The Death of Libertarianism
We are all losers in this current economic crisis. On an intellectual level, though, no one has been more damaged by the crisis and the bailout than property rights libertarians. I think this is true across the libertarian spectrum.
There are two broad types of property rights libertarian.
In contrast, there are those who subscribe to a consequentialist defense of libertarian policy. Wealth will be maximized, they argue, when the state respects and enforces rights of private ownership and freedom of contract. Think here of Milton Friedman. This is obviously a bit simplistic. Even Friedman was not a pure libertarian, and there are some figures, like Hayek, who seem to straddle both categories. But I think the broad distinction between a consequentialist defense of libertarian limits on state power and the moral defense of libertarian principle remains a valuable one.
Consequentialist libertarians have suffered the hardest blow. The current crisis is widely attributed to lax regulatory oversight and the corporate welfare currently being doled out to the financial industry gives the lie to the consequentialist argument that the government maximizes aggregate wealth by refusing to butt into the workings of the market system. Of course, there are those on the right who will dispute this and attempt to blame the current crisis on regulation (not its absence), but they have not as yet been able to marshal very convincing arguments in support of their position. Perhaps with the benefit of hindsight, they will be vindicated, but I doubt it. As it now stands, it would seem that a fairly robust regulatory state is required to maximize aggregate wealth.
The current crisis interacts with “moral” libertarians in a more subtle way. Because their position is not based on the favorable consequences that will be generated by protecting rights of private ownership, the crisis, even if the result of insufficient regulatory intervention in the market, cannot undermine their position. Only moral argument can conclusively rebut the claims of moral libertarians. Nevertheless, it seems to me that the state’s response to the economic crisis fatally undermines efforts to draw robust policy implications from the principles of moral libertarianism, even if the moral libertarian position is the correct one as a matter of abstract moral theory.
Consider Nozick’s position. In broad strokes, Nozick argues that a property distribution is just if it is the result of just original acquisition followed by just transfers, where just transfers are understood as those that result from consensual transactions with a few narrow exceptions for forced transfers that are justified by the need to maintain a viable (though minimal) state. Nozick used this “historical” theory of just property distribution to argue against the validity (at least in the abstract, as I’ll explain in just a moment) of redistributive taxation and the welfare state.
As many people (including Nozick himself) had already argued, the implications of Nozick’s arguments for current policy are actually somewhat opaque. This is because existing property distributions are not themselves justified under Nozick’s own system. The theft of land from Native Americans and of labor from African slaves, to give just two examples, cast a cloud that extends to the present day, perhaps justifying, even in Nozick’s view, something like the welfare state, now cast as restitution for past injustice rather than an entitlement by its own right.
The current crisis, and particularly the bailout of the financial industry, further drives home just how far from Nozick’s ideal of justified property distribution we are. The use of tax dollars to subsidize the industries that employ the wealthiest Americans demonstrates the impossibility of pretending that those at the top have gotten there on their own steam such that they are somehow entitled to keep what they have “earned” and that it is unjust to take from them in order to give to those at the bottom of the economic pyramid. The social insurance on which the super-rich are currently drawing makes plain that they are as dependent as the single mother on welfare who was the subject of so much vitriol during the Reagan years.
In other words, even if moral libertarians like Nozick are right as a matter of moral theory — I don’t think they are, but let’s just assume it for a moment – our current situation is so far from the necessary starting point for such a theory that the theory is, as a practical matter, nearly irrelevant.
The discrediting of the hard-core libertarian position does not give us a great deal of guidance about where to go from here. There’s a lot of space left for disagreement about how much state intervention in the economy or redistributive taxation is prudent, but at least we can dispense with some of the familiar arguments against the permissibility or wisdom of any such interventions.
Most of the commentary about the appointment of Cass Sunstein as Obama’s regulatory czar has focused on his likely efforts to favor less intrusive, not more robust, regulation. The Wall Street Journal, Volokh Conspiracy, Glenn Reynolds and other libertarian-leaning sources have applauded the appointment. Sunstein and perhaps Obama may find the anti-libertarianism lessons drawn in this posting to be more than a little premature.
“The current crisis is widely attributed to lax regulatory oversight and the corporate welfare currently being doled out to the financial industry gives the lie to the consequentialist argument that the government maximizes aggregate wealth by refusing to butt into the workings of the market system.”
I don’t understand your argument here, Eduardo. When the government makes a huge transfer payment to AIG or Citigroup, no wealth is created – the assets are just transferred from Point A to Point B. The aggregate wealth remains the same. (New wealth would be created if Citigroup would loan the TARP money, but it appears that the banks are simply sitting on the government cash right now).
I’m not a libertarian, but I believe that a libertarian – or at least a free-market economist like Friedman – would say that we should let GM fail and let the market adjust to its absence. While that would cause suffering and dislocation in the short run, in the long run the economy will be stronger for it.
I think the way to read the situation is that for a generation or more, there has been a consensus in favor of unfettered markets. While the economy was humming along, that was a comfortable belief. But confronted with crisis, policy makers’ faith in free market principles has been put to the test, and it appears that in most cases, their faith is weak. Politically it is better to “do something” than subscribe to a theory while voters suffer.
Whether the consequentialists are discredited is yet to be determined. “Ignored” “discredited”. My own prediction is that as we progress through the next eight years, conomists and policy makers will be able to examine the current crisis in a more detached and thoughtful way, and that free market principles will make a roaring political comeback.
Sorry, in the final paragraph above, I tried to write ” “Ignored” does not equal “discredited” “. In this forum, typing a less-than sign followed by a greater-than sign apparently is some sort of special code – the characters don’t appear when posted.
Patrick — you’re using “libertarianism” in exactly the opposite way that I do in the post. Check the last paragraph of my post again and you’ll see what I mean.
Jim — I think the answer to your question is that the failure to prop up these institutions would (as far as I understand the economics of this) lead to their failure which would, in turn, cause widespread wealth destruction due to the collapse of credit markets on which the modern economy depends. So transferring resources to them is wealth-enhancing in the sense that it avoids losses.
Eduardo —
Thanks for a smart and thoughtful post.
I’m not sure I follow, however, why the current crisis tells us anything whatever about libertarianism. Nothing about the financial system even arguably approaches a libertarian ideal, nor has it for many, many decades. The most plausible case I’ve seen that deregulation had anything to do with the current crisis has to do with a 2004 SEC decision to allow a greater amount of leveraging as to a few wealthy investment banks. Probably a bad idea. But even that doesn’t tell us much about libertarianism.
Why? Think of the famous Lipsey and Lancaster article on the theory of the second best: Deregulating just one tiny piece of an otherwise-highly-regulated system might make things much worse, even if the system as a whole would be better off unregulated. A good example is the California electricity crisis a few years back, which showed that it’s not helpful to deregulate the wholesale electricity market (thus allowing prices to rise and fluctuate dramatically) while still tightly regulating the retail market (thus preventing retail prices from matching wholesale prices, and creating severe mismatches).
While I’m certainly not a scholar of the financial system (nor is anyone around here), I wouldn’t be surprised if someone could make a good case either that: 1) whatever deregulation occurred should have been more widespread so as to align incentives properly (or else shouldn’t have occurred at all), or that 2) whatever regulation we need to be pursuing now might be much less intrusive (or more accurately targeted at the appropriate risks) than whatever Congress might have cooked up in past decades.
You all make some good points.
Regarding the “pragmatic” aspects of libertarianism, I’ve failed to see how the critism corresponsds to reality. The media talks about a lack of regulation and acts as if waiving a regulatory wand will somehow solve the problem. The fact is the mortage market is neither particularly regulated nor deregulated, and the situation hasn’t changed during my lifetime, which has included a number of democrat and republican administrations. I have yet to see any concrete regulatory proposals that would prohibit any behavior that hasn’t always been a felony, or any evidence that a regulator would have been more likely to forsee this situation than private banks. Banks which made bad invesments would quite probably have made worse invesments had the ones they made been unavailable.
With respect to the bailout transfers, they don’t change the fundamental amount of wealth. An acre of land is still and acre of land. The money borrowed by the government will in principle have to be extorted from future generations, so even if it “creates” 3 million jobs now, it will destroy more than that at some point in the future; the lack of fiscal responsibility to this point is in large part responsible for current circumstances.
I think the best solution is to transition from a debt-based economy to a savings-based one. The bailed-out banks aren’t very well run, and lending money to people who won’t pay them back isn’t smart. Interventionists don’t agree with this and have more political power, so I’m not sure quite what will happen. Personally, I never dealt with irresponsible banks, and thus haven’t been impacted much at all.
Most “theoretical” libertarians basically believe that while money has been transferred unjustly in the past, we just need to stop this behavior and move on after some transition. Thus both theft by settlers from the natives and by bankers from the taxpayers would regretiably go unpunished, but should not reoccur (with state sponsorship).
Regarding Sunstein, I guess it’s time to dust off the copy of “Free Markets and Social Justice” that been sitting on my shelf for a while and give it a read.
At the time I bought it, it struck me as a pretty nuanced response to the free market fundamentalism that was in vogue until the current meltdown.
The book is drawn from a collection of essays based on the premise that, while free markets can promote the cause of social justice, they can also impede it. When that happens, the concerns of social justice should take precedence.
From the general tone of the book, Sunstein seems like a pragmatist like Obama, his onetime colleague. I don’t know why that gives the libertarians any cause for comfort, except for the belief that Sunstein does not fit the image of the bomb-throwing nihilist bogeyman they’d like to conjure up.
With respect to the bailout transfers, they don’t change the fundamental amount of wealth. An acre of land is still and acre of land.
The physical entity and wealth are not the same. All things considered, I’d prefer an acre of land in downtown Manhattan rather than one acre in the middle of the Mojave desert. Also, when the price of an asset plummets, wealth is destroyed. Ask the folks at Enron or anyone else relying on their 401K to get them through retirement.
What’s more, some folks are sitting on a lot of Lehman Brothers AA rated bonds bought with hard-earned cash that aren’t going to be good for much except wallpaper. I don’t know how many hard examples it takes to get this across. I guess the old religion dies hard.
For a liberal economist’s thumbnail assessment of Liberalism vs Libertarianism. see:
http://delong.typepad.com/sdj/2009/01/modern-liberalism-and-libertarianism-an-economists-view.html
Included in that post is the following quote from Maynard Keynes:
It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately. We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed “one of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion”…
Ayn Rand does not fit well into your categorization. Yes, she believes that pure capitalism is moral. It is moral because it is the only system that respects individual rights: the right to think, produce, own what you produce, etc., without force being used against you. Individual rights must be respected because they allow a man to do what’s necessary for him to live a full, happy human life. As such, for Rand, the moral is inseparable from the practical. They are one in the same.
As you’ve noted the strength of your argument also depends upon the premise that lack of government control over the economy has led to the current crisis. For a view on this question from the Randian perspective, see http://www.aynrand.org/site/PageServer?pagename=arc_financial_crisis.
Lastly, re “The use of tax dollars to subsidize the industries that employ the wealthiest Americans demonstrates the impossibility of pretending that those at the top have gotten there on their own steam such that they are somehow entitled to keep what they have ‘earned’ and that it is unjust to take from them in order to give to those at the bottom of the economic pyramid.”
This is hardly an argument against laissez-faire. No one who opposes subsidies would argue that the recipients are entitled to them, or that any position gained due to them was earned. And saying that we need more government redistribution to rectify the problems caused by government redistribution is a strange argument. At any rate, whatever short-term emergency measures are proposed as necessary to fix the mess we’re in now, it still leaves open the question of what the correct political system is for the long term.
Which of these is Eduardo saying:
1. Libertarianism (of one or both sorts) has been refuted by the current crisis.
2. A majority of the public believes libertarianism has been refuted.
TPoint 1 is not argued for in the piece. Nor could it be, because what we’ve had for the last 100 years is nothing like a laissez-faire system. It is completely question-begging to look at a system that is half-capitalist half-statist and just announce which half caused the problem. And in fact those of us who support laissez-faire see the current crisis precisely as the failure of the regulatory state–i.e., as the fault of the statist half of the mix.
Point 2 is quite true. But it is irrelevant to an intellectual magazine, like Commonweal. Yes, tons of people believe all sorts of things–now let’s discuss what’s true.
Ayn Rand’s Rational Man as the mirror image of Marx’s collective New Man and just as bogus. In such a world, Tony Soprano and his gang would have this bunch of hardy individualists for dinner. I’d compare this to the jungle but that would be giving nature a bad rap.
“On this view, the absence of state regulation or redistribution of property is valued for its own sake, and not because of any good consequences it might generate for society.”
I don’t know about anyone else, but Ayn Rand’s contention is that every value has to be for some purpose and for some person. She worded it, “of value to whom and for what?” If you are on top of a beautiful snow-covered mountain, you probably want a pair of skis, not a Subaru.
Those interested in the views of a contemporary property rights libertarian might want to look at Richard Epstein’s ongoing weekly column in Forbes. In the column linked below he responds to a (premature?) diagnosis of the “end of libertarianism” similar to that given above.
http://www.forbes.com/opinions/2008/10/27/slate-libertarian-weisberg-oped-cx_re_1028epstein.html
“Ayn Rand does not fit well into your categorization. Yes, she believes that pure capitalism is moral. It is moral because it is the only system that respects individual rights: the right to think, produce, own what you produce, etc., without force being used against you. Individual rights must be respected because they allow a man to do what’s necessary for him to live a full, happy human life. As such, for Rand, the moral is inseparable from the practical. They are one in the same.”
Surely this sort of theoretical selfishness is profoundly unChristian?
“Surely this sort of theoretical selfishness is profoundly unChristian?”
Indeed it is.
As to what caused the melt.down, a Harvard econmist said on CNN yesterday that it will be very, very difficult to determine what caused it because so many sub-systems collapsed at once. I wonder if that is true. Pity if it is because then the economists will never know which which of their theories needs revision.
“Pity if it is because then the economists will never know which which of their theories needs revision.”
I think that may be the intention…..
it seems to me that both the libertarians and the super-liberals found their ideologies on the principle that one has a right to be happy. How can this principle be justified?
Here’s an interesting rejoinder to the Epstein article, written by soneone claiming to be in the banking business. I’ll buy the assertion that the cops on the beat simply weren’t doing their jobs.
The problem with this whole line of discussion is that it begs a couple of major points- one practical, the other philosophical. Practically, the major issue with government regulation is not the regulation per se (e.g. CRA). I spent more than 30 years in banking bridging the thrift/commercial reality, then the commercial/investment reality. Fortunately, I left before Gramm’s mischief took full hold. The problem has almost always been with regulatory oversight, not the regulations themselves. What was CRA’s intent? To eliminate discriminatory lending practices which precluded home ownership opportunities and economic opportunity based on preconceived notions (remember, before CRA, a minority professional living in the inner city had little opportunity to obtain mortgage credit. Many “majority” residents were similarly blocked). Lack of regulatory oversight and, to be honest, outright fraud, permitted speculators and slumlords to use the cover of CRA the same way unscrupulous developers used government minority “set aside” programs to their own illegitimate benefit. The second and deeper issue is the belief in both “enlightened self interest” and the unfettered accumulation of wealth. To suggest this is “free markets working” or “unfettered capitalism” is dishonest. The real “re-distribution of wealth” which has occurred since 1980 is a considered plan to allow the top 1% of the economic pyramid, without control, to amass unimaginable wealth while stripping society of the appropriate financial means to tend to the infrastructure. This includes education, health, highways, transportation and, yes, even national security.
When anykind of system collapses, the reaction particularly the Western reaction, is to pass laws, regulation, rules, etc. The presumption is that somehow these regulations, rules,standards, etc. are objective measurements that people can use to ensure “justice” or “fairness” or any other more transcendent value.
Or the response is that the enforcers weren’t doing their job. Well they may well have been doing their job but interpreted all these regulations, rules, standards differently than others interpreted the same regulationsh, rules, standards and/or weighed all the factors in the same way.
So now government people go back to the drawing board to create more systems that will achieve desired objectives.
I think TS Eliot’s famous line of people dreaming of systems so perfect nobody will have to be good comes to mind.
Personally, I lean towards individualism because I think it conforms more closely to most people’s default character posture. I realize that many/most individuals are not enlightened and altruistic – “original sin” seems as good an explanation as any. But how to transcend that is the issue. Fundamentally, I believe that this is fundamentally and individual exercise that the INDIVIDUAL is called to. The monastics were correct in this regard and the early Church’s and eastern/Russian Orthodox intuition that monastics represented the Christian ideal is on target.
If I were to err on any other side, I tend to err on the side of libertarianism as opposed to system or collectivist theories.
Financial institutions are a special case in the economy because their work is vital to the functioning of the overall economy. They have a social responsibility to the rest of us. If they ignore that responsibility in the quest for personal enrichment, then they must be regulated.
“Financial institutions are a special case in the economy because their work is vital to the functioning of the overall economy. They have a social responsibility to the rest of us. If they ignore that responsibility in the quest for personal enrichment, then they must be regulated.”
Doctors are a special case in healthcare because their work is vital to the functioning of the overall system. They have a social responsibility to the rest of us. If they ignore that responsibility in the quest for personal enrichment, then they must be regulated.
Farmers are a special case in the food industry because their work is vital to the functioning of the overall food supply. They have a social responsibility to the rest of us. If they ignore that responsibility in the quest for personal enrichment, then they must be regulated.
Microsoft is a special case in the business world because their software is vital to the functioning of business overall. They have a social responsibility to the rest of us. If they ignore that responsibility in the quest for personal enrichment, then they must be regulated.
…
“Financial institutions are a special case in the economy because their work is vital to the functioning of the overall economy. They have a social responsibility to the rest of us. If they ignore that responsibility in the quest for personal enrichment, then they must be regulated.”
I have always characterized libertarianism as an “infantile disorder”. But I’ll say here that if markets were totally transparent and if people took on market risk personally and directly, the markets probably would work as they are theorized to (and maybe libertarianism would too, as unpleasant a thing that would be to contemplate). But markets have not been this way in the US for maybe 200 years.
The purpose of regulation is to ensure market transparency to make sure that risks are (more) properly allocated to those who should be bearing them. Any business that is not transparent should be regulated in order to make it so. Some will need more than others. Banking needs a lot, because we have discovered that even the largest and most sophisticated institutions still can’t price their own portfolios and in fact never were really able to.
Regulation isn’t some kind of arbitrary intrusion into the market. Regulation is what makes the market work. It keeps people from transforming economic power into effective political power in order to make things opaque for their own advantage.
“The models suggested that the risk was so remote that the fees were almost free money. Just put it on your books and enjoy the money.”
–Tom Savage, President, AIG’s Financial Products
So much for transparency and risk assessment. AIG, a supposedly rock-solid conglomerate, had a good chunk of the country’s retirement savings under management, including a chunk of *our* savings for the last 40 years. During the heigth of the panic, brokers were terrified of customers running for the exits and making a bad situation much worse. Sure, a lot of AIG’s insurance subsidiaries were supposedly sound, but once trust is lost, people stop believing, get frightened and cash out for whatever they can get. Especially if they’re on the far side of retirement. Then the domino effect sets in and the credit markets freeze up. Nobody trusts anybody else. Solid companies like, say, Boeing or Intel, can’t get the short term loans they need and are unable to pay their bills or get paid and on it goes. Loss of credit creates a situation analogous to an engine running without oil in the crankcase. As perceived risk goes up, investors start demanding risk premiums or pulling their money out of the market and into things like T-bills (which, a short time ago, had a negative yield). Then there’s no money to finance investment, growth or job creation. And the vicious cycle continues. That’s how panic works. As esoteric as it seems, the entire system runs on nothing more substantial than confidence, just like the great and powerful Oz.
That’s why, unlike doctors, farmers and even Microsoft, collapse of these giant and powerful financial entities can pull down the whole economy not just here but world-wide. Given the way the global economy is interlocked, one can imagine a threat to political stability that dwarfs the death throes of the Weimar government. Thus, the emergency meetings between governments that were held a few months ago, whatever their other motives, were primarily intended to calm badly frightened global markets.
These entities really are too big to fail. Once the dust settles, as hopefully it will, the problem will be addressing the resulting moral hazard. Institutions cannot be allowed to take risks knowing they’ll be bailed out by the government if things don’t pan out. This will require smart regulation, not some libertarian panacea.
Regulation isn’t some kind of arbitrary intrusion into the market. Regulation is what makes the market work. It keeps people from transforming economic power into effective political power in order to make things opaque for their own advantage.
It’s more than that. Lack of transparency increases the costs of capitol as investors demand compensation for the increase in perceived risk or risk-averse investors stay out of the marketplace altogether. If investment capitol dries up or becomes prohibitively expensive, innovation (ie. wealth creation) and job creation are stunted.
The situation here is a case of what happens when valuable knowledge is lost in a culture that has become dominated by those want to tear down what honest and good men have built. The idea that regulation is needed for prosperity has been refuted so many times during the past that those to advocate such a silly idea today reveal only their ignorance and their malice. Lack of regulation did not cause this crisis; regulation caused this crisis…regardless of common opinion. Fannie Mae and Freddie Mac are quasi-government institutions run by appointed government bureaucrats not businessmen. The relaxation of the regulations that “dictated” lending standards is what caused this crisis. This was done under Clinton. This crisis is not a failure of too little oversight but a failure of socialism. Classical economists, the people with the knowledge that has been lost, and even Ayn Rand, have shown definitively that it isn’t freedom (the lack of regulation) that causes economic problems it is government regulation that is responsible for economic collapse. It was Barney Frank and Christopher Dodd, hardly examples libertarianism, who got us into this mess by looking the other way to the known illegal activities at Fannie and Freddie and by looking the other way while ACORN fought to loosen “free market” lending standards. These agencies and lending institutions were shaken down by ACORN, an Obama trained organization, in order to force them to loosen standards that a free economy would not allow. It is only government that can cause the free economy not to work and in this case it was government that forced banks to loosen lending standards out of fear of being called racist and out of fear of being punished for violating government lending standards. Stop reading the tea leaves and look at history. Government is the problem, not the solution and we’ve just put the government in the hands of the mastermind of the sub-prime crisis. Be afraid…be very afraid.
“Regulation isn’t some kind of arbitrary intrusion into the market. Regulation is what makes the market work.”
Prudent regulation makes the market work. Regulation can also be imprudent – e.g. it can be abritrary and intrusive, as when the government tries to dictate wages or the prices of commodities.
Mark Wickens, re: doctors, farmers and Microsoft – you’ll have to connect the dots for me, I don’t see the parallel between those markets and the supply and demand for money.
Rob Diego said: “The situation here is a case of what happens when valuable knowledge is lost in a culture that has become dominated by those want to tear down what honest and good men have built.”
This is the kind of statement that shows us that an argument has crossed a line into religious belief.
To address your argument, you don’t identify the classical economists. But assuming that you mean someone like Adam Smith, what he said was relevant at the end of the 18th century. But even before he died, he saw the rise of things like the joint stock company and other kinds of credit institutions that really destroyed the theory of risk that was the underpinning of his system. Say what you will, we have had 200 years of capitalists inventing ways to avoid risk, either by passing it on to other people or by under cutting market mechanisms by controlling information. THIS is why we need regulation. So that risks are properly allocated and so that transactions are transparent. Even if you were correct in what you consider to be the causes of the crisis (and you aren’t) the fact is that the capitalists in control of the economy STILL can’t evaluate their own assets and we still don’t know how deep the hole goes. Is this the government’s fault?
The situation here is a case of what happens when valuable knowledge is lost in a culture that has become dominated by those want to tear down what honest and good men have built
The best irony is unintentional.