Many people are horrified by the prospects of introducing the profit motive into health care. Thus they oppose paying kidney donors, even though it would save tens of thousands of lives. They oppose price gouging on masks or vaccines, even though it would save many lives. They oppose challenge studies for vaccines, even though it would have brought us a vaccine much sooner, thus saving many lives.
Instead, we end up with a government controlled health care regime, where decisions are made by slow and cumbersome bureaucracies.
In a libertarian society, the pandemic might already be essentially over. That’s not to say that libertarianism is necessarily precisely “optimal”, as indeed there is a market failure aspect to pandemics, due to the external effects of infection. Yet despite the theoretical case for government intervention, in reality it does much more harm than good.
Critics of libertarianism make the following errors:
1. Ignoring the Lucas Critique: They assume that behavior in a highly regulated society is similar to what it would be in a libertarian society. When interviewed, several Swedes indicated that they didn’t see any need for masks because the Swedish government told them they were not needed. People don’t behave like sheep in a libertarian society; they learn to be responsible for their own decisions. Before FDIC, people took an active interest in the safety of the banks where they deposited their hard earned money. Now nobody cares how recklessly their bank lends out their money—it’s all insured. And yet I see opponents of abolishing FDIC argue that people are not able to ascertain whether banks are safe.
2. People underestimate the pervasiveness of government regulation: Occasionally one encounters progressives describing America’s socialist health care system as a free market system, which is absurd. Or they’ll say “There was nothing to prevent health care firm X from doing what you suggest.” Yes there was; health care providers are so enmeshed in our over-regulated system that they have almost no ability to engage in creative problem solving. Suppose a vaccine company pursues an ambitious plan to speed vaccine development. They ask participants to sign as waver promising not to sue if things go bad. How would that contract hold up in court?
3. Externalities cut both ways: Progressives like to talk about externalities as a market failure. They also like to suggest that selling vaccines to the highest bidder is an abhorrent idea. But you can’t have it both ways. The externality aspect of pandemics means that a program that vaccinates people more rapidly also helps those who are not yet vaccinated. In other words, when it comes to pandemics, “externality” is just another word for “trickle-down theory”. A free market regime that uses the profit motive to vaccinate 20 million people in December is superior to a bureaucratic regime that vaccinates 5 million people in December, even if the free market allocation is in some sense “unfair”.
4. Cultural norms also matter in a libertarian society: Just as people put up phony arguments against utilitarianism by positing abhorrent policies that supposedly increase aggregate utility but actually make society more unhappy, progressives make phony arguments against libertarianism by ignoring the fact that our ethical instincts would still exist in a libertarian society. Bill Gates doesn’t stop donating tens of billions of dollars for the provision of health care to the world’s poor just because we deregulate. Catholic hospitals don’t suddenly ignore ethical considerations just because we deregulate. Society is still there, with all its instincts and norms. We don’t all become Gordon Gekko; indeed people are “nicer” in capitalist countries than in communist countries. What we get through deregulation is competition; if some of our institutions are creating roadblocks then other institutions (or even foreign countries) will provide services to those willing to pay. To attract progressives, maybe we should start calling competition “diversity”.
5. Bureaucrats use cost/benefit analysis, for themselves: Yes, bureaucrats weigh costs and benefits. They consider the cost to their career in letting a bad product out prematurely and the cost to their career of a “better safe than sorry” long delay in testing a new product. Unfortunately the outcome that is best for the individual bureaucrat is almost never the outcome that is optimal for society as a whole.
This twitter thread discusses how the US government botched the vaccine rollout. And this Alex Tabarrok post discusses how the Canadians do it better. (Tyler Cowen makes a similar point.) Our government also botched testing, masks, challenge studies, etc. And now tens of thousands are dying as a result. Socialism kills.
HT: Matt Yglesias
READER COMMENTS
Russ Abbott
Dec 29 2020 at 1:52pm
Do you have evidence that most people are able to determine how safe a bank is? I don’t see how that works. As far as most people are concerned, a bank that hasn’t failed is safe. At the same time, false rumors about banks going under lead to bank runs. How does a libertarian society avoid those problems?
How about other safety standards such as those for food or medicine? Many people can’t even determine whether vaccines are safe. What makes you confident they will not fall prey to frauds that may kill them?
Then there are externalities such as climate change. How would a libertarian society reduce those sorts of effects?
Finally, where do you draw the line? Would you prefer a society with no traffic control at intersections? Would a libertarian society have fewer intoxicated drivers? And what about people who claim that their “freedom” is curtailed by rules limiting gatherings of people in enclosed spaces? Would a libertarian society magically have fewer people like that?
Scott Sumner
Dec 29 2020 at 3:27pm
You asked:
“Do you have evidence that most people are able to determine how safe a bank is?”
Yes. Before FDIC, banks were much more conservatively managed. As far as bank runs, read the research of George Selgin and Larry White. Most of the problems were caused by regulations that increased fragility. Countries that lacked those regulations (such as Canada) did not suffer from bank runs.
https://www.cato.org/blog/modeling-legend-or-trouble-diamond-dybvig-part-i
You asked:
“What makes you confident they will not fall prey to frauds that may kill them?”
Some would. What makes you confident that regulators wouldn’t kill hundreds of thousands of people by slowing the role-out of effective vaccines?
Roads should be regulated by the owners of roads. Are private roads (say within Disney World) a disaster area?
Global warming should be addressed through a carbon tax.
Tom DeMeo
Dec 30 2020 at 10:35am
Re: private roads work perfectly well as long as they are accessible via public roads. Establishing an impossibly tangled nest of rights of way would ruin the value of private property. There would be no DisneyWorld if private interests could potentially box them in.
Scott Sumner
Dec 30 2020 at 12:22pm
Yes, there is a case for public roads. But there are many examples of public roads being administered by private corporations.
Charley Hooper
Dec 29 2020 at 5:45pm
A libertarian society would aim to protect property rights. When we are driving, we effectively have property rights to the space occupied by our car and some buffer space around our cars. What traffic lights do is allow us to operate in a system with multiple people in a way the best protects our property rights. As a result, money, time, and lives are saved with easier transportation and fewer collisions.
Libertarians are not, in principle, opposed to traffic lights.
KevinDC
Dec 29 2020 at 5:55pm
Just wanted to add an extra pointin addition to what Scott said –
You wonder about the evidence that regular people will be able to tell how safe a bank is. In addition to the work of White and Selgin (both of whom are excellent) I’d also recommend you check out the work of Charles Calomiris at Columbia University. His book Fragile By Design is a good place to start. One of the things he points out is that the demand for deposit insurance didn’t come from ordinary people. It was a piece of special interests legislation created in response to lobbying from members of the banking industry. It turns out, when consumers don’t have an expectation that the government will bail them out, they actually do scrutinize financial institutions for security, and they were good at it. So good, in fact, that less secure and riskier financial institutions lobbied for deposit insurance because they didn’t want to have to keep competing for consumers along the dimension of risk. Deposit insurance was created for the explicit purpose of making sure that being safe and low risk would no longer provide you with a competitive advantage with the consumers.
Jose Pablo
Dec 30 2020 at 10:57am
I do find your mentioning ¨climate change¨ as a market externality, very funny since ¨carbon emission¨ is heavily subsidized by governments all over the world. Of course, by the US government (not just the last one, all of them):
https://www.taxpayer.net/wp-content/uploads/ported/images/downloads/TCS_ETR-Report.pdf
but also, by the prone to “virtue signaling” Europe which subsidizes “domestic coal consumption” and opposes (believe it or not) the closing of existing coal power plants.
https://www.powermag.com/spanish-government-takes-steps-to-support-coal-fired-generation/
In all countries (including US and “not so virtuous” Europe) governments subsidize the use of roads (they are “free” to users) and keep transforming toll roads into “free” to use ones.
French government had to backtrack from the introduction of a carbon tax when they discover that there is a limit to the money that the Sovereign is willing to devote to “virtue signaling”. Washington state discovered the same thing when they put the carbon tax policiest to a vote … even making it tax neutral.
https://www.reuters.com/article/us-climate-change-france-protests/frances-macron-learns-the-hard-way-green-taxes-carry-political-risks-idUSKBN1O10AQ
https://www.vox.com/energy-and-environment/2018/9/28/17899804/washington-1631-results-carbon-fee-green-new-deal
Governments all over the world are the biggest oil producers.
And yet, knowing all that, you include “climate change” in your list of “free market” externalities.
Thanks for the free example of how inaccurate is the widespread “theoretical” believe that “government interventions are required to “counter” market externalities”. I would recommend starting with “government interventions required to counter government intervention externalities”. It will very likely take some decades (or maybe forever) for the governments to clean up the “externalities mess-up” they have created.
Some believes are extremely elusive to discouragement.
Scott Sumner
Dec 31 2020 at 1:38pm
You are attacking a straw man, as you presumably know.
KevinDC
Dec 29 2020 at 6:08pm
Scott said:
This reminds me of something Thomas Sowell talked about as a formative experience in his life. He recounted how in his youth, he was a hard leftist and a Marxist – and what began to shake his leftist beliefs was…working for the government. Specifically, at the Department of Labor, where he was studying the effects of the minimum wage in Puerto Rico. As the minimum wages were increased there, unemployment rose as well. (Who could have predicted that?) He was looking at data for the sugar industry. While the standard economics explanation for the rising unemployment in the industry was the legally mandated increases in wages, some claimed that it was due to hurricanes having disrupted sugar production.
He was working on a way to empirically test these competing explanations, and developed a model that would use data on sugar field production from before and after the hurricanes struck. When he announced this to his superiors in the Labor Department, he was expecting to get a proverbial pat on the back. But they were appalled and wanted nothing of the sort to happen. A significant portion of the Labor Department’s budget was for the purpose of enforcing wage laws – if they were to report or acknowledge anything that suggested minimum wage laws were less than wonderful, it would risk their own budget being cut and reduce their authority. The actual issue of whether or not these laws were helping or hurting people just wasn’t as important to them as protecting their budget.
Jose Pablo
Dec 30 2020 at 11:07am
Still refreshing reading Tullock’s Bureaucracy on this issue.
Examples of this kind of behavior at the Foreign Office are plentiful and you, even, end up with a tenderness feeling to the poor professionals trapped on this horrible incentive schemes.
Which is very surprising to me is that people are still surprise by the idea that individuals respond to incentives.
Scott Sumner
Dec 29 2020 at 7:59pm
Everyone, Good comments.
Thomas Hutcheson
Dec 29 2020 at 8:11pm
I mainly agree with this, but I don’t see exactly (and sometimes even approximately) what the Libertarian wants to do. Tabarrok is the exception.
robc
Dec 30 2020 at 6:20pm
While it often seems like there is just “The Libertarian”, there are really millions of us and we dont agree on what we want to do. To quote a certain rap video, ” we want plans by the millions, not plans by the few.”
Or, my two rules of libertarianism:
1. Everyone agrees wirh libertarians about something.
2. No two libertarians agree about anything.
For example, if utilitarianiam and deontology lead to the same results, what is the point of utilitarianism? Clearly, it must have some result that (some – see #2) deontologists find immoral.
Travis Allison
Dec 29 2020 at 10:02pm
Scott, the Taiwanese non-libertarian interventions didn’t do more harm than good.
https://fortune.com/2020/10/31/taiwan-best-covid-response/
Scott Sumner
Dec 30 2020 at 12:24pm
Yes, it’s certainly theoretically possible for governments to help when there are externalities. But they usually make things worse.
Jon Murphy
Dec 30 2020 at 11:08am
Your point #2 is important. I see economists making the mistake all the time. Indeed, I’d argue Coase’s big contribution in The Problem of Social Costs is to remind us to look at the regulation and institutions that exist presently.
Particularly in matters of externalities, economists rarely (if ever) look at the current set of regulations and institutions. Estimates of carbon taxes are almost certainly too high because they do not take into account the pervasiveness of regulations and institutions that already affect carbon output. In fact, much neoclassical economics treats institutions that develop to fix market failures as market failures themselves!
Phil H
Dec 30 2020 at 9:25pm
Hmm.
As a political argument, this isn’t really working for me, for a couple of reasons.
First, once again you’re asserting the fragility of market systems.
“Before FDIC, people took an active interest in the safety of the banks where they deposited their hard earned money.” – Most people in the USA couldn’t tell you what FDIC stands for. But your assertion is that the existence of this relatively obscure piece of legislation has a massive impact on the way that they interact with their banks. This is a weird and scary claim, and makes me think, if your perfect “markets” can’t withstand the existence of one obscure piece of regulation, what else can’t they withstand? Our countries have to deal with big problems all the time. Trump. Covid. Which one of these will knock your market systems off kilter? Why should I believe that they will be resilient in the face of natural disaster, if they’re not resilient in the face of a four-letter acronym?
“health care providers are so enmeshed in our over-regulated system that they have almost no ability to engage in creative problem solving.” – same issue: what happened to that ability for creative problem solving? If a little regulation kills it, why should I believe that it will withstand any of the other million problems that are thrown at it?
Second issue: Even if I believe that the non-regulated world you describe would “work” (there would be a stable equilibrium of highly efficient economic and social activity), you haven’t done much to make it attractive to me. It sounds like a nightmare! For example, paying tolls on all those private roads would be a major hassle. Having to pay large amounts of money all the time for technology to protect my IPR because the courts won’t do it any more sounds like a major dampener on my creative spirit. Constantly checking my friends and relatives for vaccinations because it’s now my responsibility to determine whether I’m in a herd-immunity zone or not sounds inhumane.
I get the argument. But it doesn’t work as an argument for anyone who doesn’t already agree with you. As you note at the beginning, some of these consequences horrify many people. Dubious efficiency arguments aren’t going to be enough to overcome horror.
john hare
Dec 31 2020 at 4:47am
Some of your argument boils down to, “Your system makes it impossible to get ahead if people can be stymied by thieves.” These “obscure” regulations are far reaching and not obscure in their effects at all. It’s as if you created a sanctuary city for thieves and then questioned why the city failed across the board.
Jose Pablo
Dec 31 2020 at 9:48am
The only surprising thing about the basic argument of the post: “markets are the best mechanism we know to allocate scarce resources and we doubt to use them when/where they are needed the most” is the need to keep repeating it.
Our “antimarket bias” (the mental barriers) prevent us from achieving efficiency when/where we need it most. The result is that there is a clear correlation between areas (geographical or economical) where our antimarket bias is bigger and economical inefficiency.
Your “dubious efficiency” is pretty certain. If you are looking for horrors to overcome, tray to live in Cuba or Venezuela for a while.
Or take the US an do a temporal analysis comparing the accessibility of goods and services between now and 50 years ago. The real prices of all goods and services have gone significantly down (making them much more affordable to the average citizen, a courtesy of the invisible hand) except for health care, education, housing, and taxes.
Again, a clear correlation between level of government intervention and inefficiency. Totally “certain” (no doubts) inefficiency.
Cobey Williamson
Dec 31 2020 at 10:40am
The fundamental failure of a free market philosophy is that you must first have the means to signal with.
Ensure that everyone has the means, in equal measure, and, sure, markets will work out fine.
Edward Bellamy’s Looking Backward illustrates this rather well.
Jon Murphy
Dec 31 2020 at 11:20am
David Ricardo showed back in 1815 why that is not a necessary condition. People with unequal means trade all the time, to both’s mutual benefit
Jose Pablo
Dec 31 2020 at 12:44pm
In fact, the unequal distribution of means reflecting unequal contributions to the general wellbeing is one of the key parts of the incentive mechanism that markets provide.
Even further, since you can say that unequal distributions are going to happen (after all, they are not a “necessary” outcome of the socialist system, and still, “real socialism” time and again results in very unequal distributions of means), it is empirically clear that putting this inequality to work improves everybody lives.
It is always a puzzle the powerful mental barriers that prevent us for accepting this despite the abundant examples. Kristian Niemietz illustrates this rather well.
https://iea.org.uk/wp-content/uploads/2019/02/Niemietz-Socialism.pdf
Jon Murphy
Dec 31 2020 at 1:48pm
As an aside, I recently re-read Looking Backward. What’s amazing about the utopia he imagines is how much of his predictions have come true: working hours have drastically been reduced. There is almost immediate delivery of many goods. There are major stores, like BJs, Wal-Mart, and Costco that reduce middleman expenses. Modern debit cards function similarly to the “credit” cards in the novel. There was no need for a socialist take-over. Just “capital/preference driven” innovation.
robc
Dec 31 2020 at 12:25pm
He already lives in one of the most totalitarian countries on Earth, I am not sure moving to one slightly worse will make an impact.
Jose Pablo
Dec 31 2020 at 12:31pm
One of the amazing things about free markets is how little of them you need to make a huge difference. One can only wonder what would happen if the mechanism were fully embraced.
KevinDC
Dec 31 2020 at 11:50am
You may find it weird or scary, but it’s a pretty unambiguous historical fact. Before deposit insurance, people took an active interest in the financial health of the institutions where they invested. After deposit insurance, they didn’t – why bother making an effort with all that? And it shouldn’t be too surprising that regulations which are designed to block fundamental aspects of the market process from working (such as eliminating the “loss” part of the “profit and loss system”) will have a huge impact on how the market works. If that leaves you worried about how well markets respond to other kinds of stresses when those market mechanisms aren’t legally forbidden to take place, you can relax. As Scott pointed out, banking systems which didn’t have these kinds of regulations in place (such as the much more lightly regulated Canadian banking system) historically outperformed the more regulated banking systems, and by a very, very wide margin. This, again, is just an unambiguous historical fact.
You seem to make a great deal about how if markets are so affected by regulation, that just speaks poorly of markets for failing to be sufficiently robust. (Also, it seems just a tiny bit silly to say of the health care market that “If a little regulation kills it…”. A little regulation??? The amount of regulations in the healthcare industry is so massive that you could spend your entire lifetime dedicated solely to attempting to read and understand all of it, and never succeed.) This reminds me of some of the comments made by Shelia Bair, the former head of the FDIC, in regards to the financial crisis of 2008, and the responding criticisms made by the political scientist (and critic of libertarianism) Jeffrey Friedman in his paper Capitalism and the Crisis:
Scott Sumner
Dec 31 2020 at 1:43pm
You said:
“Most people in the USA couldn’t tell you what FDIC stands for. But your assertion is that the existence of this relatively obscure piece of legislation has a massive impact on the way that they interact with their banks.”
Have you ever met anyone who said they decided which bank to use on the basis of whether it was likely to fail? Most people I meet know that their bank deposits are now insured, although they may not know that it’s by FDIC. They don’t care about the risk of bank failure.
Before FDIC was created, the fear of losing one’s money was certainly a factor in the minds of depositors, which is why bankers managed banks in a much more conservative fashion back then. They had to.
So yes, FDIC had a huge impact on banking.
Danno
Dec 31 2020 at 1:49pm
The need for deposit insurance was partially created by regulations. It has been noted that during the Great Depression Canada had very few, if any, bank failures, especially as compared to the U.S. One explanation why is that the banks in Canada operated throughout the nation while in the U.S., with a few exceptions grandfathered in, where limited to operating within one state.
“Branch banking restrictions, for example, limit geographic diversification, leaving banks more vulnerable to localized economic distress.” From Wheelock, 1995,
https://research.stlouisfed.org/publications/review/1995/03/01/regulation-market-structure-and-the-bank-failures-of-the-great-depression/
Mark Z
Dec 31 2020 at 4:47pm
“For example, paying tolls on all those private roads would be a major hassle.”
Inasmuch as people don’t like having to do that (I agree), then an unregulated world would not look that way. Markets take transaction costs into account. E.g., if people prefer to just pay an annual subscription to all the roads through some middleman between customer and owner, that’s probably what the market would end up looking like, just as many goods sold in unregulated markets today are bundled or sold on annual subscription, because people would rather get some of what they don’t necessarily want than waste time or effort to get the exact thing they do want. You might pay an annual premium for IP theft insurance instead of paying the courts annually in taxes, etc.
I suspect that an unregulated world would (for better worse) be much more similar to our wold in a lot of ways than we’d expect.
KevinDC
Dec 31 2020 at 5:29pm
Indeed, whether or not private roads would be the horrible experience some fear isn’t something we needs to speculate about from an armchair. The various Nordic countries use already use mostly private roads, and they work really well. Two thirds of the roads in Sweden, for example, are privately owned and operated. The end result is a driving experience that is much more convenient and pleasant than publicly owned roads, at less than half the cost.
Cobey Williamson
Dec 31 2020 at 10:33am
As demonstrated by the bureaucrat self-interest example, as long as you have a system predicated on personal preferences, you will experience systemic failure.
It’s a culture problem, not a mathematical one.
Jon Murphy
Dec 31 2020 at 11:19am
It’s not clear what you mean by your comment. Are you saying that personal preferences do not have to exist? That people can simply become preference-less? What would that even look like?
Jose Pablo
Dec 31 2020 at 12:54pm
The problem with the bureaucrat self-interest arises when they are acting as “agents”. So, it does not demonstrate anything about the effects of their self-interest when acting as “principals”.
As a matter of fact, as Jon points out, is even an alternative to following your preferences when acting as a principal of your own life? I really don’t want to live in a system in which I have to second guess myself in order to arrive to the “right” set of preferences to avoid “systemic failure”.
Jose Pablo
Jan 2 2021 at 11:32am
https://www.wsj.com/articles/covid-19-vaccines-slow-rollout-could-portend-more-problems-11609525711?mod=hp_lead_pos1
Pretty much as predicted.
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