Monday, February 06, 2006

Liberty, General Welfare, and the State

In an earlier post I said that "the economy isn't a zero-sum game." That assertion warrants explanation and elaboration. Here it is.

Gains from Specialization and Trade

Imagine a very simple economy in which Jack makes bread and Jill makes butter. Jack also could make butter and Jill also could make bread, but both of them have learned that they are better off if they specialize. Thus:
  • Jack can make 1 loaf of bread or 0.5 pound of butter a day. (The "rate of transformation" is linear; e.g., in Jill's absence Jack would make 0.5 loaf of bread and 0.25 pound of butter daily.)
  • Jill can make 0.5 loaf of bread or 1 pound of butter a day. (Again, the rate of transformation is linear; e.g., in Jack's absence Jill would make 0.25 loaf of bread and 0.5 pound of butter daily.)
  • If both Jack and Jill make bread and butter their total daily output might be, to continue the example, 0.75 loaf and 0.75 pounds.
  • Alternatively, if Jack specializes in bread and Jill specializes in butter their total daily output is 1 loaf and 1 pound.
Now, the question for Jack and Jill is this: At what rate should they exchange bread and butter so that both are better off than they would be in the absence of specialization and trade? There is no right answer to that question. The answer depends on Jack and Jill's respective preferences for bread and butter, and on their respective negotiating skills. But of one thing we can be certain, Jack and Jill will strike a bargain that makes both of them better off than they would be in the absence of specialization and trade.

Consider some possibilities:
  • Jack makes 1 loaf of bread, keeps 0.5 loaf, and trades the other 0.5 loaf to Jill in exchange for 0.25 pound of butter. Jack, with 0.5 loaf and 0.25 pound, is where he would be in the absence of specialization and trade. Jill makes 1 pound of butter and trades 0.25 pound to Jack for 0.5 loaf of bread. Jill, with 0.5 loaf and 0.75 pound, is better off than she would be in the absence of specialization and trade (+0.25 loaf and +0.25 pound). This outcome is unlikely because Jack, seeing his lot unimproved, would have no incentive to specialize in bread and trade with Jill. Jill, therefore, would have an incentive to strike a bargain with Jack that makes both of them better off than they would be in the absence of specialization and trade.
  • At the other end of the spectrum of possible trades, Jill could end up no better off while Jack reaps all the gains to specialization and trade. But this outcome, too, is unlikely because Jill, seeing her lot unimproved, would have no incentive to specialize in butter and trade with Jack. Jack, therefore, would have an incentive to strike a bargain with Jill that makes both of them better off than they would be in the absence of specialization and trade.
  • More realistically, then, Jack and Jill make a trade that leaves both of them better off. For example, Jack trades 0.5 loaf to Jill for 0.5 pound of butter, leaving him ahead by 0.25 pound of butter. Jilll ends up with 0.5 loaf and 0.5 pound of butter, leaving her ahead by 0.25 loaf of bread.
In sum, liberty -- which includes the right to engage in voluntary exchange -- makes both Jack and Jill better off. Moreover, because they are better off they can convert some of their gains from trade into investments that yield even more output in the future. For example, to continue with this homely metaphor, imagine that Jill -- fueled by additional food -- is able to produce the usual amount of butter in less time, giving her time in which to design and build a churn that can produce butter at a faster rate.

Liberty advances the general welfare, which means the general well-being -- not handouts.

Enter the State

Under a regime of liberty there is no "exploitation" of Jack by Jill, or vice versa, unless one of them cheats or robs the other. In the naïve libertarian view of the world, cheating and theft are irrational. If Jack cheats or steals from Jill, Jill refuses to trade with Jack until he made things right. If he refuses to do so he would face a lifetime of living less well than he could by trading honestly with Jill. Alternatively, Jack would come to understand that this thievery or cheating will weaken Jill and diminish her ability to produce 1 pound of butter a day. That understanding should cause Jack to desist from cheating or thievery.

But Jack would not desist from cheating or thievery if he had a taste for such things, nor would Jill if she had a taste for such things. (Wealth-maximization, contrary to many economists and all naïve libertarians, isn't necessarily the be-all and end-all of human existence.) Even if neither Jack nor Jill has a taste for cheating or thievery, they must beware predators who have such tastes.

The Delusion of Statelessness (or Anarcho-Libertarianism)

An anarcho-capitalist (or anarcho-libertarian) would have Jack and Jill protect themselves (from each other and outside predators) by hiring a third party to enforce their trading contract and deal with predators. An anarcho-libertarian would call such a third party a private defense agency. But an entity that has the power to enforce contracts and keep the peace is the state, no matter what you call it.

In an effort to avoid the necessity of the state, the anarcho-libertarian posits competing private defense agencies. But if a generally peaceful and cooperative people cannot control one state (or private defense agency), such a people surely cannot control competing states -- or warlords -- all of them armed and many of them having a taste for dominance.

For a sample of the consequences of warlordism in the American experience, consider the Civil War. An anarcho-libertarian would be quick to call Abraham Lincoln a warlord. But it takes two warlords to foment a war. And so -- with the creation of a rival warlord in the South -- there was a civil war: a war that resulted in 50 percent more military deaths than did World War II (twice as many deaths per capita); a war with dire, long-lasting consequences for race relations in America (e.g., Jim Crow and "black redneck" culture); a war that would not have happened if the South had not chosen to form a "competing defense agency." (For more about anarcho-libertarianism and defense, read this post and the posts linked at the bottom.)

The Busybody State

The lesson here is simple, the best way to reap the benefits of liberty is to create a single, accountable state with limited powers -- and to be vigilant about enforcing the limits. When vigilance fails, those who control the levers of power will use that power to interfere with the lives, liberty, and property that they were hired to protect. The Framers of the Constitution knew that well, and so they designed a system of checks and balances to circumscribe the power of the state. (The design is still there, on paper, and -- with time and the right Supreme Court -- can be re-applied.)

The fact of the matter is that the state has no moral standing with respect to its citizens. For example, a person who "fails" to give money or assistance to a fellow citizen owes an apology to no one, especially not to the busybodies who happen to control the state. The state's moral judgment in such matters is "superior" only in that it is enforceable through the power of the state. Let us not lose sight of this fact: Edward Kennedy and his ilk (of all political stripes) have no claim whatever to moral superiority.

To return to Jack and Jill, suppose that Jill becomes ill and incapable of producing anything. As a result, Jill has no income and Jack is reduced to providing for himself. It isn't Jack's fault that Jill is incapable of working; Jack is worse off because Jill isn't working. It isn't Jack's fault if Jill has not somehow insured herself against illness (e.g., by stockpiling bread and butter). Is Jack nevertheless compelled to give Jill some of his reduce income?

Jack, out of empathy for a fellow human being, may wish to give Jill some of his bread and butter. (In fact, absent the busybody state, Jack would be more willing and able to do just that.) Jack may even make an economic calculation and decide that if he gives some of his bread and butter to Jill she will recover and return to work, making both of them better off. But when the state -- namely, the controlling faction of busybodies -- is empowered to dictate the terms of Jack's chartity toward Jill, here's what happens:
  • The busybody state taxes Jack by taking away some of the bread and butter he produces, which is less than he had when Jill was capable of working (a fact that never occurs to the busybody state).
  • The tax (whether it's an income tax or a consumption tax) makes work less attractive to Jack, assuming that he is producing more than he needs for subsistence.
  • When work becomes less attractive in relation to leisure, Jack chooses more leisure and therefore produces less.
  • As a result, Jack has less "excess" food to stockpile against misfortune or to sustain himself in efforts to improve his bread-and-butter-making technology (which would enable him to give more aid to Jill).
In sum, when the state becomes Jack's conscience, it is far more likely to make matters worse than it is to make them better. Jill's plight is unfortunate, but Jack is the only person who is in a position to make the right decision about how to respond to Jill's plight. It is false and cheap compassion for the busybody state to tell Jack what to do about Jill.

Moreover, the state's patent willingness to extort aid from Jack has the effect of (a) blunting Jill's incentive to build a stockpile of food for a "rainy day" and (b) blunting Jill's incentive to return to work when she is able to do so.

The state's busybody ways make both Jack and Jill worse off, in the end.

There's much more to be said for an economic order of voluntary exchange, in which the state's only role is to enforce contracts and keep the peace. Here's some of it:

The Destruction of Income and Wealth by the State (start here)
Why Outsourcing Is Good: A Simple Lesson for Liberal Yuppies
Fear of the Free Market -- Part I
Fear of the Free Market -- Part II
Fear of the Free Market -- Part III
Trade Deficit Hysteria
Social Injustice
The Sentinel: A Tragic Parable of Economic Reality
Why We Deserve What We Earn
Who Decides Who's Deserving?
The Rationality Fallacy
Brains Sans Borders
Why Class Warfare Is Bad for Everyone
Fighting Myths with Facts
Debunking More Myths of Income Inequality
Free-Market Healthcare
Understanding Economic Growth
Socialist Calculation and the Turing Test
The Social Welfare Function
Funding the Welfare State
A Mathematician's Insight
Giving Back to the Community
Computer Technology Will Replace Concrete
Second-Guessing, Paternalism, Parentalism, and Choice
A Non-Paradox for Libertarians
"The Private Sector Isn't Perfect"
Whose Incompetence Do You Trust?
Understanding Outsourcing
Much Ado about Donning
Joe Stiglitz, Ig-Nobelist
A Simple Fallacy
Ten Commandments of Economics
More Commandments of Economics
Three Truths for Central Planners
Bits of Economic Wisdom
Productivity Growth and Tax Cuts
Zero-Sum Thinking
Risk and Regulation
Wal-Mart and Jobs
Economist, Heal Thyself