the economy. That is, all things being equal, the more the state withdraws, the more we can expect of those benefits.

For anyone looking to test this claim, conveniently enough, the world has undergone some very libertarian-style changes in the last 35 years—under the organizing principle broadly known as neoliberalism[2]. These changes are popularly called “globalization.” State regulation of the economy has been rolled back on an international scale; import and export tariffs and price and wage controls have been repealed; enormous parcels of public property have been privatized. In wealthier countries, this movement has been instigated by business and financial blocs in response to the falling profit margins of the 1970’s. In turn, it has been forced on poorer countries through “Structural Adjustment Programs” (SAP’s) as a condition for getting loans. Cross-border capital flows have increased as a result.

Using the proportionality interpretation, has the libertarian promise been borne out? Below is a graphic from the Center for Popular Economics, illustrating global economic performance across three historical periods: (1) post-World War II, (2) the crisis period of the 1970’s, and lastly, (3) the period beginning in the 1980’s when neoliberal policies really “took off” and trade and foreign investment expanded dramatically. If “proportional” libertarianism is correct, the graphic should show a correspondence between lower state regulation and better economic performance; that is, economic indicators should be best in the third period.

A clear, overall pattern can be discerned: For all indicators, economic performance was best by far in the phase stretching from the postwar period through the early 1970’s. This period is referred to by historians as “the Golden Age of Capitalism” and is marked by none other than record degrees of state management of local economies. Performance dropped off—that is, the bad indicators got higher and the good ones got lower—with the ascendancy of neoliberalism in the early 1980’s.

To be more specific (this part may bore a little): World economic growth (GDP) slowed significantly in the early neoliberal period and has never returned to Golden-Age levels. Real interest rates in the richest countries more than doubled in the early neoliberal period, and remain much higher than in the Golden Age. Accordingly, capital investment[3] dropped off sharply in the mid-70’s (from 7.0-2.2%) and remains less than half of Golden-Age levels. OECD nations[4] saw the productivity of labor (the “returns” on labor investment per worker) fall in the 70’s and then further in the early neoliberal period; productivity rates remain roughly 1/3 as high as in the Golden Age.

Not everything is shown by the graphic, but the CEP article elaborates (with sources, here). Where there are regional exceptions to bad performance in the neoliberal period, they occur in East Asia, where high state management of economies held out as other developing regions scaled it back. For example, before they sunk into crisis, East Asian economies saw GDP growth in the 1990’s that outpaced even the post-war period. This misleadingly brings up the average for all regions in the first neoliberal phase; if you remove Asia from the stats, they show even poorer growth for the West, etc. Asia was the only region not to experience a serious slowdown in growth during this period.

Finally, financial instability has not improved with neoliberal policies. Crisis is truly endemic to the system, and appears if anything to be correlated with short-term influxes of capital. Inequality among countries has increased in the neoliberal period by any viable measure—consumption levels, income, per capita GDP, etc.—and at rates higher than in previous periods.

* * *

Clearly, what facts we have provide zero evidence for the claim: The freer the market, the better the economic indicators. If anything, the precise opposite is the case.

(II) The “someday” interpretation

(i) A fuzzy claim

But this still isn’t enough to refute libertarianism. For “free” is a relative concept; and perhaps the market is just not free enough. This suggests a second interpretation of libertarian claims: Perhaps with even less intervention, less regulation, the promised benefits will finally come to light.

But this “someday” interpretation is problematic. It is not so much that it is false as it is that we don’t know the conditions under which it could be shown to be true or false. We don’t know what “less” means, exactly. This makes the claim untestable; it is compatible with virtually any degree of management of the economy. That is, there is no point at which the libertarian could not say, “It doesn’t look good now, but give it time.” It becomes the classic irrefutable hypothesis.

Put another way: Just how much management is “less” management? Just any amount less than we have today? (We’ll reach that point next week; in five minutes, perhaps.) In truth, there is no way to define a “point” called “less” such that when we arrive at it, we can say: “Ah, yes, so this is what those libertarians told us to wait for; now, let’s check those indicators….”

(ii) A fatally incomplete claim, if not fuzzy

Let us assume what is doubtful, that some clear sense can be given to “less” intervention. Still, how does this “someday” interpretation fit into the CEP data?

Imagine a new graph stretching from postwar to “someday.” It would show that a whole lot of regulation (re. the Golden Age) is good, just a little regulation (neoliberal period) is bad, but then almost no regulation (the “someday” period) is very best of all.

What a strangely convoluted story!: It is as if I can run pretty well in very heavy boots, and very fast barefoot—but then terribly slow in regular shoes. Granted, strangely convoluted stories occur all the time—but they aren’t explained by a single causal mechanism, like “less state regulation.” If my theory is that removing weight from my feet makes me run more “efficiently”—i.e., the mechanism of weight-removal will cause faster running—how does this explain that regular shoes cause me to run slower than heavy boots? Something else must be brought into, must be added to, the theory to explain this “glitch.” (Maybe I am allergic to something in the regular shoes.) By itself, the theory doesn’t explain the data and is in fact cast doubt upon by it.

(Actually, it is worse for the libertarian. All he has is the data that heavy boots cause speed, and regular shoes cause plodding slowness. He only predicts that running barefoot will be fastest, on the basis that “less weight causes speed.” Clearly, this theory alone would never sustain the data, much less warrant the prediction.)

So: The rollback of state management alone might explain an economic development, but not why this development should have proceeded in such a contradictory, herky-jerky fashion. The libertarian must give us more here. He must explain why reducing state management should yield such bad indicators just to a point and then jump to good ones after.[5]

(III) The “all or nothing” interpretation

(i) A state is a natural intervener

The inability of libertarianism to render itself as a meaningful, refutable claim (or claims) is what I have termed its “second incoherence.” (The first, or one version of it, is articulated here.)

But there is a third and final interpretation of libertarianism that may sidestep that problem: Perhaps the idea is that we must achieve, not less freedom of the market, but total freedom. The economic indicators will improve when the state withdraws completely from market management.

This sounds promising. Indeed, “none” of something is often easier to pinpoint than “more” or “less” of it: I may not know precisely when I’ve had “half a meal,” but I certainly know when I’ve had no meal. This interpretation would at least preserve the libertarian against the “irrefutable hypothesis” charge. He could not be accused of padding his theory with the means for saying “wait, wait—it will still pan out,” every time a critic notes that the promised benefits have not arrived.

Or so it might seem. In truth, we don’t know what “no” state intervention means, any more than “less” intervention. For one, it is unclear how there could be a state without state intervention in the economy. If there is to be a government at all—and libertarians want one, if a small one—it must contract for some amount of goods and services. The state cannot produce everything it needs by itself.[6]

But contracting for goods and services requires the state to favor some private producers over others; it gives some an edge they haven’t earned on account of their own marketplace “fitness.” This carries the same old threat of disequilibrium and market distortions that keep those economic indicators from smiling.

Of course, the state can do more or less of this; but the point is that it is a case of more or less—not “all or nothing.” We are thrust back upon the “someday” interpretation of the theory, with all of its inadequacies.

(ii) Even a stateless market is never “free”

The point can be made from another angle: In presenting the libertarian case, we have focused on the peculiarities of the state, its uniqueness among economic actors. Its position in society allows it to “sit above” those natural, self-corrective market forces; it alone can “override” these to coerce the other actors to behave in “counter-market” ways, or favor one actor above the others when the market wouldn’t.

But to say that the state has unique means of acting in the market is not to say that all of the effects of this activity are unique. Granted, some of them probably are: The state can infuse one competitor with tons of capital, or buy up all of its products, without there being a corresponding consumer demand; or it can “bail out” a failed competitor without any other competitor being made stronger. It is difficult to imagine any other agency capable of generating these outcomes. So, to the extent the state curbs these kinds of activity—it is gone for good.

But consider another “effect” of state management: Virtually every form of state intervention in the market—no matter what else it may produce—hinders trade. This in itself is a problem for a market system. (Being free to trade is important, in practical terms, only so long people actually do trade. Conversely, even if the government backed out of the market completely, but nobody traded anything, the system would collapse and those “indicators” along with it.) The market needs trade, and lots of it: Real acts of exchange are the place where supply and demand are calibrated to one another, and where imbalances are corrected and re-corrected. When libertarians speak of the “long term” in which equilibrium is achieved, they are measuring not in years but in transactions.

But even if the state has unique ways of hindering trade, it is not unique in hindering trade. Clearly, all kinds of things hinder trade; there are untold social factors in the absence of which “more trade” would be going on: Good weather can inhibit trade in the sense that natural disasters often increase it. If a corporation segmented itself into its various departments, rendering the marketing, R & D, etc., units as new corporations forced to compete against one other and the rest, trade would be increased; even more so if each new corporation further segmented into two new ones of the same type—and so on. The necessary “integrity” of economic actors—the fact that they are not infinitely sub-divisible—hinders trade. (If nothing else, time hinders trade; because some trades will happen in the future, they can’t be happening, nor can have happened, now.)

In short: For libertarianism, the state must be curbed because it acts as a barrier to trade. (It does other bad things, but if all it did were this, libertarians would still oppose it.) So long as any quantity of “state hindrance of trade” remains, the libertarian can use it to dismiss those poor economic indicators (the “someday” interpretation). But by this logic, any quantity of “hindrance of trade” from any source can be used to dismiss them. And we can never eliminate everything which hinders trade. (We can’t stop good weather; nor make companies infinitely divisible.) There will always be hindrances; there can always be more trade.

We are thrust again upon the “someday” interpretation, left awaiting the indefinable “less,” the libertarian insulated against all counter-evidence to his claim. And this, even if the state ceases to be altogether.


[1] Everything in this post applies equally to “libertarian,” “neoliberal,” and “neoclassical” econcomics—to any view that the state hinders economic efficiency. I address libertarians directly as I intend this post as part of an ongoing polemic against Ron Paul(ism). I started this when his Presidential campaign was in swing and drawing a lot of positive attention, even from the left (previous posts here and here). None of this assumes the terms in quotes are synonyms; I focus on the common content.

[2] Libertarians would resist the “neoliberal” label. It is mostly applied to those who favor using Non-Governmental Organizations like WTO, IMF, etc., and international trade agreements like NAFTA, to erode states’ economic role and increase cross-border capital flows. Libertarians would view these entities as controlled by states or otherwise illegitimate interferers in market mechanisms. But the point is that the economic role of the state has diminished, and capital flows have increased, in the “neoliberal” era. To this extent the libertarian agenda has been advanced. The “tools” responsible for this (WTO, etc.) are immaterial to the argument.

[3] That is, “real” or productive capital investment—the kind that generates goods and services rather than being put to speculative purposes.

[4]  A large group of countries, including the US, formally committed to “free market” principles.

[5] Or, in fairness, he could critique the data. He could say, contrary to the CEP (and other) data, that the indicators aren’t worse, or capital flows haven’t increased, in the “neoliberal period.” (Or that state management of economies hasn’t been rolled back, i.e., there hasn’t been any “neoliberal period” at all.)

[6] This goes for ordinary goods (buildings, transport, office and sanitary supplies) but doubly for munitions, where simple supply and demand cannot dictate production: For security concerns, the state will contract for some military technologies in advance and forbid even the existence of competing suppliers. Can we conceive of a marketplace where several corporations build their own aircraft carriers and nuclear warheads and then compete for the state’s contract—knowing if they don’t get it, the whole effort will have been wasted? Will the state tolerate this swamping of the landscape with military info-tech and material? Won’t it “regulate” the plan-B sale of these items by the losers on the global marketplace? (Especially if the state is a small one.)


4 responses to “Another hit for the Ron Paul fans: A second incoherence of libertarianism

  1. Craig J. Bolton

    “So what to make of this story? First, there is more than one way to interpret libertarian claims about the economy. One is to say that market efficiency will increase in direct proportion to reduction of state intervention in the economy. That is, all things being equal, the more the state withdraws, the more we can expect of those benefits.”

    Two things: (1) This is what is called a strawman. I know of no libertarian [at least no libertarian who is recognized by his fellow libertarians as a libertarian] who takes this position. The libertarian position is that markets work and central direction of economic affairs, including “regulation” are always a disaster. Period. (2) This issue was explored in what is technically known as “general equilibrium theory” or “welfare economics” in the 1960s under the label “the theory of the second best”. The conclusion of those studies was that a movement from a lot of government interference in the market to somewhat less interference does not make things better. An economy is like an ecology, small scale or erratic tinkering can have just as catastrophic effects as large scale tinkering.

    In other words, you fail the test for knowing your subject before starting to type.

  2. (a) Yes, position (1) may be a strawman–if I actually ascribed it to any libertarians. But I didn’t do this. So I haven’t failed to “know [my] subject before starting to type.” In my effort to *avoid* attacking a strawman, I articulated three possible ways to interpret libertarian claims about market efficiency. I remain agnostic about which (may) actually apply. (In general I address positions rather than people; they are far less dodgy.)

    (b) The reason I had to explore multiple interpretations is because the libertarian “claim” is damned ambiguous. Take your own rendering: “Markets work and central direction of economic affairs…are always a disaster. Period.” You substitute this for my own rendering of libertarianism (before I “multiply interpret” it) as if mine and yours are not as good as synonyms. Again: Just what does “central direction” mean? Any old quantity of central direction? (So if the state intervenes in the market just once in 200 years, to buy a half-price hamburger for the President, the economy will undergo “disaster”?) And what is the alternative? Less central direction than we have now?—How much less, and how do we know when we’ve gotten to that amount? No central direction at all?—Is that possible? (But I direct you to the—entire—essay.)

    [i.e., When you say, “a movement from a lot of government interference in the market to somewhat less interference does not make things better,” you are simply rejecting one of the possible interpretations of libertarianism which I lay out—namely, the one you quote (and mistakenly think I ascribe to some actual libertarians). This is fine; read on: I offer two other possible ways to interpret libertarianism, and refute those as well. That is, you either want (a) a lot, lot, lot less gov. interference than the “less” we have now, or (b) no interference at all. Is there a third interpretation of “interference is bad for the market” I’ve overlooked?]

    (c) Whether any actual libertarians explicitly “take” one (or any) of the three positions I attack is immaterial, because that isn’t the only way to “take” a position. My point is that the position itself can only mean—if it is to have meaning—one of the three options. (Then again, maybe it has no meaning–but I’m being generous.) No flesh-and-blood libertarian has to assent to one (or any) of the views in real life for this to be the case. The position is ambiguous and must “go” in one of these three directions if it is to not be. My essay forces libertarians to pick one of a trichotomy of positions, each leading to absurd conclusions. (There’s probably a latin name for that but I don’t know it.)

    (d) I think I said all this in the essay—right?

  3. Craig J. Bolton

    (1) Any term purporting to refer to an entire ideology is “ambiguous,” jus like every other term describing a class. However, it is also empty if there is not at least one exemplator. “Socialism” refers to a vast varieties of different views, but none of them involve an absolute dictatorship by th Dali Lama. Hence, it is fruitless to discuss a socialism with such a characteristic.

    (2) I am not certain which of us is unsophistocated about this particular issue, but one of us sure is. Of course, most people would argue that government must define and enforce property rights, and, of course, there are alternative different ways to make certain choices about that original definition and the techniques of enforcement, but THE POINT IS that once those decisions are made they are not perpetually modified on a day by day and case by case basis. The same is not true of regulation or other forms of government intervention [as we are now seeing in the credit markets]. Here, perhaps this will help
    I would also suggest that you read the chapters on Economic Calculation in this and, finally, on an alternative view as to how property right definition and enforcement might occur without a government, take a look at

  4. (a) I’m not using “libertarianism” to refer to an “entire ideology,” but to the basic claim that reduction of state interference in the economy yields market efficiency.

    (b) Even still, every term, class-referring or not, is indeed “ambiguous.” My point was not that “libertarianism” (as I’ve defined it) is ambiguous, but that the ambiguity is a particularly problematic one, and bears the particular implications I outlined.

    (c) Again, it is not required that one consciously assent to “proportional libertarianism” to be an “exemplator” of the “set” of believers in it—only that some other belief(s) of his imply this logically. (Though, again, my point is slightly more complex—that the “libertarianism” claim must mean, when consistently rendered, the “proportional” view OR one of either of the two other views treated.)

    I have to stress that this whole thing is a logical exercise. Even if nobody believes (1) now, they might go there when the doors to (2) and (3) (of the three views treated) are closed in the course of the argument. It is like C.S. Lewis’s argument that Christ must have been a “liar, lunatic, or Lord.” Nobody (nobody he is addressing) actually thinks Christ is a liar or a lunatic (the sets have no “exemplator[s]”), but that doesn’t make the exercise worthless. It forces the reader to choose one of three logically possible options implicit within their belief that Christ is a worthy moral teacher but not God. It is, in fact, because the sets are empty that the argument works. (Well, it works for the audience, given false beliefs they already hold–but that’s another story.) I’m not sure that’s what I’m doing, but in the extreme case that I were, it still wouldn’t be a pointless enterprise.

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