Monday, March 28, 2011

Mish's Libertarian Economic Model Proves Friends Can Be More Dangerous Than Enemies

In attempting to dismantle the confused claims of one of his readers concerning "libertarian economics", blogger Mike "Mish" Shedlock ends up doing damage of his own to the logic of sound economic and political theory as espoused by consistent libertarians, demonstrating that sometimes we have more to fear from our friends than our enemies.

To be sure, overall Mish is a strong advocate of sound economic theory, knowledgeable financial market interpretations and a trustworthy explainer of the libertarian perspective. But every now and then he botches things up, badly, and as something of an authoritative voice out there he needs to be corrected lest his readers come across with a disjointed and self-contradictory interpretation of free market economic theory and its political implications for those seeking to live in a just, free individualist society.

To that extent, let's examine the two competing claims that Mish introduces, which he refers to as the "Regulation Model" of his reader, Tin Hat, and the "Libertarian Model" which he puts forth in its place, and see if we can arrive at a fully consistent third way that ultimately rejects both of these approaches as flawed.

First, the explanation by Tin Hat of the "core premise behind libertarian economics":
The private business sector will put ethics, morality and public employee good above profits, shareholders, bonuses, golden parachutes and CEO compensation -- IF they were completely unfettered from any government imposed rules, laws, and regulations.

And IF the private sector entity failed in its fiduciary duty to the public, Main Street would rise up and kick them out.

That's Corporatism.
Mish himself does a good job of responding to these claims and successfully refutes them, so I won't bother covering the same ground here. In addition, Mish outlines the "Libertarian Economic Model" as the alternative, which I reproduce below and have added bold emphasis to highlight claims I disagree with and will address afterward:
The Libertarian model does not end all regulation. Indeed the basis of the Libertarian economic model is that we need to protect private property, prevent fraud, protect human rights, and give everyone an equal chance under the law.

Had we done that, and "just" that we would not be in this mess.

In the Libertarian model, Fannie Mae and Freddie mac would not have existed. Nor would there have been a Fed keeping interest rates too low, too long. Without the loose lending model of the Fed, and without banks being able to lend more money than they have, the housing securitization model that blew up would not have happened or if somehow it did, it would have been less problematic by orders of magnitude

In the Libertarian model, there would not have been government sponsorship of the rating agencies Moody's, Fitch, and the S&P.

In the Libertarian model the construct of "Too big to fail" does not exist. Indeed, allowing failure is one of the tenants of the Libertarian model.

Note that something like Glass-Steagall would work in the context of a Libertarian model because its purpose is to put a firewall to prevent fraud. Pollution laws would still be needed to protect private property. Child labor laws would still be needed to protect human rights. Public safety laws are fine. No one would be allowed to yell "fire" in a movie theater.

If you want to take that model and add some social safety nets, all but strict Libertarians might agree.
First things first, an important distinction should be made between economic models and political/judicial models. Mish treats the two terms as essentially equivalent. He's correct that the free market economic theory or model he describes is generally one espoused by libertarians, but in describing the role that government intervention into the economy should or could play, he's describing a political system, not an economic one. I don't want to pick nits here but it's important to point out that there is no such thing as "libertarian economics", as opposed to "conservative economics" or "liberal economics" or whatever other type of economics you want to come up with.

The science of economics is supposed to be a description and analysis of fundamental, natural laws seen to operate in the realm of economic behaviors and relationships. These laws and cause-effect interactions are to be constant and immutable at all places, at all times, for all people. They are not dependent upon a particular political system or political viewpoint to remain true and they certainly can not be transformed through willful disbelief or the ideology of "perception is reality." Just as there is no "libertarian physics" or "libertarian biology", there is really no "libertarian economics." There is only physics, biology, economics, etc.

I think Mish would essentially agree with that proposal but I point it out nonetheless because the way he's chosen to frame the argument would seem to invite a response from people like Tin Hat to say, "Well, that's what you think based upon your political biases, which I don't share, so I reject the truth of your claims."

With that out of the way, I want to address the bold emphasis claims one by one.

The Libertarian model does not end all regulation
In reality, it absolutely does. In basic economic theory we can categorize all economic behavior as either voluntary or involuntary in nature. Voluntary behaviors are those which are willfully carried out by individual economic participants because they perceive such acts to be welfare enhancing. This could be anything from producing shoes, to selling shoes to somebody, to wearing those shoes (production, exchange, consumption). Involuntary behaviors are those which are carried out by individual economic participants because they perceive they will be punished, harmed or otherwise physically coerced by a third party if they do not do so. These behavior are necessarily welfare reducing, because the participant is behaving in a way they do not judge to be in their best interest and would not commit to were they not under threat of coercion.

Economic theory seeks to understand the structure and mechanics of voluntary economic behavior. Technically speaking, while economic theory can provide comment and observation as to the results of involuntary behaviors, truly this is a subset of economic theory known as "political economy", that is, the forceful redistribution of wealth and manipulation of free economic behavior.

Economic theory accepts as implicit the idea that private property exists and that its existence is observed and adequately protected by all participants, ie, that economic participants are barred from stealing from, defrauding or attacking one another and that these types of behaviors are essentially outside the scope of analysis.

These coercive acts do not require legislation or regulation to address. Their untenability is taken as given and is a necessary precondition for the operation of the market economy and the division of labor, which is based upon voluntary, peaceful exchange of wealth and values.

In other words, there is no need for any 3rd party "regulation" to make a voluntary economic system work. Any act initiatory force is an attack of that system from without-- it is not assumed into the model and does not require any particular regulatory structure or considerations ex ante to ensure everything runs smoothly.

Prevent fraud, protect human rights
These are absolutely not bases of the "Libertarian economic model" (quick note: big "L" Libertarian generally means having to do with an official, proper noun-type libertarian body, such as the Libertarian Party in the US, while little "l" libertarian typcially refers to the general body of concepts applicable to libertarian thinking, which is what I assume Mish is actually referring to here).

The libertarian political or legal framework underlying basic economic theory has essentially one major, axiomatic tenet, known as the Non-Aggression Principle (NAP) which simply states, "It is unjust for any individual to initiate the use of physical force against any other individual or his personal property." The NAP wholly and absolutely bans theft, fraud (a form of theft) and assault as illegitimate forms of social interaction and deems these to be punishable acts. All other consensual, voluntary exchanges are permissible. That's it.

While the NAP "outlaws" acts of fraud and deems these acts to be punishable as criminal in nature once committed, it does not approve of any law or regulation which would seek to "prevent fraud" before it occurs. The prevention of fraud, like the prevention of any other crime such as theft or assault, is up to every individual to make preparations for on his own time, at his own expense and according to his own reason. There is no way to justifiably enact a regulation or law which seeks to coerce individuals into arranging themselves and their property in ways they would not arrive at voluntarily, in the name of seeking to "prevent fraud," because in such a case the prevention of fraud has been gained at the expense of the actual commission of initiatory coercion.

The legal authorities, whoever they may be, are not the rightful owners of any property but their own and therefore they have no claim as to how other individuals should arrange their own property and business agreements so as to try to prevent fraud. Any attempt to have such an influence, short of peaceful, non-physical, verbal persuasion, constitutes an aggressive act of physical interference which is the very anti-thesis of the stated aims being pursued.

Similarly, there are no "human rights" as a special class of rights which can be legitimately protected under regulatory law. The only rights anyone possesses are property rights, that is, property rights in themselves and property rights in their possessions. These are the sacred boundaries and rights which must be respected by all social participants at all times, there are no additional "human rights" that can or must be protected.

Glass-Steagall would work in the context of a Libertarian model because its purpose is to put a firewall to prevent fraud

See the discussion above about the illegitimacy of "anti-fraud laws."

Glass-Steagall was a coercive act which treated the property and business arrangements of particular financial institutions as the property of public regulators. It made rules and restrictions as to how these institutions could voluntarily conduct their internal and external relationships in the name of preventing the possibility of actual malfeasance at an indeterminate point in the future. In effect, Glass-Steagall claimed that large banking operations were "guilty of fraud until proven innocent", a 180-degree contradiction of the normal legal precedent of "innocent until proven guilty."

It was a form of physical interference in the consensual, voluntary exchanges of those within the banking industry as well as those seeking to do business with those in the banking industry. It violated every participant's ability to engage in voluntary exchange within the construct of the NAP.

Furthermore, it was one of the pinnacle achievements of the Progressive Era and was enacted in 1932 as part of a wave of anti-liberty, interventionist "anti-trust" legislation of the statists of that time. The genesis of the law itself should lead any true libertarian to eye it suspiciously and seriously question its compatibility with the NAP and sound economic and political theory. Mish should know better than this.

Pollution laws would still be needed to protect private property
This is at best an ambiguously correct claim. What is needed is proper definitions of private property rights, in all cases. Then, it's a simple matter of adjudicating claims of interference or damage to those property rights. This is not something a legislative body can or will ever properly "regulate."

Child labor laws would still be needed to protect human rights
Again, completely false.

Child labor laws essentially are a body of laws which prevent individuals from hiring children to work in their businesses as paid employees or, to the extent that they are allowed to be hired, limits are placed on the age at which a child can be hired, the wage with which they can be paid, the hours they can work and the type of work they can engage in.

As a reminder, the NAP simply states "It is unjust for any individual to initiate the use of physical force against any other individual or his personal property." Parents are responsible for their children. Assuming a potential employer voluntarily wants to hire a child, the child voluntarily wants to work and the parent voluntarily agrees to let them, "child labor" is not problematic under the framework of the NAP and any law or regulation which would seek to create rules or restrictions on such exchanges would necessarily be a criminal act of coercive, physical interference in the voluntary, consensual exchange of the parties involved.

Yet again, like Glass-Steagall, child labor laws historically have been the work of union organizers and activists who were frustrated with the ability of employers to hire children and women as cheaper labor instead of paying padded wages to unionized, male personnel. The intent of these laws was not to protect children and preserve "human rights" but to prevent wage competition and protect the interests of unionized labor. As an outspoken critic of unions and organized labor, Mish should know better than to walk into this trap.

Public safety laws are fine. No one would be allowed to yell "fire" in a movie theater
False! False false false false false!

There is simply no need for "public safety laws". An act either constitutes a violation of the NAP (theft, fraud, assault) and is punishable as a crime, or it does not. There is no need to try to predict harm or behavior before the fact or create special classes or crimes or rules for protection, deemed to be "public safety laws."

The example of yelling fire in a crowded theater is a red herring, based upon faulty premises. It assumes that without some special public law governing behavior inside the private property of a movie theater, a person could get away with shouting "Fire!" and causing a lethal stampede.

The reality is that such an act, were it to occur, is covered under the rubric of fraud in the NAP! If someone were to shout "Fire!" in a crowded public space, or otherwise try to alarm a group of people to an immanent danger which does not actually exist, this would be an act of fraud. Further, if their intent was to cause a panic that would lead to injury and death, this would be an act of assault, just as if they were to brandish a crowbar and start beating and injuring people themselves.

Would you be surprised to learn that the genesis of this oft-misquoted "libertarian dilemma" cliche is, once again, statist agitation? The phrase and the thought problem originated from the opinion of Oliver Wendell Holmes, a Supreme Court justice, in the 1919 Supreme Court case Schenck vs. United States. The case was not about public safety and shouting "Fire!" in crowded public theatres-- it was about the supposed right of Congress to prohibit the distribution of anti-draft materials during World War I!

Do your homework, Mish!

All but strict Libertarians might agree
This final and last claim is perhaps most dangerous of all!

"Social safety nets" are a euphemism for slavery and a violation of the NAP. Any "social safety net" that would be publicly provided (aka, the responsibility of the government) would necessarily be the result of taxation, which is a coervice redistribution of private wealth. This is a clear violation of the NAP and it makes the provider of the resources for the "social safety net", the taxpayer, the effective slave of the despondent who depends upon such grace.

Libertarians uphold one, single axiomatic rule, the NAP, and they uphold it consistently and without compromise. Any libertarian who would make an exception for "social safety nets" and affirm the violation of the NAP in their pursuit is no libertarian, at all. Maybe they're a liberal, a conservative, a communist, or what have you, but they've given up their right to accurately and honestly call themselves a libertarian at that point.

Further, it's absolutely incredible that Mish would suggest that libertarian principles and sound logic allow one to mix and match different contradictory logical claims and integrate them into one system of thinking or worldview without problem. This is simply not possible! It doesn't make sense to say you agree with the NAP, except when it comes to bombing foreigners. Or, you agree with the NAP, except when it comes to handouts for the poor. Or, you agree with the NAP, except when it comes to grants of monopoly power to unions via regulations passed by the government.

You either agree with the NAP (how could you not? It's quite simple!), or you do not. Wholesale, fullstop.

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