12.10.2008

I want FREEDOM!, and that's what you should want!

WARNING: In order to save myself some typing and my readers some critical thinking, I'm going to change the tone of this post... if it seems at times ideological, understand that it is only for the sake of expediency. In a subsequent post, I'd be happy to undermine my own conclusions here. Enjoy.

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The modern defense of small government, which is the defense of capitalism, begins with an almost simultaneous discovery in three different countries by Carl Menger, Leon Walras, and William Stanley Jevons (all between 1870-73). Their breakthrough involved a recognition of the fact that the value of a good or service depends entirely on utility (see below). At the time, this stood in contradiction (most obviously) to Marx's conception of value, which was labor-based.

The labor theory held that hours of labor were what invested an object with value. But followers of Marx were daunted by a theoretical objection called the "paradox of value," which pointed (for example) to the problem of stumbling upon a raw diamond, which was not the product of any labor hours, on the side of a mountain. Despite the fact that no labor went into producing the diamond, it's value was far greater than the value of (say) a dissertation, which may have taken 1200+ labor hours.

To answer, the "marginalists" presented an interesting scenario (I'm making this up, but it's along the lines of what they'd describe): Man A is stumbling through a desert, lost, about to die of thirst, when he stumbles upon Man B. Both men are wearing tattered clothing, and both are miles from an oasis. Man A is wearing a 3-carat diamond ring, but has nothing else. Man B has no ring, but has a full bottle of water. Despite the typical market values of the diamond and the glass of water, in this situation the water is clearly more valuable -- consequently, Man B will not trade his water for the diamond. So while Marx defined value as a combination between what he called "use-value" and "labor-value," the marginalists redefined utility (which is subjective) as the sole source of value.

Marginal utility refined these imaginary scenarios with difficult equations, but the crux of the matter involves a recognition that value is not inherent, but subjective. For those defending laissez-faire style government, the importance of understanding subjective value theory cannot be understated. In the layest of lay-terms, this discovery in economics might be understood as corresponding to a Nietzschean style revolution in ethical values: what were taken for hundreds of years previously to be unchanging and eternal (objective) values were reassessed in Nietzsche's proto-postmodernist worldview as being entirely constructed and therefore changeable (the timing of Nietzsche/Menger is not, I think, a coincidence). For a more theoretical description of all of this, libertarians would typically recommend Ludwig Von Mises' giant 1949 treatise, Human Action. The entire book is available for free (Austrians like Mises tend to oppose the notion of "intellectual property," incidentally), and I strongly recommend the introduction, which is easy to read and includes no mathematics.

The reason all of this (and trust me, this is a SHORT, short version) is so important is when we arrive at the practical questions of government. If individual people are understood to value goods and services differently, then the question of "distribution" becomes very complicated. To highlight the differences in the two (big & small gov't) approaches, imagine the extremes: on the one hand, laissez-faire free trade; on the other, soviet-style communism. In the market, prices function as indicators -- sort of like pressure valves. If there is great demand and low production of a certain good, the price will increase until (theoretically) some enthusiastic soul decides he can produce that good and turn a profit that he finds, subjectively, worthwhile... distribution problem solved. On the other hand, the czar has no direct indicators that works like the price system. He is faced with all sorts of questions: how many dolls should we produce for our children? How much oil should we produce? How many of our fields should be used for farming (and which foods?), how many should be used for factories (of what kind?), etc. Not to mention what qualities should our products (say, public education) have? Inevitably the sheer volume overwhelms the czar. For more on prices as necessary data, click here.

Of course, what we have in reality is a mixed-bag -- some government control, some intervention. Most importantly, we do have prices, and, at least in America, nobody is talking about turning away from the market altogether... isn't that good enough? This is the problem we're faced with today. The short defense of small government in a case like the auto industry in our mixed-economy situation is that intervention makes economic decision more uncertain: should you buy a Ford? The question "Do you think the government will bailout Ford again in two years?" is more difficult to answer than "What is Ford's financial situation?"

The two key concepts here are "spontaneous order" (see Hayek) and "creative destruction" (see Schumpeter). The capitalists look at an economic situation like Detroit and see a bloated, corrupt, broken industry. Just as the archetypal gothic inbred families of 18th century English novels were becoming outmoded and superceded, the auto industry (say the capitalists) should be allowed to fail. "Creative Destruction" is simply the process of letting the market do what it does... the procedure for an insolvent business is simply bankruptcy (Note: concerning the 3 million jobs lost: capitalists will point out that the rate of unemployment has been more or less stable in this country for a hundred years. People lose jobs, and new jobs are created, if only because there is a flood of cheap labor on the market in the aftermath. Hundreds of large corporations have failed in American history, and yet unemployment hovers around 5%. The "special objection" seems to stem from the sheer size of an industry like Detroit's, but if it's true that the bigger-they-are-they-harder-they-fall, should we just "get it over with," or let it get even bigger? Once you enter the "bailout" game you can't stop.).

For "spontaneous order," compare an unregulated phenomena like the internet or book publishing to a heavily-government-ordered organization like the (legendary) Post Office--or the DMV, or AMWAY, or your local health center, or public education. The idea that we can simply "incentivize" new industries is based on a kind of deceptive shuffling of the deck. The odd thing is that it IS actually possible to incentivize new industries, but it is always less efficient. A quick story to make my point (from a paper I wrote on Roger Williams, America's first Libertarian, sort of):

The fur trade was not at all alone in its becoming a target of the church. Although the higher-ups saw themselves as trying to assist merchants in spiritual protection, the fact is that these interventions were economic disasters waiting to happen. One of the most interesting examples was the “maximum wage” controversy of the 1630s. Because labor in the New World was extremely scarce, workers could demand very high wages and expect to find compensation. The conservative Gov. Winthrop, however, was not willing to let economics run its course; perhaps he was trying to artificially keep capital in the hands of the few. In any case, he complained in 1633 that, “the scarcity of workmen had caused them to raise their wages to an excessive rate” (qtd. in Rothbard 254). Here again we are confronted with that odd phrase: excessive rates. How was the governor able to recognize these rates as “excessive?” What would have been “just” rates? However he determined the proper cost of labor, Gov. Winthrop imposed a maximum wage control in Massachusetts and, just as raising minimum wage inevitably causes unemployment, setting maximum wage always leads to labor shortages. In addition to trying to fix wage rates, the confused Massachusetts oligarchy tried to respond by also fixing the cost of consumer goods – mostly notably corn, which was the “major monetary medium of the North” (Rothbard 256). Bernard Bailyn summarizes the debacle nicely: “still insisting on the theory of universally equitable wage- and price-levels,” the General Court was despairing of its own regulations (33). By 1635, the theocracy gave up the inefficient and largely unenforceable price and wage-fixing, but undertook a new and equally ineffective measure:
…under the cloak of a desire to ‘combat monopolizing,’ the Massachusetts government created a legal monopoly of nine men—one from each of the existing towns—for purchasing any goods from incoming ships. This import monopoly was to board all the ships before anyone else, decide on the prices it would pay, and then buy the goods and limit itself to resale at a fixed five percent profit. (Rothbard 257)
In his discussion of the import monopoly, Bernard Bailyn focuses on the impossibility of enforcement, arguing that it would have been unrealistic to hope that the merchants would only sell to these nine buyers when others were willing to buy and perhaps even pay more (34). It must be understood that all of this – hypocritically or not – was part of the more general ideology that suggested that officials could “use the State’s means to make men worship rightly” (Garrett 191). We are likely, in retrospect, to assume that the officials were playing at market for their own gain, using the rhetoric of insistence on religious piety as their cover. But the powerful question formulated by Roger Williams was not “is there a just price,” but “by whom are these admonitions to be given” (Bloudy Tenent 33). In short, who is qualified to know the just price or the just wage in every situation?

Yes, "Maximum Wage." And: see how the state becomes the dispenser not only of goods and services, but also of "spiritual" and ethical values? The notion of the "Just Price" is fun to explore -- developed by Aquinas, it was the Catholic church's "check" on injustice in economics for almost 500 years... The point is just what I tried to explain at the end: the problem of "big government" is always the same: who is qualified to know, and how will they know? Seems John Winthrop was unqualified. Certainly not Henry Paulson. Can we trust Lawrence Summers? Who's the new auto-czar going to be? Will he know better than the Japanese auto-market what cars to make in 2010? What should the minimum wage be, and does it matter that raising it will cause unemployment?

Two points to conclude: a small-government attitude is fundamentally suspicious of utopian discourse, based on the assumptions that resources are limited, and values are subjective (no single policy could answer to everyone's values...). Secondly, everything I've presented here is an amateurish representation of a truly enormous body of literature that simply cannot be "done justice" in a blog post. To get a basic education in libertarian economics would require reading Menger, Von Mises, Schumpeter, Freidman, F.A. Hayek (nobel prize winner), and Murray Rothbard (not to mention a deep knowledge of American and soviet economics in the 20th century). I genuinely don't say this to establish a kind of "You're-too-uneducated-to-question-this/this-is-best-left-to-experts-view" tone, but only out of a genuinely felt sense of ethical obligation to the economists I've studied. To conclude:
It is important to remember that government interference always means either violent action or the threat of such action. The funds that a government spends for whatever purposes are levied by taxation. And taxes are paid because the taxpayers are afraid of offering resistance to the tax gatherers. They know that any disobedience or resistance is hopeless. As long as this is the state of affairs, the government is able to collect the money that it wants to spend. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom. --from Ludwig Von Mises' Human Action
P.S. -- anyone interested enough to read my 20-page paper on Roger Williams, morality, freedom, and economics is welcome to... we'll arrange that via email.

7 comments:

Mberenis said...

Grrrrrrrrrreat blog!!!
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fenhopper said...

very nice. now can you address the problem of defining gov't by its most draconian means of enforcement even if they are available only in principle?

Casey said...

I don't see that as a problem -- all laws are enforced by the threat of jail. Is that what you're asking, Fen? -- about Mises' characterization of gov't in that last quote? You feel that he's making a benevolent institution sound evil in his language without supporting his claims with facts?

Mises isn't saying anything that Thoreau wasn't saying in "Civil Disobedience" -- I mean, is it a matter of tone? I can see how Mises' stylistic flourishes seem to rub his conclusions in the face of his readers... but Paul Krugman does precisely the same thing.

For me, Libertarianism leaves individuals freer AND provides better for the masses than its ideological opposite, communism. If you're not interested in theoretical & principled arguments, but you prefer a mixed-economy approach (as Obama says, "We're just gonna be willing to try some things. If those things don't work, we'll try some other things), then I guess the question is which direction do you think we should "tug" in?

And, if you think it's self-evident that big government takes better care of the masses, I suppose it's obvious which side you'll be on. If you think (for example) that imposing a raise on the minimum wage could never possibly have a negative impact on the poorest of America's workers, you would of course vote in favor of raising minimum wage... but if you discovered that raising minimum wage left a greater percentage of America's poor unemployed, you might reconsider.

However, as I've hinted before (in 215), there's certainly room for doubt... the libertarians would have us believe that the road to hell is paved with good intentions. Enough of my friends (you, Leahy, Gil, et. al.) believe that increased government spending on social programs will lead to positive outcomes that I simply "veto" my rational conclusions and side (in this election, at least) with my friends... how's that for trusting one's emotions?

But if you ask me to defend in an organized debate of abstracts between a contemporary Obama-economist (like Krugman) and a libertarian like Hayek, I'd certainly be more convinced by Hayek: and what's more, I think that most people would if they read the literature. But they don't. And this is how dark ages begin, for better or (I think more likely) worse.

Thanks for asking, anyhow: I rarely get to unabashedly don my know-it-all cap anymore.

fenhopper said...

but what i see is not really a rational conclusion but an argument that in principle, even if not in effect, asking the government to be involved is making a deal with the devil.

do you believe that a libertarian gov't would provide better for this country or the country that would have to emerge from the anarchy? do you think it might force more local insularity due to less stability in a larger marketplace and along the path to this there will be a change in values that accommodates poverty as a more neutral state and accepts a caste system?

you're willing to lose greenland to the rising sea levels. are you willing to lose antibiotics to the libertarians?

Casey said...

I'm not sure I'm going to be able to settle this for you -- and honestly, I'm very possibly not a trustworthy source here. The economists I've been drawn to are on an extreme end of a wide spectrum, and I'm certain that other economists could argue somewhat convincingly that I've simply been beguiled by bourgeois propaganda... I don't know any way around that question. You could "trust me," but that would be dumb. Or you could read whichever economists you feel like reading -- the important touchstones on the "left" include John Maynard Keynes, John Kenneth Galbraith, Gunner somethingrather, and now Paul Krugman.

But I just had a Eureka moment; I wish I had thought of this earlier. PBS put together a MOST excellent documentary on the effects of economic theory on the 20th century... it's very engaging, well made, full of interesting interviews, and a great place to go when you're no longer satisfied with soundbite economics from the pundits.

Here's the link to the homepage:

http://www.pbs.org/wgbh/commandingheights/

And from there, click "storyline" and then just start in with episode one... add this to your favorites list. If I remember right, it's a six hour documentary. I've watched it about four times, and will be thrilled to talk about it with you --

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As for your specific question: I do believe that gov't intervention is a deal with the devil with a snowball effect added for good measure... a house of cards/tower of babylon, whatever. Whenever I think of the book of Revelation, I think of a envision a failed monetary system.

I'm not sure I understood the rest of your question... the stuff about antibiotics? Did you mean universal healthcare vs. our current system? I mean, obviously that requires a dissertation -- my brief answer is that it was a (mostly) unregulated system that raised life expectancy in America from something like 48 to something like 73 in the time between 1900-1975, and those numbers include poor people.

On the other hand, there is this dangling point of skepticism in my brain: maybe capitalism only works when it's accompanied by a separate moral foundation (like the cultural protestantism of the 19th century?). In that case, the urgent impulse you feel toward universal healthcare would be an impulse to replace ethics that existed at a individual/spiritual level with state-regulated ethics. Hmmm...

Watch Commanding Heights. You'll like it... maybe over Christmas (I'm assuming you're busy as hell right now, like me?)

fenhopper said...

the antibiotics thing was just a biopsy of the argument that some imposed structure might be necessary to give equal benefit to those who might not have earned it through the behavior that those with power deem worthy. i really wasn't thinking of healthcare -- but of emergent resources.

the benefit of proprietary knowledge must sometimes be apportioned with less benefit to the "producers" than they would ask for on their own.

education, technology, skill, money... some systems simply will not loosen their grip because they like having the power. government, when honestly executed, is one way to deal with this.

i'm really just stuck on making sure that the argument for small gov't isn't the baby/bathwater principle that i mentioned before.

so i'll watch the pbs thing. then we can continue. because i hate to play the role of 'lalala i can't hear yoooou' when i know you have given this much more thought than i have.

Casey said...

Well, and as I said, I'm happy to undercut all of these premises, which turned into a much more beligerent defense of market economics than I would feel comfortable with if I hadn't been called to defend it...

In tr-th, I think of the market like a radio that has two "tuner" dials... one "rich people" tuner and one "everybody else" tuner...

And for the best reception, you have to set them both at 96.1 (or whatever)... but you certainly can turn one of them up a little or the other one down a little. It may cause the overall reception to get a little fuzzy, but--as you suggest--if we deem that fuzz acceptable, so be it.

But that's a stupid metaphor -- I think you know what I mean. There should be no moral judgment attached to fidgeting with the dials... if you want to intervene and raise wages, go ahead (the UAW did that quite effectively -- which WAS good for workers, right up until it contributed to destroying their industry). It's just that there is "actual" value in goods and services, and supply & demand are unavoidable forces. Fidget reasonably, and you probably don't have big problems -- fidget too much, and you end up like Detroit. And I don't want that to happen on a national level.