Capitalism’s limit cases ?

It is a fait établi that most people maintain that centralisation and the erosion of our freedoms is a good thing. Such thoughts are based on rhetoric and ignorance of basic political principles, and we are justified, as libertarians, to reject them. However, a sizable proportion of people do agree that government should be smaller. Economists are a group which usually agrees with this kind of statement, because they study the economy and know that freedom in general is most conductive to prosperity.

However, even if we agree that capitalism is a superior alternative, there is still room for disagreement. A new doctrine has emerged, both in economics and in the population in general, called “market failure”. This is the idea that there are specific contexts or markets where capitalism fails to produce an optimal result, and that therefore the government is justified to intervene in those cases. However, both premises are questionable.

The roving limit case

The common conception of such failures is easier to refute – since usually they are not even based on capitalism.

Surely the most ridiculous example is pollution. Some people propose that pollution (or even things like visual pollution) is an unresolved problem in libertarian systems. This class of arguments is downright laughable. If it is already an established fact that the right of property exists, then a break of that right is a crime. It cannot be any more clearer than that. If I crank my radio to a hundred and fifty decibels, and blast it on my front lawn, I’m disturbing the peace – we acknowledge that fact even in our current societies.

The root cause of this misconception is thinking that today’s policies on pollution are capitalist. Environmentalists notably impute pollution problems on the free market. Not only, as I said, is pollution against the principle of the free market, but the agent most responsible for pollution today is the government, by its corporatism, mismanaged sewer systems, military, and other democratic foibles !

While the principle that pollution is a crime is clear, the implementation of this principle, however, can afford to be subtle when the problem is subtle. Take the example of dispersed pollution at high altitude. While we acknowledge it has an effect, there is also no clear victim of this action. The regulation of this kind of pollution, therefore, must be flexible. So my point is that while some cases may be more complex than others, to label the problem a “market failure” is simply a failure to think.

Another popular idea of market failure is the demand for universal rationality. That is, some people imagine that a capitalist society requires that everyone act in a rational way in order to work. This is another stupid argument, since it is precisely a strength of a libertarian system that freedom is preserved as much as possible thru the rule of law regardless of individual intentions ! As such, individual stupidity has less influence than in a democracy, where other people are free to vote against my own freedom, or in an anarcho-capitalist system, where one is free to use force against me if it is deemed acceptable by other parties. So while stupidity is a problem in any system, it is less of a problem in a libertarian system because idiots have less influence on public policy.

The formal idea of market failure in economy is described in Regulation Magazine (vol. 23 no.2) as such : “a circumstance where the pursuit of private interest does not lead to an efficient use of society’s resources or a fair distribution of society’s goods”.

Even from a pragmatic standpoint, this definition is problematic : there is no such thing as “society’s resources” or a “fair distribution”. The underlying cause of this confusion is that it is the benefit to everyone that market failure analysis measures, without measuring the hypothetical cost to the provider to switch to that “better” state of affairs. “Although no such world exists, the world of zero transaction costs is the world in which market failure analysis operates”.

When transaction costs become too prohibitive, it is in the interests of the actors to not resolve the “market failure”. This is not a flaw of the market, but rather of the market failure model which does not take transaction costs (and therefore, the costs of some products) into account.

There are three main forms of supposed market failure : natural monopolies (where the nature of a product prevents alternative suppliers from existing), externalities (a cost encurred because of someone else’s actions, such as pollution) and public goods (goods which benefit everyone).

One example of public goods is lighthouses. They are public goods because all ships benefit from them. The lighthouse is a traditional example of severe market failure because it is impossible for lighthouses to collect boats as they pass by, and this is supposed to signify that capitalism is unable to furnish lighthouses. Yet this is historically a lie, since “most seventeenth century lighthouses were not built or run by government bodies. The lighthouses were built by private parties for private gain” (as reportedly examined in “The Lighthouse in Economics” in Journal of Law and Economics). Tolls were collected at ports by custom officials, after a patent had been given for the lighthouse.

How does replacing the private sector by the government solve the “problem” ? All it does is replace a natural monopoly, which may eventually become more competitive due to technology, by a public monopoly which in all probability will never break itself.

The ineffiency of centralisation

Yet the fact that private lighthouses did exist is not a necessary argument. Even if they didn’t, it is obvious that if they could not be paid for, then their use would be insufficient to validate their existence.

The point is that even if market failures existed, such events would not justify government intervention. Take the case of natural monopolies. Yes, it is true that, for example, the monopoly on power distribution is problematic and raises prices for everyone. But this is precisely what we should expect of any rare resource ! Here the resource that is rare is the availability of power lines. The higher price is a faithful reflect of the rarity of this resource, and therefore prevents the system from being in a state of shortage.

Furthermore, technology is making small-scale power plants and undisruptive underground power grids possible, thereby making prices lower, which is what we should expect from progress. The same pattern exists for all natural monopolies and public goods. How does replacing the private sector by the government solve the “problem” ? All it does is replace a natural monopoly, which may eventually become more competitive due to technology, by a public monopoly which in all probability will never break itself.

Some other purported problems of capitalism are not really problems at all. For example, the inequality inherent to capitalist systems is decried by communists as corruption. Yet this is patent nonsense, since it is the fact that people are wealthy proportionally to their productivity that makes capitalism the most prosperous system. It is the only free, just and prosperous way of functioning in society.

People try to obscure this by referring to inequality as poverty. Inequality is not poverty. Poverty is the fact of people having less absolute purchasing power, while inequality is a disparity between the lowest and highest purchasing powers. In a capitalist system, people have the highest degree of purchasing power, but there is also a lot of disparity. The only alternative is to promote poverty over disparity, that is to say that since there are people richer than others, we should force everyone to be equally poor. But from an egoist point of view, this is objectively absurd.

The question of market failure is in fact worse in a centralised system. Indeed, many supposed failures of the free market are already caused by taxes, regulations and other interventions. To take an example here in Quebec, there is a law that restricts large-scale grocery stores from having more than 4 employees after certain hours on the weekend. This is done purportedly to satisfy smaller store owners and get their votes. But the real result is, as I unfortunately experience, that people still come to the store, but wait in long lines (reminiscence of communist countries perhaps ?). This is a market failure, or more precisely a non-market failure, caused by the government.

Let me now express myself succintly on the subject of capitalism in general. Capitalism is the most efficient system, as demonstrated empirically (relation between economical freedom and GDP, comparaisons between private and public markets) and deductively (deduction of natural rights and choice criterias), simply because :

1. It permits everyone to act in his own self-interest. Bureaucracies sap a humongous percentage of societal resources, going in their own pockets as self-appointed wages, with no tangible result to speak of because centralisation and political motivation makes it inevitable that government action will not be in the interest of the individual.

2. In terms of principles, going against capitalism means going against our freedom of action, and makes us all slaves of the state, and degrades the moral fabric of society.

I cannot be any more direct than that. Any alternative to free action is not acceptable from any point of view whatsoever, whatever excuse you try to contrive out of it. Any deviation from mutual benefit inevitably entails non-optimality.

This does not mean that the government has no role whatsoever in the economy. However, this role is restricted to ensuring the integrity of trade and the individual rights of each individual. As soon as the government gets his hands on a sizeable portion of the GDP, or starts regulating markets, we obtain a non-optimal situation.

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