4 July 2001

How My Libertarianism Lost Its Mojo

I'll avoid coherent argument, and try Nietzschean point making:

People are fallible. And society is evolved. Any attempt to comprehend society and its mechanisms with a theory deduced from some principle is suspect: society is likely to be more complex than your theory, and your attempts to compensate for that are likely to have overlooked something, even if all your deductions are correct.

This isn't to discourage people from trying to come up with theories; I'm all for using Reason. But not, perhaps, for trusting it uncritically after use. And the larger the discrepancy between reality and theory, the more suspicion should adhere to the theory.

Worse, the social sciences are not the natural sciences, especially when you live in the society. Studying subjects who are not only aware of being studied but have an interest in the result of your study is a slippery business. For example, proof by prediction, so successful in the natural sciences, doesn't necessarily work here. A theory which was valid initially may become false through the reaction to its statement; we call these self-cancelling prophecies, such as the collapse of the capitalist system in _The Communist Manifesto_, or _1984_. And there are self-fulfilling prophecies, where a bogus prediction becomes true, at least for a while, because people believe in it. The early industrial success of the Soviet Union might be explained this way: enough people believed in what they were doing that the free-rider and shirker problems were not overwhelming. Stock movements also behave like this: a belief that a stock is becoming more valuable increases demand and hence its value, or at least its price.

Government is a tool. It can be used for many things, many of them bad. But one use, in democratic hands, is to solve the free rider problem. A majority may wish to do something but be hampered by the minority benefitting, or more likely by cascading defection from the majority: people who wish to benefit, but aren't constrained to pay. Democratic coercion is one solution: "Enough of us have decided this that you'll all join in, like it or not." This can be misused, of course. That's why we have other tools, such as the rule of law, and minority protections.

Some effort has been put into creative libertarian solutions to free riders. One, I'm not convinced they fit all situations. Two, Coase taught us not to assume away transaction costs, but to compare them to administrative costs; this explains why companies exist, instead of everyone competing in the market. A natural extension is that some problems might be most efficiently solved through coercive administration, so that even if freer solutions worked, government worked better. In many areas coercion costs are high, but there's no a priori reason to rule out the possibility that sometimes they're the lowest of the three costs.

Unless you take Ec 101 too seriously, and walk around thinking that the perfection of perfect markets is relevant to the real world. If so, you probably haven't heard of Coase. But let's go back to the stock market. Remember those supply and demand curves? When price goes up, quantity demanded goes down? Not with stocks! When price goes up quantity demanded can go up, as people pile onto the bandwagon. And supply can go down, as people become reluctant to sell. Conversely, as prices fall demand can fall while supply gluts, as people panic and try to sell. This phenomenon, untimeable by any theory, is hardly something to be brushed under the rug; boom-bust cycles were a major feature of 19th century economic life in the US, and the 1997 big bust caused a lot of damage in East Asia, possibly including toppling the government of Indonesia.

Oddly enough, the financial markets people have the most confidence in operate under a lot of government regulation, from reserve requirements for banks to the disclosure and insider trading rules of the SEC. People have the most confidence in the US stock market; the SEC is the strongest stock regulator in the world. Odd, that... while unregulated markets have not come up with self-regulation of equal confidence.

I've also become less enamored of the desirability or even benefits of utterly unrestrained competition. Skipping the pleasures of luxury and leisure to the pragmatic argument, we can consider market competition a form of evolution. We can also remember that evolution has some drawbacks, such as getting stuck on local optima. One of the human advantages is that our ideas can evolve faster than genes, but another is that we can entertain nonviable (dumb) ideas for a while before hitting on an improvement not well connected (if connected at all) by small improvements from our starting point. One of the concerns about the increasing profit-orientation of the universities is that they may lose their nature as a place where ideas can be nurtured while having no forseeable profitability. And if we think about it, tenure is a rather odd and unmarketlike privilege, if we think tests for merit should be strict and frequent. But not so odd, if we think in terms of creating islands free from competition, where odd novelties become possible, some of which might lead to otherwise unobtainable improvements.

All of which is to say that, never mind the humanitarian advantages, a society which forcibly creates areas free of market competition, even at taxpayer expense, may eventually outcompete -- with either technological or social innovations -- one which subjects all parts of itself to market discipline.

[ Since the goal of the intended collection of aphorisms was to make cracks in a libertarian facade, rather than a single logical argument, which generally doesn't work and probably can't, I'm stealing succint puffs I like unless you object.

(can't: libertarianism is logical, given the premise. You _can't_ win a logical argument, really, you have to show that the discrepancy between their results and desirable reality is too great, so they reject the premise.)

(aphorisms: kind of like comic strips. Hit several disjoint points of a hard to verbalize or formalize concept so the reader might be able to fill in the harder thoughts.) ]

Re your second-to-last paragraph, hardcore Libs would claim that futures markets can finance exploratory speculation, and point to the VC boom in the last few years as an example of a time when it became apparent to some people (despite the ridicule of others) that exploratory speculation in certain fields could be highly profitable, even if the immedate payback was uncertain.
(Dan Egnor)
Still, VCs tend to have a rather shorter timescale than academic research. There are some long-term examples (e.g. biotech) but I don't think I've heard of VCs pursuing a century-long project.
(Preston Pfarner)
I would disagree and say that it seems very clear that real-world markets are reasonably shortsighted; venture explosions are rare, short-lived, and as often as not focused on swindling naive investors. I would posit that this goes back to the problem of unaccountable externality; the Really Big Ideas don't tend to benefit their creator in proportion to the amount by which they benefit society.
(Dan Egnor)

Right, what they said. Futures markets/VCs have theoretical potential, but dismissing government-funded research and counting on them seems imprudent. Of course, possibly the private sector would take up more slack if suddenly required to do so, in the right setting, a la the self-fulfilling beliefs described above. And perhaps they'll develop to fund more long-term research. But in current practice they go for a high-chance of profit, not decades long pure research projects. As well they should, given their nature.

I sometimes make the argument that the world *is* a libertarian "paradise". There is, after all, no world government. You want to talk about "private" police forces and infrastructure companies? We call them "nations". There are many, and they offer a variety of "packages". Some do well and others do not.

"What," I say to the spluttering Libertarian, "You want to talk about hegemony, bundling, required contracts, the importance of colocation, and natural monopoly? Those aren't very Libertarian points to make."

I then argue that apparently nation-states are the equilibrium result of anarchy. Good news: Libertarianism "works"! (Well, insofar as our nation-states "work".) "You're absolutely right; people will, and have, self-organized to the degree they see necessary. Now what's your point, again?"
(Dan Egnor)

Back to me.