Libertarian Economics

Economics is contextual. At its inception this context was the struggle for power as entrepreneurial and landowner citizens tried to wriggle free of the impress of ages old monarchical rule. As political freedoms steadily grew and different societies obtained an ability to critique their rulers and as they managed to change the institutional set up in which their economies were embedded the study of economics became a coherent field of enquiry.

This early economics was almost invariably an attempt to demonstrate why it was that monarchs ought to interfere less in the workings of the economy. Such interference was seen as arbitrary and inefficient, whereas the operation of the entrepreneurs and landowners was seen as obeying ‘natural laws’ that would, inevitably, produce better outcomes than those obtaining under state rule.

The market versus state conflict was thus built into classical economic thought from the beginning. Indeed much of the original impetus for economic theorizing was precisely to ‘prove’ the efficacy of markets.

Thus economics has within it a deep tradition of articulating one side of an argument. It is a tradition that resonates strongly today. That one side of the argument is easily detected in the views of libertarian economists – there are very many – who seem to begin their work with an end in mind. That end being a proof of market efficacy.

This is why classical economics and its modern variants are willing to adopt a variety of assumptions that appear to drive towards only one conclusion. It is why so many economists find it difficult to find a role for government in their models. It is certainly why in recent decades the old Keynesian governmental role is so commonly ridiculed.

In many ways modern economics has a predictable air to it: the outcome that markets are so efficacious is based not on empirical work, but on a careful choice of starting assumptions designed to allow that outcome to emerge ‘naturally’. Friedman was hinting at this when he argued that nonsensical assumptions were of no consequence as long as the outcome was ‘correct’.

Modern microeconomics is an example: it is carefully prepared and cleverly constructed to ensure that market outcomes – when markets are left to their own devices – arrive at social outcomes that cannot be bettered. That in order to do this economists have had to resort to adopting a model of human behavior not found in the real world is little mentioned. And when awkward realities do intrude they are usually ignored – as, for instance, with the celebrated questions asked by Ronald Coase and the existence of the firm.

This bias in economics reached its apogee with the notion that modern macroeconomics ought to be constructed atop micro foundations. This would thus assure the market solution would flow through to models of entire economies and thus squeeze the state out. This was necessary in order to undo the work of Keynes who had the temerity to see a permanent role for government and who thus was an apostate in the eyes of the libertarians.

The libertarian worldview thus infects economics thoroughly. And it also means that much of economics is not scientific in the sense that it tries to understand aspects of reality, but is rather ideological in that it tries to advocate a particular way of organizing society.

So libertarian economics is idealistic. It posits a world as it ought to be. It argues a great deal of ‘if only the markets were free’ and has no interest in opening up space for other institutions to play mediatory roles. It is an analog to Marxist thought which has its own teleological drive and idealistic outcomes. Neither are studies of reality. They are critiques. Both are stories with happy endings if only we all submit to their rules.

A critical missing context in both libertarian and Marxist economics is the emergence subsequent to their origins of modern democracy. The modern state that libertarians so decry is a parallel expression of the very ‘agents’ that they model as being so tirelessly self-interested and rational in their economic lives. Yet when these ‘agents’ change coats and become ‘citizens’ they make fools of themselves and vote for all sorts of state activity the libertarians detest.

How can this be?

How can people-as-agents contradict people-as-citizens? Especially when both sets of people are identical.

The problem is, I argue, that libertarians live in the past. They imagine a wonderland of simple production, simple relationships, and simple rules. Causes and effects are easily connected in such a world. They can be easily modeled. Tracing an efficacious curve in such a world is relatively easy. And, yes, the libertarian vision fits quite well with it.

But it is not a modern world. Modes of production have changed. Logistics are different. Distances have collapsed due to better communication. The division of labor has separated us all from our more self-sustaining past. And we are now self-governing. The state, to paraphrase Louis XIV, is us. So the libertarian world is outdated and it is especially not a democratic world where people have two ways to mediate economic outcomes: one through their transacting relationships, another through the ballot box.

Keynes, in his confrontation with Hayek in the 1930’s, recognized this. His response was to attempt to build a theory that accommodated democratic wishes: you cannot have extreme adjustments and massive unemployment without threatening political unrest. So, in order to protect the market driven engine of growth we have to mitigate its apparent occasional extreme outcomes. Our best option for such mitigation is through then state. The mass of the people in their democratic role will demand this mitigation. After all few will benefit from the extreme rewards on offer in a free market, but many can, and do, suffer the extreme penalties from those occasional breakdowns that history tells us markets go through periodically.

Hayek, in contrast was so beset with fears of repressive state interference – his childhood had been spent watching the decline of the Hapsburg lineage and the emergence of fascism – that he found himself forced to argue that even well intentioned state intervention was less efficacious than the most extreme market outcome.

Hayek’s classic work on the role of knowledge in the economy is his attempt to demonstrate this latter point. Since knowledge is so dispersed, and since it is only revealed locally, no central player can accumulate sufficient knowledge to out perform the outcomes generated by a decentralized marketplace. Lange’s counterargument that this exact same set of conditions can be used to justify a socialist economy has, unfortunately, been lost or ignored in the decades since.

My point here is simply this: economics began its life as either a defense or a critique of the emerging industrial economy. It was adjusted in the 1930’s to account for democracy. But this adjustment was rejected by libertarians whose worldview was offended by any economic outcome being subjected to political input. As the libertarian view regained dominance in economics it implied that the profession drifted away from democracy too. It is this latter drift that has made it so difficult for many economists to embrace inequality as a topic worthy of study. It is also this drift that makes many economists so tone deaf to the real world social outcomes of unfettered markets. Creative destruction is still destruction. The system may re-emerge healthier, but the human cost along the way is also real. Accounting for it sits outside the libertarian agenda. Besides our modern economy is not much like that being observed by the founders of economics. It isn’t even much like that of the 1930’s.

Are we sure economics ought to be invariant even while the economy itself evolves so radically?

This libertarian drift is also the reason that we see so many economist give attribution to the market for all sorts of social and political changes. In their narrow and binary world where the only agency is situated either in a market or in a state, they are forced to go to extremes. They give themselves no choice. They have to suggest that progress can only come from free market activity. After all, in their eyes, the state can only be negative.

Even if the state embodies the wishes of ‘we the people’.