Sunday, July 6, 2008

Is Libertarianism a Failure?

I recently ran across this commentary by Charles Wheelan, the author of Naked Economics. Entitled “Confessions of a Maturing Libertarian”, Dr. Wheelan makes a mistake that far too many economists and laymen make when it comes to the point of libertarianism and belief in the free market. From his article:

I've discovered just one problem with my elegant libertarian philosophy after spending two decades in public policy: It's terribly impractical for actually governing society. My whole quibble with libertarians can be boiled down to one banal question: What's the libertarian point of view on stoplights?

I like stoplights. More to the point, they're a simple and tangible example of how government can make us better off: They enable complete strangers to interact more safely and efficiently. Given a choice between the freedom to speed through an intersection at any time and the coercive red light, I'll tolerate the red light.

That's kind of silly, so consider a more significant example, like counterterrorism. In a world of libertarians, who finds Osama bin Laden?

Far too many libertarians believe that the market is omniscient, and too many anti-libertarian skeptics belittle it for not being so. Both sides are wrong.

By omniscient, I am speaking of the assumption by many libertarians that if only the government was eliminated all problems would go away. They embrace the power that the free market has in solving problems with religious fervor. It’s not that this viewpoint is far from the truth, but when proselytizing to a skeptical world it’s a little like quoting the Bible to Richard Dawkins. Saying “let the free market figure it out” falls on the deaf ears of non-believers.

The problem with these puritanical libertarians, and Dr. Wheelan’s understanding, is that the free market doesn’t have all the answers. The concept of the tragedy of the commons was first noted in 1833. The solution is to set up private property rights. This was fine in England where plots of land were small and stone was readily available to build fences. In the American West this was not so easy. It can be rather costly and time consuming to fence a 50,000 acre ranch. It wasn’t until the invention of cheap barbed wire that this was a viable option. Yes, the market found a solution, but the problem was apparent long before the solution came along.

In recent decades pollution has become one of the more befuddling externalities. A number of economic mechanisms have been created to reduce the negative affects it has on those uninvolved in its production. The most recent being cap and trade. The market has failed to produce a solution that eliminates the problem. A debate can be had as to the magnitude of loss that pollution produces, but I am aware of very few market solutions for it. Should we wait and let the market figure out a marketable use for soot and other pollutants? I don’t want to bet my health on it in the meantime.

Mr. Wheelan’s mistake, as with many others, is that their conversation ends here. I hold libertarianism as an ethic to strive towards in my economic analysis. Simply because there is no free market solution right now does not mean that there isn’t going to be one down the road. The market doesn’t have all the answers right now, but it is the best mechanism we have to find the answers that avoid coercion. Profit focuses our attention to solve complex problems.

I will never concede that the free market fails. It is only the limited knowledge of humanity that prevents it from finding the answer, not the failure of the mechanisms it creates. I see examples of free rider problems in the private sector all the time, from the unkempt refrigerator in the break room to community LAN space. Market “failures” are examples of bounded human knowledge not a blight on libertarianism.

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