The Encyclopedia of Libertarianism. Edited: Ronald Hamowy, Sage Publications, 2008.
Modern economies can be categorized by three kinds of economic policies. The first is one in which the government owns the means of production, or socialism. The second is marked by substantial government regulation, or interventionism, where the government leaves production to the private sector, but tries to shape market outcomes with subsidies, taxes, licensing, price and quantity restrictions, standards of quality, safety, and health, nonwaivable worker and consumer rights, and other measures. The third is the free market, or laissez-faire, where private property rights and freedom of contract alone provide the framework for the interaction among the many firms, consumers, and workers that comprise the economy. The relationship between libertarianism and laissez-faire is a simple one: Laissez-faire is the libertarian position on economic policy. Although most who regard themselves as libertarians admit exceptions, even the most moderate embrace a laissez-faire economy as the benchmark of a free society.
There can be little doubt that a commitment to laissez-faire is the most distinctive and controversial aspect of the libertarian program, at least in the democracies of North America and Western Europe. Although support for civil liberties is hardly unanimous in these countries, libertarian positions on personal freedom have considerable support from nonlibertarians across the political spectrum, and particularly from the left. In contrast, even in the United States, with a political culture that has traditionally been most market-friendly, laissez-faire economic policy has few adherents. The politicians most critical of state ownership and regulation are primarily opponents of more state ownership and regulation, rather than proponents of the radical privatization and deregulation measuresa true laissez-faire system would require.
Although laissez-faire has often been equated with disorder and even lawlessness, this equivalence is, in fact, a caricature put forward by its critics. As Ludwig von Mises observed, “The alternative is not plan or no plan. The question is whose planning? Should each member of society plan for himself, or should a benevolent government alone plan for them all?” Laissez-faire is as much defined by what it forbids as by what it allows. Under laissez-faire, it would at once be legally permissible to use one’s own property however one desires and legally forbidden to use that property to harm others or to employ the property of others without their consent. Similarly, it would be legal for parties to make almost any voluntary contract they desired involving their own property and illegitimate to violate such a contract. In summary, a policy of laissez-faire entails that individuals and voluntarily formed groups would have the liberty to use their own property, singly or conjointly, in any way they choose, always provided that they did not infringe these same rights of others.
Deontological arguments against laissez-faire are numerous and well known, appealing to the free markets’ incompatibility with egalitarian and democratic principles. However, there also are deontological arguments in support of laissez-faire, most of which fall into three categories. The first rests on the fact that people are morally entitled to the fruits of their labor and that income redistribution and “positive rights” like the “right to an adequate pension when one reaches the age of sixtyfive” amount to a politer form of slavery. The second is that economic freedom deserves the same respect as does personal freedom, consequences aside. Using the notion of sexual autonomy as a simile, Robert Nozick famously noted that, “The socialist society would have to forbid capitalist acts between consenting adults.” The third argument is predicated on the fact that the deontological critics of laissez-faire are altogether inconsistent. Few egalitarians want to equalize incomes on the international level, and perhaps even fewer insist on equalizing friendship or sex.
Consequentialist cases for and against laissez-faire, for the most part in the form of cost-benefit analysis (or, in economic terminology, “Kaldor–Hicks efficiency”) are remarkably well developed. The efficiency case against state ownership is now widely accepted, intellectually if not politically. Bureaucrats lack the financial incentives to satisfy consumers and minimize costs, they face severe knowledge problems, and they have low rates of innovation. Even if state funding has efficiency advantages, at best questionable, these advantages do not require state ownership. Admittedly, only a minority of economists would favor significant privatization in a country like the United States, but this view often stems from a bias in support of the status quo, rather than because they accept that the government operations are more efficient than are their private alternatives.
The primary efficiency debate is now between proponents of laissez-faire, on the one hand, and some form of intervention, on the other hand. Sophisticated critics of laissez-faire, such as Joseph Stiglitz, Paul Krugman, and Robert Frank, would agree that many forms of government intervention, among them price controls, entry restrictions, and high marginal tax rates, are typically inefficient. However, they would still insist that much government regulation is rational because of its efficiency, pointing to the commonly accepted list of market failures: externalities and public goods, monopoly and imperfect competition, and imperfect information.
Defenders of laissez-faire have offered four types of response to this criticism. The first is to deny that the critics are applying market failure concepts appropriately. The second is that markets are much more able to handle genuine market failures than critics realize. The third is that interventionist policies are almost invariably ineffective or even counterproductive ways to deal with market failure. The fourth is to draw attention to a parallel list of political failures to show that, even when promising opportunities for efficiency-enhancing intervention, governments customarily choose inefficient policies.
Externalities and public goods are probably the most misused of the arguments supporting market failure. Education has been widely classified as a public good, but it is not clear what benefits that accrue from one’s education individuals cannot be internalized. Those people who acknowledge this point often make vague appeals to the benefits education has in sustaining a viable democracy. However, if these benefits exist, they are probably of only marginal significance. Public goods arguments for social security, worker safety regulations, and health care for non-contagious ailments are similarly strained.
Efficiency complaints about monopoly and imperfect political competition rest on particularly weak theoretical grounds. When economies of scale are large relative to the size of the market, efficiency requires imperfect competition. Moreover, in many oligopoly models, firms act no differently from perfect competitors, and the same holds for monopolists, who, although seemingly in a monopoly situation, in fact face potential competition.
To take a final case, markets can function well even with low levels of information. So long as information is symmetrically distributed, the standard results essentially still apply.
The market can often take care of market failures given time or in the absence of government restraint. Many externality problems stem from government ownership of lands, waterways, wildlife, airwave frequencies, and the like, and they could be readily solved by privatization. Other externalities can be handled with bargaining between affected parties, as Ronald Coase emphasized. Collusion and predation, the primary problems associated with imperfect competition, similarly face effective market checks and would probably be rare even if they were legal. Imperfect information problems can be solved by investing in firm reputation; simply allowing firms to adjust prices for observable risk can often eliminate inefficiencies associated with asymmetric information.
Government solutions to problems occasioned by externalities often intensify the problem: Drug laws, for example, amplify the crime and health externalities that supposedly justify prohibition. Antitrust probably remains the best example of government policy with perverse efficiency effects. Antitrust laws provide a rationale for forbidding mergers with large potential cost savings and allow inefficient firms to sue more successful rivals for anticompetitive practices. In general, these policies act as a tax on market leaders. Most interestingly, as the antitrust laws have undergone interpretation, one of the few business strategies free of legal risk is often to charge high prices. Similarly, much insurance regulation that economists rationalize in terms of imperfect information intensifies the problem by making it more difficult to tailor prices to risk.
Even in the rare instances where efficiency-enhancing government policies are feasible, will they actually be implemented? Defenders of laissez-faire often appeal to “public choice theory,” which emphasizes that politicians and bureaucrats are self-interested actors who respond to political clout, not economic efficiency. Democracy is a weak check at best: Political information and economic understanding are public goods that individual voters have little incentive to supply. Giving government the power to “subsidize goods with positive externalities,” for example, sparks wasteful competition for government support (rent seeking) among rival lobbies. The winners tend to be the best-connected political players, not industries with particularly large externalities.
More generally, all of the problems that interventionists find in markets—externalities, monopoly, imperfect information, and so on—can and do also appear in the political arena. Combining this realization with other doubts about intervention yields a strong consequentialist presumption for simply accepting market failures, rather than trying to correct them through the political mechanism.
Efficiency is not the only consequentialist measure of interest. Most philosophers minimally would correct for the marginal utility of income. Here again, however, the consequentialist reply in favor of laissez-faire also applies. Many supposedly redistributive programs like spending on education, social security, and Medicare actually tend to increase income inequality. Redistributive programs aimed at the poor have large negative side effects: Aside from the obvious impact on work and family structure, welfare programs provide a rationale for harming the world’s poorest with stricter immigration restrictions. Simple public choice considerations—in particular, that the poor are unlikely to be successful rent seekers—again bolster the case for simply accepting income inequality, rather than using state action to improve upon it.
There are cases where what constitutes a laissez-faire policy is difficult to ascertain. Air pollution can be understood as a property rights invasion, but human beings exhale carbon dioxide onto one another simply by living. Likewise, all “capitalist acts between consenting adults,” as Nozick terms them, may be legal, but when does a person become an adult? In other cases, laissez-faire policy is clear, but proves disturbing, as a number of David Friedman’s hypothetical scenarios show. Still occasional ambiguities and fanciful counterexamples are at most mild impediments to laissez-faire as a practical policy regime. The more important question is, what role for government is compatible with laissez-faire? If the literature concerning market failure is unable to make its case, the anarcho-capitalist position certainly should suggest itself as an alternative.