Most government interventions consist in forbidding adult individuals (or their voluntary associations) to freely engage in acts of exchange: securities laws, antitrust laws, minimum-wage laws, maximum prices (like in “price gouging” laws, for example), laws and regulations mandating or banning discrimination, legal privileges for trade unions, tariffs and import controls, and so forth. Some believe that all these interventions are required, and required in growing number.
Many people including some economists ignore or forget the benefits of voluntary exchange. In The Wealth of Nations (1786), Adam Smith illustrated the centrality of exchange in economic relations (and, in fact, in all social relations) when he wrote about
a certain propensity in human nature … the propensity to truck, barter, and exchange one thing for another. … Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.
This is a positive statement, which describes a distinctive way in which human individuals often behave: they engage in acts of voluntary exchange when it is in their mutual interest to do so. Smith also showed that a society based on free exchange is the secret to general prosperity. All animals including humans, however, also use force (murder and theft) as an alternative to exchange. This suggests a normative (that is, moral) idea: free exchange should be the founding principle of social interaction.
One common objection is that the individual does not really know what is good for himself and should, in his own interest, have his choices, or some of them, coercively limited or dictated by political rulers. The problems with this objection are many, as the public-choice school of economics has confirmed. There is nothing to prove that such an authoritarian ruler, whether representing a minority or a majority, can know better than each individual what is good for him given his own circumstances. Even if the ruler could know, his altruistic incentives would be generally lacking. And even an altruistic despot (or despotic assembly) would be unable to act for the good of each and every individual, for different individuals have different preferences and values.
Another objection is that market exchange fails because of “externalities” and other market imperfections. The proponents of this approach don’t seem to realize that government intervention is generally subject to even more failures than exchange on free markets. (See a short review of the problem in my EconLog post “Externalities: Handle with Care.”)
James Buchanan, one of the main founders of the public-choice school of economics, expresses the principle of free exchange in a way that puts in sharp focus the revolutionary character of the normative approach suggested by economics:
If I observe someone with apples and somebody else with oranges, I don’t want to try to say a particular allocation of oranges and apples in a final position is better than in the other allocation. If I observe them trading without defrauding each other, whatever emerges, emerges, and that is the way I define what is efficient.
That this quote comes from a conversation between Buchanan and Richard Musgrave, a major theorist of mainstream public finance, shows the extent of the mini-revolution that the former introduced into the already revolutionary science of economics (James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State [MIT Press, 1999]). In the same book, Buchanan argues:
As for global or social utility or social welfare, I am not willing to impose any sort of maximand. … Whatever emerges from individual choices emerges, and it is not a question of imposing a kind of global maximization process. …
My concern and my primary motivation here in a normative sense is preventing the exploitation of man by man, or woman by woman, through the political process. That is what is driving my whole approach.
Buchanan dreamed of, and theorized about, a state that would be based on “politics as exchange,” trying to mimic in politics free exchange between free individuals on free markets. To which extent his ambitious and sophisticated demonstration was successful remains an open question.
Speaking about the 20th century, which continues in the 21st with a vengeance, Buchanan added:
This terrible century has done much more than bear witness to the tragic failures of collectivist controls over personal lives.
READER COMMENTS
Tom DeMeo
Jun 11 2021 at 9:25am
What you are missing from your explanation here is that we have a large number of markets that don’t really have the ability to form in a pure private play. They are extremely problematic for liability, or trust, or public accommodation reasons. Securities would be an example. Without the scaffolding of government to normalize the activity and enforce certain guaranteed disciplines and protections, those markets would likely not exist on their own. We would have a stunted, highly problematic version instead.
You might make the argument that when you add up all the pluses and minuses, a life unencumbered by government but limited by private relationships would superior, but don’t mischaracterize why we have what we have.
Henri Hein
Jun 11 2021 at 1:31pm
But those markets did exist on their own, long before government involvement. The history of the financial markets goes all the way back to Venetian coffee houses in the 14th century. It’s true the European bourses that came later were sometimes a public/private partnership, but the American exchanges were wholly private. The securities market strikes me as an excellent example of the opposite: spontaneous order.
Pierre Lemieux
Jun 11 2021 at 2:54pm
Tom: I would add three points to Henri’s comment. First (and this is in direct line with that comment), the whole Industrial Revolution happened, starting in England in the late eighteenth and early 19th century, with vibrant financial markets and no SEC-type regulation. Second, consider the case of the US and compare with Canada, where there is no national securities regulator (if I may quote an old short Financial Post piece of mine on this topic):
It seems that many people are romantic about securities regulation. It’s easy to forget that the SEC was a product of the New Deal and quite probably favored large established firms against new entrepreneurial ventures.
Tom DeMeo
Jun 18 2021 at 12:39pm
I would agree that a smaller form of markets would still be there for securities. But they would be scalable in the same way handshake agreements are. They happen, but they don’t support wider commerce. We would have a stunted result. Common laws for fraud are insufficient to provide wider confidence. What we give up allows for a completely different level of activities that produce a lot of economic growth that wouldn’t otherwise be there.
An emergent order for securities would grow, and private resolution of legal conflicts in the market would eventually become too inefficient. The best regulations are really just an efficiency where the most obvious legal conflicts can be resolved by proscribed disciplines in exchange for public accommodation.
David Seltzer
Jun 11 2021 at 11:33am
Pierre: As you point out, government intervention has eroded our liberties and freedom to freely engage in voluntary exchange. I recently completed reading The limits of Liberty and The State. As de Jasay says, the state acts in its own interest; often contrary to the interests of individuals. The state, in order to stay in power will promote the interest of those who support it by choosing which interest to further and which ones to limit. When and how do we push back against this assault on our but continued and increased assaults on liberty?
When: I don’t know.
How: Politically. Tea Party Movement as an example. In the extreme, non-violent resistance. It worked for Ghandi and Dr. King. Failing that, violent resistance to a Leviathan.
Pierre Lemieux
Jun 11 2021 at 2:58pm
David: Good readings! The “how” is a difficult question, but note how the tea party movement, like all populist movements, was rapidly co-opted by people with an interventionist-government agenda.
David Seltzer
Jun 11 2021 at 11:37am
Meant, When and how do we push back against this continuing assault on liberty?
Thomas Lee Hutcheson
Jun 11 2021 at 4:12pm
I doubt anyone has forgotten the benefits of exchange or has not heard of what can go wrong sometimes when governments intervene to redistribute income, prevent people from harming to others (externalities) or occasionally themselves.
Libertarians/Public Choice theorists could make valuable contributions to the public debate by showing how, when, and by how much these interventions are going wrong in particular cases. Demonstrating theoretically how things can go wrong and pointing out negative aspects of policy in specific cases, but without showing that the negative actually outweighs the good or how the negative aspects could be reduced (Alex Tabarrok is the best example of this), is not very valuable, in my view.
Preaching cleanliness is worth something, but the garbage collector does more actual good.
Jon Murphy
Jun 11 2021 at 7:46pm
If you haven’t already, I highly recommend Bart Wilson’s 2020 book The Property Species. In it, he re-considers the role of property and property rights along many dimensions, one of which is with exchange as primacy. The book changed my mind on certain elements of property in economics.
When we move from assuming some sort of maximand to focusing the process (that is to say, from assuming exchange happens for the purpose of maximizing something to exchange happening to improve one’s life), it gives us a different, and powerful, lens through which to view human activity.
Jon Murphy
Jun 11 2021 at 7:47pm
(By the way, I have a forthcoming review in Public Choice of the book. Needless to say, I am a fan)
Mark Brady
Jun 11 2021 at 7:57pm
Mutually beneficial exchange turns on a prior system of property rights. What makes for justice in property rights? Can we imagine more than one just system of property rights? Does economics have anything to say in this regard?
Pierre Lemieux
Jun 11 2021 at 9:30pm
Mark: Good questions, of course. Economists have tried to say something about your second question. In the Buchanan tradition, just property rights are those unanimously agreed to. In the Hume/Smith/Hayek tradition (to which de Jasay is strangely close), it is those property rights recognized by evolved coordination conventions. (I am simplifying, of course.) The problem is that many economists just assume, like most people, that just property rights are those decreed by a plurality of voters.
(Now, an iconoclast question as you like them. Somebody has been kidnapped. Property rights in the sense of control of the kidnapped belong to the kidnapper. Can’t the kidnapped still hope for some potential benefits of exchange by offering the kidnapper a ransom that he will ask his friends to pay?)
Mark Brady
Jun 12 2021 at 3:20pm
Here is a brief answer to your “iconoclast question.” Yes, but it is clearly not what Adam Smith had in mind when he discussed voluntary exchange to mutual benefit.
Mark Brady
Jun 12 2021 at 3:23pm
And here is another “iconclast question.” Is it voluntary exchange when you are dying of thirst in a desert and I offer you a bottle of water for your collection of guns? 🙂
Jon Murphy
Jun 11 2021 at 11:20pm
The book I reference above, The Property Species, has some answers to your questions, Mark
Mark Brady
Jun 12 2021 at 3:16pm
Yes, I am aware of, and respect, the book. The economics department at San Jose State University hosted a lecture and discussion with him. And I look forward to reading your forthcoming review in Public Choice.
Comments are closed.