A double warning before we begin: this one is a tad long.
And as I mentioned last time, this part will mainly be focused on the economic concerns surrounding libertarianism, which some find to be extremely dry. If it helps, I’m one of those people.
In a free market, all trade must be voluntary, so you will never agree to a trade unless it has a benefit.
Furthermore, you will not make a trade unless it is the best possible trade for you to make. If you could make a better one, after all, you’d hold out for that. Trades in a free market, therefore, must not only be better than nil, but must be the best possible trade you could make at that time.
Labor is the same as any other transaction in this regard. If you agree to a job, it’s because it benefits you more than whatever else you could be doing with your time, and your employer won’t hire you unless it benefits them more than whatever else they could be doing with their money. A voluntary labor contract, then, must benefit both parties, and must do so more than any alternative.
If free market trade benefits both parties, any interference by the government must hurt both parties. Put more simply, help can come from giving more options, but never from taking them away. And in a free market system where all involved start with options open, all the government can do is take them away.
This treats the world as a diarchy held by consumer and producer, rather than an integrated system made of parts that affect everything else. In addition, consumers in this system are treated as things that know variables which affect them – “utility”, “demand”, and the like. In reality, people are confusing and contradictory things and are rarely so logical.
As an example of the first point – the world is an integrated system and trade often affects more than one person – let’s say that I sell my land to an amateur wolverine breeder. She’s an amateur, though, who previously only worked with spiders. The result is that her wolverines often run amok, biting people on neighboring lands and instigating rebellions against Communist states.
This is an externality – trade that affects people who weren’t involved with it. While the trade benefited the wolverine breeder and myself, it wasn’t very good for all our neighbors, who are now hiding in their kitchens clutching cans of industrial-strength Wolverine-B-Gone.
Of course there are libertarian ways to get around this. You could refuse to settle in a town unless the people in it had signed a contract declaring they wouldn’t raise wolverines. You could try making something like a neighborhood association to sign contracts banning certain dangerous things, like carcinogenic chemical factories, lumber mill/optometrist combination plants, or breeding grounds for furry mammals of the family Mustelidae.
All it takes, though, is only one person who refuses to sign the contract, and next thing you know you’ve got the bitey little creatures all over the place. Or coal dust in your water supply, as it were. A better option might be to start your own town and refuse to let anyone settle unless they belonged to this association of yours, and agreed to abide by its rules. You could even collect dues from the members to pay for what you’d need to enforce said rules.
At this point, though, it’s no longer a clever libertarian way around government. You’ve just reinvented the concept of government and slapped a libertarian sticker on it. There’s no way around it – there is no loophole-free way to protect a community against externalities besides government, and so government remains a necessity. On this, I think we can all agree.
More importantly, externalities as a concept justify significant parts of a government – mainly environmental, zoning, and property use regulations.
The next argument against has to do with coordination problems.
These are basically cases where everyone agrees on what would be the best action, but the free market system cannot guarantee this action would take place.
One of my favorite metaphors I’ve seen illustrate this has to do with fish farms, and (with regards to Scott Alexander, its originator) it goes as follows:
As a thought experiment, let’s consider aquaculture (fish farming) in a lake. Imagine a lake with a thousand identical fish farms owned by a thousand competing companies. Each fish farm earns a profit of $1000/month. For a while, all is well.
But each fish farm produces waste, which fouls the water in the lake. Let’s say each fish farm produces enough pollution to lower productivity in the lake by $1/month.
A thousand fish farms produce enough waste to lower productivity by $1000/month, meaning none of the fish farms are making any money. Capitalism to the rescue: someone invents a complex filtering system that removes waste products. It costs $300/month to operate. All fish farms voluntarily install it, the pollution ends, and the fish farms are now making a profit of $700/month – still a respectable sum.
But one farmer (let’s call him Steve) gets tired of spending the money to operate his filter. Now one fish farm worth of waste is polluting the lake, lowering productivity by $1. Steve earns $999 profit, and everyone else earns $699 profit.
Everyone else sees Steve is much more profitable than they are, because he’s not spending the maintenance costs on his filter. They disconnect their filters too.
Once four hundred people disconnect their filters, Steve is earning $600/month – less than he would be if he and everyone else had kept their filters on! And the poor virtuous filter users are only making $300. Steve goes around to everyone, saying “Wait! We all need to make a voluntary pact to use filters! Otherwise, everyone’s productivity goes down.”
Everyone agrees with him, and they all sign the Filter Pact, except one person who is sort of a jerk. Let’s call him Mike. Now everyone is back using filters again, except Mike. Mike earns $999/month, and everyone else earns $699/month. Slowly, people start thinking they too should be getting big bucks like Mike, and disconnect their filter for $300 extra profit…
A self-interested person never has any incentive to use a filter. A self-interested person has some incentive to sign a pact to make everyone use a filter, but in many cases has a stronger incentive to wait for everyone else to sign such a pact but opt out himself. This can lead to an undesirable equilibrium in which no one will sign such a pact.
It should be self-evident that, contrary to libertarian objections, fishermen will generally not abide by the sort of pact that would benefit everyone. The Northern Cod Fishery collapsed in almost exactly this manner.
You could maybe say, “I bet that (insert privatization scheme that takes into account cod immigration patterns and population growth here) would have ensured the Atlantic cod’s survival!”
And maybe you’d be right. But on their own, no fisherman suggested it, and it’s government regulations that stopped the overfishing.
Coordination problems of this nature mean that the government should be involved in ethical business practices. The libertarian counterargument is that if a business is engaging in unethical practices, people will boycott it, and that business will either fall to bankruptcy or change its wicked ways.
This falls apart quickly when examined.
Let’s say there’s a company, Sam’s Self-Sealing Stem Bolts, that engages in some kind of horrendously unethical practice that makes it $15 million per year. Sam’s Self-Sealing Stem Bolts – let’s just call them SSSB, for kicks and giggles – has a million customers, each of whom pay SSSB $100 per year. They make $115 million annually, then.
There’s not much reason for an individual customer to boycott SSSB. Switching to Super Saving Self-Sealing Stem Bolts Ltd. would cost an extra $75. And of course, Sam himself is still making $14,999,900 of what he originally was. There is significant inconvenience to the customer, and Sam neither cares nor stops his horrendous unethical practices.
Now, if our hypothetical customer thinks that two hundred thousand other customers would join her – well, then. Suddenly Sam is losing more than he makes off of the unethical act, and for his own self-interest he will likely stop. But if a customer does not believe that others will join the boycott, there is no tangible benefit.
Of course, if a customer believes that 199,999 other people will already be boycotting Sam, there’s no real reason for them to keep doing it. It saves them $75, after all, and the other boycotters will changes Sam’s mind regardless of their participation.
To me, this says that boycotts will generally be a failure on the market – something confirmed by data. Despite many companies doing unethical things, there have been very few boycotts which were successful.
Government regulation fixes this problem. So long as >51% of people agree with our customer that the practice is unethical and should be stopped, they don’t have to worry if any of them will boycott the company. A law is passed, and the action is banned.
But surely if people really object to something, they’d boycott it, no?
Are you boycotting the Coca-Cola company because they have union members in Colombian sweatshops murdered, kidnapped, and tortured?
Me neither. What am I going to do, drink Pepsi?
If a poll was conducted, I’m pretty sure that 99.99% of the responses would agree that hiring death squads to torture and kill people is wrong. So why is there such a disconnect between words and actions? Are people just lying?
More likely, the explanation is more complex. Maybe people just can’t keep track of all the shady things massive corporations do. Maybe they compartmentalize their lives. Maybe Coca-Cola is just really good at friendly marketing, and people can’t mentally connect that fuzzy white bear with Colombian death squads. Maybe some people are actually just looking at it from a game theory point of view, and figure there’s no incentive to join a boycott.
If we can’t trust people to effectively boycott companies that use death squads and sweatshops, why should we trust their purchasing decisions to morally regulate the market?
Can the government really be more effective, though?
It sure looks that way to me. There’s plenty of laws that go against businesses engaging in unethical practices now. It could be argued that the very existence of these laws proves that boycotts are a terrible way of allowing people’s morals to influence the conduct of corporation – if 51% of the people weren’t able to form a successful boycott. Just enough to pass a successful law.
Coordination problems prove the necessity not only for government regulations on business ethics, but on charitable giving, labor unions, and other labor regulation. The inherent power differential between the boss and the worker means that we do not live in the ideal world where if someone does not like their working conditions, they can just quit and get another job.About 300 American citizens commit suicide yearly due to work-related stress. I think we can assume that more feel miserable where they are, but not so miserable as to kill themselves.
In the days before labor regulations, employers would sometimes ban workers from leaving the floor during their shifts, even to use the bathroom. This would often result in the workers wetting themselves. This is of minimal benefit to the bosses, and results in massive humiliation to the workers, so… you’d sort of think the free market would naturally get rid of it. Yet factories that held such policies never lacked for employees. Other companies would lock their employees inside the building until work hours were over, resulting in tragedies such as the Triangle Shirtwaist Fire. Despite that fire, locking employees inside buildings didn’t stop until regulation was passed against it by the government.
How am I almost at 2000 words already? Clearly, I underestimated economics.
If you’ve survived thus far, thanks for enduring all this dry economics business. I’ll be publishing a second part, covering the remaining economic portions, soon.