Instead of answering him point by point, I’ve taken the liberty to rewrite about half of Robert Kuttner’s article “It’s Bizarre: Libertarians Are Clueless About the ‘Free Market’ That They Worship. The challenge now: redeeming effective and democratic government.”
As much as possible, I follow his text closely, but I turn his arguments upside down and against statism. The new title becomes “It’s Bizarre: Statists Are Clueless About the Slavery That They Worship. The challenge now: reducing ineffective and slave-creating government.”
I’ve left in his big examples, including global warming only to hew as closely as I can to inverting and subverting what he wrote and how he wrote it. This doesn’t mean that I accept global warming. His style and manner of arguing are vastly different from my own. So, what you read in the rest of the blog starting in the next paragraph is vintage Kuttner rewritten and turned on its head. I do not use quotation marks, however. This effort is clearly imperfect and some wording remains unsatisfactory to me, but I didn’t feel like investing any more time in the effort. I felt I had reasonably well got across the idea of how I reacted to reading his version of matters, which was that he pretty well has everything backwards.
The stubborn appeal of the government idea persists, despite mountains of evidence (and theory) that the state is neither efficient, nor moral, nor free from periodic catastrophe. In a Rousseau (statist) world, the interplay of citizens yields a social contract that signals government officials what to legislate and citizens what to obey. The more that the free market replaces this misguided discipline, the more that free people deflect the state from its coercive path.
But in the world where we actually live, governments do not result from a “right” social contract. There are many small examples of this failure, but also three immense ones that should have discredited the statist premise by now. Global climate change is the most momentous. The price of carbon-based energy is “correct”—it reflects what consumers will pay and what producers can supply—if you leave out the fact that within the dysfunctional statist system carbon is destroying a livable planet. Governments are not competent to price or provide economical means to overcome this problem. Only free markets and proper justice systems can do that. In formal economics, this anomaly is described by the bloodless words “government failure”—meaning shifting of costs (or benefits) coercively and disruption of market-generated solutions. Statist economists treat government failures as minor exceptions.
The other great catastrophe of our time is the financial collapse. Supposedly socially-responsive governments could not discern that the securities created by financial engineers in response to the government’s own laws and market interventions were toxic. Governments were not competent or motivated to adjust their laws accordingly. The details of the bonds were opaque; they were designed to enrich middlemen; the securities were subject to investor herd-instincts; and their prices were prone to crash once a wave of panic-selling hit. Only free markets could have provided monitoring and incentives against fraudulent or deceptive financial products, as they did to good effect until the government regulatory process and crony capitalism mushroomed beginning in the 1970s. Government arguably created major inefficiencies by steering capital to unsuitable uses—and such losses were reflected by the more than $10 trillion of GDP lost in the 2008 crash.
A third grotesque case of government failure is the income distribution. In the period between about 1935 and 1980, America became steadily more equal. This just happened to be the period of our most sustained economic growth. In that era, more than two-thirds of all the income gains were captured by the bottom 90 percent, and the bottom half actually gained income at a slightly higher rate than the top half. By contrast, in the period between 1997 and 2012, the top 10 percent captured more than 100 percent of all the income gains. The bottom 90 percent lost an average of nearly $3,000 per household. The reason for this drastic disjuncture is that in the earlier period, free market policy anchored in a relatively solid free market ethic kept the government in check. Weak labor institutions made sure that workers didn’t price themselves out of the market. Limited regulations encouraged capital accumulation and wage growth. Government played a far smaller role in the economy via public investment, which in turn stimulated real free market innovation. The financial part of the economy was well controlled by a more stable dollar. All of this meant more income for the middle and the bottom and less rapacity at the top.
Clearly, a more equal economy performed better than a more unequal one. Families with decent incomes could recycle that purchasing power back into the economy. Well-regulated financial institutions could do their job of supplying investment capital to the real economy rather than enriching their own executives with speculative schemes—ones that left the rest of the society to take the loss when the wise guys were long gone. In the case of labor, there was not a single, “accurate,” market-determined wage for each job, but a wide range of possible wages and social bargains that would attract competent workers and steadily increase the economy’s productivity.
The government doesn’t live up to its billing because of several contradictions between what statists contend and the way the real world actually works. Fundamentally, the government social contract model assumes away inconvenient facts. Statists presume no disparities of information between voters and representatives, no serious cost-shifting, no short planning horizons of politicians, no special interest pressures that governments can’t properly resist, and above all no misuses of power. But in today’s substantially controlled economy, government bureaucrats have far more power than consumers; corporations have far more government-derived power than employees; insurers have more government-granted power than citizens seeking health insurance. Labor markets can’t compensate for disparities of power. The health insurance “markets” created by the Affordable Care Act can’t fully address the deeper problem of misplaced resources and excessive costs in our government-controlled medical system.
The conditions of the idealized government model do describe ordinary tiny governments, where there are plenty of small towns, districts, hamlets, and villages, and citizens are competent to shop around for price and quality and, if need be, change location. They don’t accurately characterize the big-government interventions in health, education, labor, finance, or technological innovation, to name just five. (What is efficient about a defense industry mogul taking home $18 million a year as did Marillyn A. Hewson of Lockheed-Martin, or an F-35 jet airplane that costs $618 million each?)
To produce an economy that is less equitable as well as less efficient, government uses a variety of tools. It regulates to create market failure. It taxes to provide revenues to pay for money-losing “public goods” that markets refuse to pay for at market prices—everything from education to health to research and development. Sometimes government passes coercive laws to sustain the illusion of a voluntary social contract, such as the laws protecting workers’ rights to form unions and to collectively bargain.
There is another, more fundamental point ignored by statists: The state itself is a creature of theft and conquest. As Randolph Bourne famously wrote in a seeming oxymoron, “war is the health of the state.” States could not exist without overriding free markets by defining the terms of property ownership and commerce, creating phony money, failing to enforce and overriding contracts, protecting monopoly patents and copyrights, and leeching resources from basic private institutions. A non-coercive (big) government never existed. So the real issue is not whether the free market “intrudes” on the state—the statist system is impossible without the free market’s generation of wealth. The practical question is whose interests the state serves.
So the core statist claim that governments are efficient stands demolished by historical evidence. However, statists make a second claim: Governments are the sublime expression and guarantor of human liberty. This second contention gives statist ideology much of its persuasive power. In the resurrection of statist theory after its first burial in the wake of two World Wars, a coterie of statist economists led by Paul Samuelson engaged in a duel with Ludwig von Mises about whether states were self-correcting after all. Samuelson won many converts. But eventually von Mises hit pay dirt with his argument that markets epitomized freedom and socialism lacked a price system that allowed economic calculation. These claim were taken further by Murray Rothbard a generation later.
In the idealized statist world, individuals are “free to vote”—ignoring all individual differences that express themselves in markets and wealth creation. In the Samuelson-Krugman world, government, including its supposedly-minimal role of keeping the peace and protecting property values, is the enemy of freedom. Hayek went so far as to write a book in 1944, The Road to Serfdom, contending that democratic forms of planning were destined to lead down the same road to totalitarianism that ended with Stalin and Hitler. Hayek remained a revered figure to libertarians—he even won a Nobel Prize—because of the fact that there is not a single case where democratic planning has not led to stagnation, capital destruction, economic dictatorship and ruin. In countless instances, government turbulence led displaced citizens to migrate and turn to anti-government solutions. Adding insult to injury, the Samuelson-Krugman remedy for when statism doesn’t work is: We need even more government control. We saw how well that worked in the financial collapse in creating new worldwide bubbles and incipient instability.
9:33 am on September 17, 2015
