Sunday, December 31, 2006

Why I bash Libertarians

[NOTE: I originally started writing this last December.]

Reddit this morning led me to a book by Henry Hazlitt presumptuously entitled Economics in One Lesson. And since rounding out my collection of articles on why everyone but me is wrong about everything seems like as good a way as any to sign off this disastrous year I thought I'd take a swipe at the Libertarians and critique Hazlitt.

Hazlitt's argument is seductively self-evident: any argument for government intervention in the free market is wrong because it focuses myopically on the benefciaries of that policy while ignoring the (invariably far more numerous) victims. According to Hazlitt, "Economics is haunted by more fallacies than any other study known to man" because of:

"... the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

I decided to pick on Hazlitt because he himself suffers from the very same myopia which he credits as the source of so many economic fallacies. It is an instructive exercise to read Hazlitt even if only to see whether you can see past his critiques of what other people have overlooked and figure out what he himself has overlooked. It is easy to get caught up in the fun of demolishing other people's arguments, even if many of them are just straw men, and so miss the fact that you are being snookered. Go on, give it a go. I'll wait.

Did you figure it out?

Identifying Hazlitt's myopia is challenging because most of his arguments are actually correct. Government intervention in free markets usually does lead to all manner of negative consequences. Unfettered capitalism really does lead to increased productivity and societal wealth. Minimum wage legislation really does increase unemployment. And so on and so on. So what's the problem?

Hazlitt himself leads the reader half-way there:

Our study of our lesson would not be complete if, before we took leave of it, we neglected to observe that the fundamental fallacy with which we have been concerned arises not accidentally but systematically. It is an almost inevitable result, in fact, of the division of labor.

In a primitive community, or among pioneers, before the division of labor has arisen, a man works solely for himself or his immediate family. What he consumes is identical with what he produces. There is always a direct and immediate connection between his output and his satisfactions.

But when an elaborate and minute division of labor has set in, this direct and immediate connection ceases to exist. I do not make all the things I consume but, perhaps, only one of them. With the income I derive from making this one commodity, or rendering this one service, I buy all the rest. I wish the price of everything I buy to be low, but it is in my interest for the price of the commodity or services that I have to sell to be high. Therefore, though I wish to see abundance in everything else, it is in my interest for scarcity to exist in the very thing that it is my business to supply. The greater the scarcity, compared to everything else, in this one thing that I supply, the higher will be the reward that I can get for my efforts.

(Emphasis added.)

Hazlitt continues:

Just as there is no technical improvement that would not hurt someone, so there is no change in public taste or morals, even for the better, that would not hurt someone. An increase in sobriety would put thousands of bartenders out of business. A decline in gambling would force croupiers and racing touts to seek more productive occupations. A growth of male chastity would ruin the oldest profession in the world.

But it is not merely those who deliberately pander to men's vices who would be hurt by a sudden improvement in public morals. Among those who would be hurt most are precisely those whose business it is to improve those morals. Preachers would have less to complain about; reformers would lose their causes; the demand for their services and contributions for their support would decline.

If there were no criminals we should need fewer lawyers, judges and firemen, and no jailers, no locksmiths, and (except for such services as untangling traffic snarls) even no policemen.

Under a system of division of labor, in short, it is difficult to think of a greater fulfillment of any human need which would not, at least temporarily, hurt some of the people who have made investments or painfully acquired skill to meet that precise need.

Now it is often not the diffused gain of the increased supply or new discovery that most forcibly strikes even the disinterested observer, but the concentrated loss. The fact that there is more and cheaper coffee for everyone is lost sight of; what is seen is merely that some coffee growers cannot make a living at the lower price. The increased output of shoes at lower cost by the new machine is forgotten; what is seen is a group of men and women thrown out of work. It is altogether proper—it is, in fact, essential to a full understanding of the problem—that the plight of these groups be recognized, that they be dealt with sympathetically, and that we try to see whether some of the gains from this specialized progress cannot be used to help the victims find a productive role elsewhere.

So far so good. Here is where he goes off the rails:

But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value.

Really? Why not? On this point Hazlitt is silent. He simply takes it as axiomatic that the more goods and services are being produced the better off the world is. He sees only the forest and misses the trees. And, unfortunately, in this case the trees are people. To someone on the street with no money and no marketable skills it matters not a whit if economic progress has produced cheaper coffee (Hazlitt's example), he still can't afford to buy a cup. Disposing of excess buggy whip makers is a much thornier problem than disposing of excess buggy whips. But Libertarians try to pretend that these are structurally comparable issues.

Unfortunately it doesn't work that way. There are lots of things you can do with buggy whips that you can't so easily do with human beings. You can put buggy whips in warehouses or landfills, but you can't do that with buggy whip makers, at least not in a civil society.

The Liberatarian answer is that when buggy whips become obsolete the buggy whip makers should find something new to do. But this is not always so easy. A fifty year old who has spent his whole life making buggy whips might not have such an easy time learning a new trade, particularly in a world where productive occupations often require decades of training.

The fundamental problem with Liberatarian economics is that there is a positive-feedback effect that tends to put capital in the hands of those who need it the least. This gives those lucky few the leverage to effectively turn everyone else into indentured servants who have to work their entire lives to pay off their debts. Or, even worse, it lets some people slip through the cracks even if they are ready, willing and able to be productive simply because they don't have the capital to find a market for their services (a.k.a. a job).

Certainly in the aggregate the world is better off if we can simply take excess people and, like excess buggy whips, warehouse them or discard them or otherwise turn them into somebody else's problem. But is that really a better world? I think not.

Finding the right quality metric for an economy is not easy, and Ron's First Law applies: all extreme positions are wrong, which in this case means that all facile positions are wrong. The Right wants to increase the average while the Left wants to decrease the variance. Those extremes lead to lassez-faire capitalism and Marxist communism, both of which the world has rightly decided are pretty bad ideas.

The right answer is some sort of engineering compromise: free markets encourage innovation and increase productivity and standards of living, but then I also think there ought to be some government intervention to recycle some of the capital from the top back to the bottom to prevent people from falling into abject poverty and despair. Yes, it's inefficient. Efficiency needs to be tempered with (but not sacrificed to) compassion.


denis bider said...

First off, you are referencing 'liberatarian' at many points in the text. You might want to correct the spelling of that.

Second, Hazlitt is right: "But the solution is never to reduce supplies arbitrarily, to prevent further inventions or discoveries, or to support people for continuing to perform a service that has lost its value."

I'll answer your question: "Really? Why not?"


- To reduce supplies arbitrarily is to do damage: it is to throw away good work that was already done, to deny the benefit of this work to the population, to make everyone a bit worse off, to prevent progress.

- To prevent further inventions or discoveries is to do damage on such a scale that it is difficult to even comprehend. This cuts off all of the possible futures in which the human condition could be vastly improved through technological progress, to replace them only with those possible futures that make use of no new inventions and discoveries, which is to replace them with status quo, which is to perpetuate human suffering. This is evil.

- To support people for continuing to perform a service that has lost its value is to place these people on a dead-end track, to make their lives pointless, it is to give up on their potential. It is stupid because resources are being expended to provide an unnecessary service, and it is tragic because the potential of these people is being wasted.

Note that Hazzlit is not arguing that nothing should be done to help these people. Unless he writes that somewhere else in his book, in a part which you did not quote, it is you who is beating the straw man. I can suggest a number of ways to improve such people's lives which are consistent with Hazzlit's paragraph you attacked:

- One is to pay such people to do nothing. Retirement comes early. No resources have to be wasted performing an unnecessary task, and the people can spend their time doing something else that actually makes their lives fulfilling.

- Another is to pay for such people to be trained to do something else. This is better than early retirement in that their potential is not wasted. I think most tax money is wasted, but education and research are fields where more spending on good programmes is always a good investment.

Finally, I know that you're too wishy-washy, teary-eyed, soft-hearted and in general not man enough to agree :) but I still think that the best solution to solve poverty in the long term would be to simply shoot everyone who cannot sponsor their own living nor find a kind sponsor who would. People in general have a tendency not to plan and think about the future. Shooting a few hopeless cases for the results of their poor planning would really set a good example and motivation for everyone to take good care of themselves, and it's hardly likely you'd see many more beggars and homeless people around in a few years. If it is made public policy that everyone needs to take responsibility for themselves "or else", then you'd see that everyone would.

It wouldn't even be necessary to do the shooting if there were not as many suckers like you who get all teary-eyed about people playing victims, refusing to see how this role is usually a choice more so than an externally imposed situation.

Ron said...

Well, Denis, I gotta give you this: you certainly have the courage to follow through on the logical consequences of your beliefs. But I wouldn't want to live in your world.

It's true that Hazlitt does not say that nothing should be done to help the less fortunate, but he is conspicuously vague about exactly what that help ought to be. Should we help poor people with education? Food? Housing? Health care? Or just a bullet to the head?


...suckers like you who get all teary-eyed about people playing victims, refusing to see how this role is usually a choice more so than an externally imposed situation.

I've been hanging out with homeless people for the last six months, so I am keenly aware that folks who are on the street often "choose" to be there one way or another. But the trick is, street people are still people, and "often" or even "usually" isn't always. Are you going to try to filter out those who are poor through no fault of their own before you start mowing them down, or are you just going to expect them to accept that type I errors are the price of progress?

Bill said...

So Dennis -- let me know what it's like when you get to your mid-fifties, you've pursued your career with company "X" for, say, 20 years or so, and one day your boss tells you that you've been downsized. Or that you have a job still, but only if you take a pay cut, or move halfway across the country. Or maybe, your division's been eliminated and along with it, all the associated jobs. Get back to me in 15-20 years and let me know how that's working for you, OK?

Find a new job? Sure. Except that you get a lot of "You're too senior" or "overqualified" for the position. Age discrimination? Maybe. Try to prove that. All the while what savings you have dwindles steadily. Retrain? Sure. You could do that. Say you spend 4-5 years in school. Now you're not only old and looking for a job, but you're an old rookie. Beyond a certain age, your options narrow significantly.

I know the argument -- I should have provided for myself. And I'm trying. I have a tidy sum in my 401(k), thanks, and it's several multiples of the average of $60,000 that people my age have, on average. I put a large percentage of my paycheck aside each pay period, and my employer matches my contribution. Still, saving takes time, and I need all the years between now and retirement to get to where I need to be. If my company decides tomorrow that they don't need me anymore, I'm screwed.

So yeah -- after 50+ years of contributing to society, paying my taxes, raising my children, working my ass off, I think someone owes me something if my company decides tomorrow that they need someone 30 years younger than me (and correspondingly cheaper) so that the chairman can get a nicer bonus.

Clint said...

I'm thinking that Denis is giving us a "Modest Proposal" here... but then again there are a lot of people willing to sacrifice the few for the many... just not so blatantly.
I personally am with Hazlitt in feeling that it is better to get the changes over with quickly rather than drag out the damage that they do by way of intervening to try an eliminate every negative effected of the shift. Instead of paying 10,000 buggy whip makers to keep making buggy whips, let them lose their jobs and try to keep themselves solvent through finding other jobs. Only when the two or three hundred who are incapable of taking care of themselves make themselves evident should anyone step in and help.
And it should be a mark of shame. It may sound harsh but to pretend that you are a productive member of society as you collect charity or welfare is ignoring reality and doing absolutely nobody any good. It is something that should be an absolute last resort and a situation that you should try to get out of as quickly as you can. If you take away the stigma, you take away the primary incentive to get away from charity and welfare and you end up with it being that person's "job".
And make no mistake, maintaining a job that is no longer needed is charity if done voluntarily and welfare if it is forced by the state.
If I was doing a job that is no longer needed, simply so that I don't have to fend for myself, I am a detriment to society and I wouldn't be able to look at myself in the mirror. If that was my only choice and I had family depending on me for a roof over their head and food on the table I would do it... but I would never lie to myself and pretend that I shouldn't feel deeply ashamed.

million pencils said...

I guess you are either pretending to be stupid for the sake of argument - or you really are stupid, which I doubt!

When the supply of goods becomes redundant, because something better has been created, then yes, it is right to get rid of the buggy whip makers. If they take the hint, they will invest some time, and increase the value of their labour to an employer through new training.
If they don't do this, they will become hobos!
What is so wrong with this view? Ever wondered to all the people who made horseshoes 100 years ago? Ever wondered what happened to the people who sold matches? Technology moves on, and the successful in life move with it!

We all need to reskill on a regular basis - I couldn't make a living today with what I learnt about computers in 1988 - so I constantly retrain, and that makes me valuable to employers, and that keeps my family fed!
If you don't understand the system - well, your stupidity ensures a cleverer person gets the job you could have had!

Ron said...

it is right to get rid of the buggy whip makers

Why? The buggy whip makers are people. They have families. Why should a buggy-whip maker's child go hungry because the demand for buggy whips drops?

And how, exactly, do you propose to get rid of them? This is a real problem. Yesterday's buggy whip makers (and welders and assembly-line workers and soldiers) are wandering the streets of our cities, so this is not an academic exercise.

If they take the hint, they will invest some time, and increase the value of their labour to an employer through new training.

Where are they going to get the capital? It's not so easy (or cheap) for a 50-year old buggy whip maker (or automobile assembly line worker) to learn to write Java code.

What is so wrong with this view?

It dehumanizes people. It says that a person has no birthright, that he or she is entitled to absolutely nothing merely because they happen to be a human, that a human who can't or won't make an economic contribution has more or less the same social status as a stray dog. It arbitrarily measures success by the total wealth of society, even if the distribution of that wealth is wildly uneven and results in widespread misery (even among the wealthy). And it relies on vague aphorisms like "getting rid of the buggy whip makers", which sounds reasonable until you sit down and try to figure out exactly how the getting-rid-of is to be accomplished.

That is what is wrong with that view.