3 Things That Make Libertarian Heads Explode

Libertarians tend to ride on theoretical unicorns that don’t take them too far in the real world.

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Libertarians are proponents of a philosophy that embraces free-market ideology, limited government, and a certain form of individual liberty. They would like to take the government and drown it in the proverbial bathtub. Unfortunately, libertarians tend to ride on theoretical unicorns that don’t take them too far in the real world.

Next time you find yourself in the company of one of these quizzical beings, try bringing up one of the following topics and watch them start galloping off in 10 directions at once.

1. The inequality problem: Why do some people end up with most of the toys? The fact that in a capitalist system, money seems to flow into the hands of the few is a source of big headaches for many libertarians, though not all—some seem to regard any market outcome as the hand of God herself.

Irrefutably, America’s income distribution has become ridiculous, ranked #4 in the world out of 141 countries for inequality, behind Russia, Ukraine and Lebanon, and this rattles many libertarians. 

Libertarians usually start by insisting that how much money you have boils down to the choices you make as an individual. Bad, stupid choices = poverty. Good, smart choices = wealth (those clever Russian oligarchs!). Often the libertarian will rush to the defense of the rich. For example, we have W. Michael Cox, director of Southern Methodist University’s Center for Global Markets and Freedom, offering this tidbit of wisdom recently on the Glenn Beck show:

“The truth is: If you look at almost all successful people in this country, from the time they were young they played with the right kids, studied in school, make good grades, get a job, get a lot of education, be productive at work everyday, save their money, start a business, hire people, invest—they made good choices.”

The truth is actually this: Many a rich person gets wealthy just by being born to wealthy parents. Others get rich by ripping off other people. Bankers committed massive fraud on mortgage loans leading up to the financial crisis, and continue a crime spree which includes laundering money for terrorists and drug cartels, rate-rigging, manipulating the prices of commodities, taking bribes, engaging in insider trading, participating in ponzi schemes, cooking the books, and so on. Fraud has grown so pervasive in corporate America that legendary short seller Jim Chanos describes a culture in which executives think they have a fiduciary duty to cheat. The idea is that since everybody else is cheating, they owe it to shareholders to cheat in order to stay competitive!

Beyond the blatant crimes, bankers are engaging far more in reckless speculation that destabilizes the economy than doing useful things like lending money to people who need it. Put simply, they make a great deal of money looting the economy through cheating taxpayers and screwing customers with fees and tricks. Result: Bankers get very rich, while the rest of us get poorer.

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When forced to deal with inequality, libertarians often talk about cronyism, something they insist would not happen in their free-market utopia. Cronyism, they insist, is all about government favors, forgetting that cronyism is rampant between various market players. What do you call it when corporate CEOs collude with their boards to award themselves outrageous salaries? If you are an English speaker, you call it "cronyism." When the owner of a bank colludes with other bank owners to do things like interfere with prices or squash competition, that’s also a form of cronyism. For some strange reason, libertarians seem to think cronyism is just something businesses do with governments.

The Washington Times’ Timothy Carney danced around the cronyism issue recently by claiming that since most people get rich “through market means” and that their wealth accumulation doesn’t hurt economic growth, so we shouldn’t be upset.

First of all, what exactly does “market means” mean? Clearly, plenty of inequality comes right out of market forces, such as the flow of markets into areas where wages are low.  

Secondly, as economists have begun to look at the issue of income inequality, they are finding that it does, in fact, hurt economic growth. As Paul Krugman recently pointed out in the New York Times, the evidence, which includes two landmark studies by the IMF, and one by Barry Cynamon and Steven Fazzari as part of a working group at the Institute of New Economic Thinking, shows that reducing the extreme inequality in America would probably increase economic growth. In other words, if America would adopt tax and transfer policies more like Europe’s, we might well have more economic growth (countries in Europe with less inequality have weathered the recent storm caused by a faulty monetary system better than those with more).

Let’s not even get started on how inequality turns us into a class-ridden, Downton Abbey-style society, or how it undermines democracy by allowing corporate and billionaire dollars to dominate the political system, or how it makes people physically and mentally sick. Inequality is a scourge on society, and libertarians can’t deal with it.

2. The public goods problem. In the libertarian utopia, you would find nothing but individuals making private transactions in private markets. Those exchanges between individuals would always be fair, because the laws of supply and demand would make sure that you got the things you need at a fair price. You want a pizza, you buy a pizza from a pizzeria, which makes it for you at a reasonable price. Everybody’s happy.

Only, what if you want to buy your pizza in the evening, and you need streetlights in order to walk to the pizzeria? Now you’ve got a problem, because you can’t go out and buy a streetlight. 

Public goods like streetlights, fresh air and defense systems are not pizzas. They are fundamentally different because you generally can’t go out and buy them all by yourself. Unlike pizzas, they aren’t consumed by one person or group of people. For example, once they are built and working, every person who walks down a street benefits from the streetlight, and there is no way to take the light away from one particular person. The streetlight is a common, or public good.

Libertarians will try to argue that many things considered public goods can, in fact, be supplied by private markets. How would this work in the case of streetlights?

Let’s say you that somehow you, or a group of people, got a lot of money together and could actually go out and buy a streetlight. Now you’d have the problem of free riders, because people would be using your streetlight who didn’t help pay for it.

Things like streetlights have to be supplied off-market. The costs have to be shared, because public goods benefit huge groups of people. One of the core functions of government is to supply public goods that markets either fail to provide or cannot provide efficiently, and this is one of the reasons libertarians get into a tizzy about them.

Another public good that flummoxes libertarians is national defense. If you mention to them that the market can’t possibly supply the defense of a country, they will cross their arms and answer: “How do you know?” They will insist that if there is enough demand, supply will magically follow.

Well, history tells us that countries that don’t get their act together on national defense have big problems. It’s almost demented to think that private markets would have supplied defense against the growing threat from Germany in the '30s, not least because as is now well documented, many private business interests in the US, Britain and France favored accommodating the Nazis.

To counter the argument about supply and demand concerning national defense, you can simply point out that the draft has been necessary in every major war. You can sometimes find enough people to volunteer during peacetime, but people have a funny habit of not wanting to get themselves blown away during wartimes. That’s why in the U.S. Civil War, recruitment was total chaos, with rich people paying poor people to go fight in their place. In 1863, New York City exploded in a four-day long murderous riot because people opposed the Civil War draft law which allowed rich people like J.P. Morgan and Andrew Carnegie to pay off a substitute. That riot was one of the bloodiest in U.S. history. 

Another thing you can point out to libertarians is how many public goods, like research and infrastructure, are necessary for all those wonderful market products they are so fond of. The iPhone would not exist if the public had not invested in research to develop GPS and touchpad technology, or developing the Internet, or creating the highways on which Apple can move its products.

In order to prosper, America needs more and better public goods, not less, and some things just can’t be left to markets, which brings us to our next issue.

3. The regulation problem. Libertarians famously oppose government regulation of business. They assume that markets do not need any regulation because they are naturally competitive, and in competitive markets, good ideas and products will flourish, and bad ones will be punished (clearly, they haven’t watched cable TV lately). For them, competition is the great creative force of the universe and the best human endeavors are the result of people beating their rivals.

Reality check: Markets are not invariably naturally competitive. In fact, many have a tendency to move toward harmful conditions like oligopoly, which turns them into anti-competitive entities.

The libertarian will try to say that oligopolies are the fault of government intervention. But there are plenty of examples to refute this. If you look at history, even at periods when governments have been quite limited and have served as little more than a night watchmen, you’ll find big, nasty oligopolies, like the 19th-century railroads, or steel. Today, we find computer operating systems (think Netscape and Microsoft) as examples of oligopolistic conditions.

Just look at the case of the American automobile industry. This industry did not consolidate into a handful of big producers because of what the government did. It consolidated because of something economists call “economies of scale.” The big guys can afford to operate more cheaply, and the small guys have higher costs. The big guys can also borrow more cheaply. These advantages block the normal working of a competitive market, and guess what happens? Oligopolies happen, that’s what. Of course the big boys love to bend the government to their needs, too, but the claim that everyone gets big only because of government is nonsense.

Economies of scale means that there are all sorts of things we need that simply aren’t going to come to us through competitive markets, and we tend to either turn these into public goods, or a less appealing alternative, we get gouged.  

Think of something like water, a public good. You turn on the tap in your kitchen and water comes out because of public investment in pipes to deliver that water. How are you going to get competition between private companies in the delivery of that water? Are you going to have four or five separate pipe systems coming into your sink? No, you are not. When we listen to libertarians and privatize things like water, something happens as sure as the sun rises: prices go up. The IMF and many unfortunate developing countries found this out when as a result of misguided Washington Consensus policies developing countries were pushed into privatizing their water supplies.

Libertarians behave as if the motto of markets ought to be something like the old GE slogan: “We bring good things to life.” But, as economist Douglas K. Smith has pointed out, what markets often bring to our lives is utter crap.

Many markets are unstable and they are forever screwing up. The automobile market, in addition to bringing us cars, has also brought us planned obsolescence (GE has recently rediscovered this trick). The auto industry also slowed the provision of things like seat belts and air bags that make cars safe, and it has obstructed fuel-saving innovation.

Libertarians may be loathe to admit it, but lots of people in markets actually get rich by profiting from market failure—just look at America’s grotesque healthcare industry. Clever market players find that rather than delivering us the things we need, it’s often more profitable to cheat, raise prices, manipulate intellectual property protections, bribe doctors, choke distribution, and engage all manner of other shenanigans that make our healthcare the most expensive in the world, and yet subpar in quality.

As Smith writes:

“Capitalists can pick between two responses to markets that are failing. They can bet their capital on fixing them—on bringing more good things to life. Or, they can do everything possible to extract more and more profit by extending, expanding and exacerbating the failures.”

In the healthcare industry, as well as a dizzying array of other areas, like housing markets, energy market, labor markets, financial services markets, and perhaps most frighteningly, capital markets in which money sloshes through a global system extracting wealth through out-of-control instruments like derivatives, markets fail spectacularly. Regulation is the only way to fix these glaring market failures.

Just leaving everything to the market, as libertarians recommend, is often guaranteed to produce epic ripoffs.

There! Now you’re ready to enjoy your next cocktail party and watch the fireworks.