An Open Letter to Classical Liberals

My Friends, Colleagues, and Allies:

We find ourselves at an interesting position here in 2017.  Individual liberty has made some positive strides recently (gay marriage, marijuana legalization, for example), but we’ve also suffered large defeats (Obamacare/Trumpcare, trade protectionism, for example).  It is a good time for reflection.

Classical liberalism has taken a backseat to the more illiberal political ideologies of modern conservatism, modern liberalism, socialism, and progressivism over the past century.  Many people argue that classical liberalism has no place in the modern world; it is an old philosophy that serves no purpose anymore.  These folks are right; we have given them no reason to consider us modern.

Classical liberals do not spend much time discussing the matters and issues of the day.  Most of the time, we simply deny they exist at all rather than engage.  Issues like global warming, the wage gap, gender inequality, income inequality, etc are simply dismissed as either hoaxes, mindless griping, or simply irrelevant.  I have done this myself.  But by failing to address these issues that are on people’s minds, regardless of the validity of such, we necessarily cede the conversation to the illiberal ideologies.  What’s worse, we look out of touch.

How can classical liberals remain relevant in today’s society?  By following in the footsteps of our forefathers and engaging in the issues of the day.  Let the sociologists argue about whether or not gender inequality exists (or multiple genders).  Let the economists argue about the wage gap.  Let the climate scientists argue about climate change.  Rather, let’s address these issues head on.  Taken the problem as given, how can classical liberalism address the issue?  How can classical liberalism address environmental issues?  How can classical liberalism address displacement from trade?  How can classical liberalism address the wage gap and discrimination?

If we are to remain relevant in today’s world, if we are to be given a seat at the table, we need to prove we belong there.  We need to engage people’s concerns, lest we doom ourselves to the perception of obsolescence.

Your Fellow in Liberty,

Jon Murphy
Fairfax, VA

Make Sure the Cure Isn’t Worse Than the Disease

TANSTAAFL.  Every action taken has costs, and sometimes those costs are borne by those who had no say in the matter (“negative externalities” to use the technical term).  The existence of externalities is often used to justify government involvement in markets (pollution tends to be the common example).  Lately, however, protectionists scarcityists have begun using that argument to promote their policies, noting job loss as an externality.  Some, more generally, claim “practical people not tied to free trade dogma understand that trade sometimes is good and that it’s bad other times.”

It certainly is possible that, any given transaction, may have enough unforeseen negative consequences as to have negative net benefits.  However, the bar needed to justify government action is high:

From a purely economic perspective*, protectionists have two tasks before them:

1) Prove that imports cause greater net harm than domestic production

and

2) Prove the proposed solution minimizes the net loss (or, inversely, maximizes net benefits). This is where comparative institutional analysis comes in.

The mere existence of condition (1) is neither necessary nor sufficient to justify government intervention. If the cost of government intervention exceeds the benefits therefrom, then even though the free market option has a net loss, it is the optimal solution because the resulting intervention would make matters worse!

The existence of condition (1) may require collective action to solve, but it may be more cheaply solved via non-government collective decision making (ie, a firm).**

There may be cases where government decision making is the lowest cost option.  However, it is very much a case-by-case basis.  Blanket legislation (like a tariff) does not allow for the necessary flexibility to make such decisions.  In order to minimize costs (and thus maximize net benefit), freedom must be given first preference, with the burden of proof upon protectionists.

*There could be many other arguments for protectionism, such as legal, or national defense.  I shan’t get bogged down in a discussion here.  I’ll leave that to the experts.

**For a more in-depth discussion on this point, read The Calculus of Consent by James Buchanan and Gordon Tullock, in particular Chapter 5.

Today’s Quote of the Day…

…is from page 147 of the excellent new book Arguments for Liberty (edited by Aaron Ross Powell and Grant Babcock).  This quote comes from the essay on Contractarianism by Jan Narveson (original emphasis):

Liberalism is exemplified by normative systems that hold two points: (a) that the sole acceptable purpose of rules, laws, and in general interventions must be the good of those intervened upon; and (b) that it is those persons themselves, rather than any supposed authorities, who fundamentally embrace those values.  Individuals, then, are the basic holders of the values that interventionist institutions and personages are to respect….Both are essential.  So-called liberals of the present day tend to think that they, the pundits or theorists or the elected politicians, know what people want better than the people themselves.

Sacrificing the Ends for the Means

Throughout his writing career, Frederic Bastiat repeatedly emphasized that consumption is the end goal of economic activity, that the consumer should be the focus of economic analysis.  While each man is both producer and consumer, man produces so he can consume.  In other words, production is the means and consumption is the ends.  This makes sense if we look at our own lives: we go to work so we can afford our homes, food, cars, clothes, etc.  We don’t consume our clothes, cars, food, homes, so that we can work more!

Although not considered much of a theorist, Bastiat was a bit ahead of his time with this emphasis.*  It would be another 50 years before the commonly-recognized supply and demand curve we use today was developed by Alfred Marshall.  Using the Marshallian Curve, we can explore Bastiat’s** insights with regard to international trade.

Let’s ask the question: what happens when we impose a tariff on international trade?

First, let’s start with our standard supply and demand curve:

20170406_093528

The green-shaded areas are “consumer surplus,” or what the consumer gains from the international trade.  The orange is domestic producer surplus (what domestic producers gain).  Domestic producers supply some of the quantity demanded (Qs) and the rest is made up in imports (Qd-Qs).  The total societal surplus is the green and the orange areas added together.

What happens when we impose a tariff?  This:

20170406_094005

Green is, as above, consumer surplus.  Orange is producer surplus.  Added in here is the blue area (tax revenue) and red (deadweight loss).  What’s going on here?  Much of what we have is a transfer of wealth: producers gain (from the consumer), government gains (from the consumer).  But where does the deadweight loss come from?  The consumer!  Not only is there a total reduction in welfare in the society (not merely a redistribution), but it all comes from one segment, the segment that is the ends of all production.  The entire welfare loss is borne by the consumer!  

The implications of this analysis are stunning, at least from an economic perspective: you reduce the ends to get more means; Protectionism results in more effort for less welfare!  The supposed blessings of scarcity that protectionism promises never materialize.

*Nor should Bastiat be considered a theorist.  He wasn’t.  He was a great distributor of economic ideas, but didn’t form any himself.

**And Say’s, Smith’s, and Ricardo’s

Warts and All

Yesterday was Opening Day for the Washington Nationals at Nationals Park in Washington, DC.  Some 40,000 people made their way to the Waterfront to see the Nationals take on the Miami Marlins.  At the corner of N and First Streets, SE, the traffic and pedestrian crossing was a nightmare.  People were flooding out from the Metro headed to the Park.  The crossing guards could barely keep order, and both cars and pedestrians were getting frustrated (this effort was compounded by the fact the traffic lights were still on, often contradicting the guards’ orders).  It was, in short, a charlie-foxtrot.  One might even say it was a government failure.

Although the government’s solution to the pedestrian issue was less-than-ideal, it would be incorrect to immediately jump to the conclusion that a laissez-faire approach would automatically be better; that a “free-market” approach would be better than the government approach.  The free-market approach would come with its own set of problems (perhaps, for example, since pedestrians have the right-of-way, tens of thousands of people would have crossed the streets and no car would have been able to move for hours).  It’s indeed possible that the free-market approach would have generated a worse outcome than the government approach.

Harold Demsetz (among others) warns us against the Nirvana Fallacy; that is, assuming a different (often preferred) method would not contain the same flaws (or flaws at all) from the current method.  We see this very often in politics (eg socialism), but free-market supporters can run aground of the fallacy, too.  Markets, just like governments, are populated with humans with the same foibles.  The incentives are different, to be sure, but markets can fail, too.  One mistake I think far too many market supporters is to assume that markets are not only perfectly efficient (the “efficient market hypothesis”), but also they instantly adjust.  That is not the case.  By arguing, as many do (especially many anarcho-capitalists) that the market solution is always the superior solution is incorrect for the exact same reasons that socialists arguing the government solution is always superior to the market solution.

Markets are extremely powerful.  Generally speaking, they provide excellent results.  But markets are just one of our institutions, and they function best when search and transaction costs are minimized.  For certain problems, there may be other institutions out there that would perform better.

Reality vs Perception

Over at the Liberty Law Blog, Prof. John McGinnis has an excellent piece on legislating.  He writes (emphasis added):

A Nebraska Senator has introduced a bill to require photo identification for voting, not because voting fraud is an actual problem, but because Nebraskans perceive there to be such fraud, whether it exists or not.

If voting is a fundamental right protected by the Constitution, legislation should burden its exercise only to address actual harms, not some people’s impressions of reality.  Thus, the legality of these laws should turn on the question of actual voter fraud and the utility of voter identification in curbing it.

I agree with the good professor, and think this rule should apply not to just legal matters, but economic matters as well.  An argument I’ve heard more and more in recent months in favor of protectionism from people who are nominally free market is that, with our current trade policy, it creates the perception of unfairness; it creates the perception of China “stealing jobs”, of a “hollowing out of the manufacturing base,” of “economic stagnation.”  It doesn’t matter that the data say otherwise, but the perception is there and that’s why Trump won.  Therefore, they conclude, we need some trade barriers to keep the protectionists at bay.

This argument is very similar to the one McGinnis addresses: there is this perception, so therefore we should pass legislation to combat the perception, even if it infringes on people’s rights.  For the same reasons McGinnis rejects the argument in the link, I do so here: legislation that burdens the free exercise of a right should only address an actual harm, not a perceived harm.  Given that free exchange is a fundamental human right, the infringement of such requires the burden of proof to be on those calling for tariffs; they must demonstrate actual unique and substantial harm, not just the perception of it and demonstrate the usefulness of their proposed actions in addressing the harm.*

In short, the perception of harm is not enough to justify the infringement of the right to trade.

*Notice I said “actual unique and substantial harm,” instead of just “harm.”  The reason for this, which will be addressed in a forthcoming blog post, is because any action whatsoever can conceivably harm anyone, but that alone is not grounds for outlawing it.