Why governments' attempts to pick winners produce more losers than winners.
I'm feeling a little damp. Or at least, feeling like I look a little damp to others. I've found myself on what many would perceive as the more moderate, centrist side of the argument several times recently.
I think I'm a “fractional reserver”. I don't think I buy the arguments of the “100% reserves” crowd. (EDIT: This link to the Cobden Centre has gone dead not long after the article appeared. They actually have three articles that have disappeared: Anthony J Evans' critique of a recent lecture by Jesus Huerta de Soto, Toby Baxendale's reply [the linked article], and Anthony's response to Toby. I guess they have decided against washing their linen in public, but it's annoying that other people's contributions have disappeared in the process. Still, maybe it shows that even the most committed of the 100% reservers are having second thoughts.)
I'm not convinced by the arguments for drug legalization.
I have a feeling that, in higher education, it is better to have no market than a skewed market.
I think the benefits of limited liability exceed the costs.
I believe not only in a social safety-net, but in universal coverage. I am strongly opposed to means-testing even the wealthiest citizens, however much that might seem like unnecessary government expenditure.
I think we should take account of the risk of harm from anthropogenic emissions of greenhouse gases by introducing an institutional framework to internalize the social cost of those emissions.
What makes this all the moister is that I can't even state most of this boldly. I lack the certainty of the "driest" libertarians (but then again, I'm not a libertarian). I can imagine that I could be persuaded otherwise on most of this (except the means-testing).
And yet, I don't think I'm really wet. In fact, I feel like I am on the drier side of these arguments. I'm just not sure I can explain why (to myself, as much as to anyone else). This post is a bit of thinking out loud to see if I can put my finger on it.
The alternative cases to the above arguments generally derive from fundamental liberal principles (as their proponents see them, at least). My side seems to be drawing more on subjective judgments on the relative utilities of various rules. But where does that stop? How am I any different, and how can my arguments carry any more force than the social democrat who is happy to make similar judgments of utility over-riding fundamentals in many more areas of government intervention?
I don't think we have much option but to argue from the basis of utility. The only alternative that I can see to utility as the basis of political choices is deistic authority. And even that has to be interpreted by man. The wide range of interpretations of the scriptures illustrates how deistic rules are interpreted through human, subjective and utilitarian judgments.
Natural law is a utilitarian construct. The true natural law is the law of the jungle. The argument for a natural law based on self-ownership, homesteading and voluntary cooperation is utilitarian. Nature doesn't decree it. Mankind has the conscious ability to understand the benefit of accepting rules that require us not simply to take what we can when we want it.
But you can't measure or aggregate utility. So does that mean the real differences between shades of political opinion are little more than the prejudices that underlie them? Do we pick our opinions and then devise utilitarian justifications for them? If so, how can one point of view be objectively more valid than another? Perhaps the only valid metric of merit really is democratic legitimacy?
But democratic choices are often lousy. There are public-choice reasons to believe, and historical examples to demonstrate, that democratic preference is often the opposite of an indication of validity. And the continued tendency of people to debate matters on which there is disagreement, rather than to jump straight to a poll or a lottery, illustrates that everyone senses that right is better distinguished from wrong by reason than by popularity, chance or authority, even if we don't agree on the philosophical basis from which the conclusions should be drawn.
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I think what unites my view of these arguments is my awareness of the depths of our ignorance. Not just ignorance that can be improved by more detailed study, but ignorance of vital aspects that no amount of study can improve, such as subjective preferences, future developments and the cumulative effect of individual reactions to changing circumstances.
Central authorities are usually tempted to pick certain developments as preferable, and to try to influence outcomes directly or indirectly to those prescriptive ends. When they do, they are more ignorant than individuals, because they have to know everything about everything to be effective, whereas individuals only need to know the limited things that affect them. Moreover, individuals have the freedom to be wrong and to learn from their mistakes, because their choices primarily affect themselves (and should be constrained by the law from mistakes that have significant effects on others). Central authorities have to be right first time, because their choices affect large numbers of people. But adequate understanding is denied central authorities because of the breadth and complexity of detail they have to understand, particularly with regard to such unknowable factors as subjective preferences and future developments. Central authorities have to be right all the time, and yet are bound to be wrong more often than individuals, who need concern themselves only with more intimate fields of understanding.
Life is chaotic, complex, uncertain, and uncomputable. The best outcomes will be achieved by policies that recognise and work with this reality. That means policies that do not work towards a certain outcome. It means rules that encourage cooperation to discover the best outcomes for the people concerned according to their subjective preferences at the time. It means supporting self-organisation, through rules that encourage discovery and reciprocity.
It also means disregarding envy and other psychological “costs”. It assumes that improvement in people's material welfare is an absolute good, regardless of whether some people are resentful of it or otherwise dissatisfied by it (for instance, if they gain a lesser share in that improvement). To assume otherwise would not only involve invalid aggregation of interpersonal utility, but would also introduce the prospect of rules that reduced the overall welfare of society in the illusory interest of making those at the bottom feel better about their condition.
The rules should be aimed only at enabling people to elevate their condition, not at ameliorating their discomfort by increasing the discomfort of others or preventing others from improving their lot. The rules should be constrained only by material, not psychological harm. The rules should not permit the involuntary reduction of individuals' material welfare, but should not constrain individual choices within this limitation.1
To return to the issues listed at the start, my position on each of them is (I think) consistent with a desire for a self-organising system that discovers the most efficient outcomes within a simple framework that encourages voluntary cooperation in pursuit of material benefit, and protects from involuntary impositions on the material welfare of others.
The “100% reserves” crowd think that they know what is the right proportion of short-term saving that should be allowed to be lent on a rolling basis to longer-term borrowers. And they think that they can prevent people from working round their draconian rule, or if not, they care more about the rule than the effect. In practice, as there is a commonality of interest between depositors who want interest on their deposits (or at least reduced costs of warehousing) and borrowers who want to be able to borrow for the periods required for investment and not the periods that depositors are comfortable locking their money up for, people will work around the 100% reserves rule by moving their money from deposit accounts to short-term savings accounts. The “100% reservers” will then have to introduce further rules limiting the proportion of short-term savings that must be retained in reserve. They apparently have this unique and unimpeachable insight into the level of reserves that represents the right balance of risk and reward for everyone. They differ from their opponents only with regard to the detail of the percentages that they somehow know are right for us. But they share in common the assumption that they know what is best for everyone.
Better to avoid arbitrary levels based on the calculations or intuitions of those who would impose their authority, and instead encourage discovery of the levels that people judge to be safe. We can create an institutional framework in which banks, savers and borrowers have the information and the incentive to discover the efficient level of reserves to set against savings and loans of different maturities. Banks should be obliged to publish their levels of deposits, reserves, and savings and loans of differing maturities, updated on a frequent basis. All money held with banks should be exchangeable (on maturity, for savings accounts) for gold at a fixed rate of exchange. Severe punishment should be imposed on the management of banks who find themselves unable to cover their obligations in gold. Bankers will then have to make judgments about the levels of reserves that represent the best balance of risk and reward between attracting more savers and borrowers with the better interest rates that accompany lower reserves, and incurring more risk of default and punishment. In medieval Spain, they did not prevent banks from lending out their deposits, but they decapitated bankers who were unable to meet their obligations to depositors. They were closer than us to the right approach.
The problem with legalization of drugs is that some of the most common drugs affect the user's judgment and motivation. A junkie may be no more able than a schizophrenic to make rational judgments of his own best interests. Legalization of the drugs that have this effect might reduce the associated direct criminality (i.e. in the business of production, distribution and supply), but that is not the only harm associated with drug-taking.
Legalization could be expected to reduce the price and increase the supply of drugs, by reducing the intermediary costs (i.e. producers and users should be able to split the reduced costs of distribution in the form of higher producer prices and lower consumer prices). This would increase the number of people for whom drug-taking represented an attractive leisure option, and the frequency with which it could be indulged. For those drugs that have negative persistent effects, from distracting or demotivating the user, through to causing mental-health problems, the effect of increased use would be reduced economic productivity, and an increased burden on the non-using section of the population.
Legalizers might argue that users shouldn't be supported and would thereby be driven to work despite their habit, but (if true) the same effect should apply now. In practice, the user's reduced capacity for work combined with their compulsive need for funds means that they are more likely to turn to the sort of money-raising activities that require little aptitude, qualification, timekeeping or conformity, i.e. criminality. Regardless of whether drug-taking itself is illegal, drug-taking is likely to remain a major motivator to criminality, and may even increase the level of criminality if the level of drug-taking increases.
If society is to organize itself, everyone must contribute to the extent of their ability. Those drugs that reduce their users' ability to contribute should remain illegal. Those drugs that have only short-term effects, without significant impacts on people's perceptions and motivations, should be legalized. It is in this respect that alcohol differs from many of the illegal drugs. Most people can indulge in alcohol regularly without a significant impact on their day-to-day capabilities and motivation. Where the same can be said for other drugs, they too should be legal. But the same cannot be said for some of the most common drugs, such as marijuana, the opiates and cocaine. They should remain illegal.
This is a difference between the natural-law and the utilitarian approach. One may derive from natural-law principles a concept of individual freedom so pure and abstract that any constraint on individual choices, other than to prevent harm to others, is prohibited. But the same logic taken to its natural conclusion has led logical thinkers to argue for the privatization of defence and law & order. There is no room for the state (as guardian of the rules that ensure optimal cooperation) in this logic. The natural end-point is anarchism. The founding premise is false, and to stand by conclusions that follow logically from it, even though they seem intuitively unreasonable or impractical, is not dry but wet.
One of the main functions of a classical-liberal institutional framework is to enable discovery of the balance between supply and demand for various goods. If state intervention results in either demand or supply being significantly different to the level it would be without intervention, the market is not just sub-optimal, but positively harmful. That is the case where demand for university places is inflated by a mechanism where those who are able to contribute least as a result are protected from having to pay the cost of the education, while those who contribute most have to pay a heavier cost than they would without the intervention. This ensures that we get many more students and teachers than is efficient for society, and that, of those students, there are fewer of those whose education would result in material contributions to the economy and more of those whose education would result in little benefit to anyone but themselves (if that). With such a distorted system, it would arguably be better for the state to limit the numbers of students whose education is funded, than to have a “market” system where a false and harmful number and distribution of students is encouraged. At least the state-allocated system is limited by ability to pay, to a greater extent than the deferred-repayment model. Haven't we already done enough of imposing today's costs on tomorrow?
A system without state welfare would probably be the most economically efficient. Perhaps we should ideally (in an economic sense) rely on savings, family, friends and charity to provide for misfortune. This is perhaps how the most efficient self-organising system would work, so long as one discounts the harm to those who fall between the cracks of voluntary welfare provision.
But it is undeliverable in a democracy. Limited democracy (i.e. for the purpose only of electing governments and being able to throw the bums out again) probably is a necessary evil – the worst form of government except for all the others...
If democratic government and therefore state welfare-provision is necessary, the question is simply how best to limit the harm from state welfare in a democratically-deliverable manner. The simple answer is a Basic Income combined with a Flat Tax. It is the simplest combination that eliminates poverty traps and disincentives to work, whilst providing the progressive effective rates of taxation that democratic policy requires. If accompanied by abolition of the minimum wage, it would go a long way towards making the labour market in the developed world competitive with the developing world, reducing worklessness and xenophobia.
People who advocate means-testing are looking at individual mechanisms in isolation, when what matters in reality is the net effect of welfare and tax on disposable income. Means-testing always requires one to take one of two options: (a) low rates of withdrawal, requiring a wide proportion of the population to be subject to the bureaucratic procedures and disincentives of benefit-withdrawal, or (b) high rates of withdrawal, creating significant poverty-traps where an increase in earned income results in little increase in disposable income (or sometimes even a reduction in disposable income).
This is the issue on which I have least doubt, because advocacy of means-testing is quite simply and objectively advocacy of bureaucracy and work-deterrence. Means-testing is a mechanistic rather than a self-organising approach to government and social cooperation, and its effect on the self-organisation of society is negative. It is a pure drag on society and economy. Its justification depends on ignorance and false logic.
The "dries" argue that limited liability reduces the incentives for managers of business to behave responsibly, and anyway goes against basic principles of property rights and personal responsibility. But to anyone who has a substantial shareholding in a business of any significance, the proportion of their assets that could be lost if the business is mismanaged dwarfs the value of their other assets. What reduces the incentive for managers to behave responsibly is lack of supervision by shareholders in this situation. Predominance of shareholding by institutional shareholders, whose agents have little "skin in the game" themselves is the problem. Removing limited liability status would be throwing the baby out with the bathwater. We need entrepreneurs if an economy is to develop, and entrepreneurs need to be able to take risk. If 90% of my assets are at risk, but not my house and other personal assets, I will be very careful about risking my business assets, but I will not be deterred completely from risk-taking. If I could be left destitute by bad luck or judgment, I will not risk the assets in the first place. Limited liability facilitates entrepreneurialism, and therefore enables progress. It may be inconsistent with natural-law principles, but it is entirely consistent with a rules-utilitarian approach. And that's one more illustration of why the natural-law approach is broken.
Nation states are necessary pieces in the self-organising patchwork of the global economy. They provide units within which laws and other government actions can reflect broadly shared norms and cultural values. They provide for competition and discovery between different sets of laws and values. They allow for defence of those laws and values against competing cultures who might prefer to prevent discovery of their weaknesses.
Notions of efficiency in defence and law & order are illusory. We would get the best value from our military if they were constantly engaged in fighting. Paying for a military that does nothing might seem hopelessly inefficient. But in practice, a military that so successfully deters aggressors (and resists temptation to aggression) is the best result, not the worst. Likewise for law & order. If we had many policemen, courts and prisons but no criminals, that might be inefficient in the sense of value-for-money, but it would be the best outcome, not the worst.
Conversely, savings that reduce our capability to defend ourselves from intrusion (nationally or individually) are a false efficiency. It may be that the direct cost of crime that results from cuts to the Home Office budget is less than the savings achieved. But there are substantial indirect costs. People may have to spend their money on defensive measures rather than on goods that give them genuine satisfaction. The costs of those measures may be greater than the savings to the budget, but they are not compared (in fact, as such expenditure would count as consumer spending, it may appear to be an economic benefit, to those foolish enough to rely on such aggregates as GDP and National Income for their indications of economic progress). People may judge that putting in the work to buy goods that are likely to be stolen is not worthwhile. Security of property rights is an economic benefit that cannot easily be quantified. It is a fundamental aspect of an efficient, self-organising system.
Making cuts to these aspects of government activity is the sort of efficiency that wets think makes them dry. They are wrong. We should decide what provision gives us sufficient security against a range of threats (not just present threats, but conceivable threats), and raise the funds for it, if necessary at the expense of other government expenditure. We should not approach it by simply asking those departments to take arbitrary shares of general reductions in government expenditure, particularly without reference to the relative growth in shares of expenditure by different departments over the preceding decade. Only feeble-minded Cameroons, LibDems, Labourites and their supporting intellectual caste could think that cutting defense of those things that a government should defend, whilst massively increasing taxpayer funding for projects in poorly-governed countries, is somehow a sign of economic enlightenment.
Somalia has a very cheap government, if one regards only the direct costs.
The policy treatment of climate change is the classic case where both sides enjoy similar delusions of omniscience. There is no certainty in this field. Certainty that anthropogenic emissions of greenhouse gases represent no threat is as delusional as the certainty that they present an imminent and severe threat. We need to create an institutional framework that will encourage and reflect improvements to our understanding and the benefit of experience. Instead, all sides propose some form of dirigisme, where they have already worked out the optimal set of responses and simply want to force or nudge people towards them.
Economists are deeply involved in calculating these responses and the mechanisms that are supposed to encourage them. It is as though there is an inverse law, where the more uncertain a field is, the less economists are inclined to take account of that certainty, other than to magic it away by statistical trickery.
It is possible to devise an institutional framework that would discover the social cost of carbon at a given point in time, and continuously adjust that valuation as our information changes. But there is absolutely no interest in such a mechanism from either side. They are equally committed to their prejudgments. They are as wet as each other.
It doesn't really matter what names we put on things. If my position on these issues is wet, then I'll happily call myself a wet.
But I won't tolerate the association of bad policy-making with good policy-making in earlier times, by the simple device of attaching a label that does not belong to it. Dryness to me implies taking account of the longer-term and indirect effects of a policy, rather than just the short-term and direct effects. Sounding tough is irrelevant. That's just presentation. What matters is the foundation of policy-making on an assumption of deep and irredeemable ignorance and uncertainty, under which conditions the best form of social organisation is a simple, self-organising system promoting voluntary cooperation in pursuit of material benefit.
I hope that's logical, consistent and dry. But I'm not certain.
1See Murray N Rothbard, “Toward a Reconstruction of Utility and Welfare Economics” (1956)
"Nobody spends somebody else's money as carefully as he spends his own. Nobody uses somebody else's resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property."