Economics

Simple example:  There are just two of us, stuck on an island. We survive by harvesting coconuts and catching rabbits.

Scenario #1 — Autarky. We each work independently, doing both tasks. Since we’re dividing our effort, neither of us gets very proficient at these tasks and it takes us each 16 hours of daily effort to scrape by, after which we collapse from exhaustion for the day.

Scenario #2 — Specialization. You are a better climber than I am, but I am a better with snares. So, we specialize, you on gathering coconuts, me on catching rabbits. By focusing on that one task we each gain greater skills in that area. We each complete our work for the day in only 12 hours after which we trade a portion of our goods with each other.

As a bonus, we now each have four hours left over before we go to sleep. This is time that could be used for leisure and relaxation. It could be used to satisfy other needs. Maybe one of us wants to try fishing, or building a boat? The time could also be used to build tools to make our main production even more efficient. For example, I may design new and better snares for catching rabbits. This might mean I can, down the road, reduce my labor to only 10 hours a day.

Whether you are talking about an island of two persons, a community, a nation or the entire world, it is the same basic mechanisms at play. There is comparative advantage (you are naturally a better climber than I am). There is specialization and division of labor (I focus on catching rabbits and become really good at that one thing.) There is capital investment (I take my free time to build tools that make my production more efficient.) And there are gains for trade (It is cheaper for me to get some of your coconut in trade than for me to take time away from rabbit hunting to get them on my own.)

Note that there are also some unstated pre-requisites that enabled the productivity gains described above.  We had to agree not to kill each other or steal each other’s property.  We also had to honor whatever agreements we made with each other.  This “rule of law” provides the foundations on which all thriving societies are built.

Suppose there is some Grand Project that several people want funded. They have a few basic ways of doing this.  They could:

1. Fund the Grand Project themselves, from money they have on hand.
2. Try to persuade more and more people to support the Project.
3. Take out a loan to fund the Grand Project
4. Attract investors to fund Grand Project, offering to pay them back a percentage of any eventual profits.
5. Invite a private party to fully fund the Grand Project, which they would then make available to others on a rental or lease or per-use or some other basis, amortizing the cost.
6. Try a different business model, maybe give big sponsors of the Grand Project naming rights, or offer them space for advertising.

I’m sure you can think of several more. That is the wonderful thing about the private sector, there are so many ways to fund the things that people truly want.

The harder task is funding the things that people don’t want. Let’s take the war in Iraq. How many Americans really wanted that? At the time? A decade later? 20 years later? Today? I’m sure it has very little support. But there it is, funded. Something like that could not be funded by any market-based mechanisms. It can only be funded via taxation. This is not because it the war is expensive. It is not because of free rider or public goods concerns. It is because it is unpopular. Taxation is the only means to fund things that no one in their right mind would fund with their own money. The fact that there is no alternative to this kind of funding, in a libertarian society, is a good thing.  It is a feature, not a bug.

Now, let’s imagine some intermediate Grand Project, something that many people would support with their own money, say at a 70% level. With taxation you would be able to fund it at 100%. Without taxation it would be funded at 70%. You would still have the Grand Project, but it would be a little bit less grand. Or the supporters would need to sell their idea a bit harder, trying harder to persuade citizens, and not just politicians, that it is a good idea.

I think most people understand and appreciate the need for a defensive military. They probably understand less why we still have active troops still in Germany and Japan and in 148 other countries. If the military were funded by voluntary payments, the emphasis would be on defense, and not on being the world’s policeman. Is this a bad thing? Some might disagree. Let them pay for it then, I say. The rest of us would fund a defensive military.

What about social entitlements? I’m sure there is wide support for ensuring the destitute, beset by accidents or tragedy, are not left to die on the streets. Many think that government is the solution here. Many others think private charity should play a major role. Let them vote with their pocketbooks and express their priorities that way. I’m sure when this is done, help for the most needy will be funded at a higher level than, say, corporate welfare, which would have almost no support.  Is this a bad thing? I don’t think so.

So that’s the essential trade-off. In return for some popular projects not being funded 100% by compulsory taxation, and for proponents of such projects needing to work harder to persuade the people actually paying, 100% of all the horrendous things that taxation funds, things that only make sense when someone else pays for it, would disappear. All of it.

I think that is a great trade-off. Arguably, with the money left over, the 70% that want to fund something popular might be able to fund it to 100% or even 110% and still be ahead.

Of course, this is all like garlic and a crucifix to the special interests vampires who survive only by drinking the blood of the living.

Say there are 10 loaves of bread, and 20 hungry people. What is a fair way to distribute the loaves?

Answer however you want, and it will be the wrong answer. Wrong, because the question is wrong. Distribute how you will, but then ask yourself, what happens the next day, after the loaves are eaten and gone?

Distribution is not really the interesting problem. Any idiot can distribute loaves of bread (In Venezuela an idiot essentially did). The harder part is encouraging a system where loaves of bread are created, today, tomorrow and the next day.

Teach a society how to redistribute loaves and we’ll all eat for a day. Teach them about exchange and trade for mutual benefit, investment, employment, division of labor and comparative advantage—in other words free market capitalism—and they will eat all the days of their lives.

It is sometimes proposed to institute a “maximum wage” of sorts, to reduce inequality with either a hard income cap, or by restricting the ratio of the highest paid to the lowest paid person in a corporation.  Let’s do a thought experiment to see what might result from such a scheme.

Imagine a supermarket aiming to reduce inequality.  To this end, every item in the supermarket has the same price sticker on it. Everything costs the same. How would this work out?  At the end of the week, what do you think is left on the shelves and what is not? What will be restocked the next week by the wholesaler and what will not? What will producers be shifting their production to?

Hopefully your intuition leads you to suspect that everyone grabs the steaks and the cigarettes on the first day. The wholesalers then hoard these goods and only ship the cheapest goods to the stores the next week. After that, only the cheapest goods are officially produced and sold. The more expensive goods, if they exist at all, are only available on the black market, where they exchange at something closer to a free market price.

The same would be true in a job market, if everyone were paid the same.  Everyone would want the fun jobs, taking care of puppy dogs, playing in a rock band or being a centerfold photographer. Very few would want to do the messy and unpleasant jobs, or jobs that require many years of study, like becoming a doctor.

Of course, you might try to prevent this dynamic by having the government test everyone, to determine their aptitudes, and assign each person a mandatory occupation, according to the “needs of society.” Some of those jobs, no doubt, would be those of a jailer and border guard, to imprison those who rebel against such notions, or shoot those who try to flee the country.

The secondary effect would be that everyone would do a half-assed job at their work. In any given line of work, say an auto mechanic, the most-skilled and most-efficient and most-diligent worker would get not one cent more than the idiot who returns cars worse than when they arrived. With no incentives for excellence, few would strive to excel.

The third predictable outcome is that those of skill and talent would make their services available, at something approximating a free market price on the black market. Side by side with this would be a common practice of bribery. To get a qualified plumber, electrician, etc., would require a bribe.

Of course, the profit motive is not the only incentive known to man. In a pinch the threat of a firing squad can work as well.

“You didn’t build that!”  Elizabeth Warren used that line first, addressing it (rhetorically) to business owner who thinks that he built a business.   Warren the gives a litany of various things like roads, police protection, schools that educated his employees, and so on. Since the businessman benefits from these things, the argument goes, he woes compensation back to society, i.e., more taxes.

How should we think of such an argument?  Let’s imagine a pure libertarian society. Here road maintenance, security, and education are private functions, provided by private businesses and non-profits. It is still the case that the business owner does not provide these services directly himself. He needs to pay someone else for them. For example, he would need to pay tolls on a private road to fund road construction and maintenance.

So, in this libertarian society, can we wag our finger at the businessman and scold, “You didn’t build that”? No, not really. Of course, the businessman depends on suppliers and clients, etc. We cannot argue against that obvious fact. The libertarian merely argues that such relationships ought to be consensual, not coerced.

So, back to the Warren argument. I think the same logic applies there. It is well known that, in our progressive tax regime, most of the taxes are paid by a small fraction of taxpayers. The top 3% of taxpayers pay over half of income taxes, while the bottom 50% pay only 5%.  So, in a very real way, the roads that the businessman used, the schools that educated his employees, the police presence that protects him, these are all things he, and other high-income persons, already paid for. And not only that, he paid for these not only for his own business, but for numerous others in society who paid nothing.

Warren are is trying to double-charge the wealthy, taxing them initially to build the roads, fund the police, etc., and then, noting that they benefited from the roads they paid for, goes back and claims they owe another debt, to society, for the roads the exact same roads they already paid for.

Again, the libertarian argument is not that the businessman does not benefit from roads, police, etc., but that the businessman, who in a very real way is already paying for the roads, would be better off buying such services in a competitive market than from a monopoly supplier. Libertarians would rather have these relationships be consensual than coerced.