January 06, 2005
How not to complain about taxes (1)
Anderson on Political Economy, Anderson on Taxes, Elizabeth Anderson: January 6, 2005
"Governments cannot be supported without great charge, and it is fit every one who enjoys his share of the protection, should pay out of his estate his proportion for the maintenance of it."
That's John Locke, the great defender of private property, writing (Second Treatise of Government, ch. XI, par. 140). It pays for defenders of private property to listen to Locke, so as to avoid silly complaints about taxation. Here's one common one I hear: that government, in taxing my property, is taking away what is really mine. This complaint is often conjoined with the accusation that liberals, in order to justify taxation, must believe that the government owns all property to begin with and by rights could confiscate it all. Two points should put these fallacies to rest.
First, a technical point: the fact that some property is mine does not entail that other people do not have rightful claims to some portion of it. I am entitled to my salary; it's mine. But my children have a rightful claim to support from my income. In some states, such as California, I have a legal obligation to support my parents out of my income, if they cannot support themselves. I have to pay my bills out of my income. If I negligently injure someone, I am liable to pay them damages from my income. The fact that this income is mine does not settle anything about who else might have legitimate claims to some portion of it, and on what grounds. Note also that I did not have to give my personal consent for some of these others to have a claim on it.
So far, I've just been talking about property as a legal institution. But perhaps the complaint I am criticizing is talking about supposed "natural" property rights, following theorists such as Locke. So here's my second point: unless one is a bomb-throwing anarchist, an advocate of natural property rights must concede the legitimacy and indeed necessity of a state, at least as an institution for collective protection and impartial adjudication of claims--the so-called "minimal state." And such a state will have a legitimate claim on every member's property, to the extent necessary for everyone to pay their fair share for its maintenance, as Locke rightly insisted. Even in a minimal state, the fact that my income is mine does not constitute an argument against the taxation necessary to support the state.
In fact, Locke himself went much further than this minimal claim. In the Lockean mythology loved by libertarians, it is supposed that individuals, upon joining a minimal state, retain full claim to all of their natural property rights, except to the small extent needed to support a minimal state. The fallacy here is to suppose that, when people join together to form a state for the protection of their property, they are concerned only to protect their property from the encroachment of others. According to Locke, however, individuals form a state not just for protection against violations of their negative liberties but for the preservation of their lives (which are part of their property):
"the first and fundamental natural law, which is to govern even the legislature itself, is the preservation of society, and (as far as will consist with the public good) of every person in it." (Locke, Second Treatise, ch. 11, par. 134)
Unless one could show, contrary to fact, that death rates under publicly funded health care systems are higher than under systems that leave people to pay for their health care with whatever resources are at their disposal, some kind of publicly funded health insurance entitlements are compatible with, and may even be required by, Locke's theory of natural property rights. Moreover, Locke insists on our obligation to provide for the poor:
God hath not left one man so to the mercy of another, that he may starve him if he please: God the Lord and Father of all, has given no one of his children such a property in his peculiar portion of the things of this world, but that he has given his needy brother a right to the surplusage of his goods; so that it cannot justly be denied him, when his pressing wants call for it. . . . As justice gives every man a title to the product of his honest industry, and the fair acquisitions of his ancestors descended to him; so charity gives every man a title to so much out of another's plenty, as will keep him from extreme want, where he has no means to subsist otherwise: and a man can no more justly make use of another's necessity to force him to become his vassal, by with-holding that relief God requires him to afford to the wants of his brother, than he that has more strength can seize upon a weaker, master him to his obedience, and with a dagger at his throat, offer his death or slavery. (First Treatise, ch. 4, par. 42, emphasis mine)
Locke's point is not just that some kind of entitlement-based welfare system is required by morality and built into the structure of natural property rights (the poor have a title to what they need). It's also that, to prevent a free property system from degenerating into feudalism, constraints on freedom of contract are required. Just as contracts into slavery are invalid, contracts into vassalage are. People are not entitled to use their superior bargaining power to drive others to the wall, or into subjection.
So, you can't get an argument against a welfare state from Locke's theory of natural property rights. I won't pretend that Locke was as generous as modern welfare states; his preferred system of provision for the poor was in fact very harsh. And, given the primitive state of medicine in his day, no one at the time imagined it would have done much good to universalize access to it. But nothing in his system prevents a more generous welfare state.
In fact, given the wide scope of the legislature to pass laws for the common good of society (Second Treatise, ch. 11, par. 135), it isn't even clear that the distribution of natural property before people joined a state provides a constraint on the legislative power. Locke insists that any just government establish some system of private property or other. But there is no indication that it must mirror the distribution of property people brought with them into civil society. He never says that people in civil society have a right to the goods which were theirs in the state of nature. Rather, he says "they have such a right to the goods, which by the law of the community are their’s" (Second Treatise, ch. 11, par. 138, emphasis mine).
Does it follow that Locke, in accepting the legitimacy of taxation to promote the general welfare, including the establishment of welfare entitlements, really believes that the government owns everything and so could by rights dispose of all property arbitrarily? Of course not. He lays out the following constraints on legitimate taxation in ch. 11 of the Second Treatise:
1. It must be consistent with some system of private property or other (par. 138).
2. It cannot confiscate people's private property arbitrarily, but only in accordance with duly passed laws (par. 135-8).
3. The people must consent to these laws, not in the sense that they must obtain the personal consent of each individual, but in the sense that they have the consent of the majority of representatives in the legislature (taxation "must be with his own consent, i.e. the consent of the majority, giving it either by themselves, or their representatives chosen by them") (par. 140).
4. The laws must be for the common good of society, and in particular, promote the preservation of each member in it (par. 134-5).
5. The level of taxation cannot be so great as to reduce anyone to poverty or subjection ("It [the legislative power] . . . can never have a right to destroy, enslave, or designedly to impoverish the subjects" par. 135).
Although I'm no Lockean, I'm happy with these constraints, as I think all liberals are. (Personally, I would add another constraint, that requires the distribution of tax burdens to be fair. Locke may also implicitly be insisting on fairness in the quote that opens this post.)
So please, stop the silly rhetoric that liberals suppose that the government owns everything already. Stop the silly rhetoric that supposes that the fact that some property is mine offers any argument whatsoever against the legitimacy of taxing it.
I hasten to add that this still leaves plenty of room for reasonable dispute about proper levels of taxation. For all I've said so far, it's fine to argue that current levels of government spending are excessive, so that the levels of taxation required to support those levels are unjustified. It's fine to argue that the tax system we have unfairly distributes its burdens on the rich (I'll be posting later on that subject). It's fine to argue that our tax system stupidly rigs incentives in unproductive ways. It's even fine to argue that government welfare entitlements are illegitimate in principle, and hence that taxation to support them is unjust. (For my point here is narrow: merely that one can't get any support from Locke's theory of natural property rights, and hence not from the general idea of natural property rights, to argue this point. I'll be posting later on why I reject theories of natural property rights. My answer will surprise you.) This post is simply a plea to focus on real arguments about taxation, not silly rhetoric. But I wouldn't mind if you also learned a thing or two about Locke.
January 09, 2005
Toward a Post Cold-War Political Economy
Anderson on Political Economy, Elizabeth Anderson: January 9, 2005
The Cold War was a necessary war. But many of its battles were not. On the intellectual front, it distorted our readings of leading figures in the history of political economy so as to recruit them to one side or another. The classic case of this is scholarship on John Locke, who was eagerly recruited by the likes of Robert Nozick and others to the side of laissez-faire capitalism. Academic Marxists such as C.B. MacPherson were more than happy to cede Locke to that side, so they could bash him. Yet, as my last post argued, Locke was hardly the advocate of absolute property rights that Cold Warriors on both sides took him to be. And as Don Herzog has argued on this blog, Adam Smith was no advocate of pure laissez faire either. It's time to rethink the canon of political economy from a post-Cold War perspective, in which we don't feel forced to assign figures to one or another side of a war they did not participate in, and that is over for us, too. Some scholars have made a start on this. Jeremy Waldron's recent book on Locke, which stresses the Christian roots of his thought, is a step in the right direction.
Here's another legacy of the Cold War that should be discarded: the convention of classifying the systems of economic organization on a continuous spectrum from left to right, with communism on the far left, then socialism, then the so-called "mixed" economies of Western Europe and North America, and, on the right, the laissez-faire capitalist minimal state, and on the far right, anarcho-capitalism. We should know this spectrum is in trouble when we recollect that when fascism was still considered a serious alternative, or threat, it was represented as the far-right position.
There are many difficulties with this way of classifying economic alternatives. For one, the extremes on both left and right are no longer credible options, if they ever were. (On why anarcho-capitalism is not credible, I share Brad DeLong's views here.) For another, it doesn't make much sense to represent the economies of Western Europe and North America as "mixtures" of two deeply incompatible and doomed systems.
The American Republic was once understood as a "mixed government," in that it incorporated elements of monarchy, aristocracy, and democracy in its President, Senate, and House, respectively. Today we find the idea that the jobs of the Senate and House are to represent distinct class interests of society quaint and ridiculous. A way of classifying regimes that once seemed to make sense in light of the other genuine alternatives available in the 18th century makes no sense at all, now that monarchy and aristocracy are thankfully dead, and our institutions have been democratized, through such reforms as the massive expansion of the franchise, the destruction of slavery, and direct election of Senators. Good riddance to the idea of "mixed government."
It's time we got rid of the contemporary conceptual analogue to "mixed government"--namely, the idea of a "mixed economy." We still tend to think that the economies of the advanced democracies in North America and Europe are "mixed" in some kind of combination of laissez-faire capitalism and socialism. The idea got a lot of traction from the seeming viability of communism as an alternative mode of organizing an economy, plus a mythology of capitalism as at its most pure in its laissez-faire version. It turned out the both the (far) left and the right had an interest in representing "true" capitalism as laissez-faire capitalism--the former, to stress the ill fates of those who get chewed up in a dog-eat-dog economy, the latter, to celebrate the freedom to be top dog in such a system.
Now that communism is thankfully dead, along with such lamentable economic ideas as centralized economic planning, state ownership of major industries, and comprehensive wage and price controls, which were tried by many "mixed" economies as well as communist regimes, we should start reflecting on the economy we have with a clearer eye. The key features of the economy that amount to departures from laissez-faire are:
1. State provision of public goods, such as roads, public health programs, and schools.
2. Centralized banking.
3. Regulation of the environment, securities markets, food and drugs, auto safety, etc.
4. Social insurance, and, to a much smaller extent, "welfare."
5. Laws enabling labor unions (weak in the U.S., but much stronger in Europe).
We still have barriers to trade, to be sure, but the long-run trends here are definitely in the direction of reduction, even in the stubborn area of archaic agricultural subsidies, which should certainly be eliminated. (Here right and left ought to enjoy real common ground. The (libertarian) right hates them because they involve departures from free-market principles. Some parts of the left (e.g., NGO's such as Oxfam), including myself, hate them because they impoverish poor countries that could improve their economies if they were free to export their agricultural products, textiles, and cheap manufactures to rich countries without barriers. Alas, neither element of left or right is numerically dominant in domestic U.S. and European political institutions. But the WTO may force the hands of the U.S. and Europe anyway: chalk one up in favor of sovereignty-compromising global institutions.)
What I'm suggesting is that the kinds of departures from laissez-faire that it made sense to call "mixed," in the sense of borrowing elements from socialism/communism--things like centralized planning and state ownership of major industries--have either largely been eliminated or, like trade barriers, are on their way out, and none-too-soon. The five that remain I support, but that's not the point of this post, and I won't argue that here. My point is rather that these five should be seen as developments internal to the dynamics of democratic capitalism itself, rather than borrowings from fundamentally alien economic systems. So it makes no sense to call economies that have them "mixed," as opposed to advanced variants of democratic capitalism. Public provision of infrastructure and education, and sponsorship of science research, has long been a great engine of capitalist development. Even if socialism and communism had never existed, it would have been necessary to invent centralized banking to moderate the effects of capitalism's business cycles. (By contrast, socialists and communists had always hoped to eliminate business cycles through centralized planning.) Regulation of private sector actions to reduce pollution, ensure public safety, etc. was brought to capitalism by popular demand. (By contrast, communism never tried to repair its catastrophic environmental policies and its workplace safety record is disastrous, nor was environmentalism ever much of a socialist issue until capitalist economies embraced it.) Ditto for social insurance and independent labor unions, neither of which were part of the imaginary communist utopia, nor happy in the dreadful communist reality (recall the wretched state of health care in ex-communist Europe, and Solidarity in Poland). Socialists and progressive liberals can take the historical credit (or blame, depending on your point of view) for some of these five. But that's no more reason to call the five "socialist" than it is to call the Senate "aristocratic" because aristocrats designed it. They are integral parts of advanced capitalist democracies.
Getting beyond the "mixed economy" would have three salutary consequences. One would be to dethrone "laissez-faire" from its position as definitive of capitalism in a classificatory system that is supposed to be useful for empirical understanding. (I hasten to add that I don't intend this to imply that laissez-faire capitalism is refuted as a normative ideal.) Another would be to focus our attention on the varieties of capitalism that actually exist, and on the highly consequential choices we face among different versions of capitalism as we know it. This would, third and most importantly, remove ideological cover from U.S.-sponsored attempts to impose on developing countries a particularly harsh version of capitalism (involving drastic restraints on public investment in human capital, public health, social insurance, and freedom to organize labor unions) that no advanced capitalist democracy has chosen for itself, on the premise that "capitalism" is the one viable path to development.
January 20, 2005
How Not to Complain Against Taxes (II): Against Natural Property Rights
Anderson on Political Economy, Anderson on Taxes, Elizabeth Anderson: January 20, 2005
In a previous post, I argued that the claim "it's mine" does not by itself constitute an argument against taxation. Nothing follows about the legitimacy of taxation from the mere fact that something is one's own property, nor, as Locke's example shows, even from the fact that something is one's own by a natural property right. Several comments and a trackback on that post supposed that I was arguing from the truth of Locke's theory of natural property to my conclusions. This is odd, since I explicitly disavowed theories of natural property rights in that post. My point was only that "it's mine" is no argument against taxes; it's at best a begged question. This of course does not rule out anyone's offering an alternative comprehensive theory of natural property that entails the illegitimacy of taxation, or taxation beyond what the minimal state requires.
Now I'd like to take on the idea of such a comprehensive theory of natural property more directly. In that earlier post, I promised to explain why I reject theories of natural property rights, dropping the teaser that my answer would surprise you. Here I spill the beans: I reject theories of natural property rights because they are incompatible with capitalism. More precisely, they are incompatible with the forms of modern capitalism that have proven so successful in expanding people's opportunities, prosperity, and the scope of cooperation--that is, the forms worth supporting. Far from being the foundation of capitalism, natural property rights, construed as putting constraints on state action, are its bane.
By a theory of natural property rights, I mean a theory that (a) identifies first principles by which individuals may initially own or acquire property without the help of a state; (b) upholds principles of virtually unrestricted voluntary transfer (freedom of contract, gift, and inheritance); and (c) limits the state (if it is to exist at all) to enforcing these strict property rights and whatever obligations arise from unrestricted freedom of contract. Crucially, these rights and obligations may not be abridged, limited, or revised by the state in order to produce various desired consequences. Some natural property rights theorists allow exceptions to these principles at the margins (Nozick, for example, allows that property rights may be abridged to avoid catastrophe). But by and large they see free market capitalism as a spontaneous self-sustaining product of systems of property whose logic lies outside state definitions and social engineering. The great danger to capitalism, on this view, is state "intervention" into a market sphere that runs by its own natural laws.
I think this picture of capitalism is misguided. The forms of capitalism that exemplify its greatest virtues rest on artificial, not natural property formations. The state does not "interfere" in a "natural" capitalistic realm; rather, state action constitutes this realm as distinctively capitalistic. Advanced capitalism requires a vast apparatus of socially engineered institutions to sustain itself. To put some specificity on these claims, I'll argue as follows. (1) Certain types of property rights and rules found in advanced capitalism have no sound basis in "natural" property rights but are nonetheless essential to advanced capitalism. (2) Natural property claims do spontaneously arise independent of state action, but they are incapable of generating the distinctive form of property needed for capitalism--namely, capital. State action is required to turn property into capital, and such action will inevitably, and rightly, abrogate these "natural" claims. (3) A pure system of natural property rights with unrestricted freedom of contract contains inherent tendencies to revert to feudalism if the state does not limit freedom of contract by restricting property transfers from the desperate to the well-endowed.
(1) Advanced forms of capitalism depend on types of property that have no natural foundation.
Consider, for example, the limited liability corporation. In a natural property regime, groups of people contracting together can enjoy no more rights vis-a-vis third parties than what the sum of their individual property rights already gives them. Since individuals do not enjoy any "natural" limitation on their liability, they can't naturally acquire such a limitation just by combining their property with others. Limited liability is justified not because it could arise from a system of natural liberty, but because investment in firms that separate ownership and control will be retarded, and hence overall economic growth will be depressed, if investors don't enjoy it. Limited liability does leave some rightful claimants uncompensated when firms go bust. Capitalism makes up for this in part through generally higher growth (which socializes some of the benefits of this property form). It also partly makes up for this through social insurance schemes that prevent some of the worst costs from being so concentrated as to produce hardship (which socializes some of the costs of this property form). For example, the state bails out pension funds that bankrupt firms owe to their workers.
Intellectual property rights are also both indispensable to capitalism and deeply artificial. They contain two features that, in combination, cannot be rationalized by a theory of natural property: (a) they afford monopoly rights to inventors, and (b) they are temporary. A theory of natural property could reject intellectual property altogether, on the ground that thought, once made public, becomes part of the commons, and no one coerces anyone else in using a valuable idea. Or it could insist that inventors have an absolute and permanent right to their ideas. (This would, for example, grant to the heirs of the inventor of the alphabet the permanent right to determine who is permitted to use it, and how much they must pay for the privilege.) But it is difficult to envision any theory of natural property that could both acknowledge the existence of such rights and insist on their expiration. There is a sound economic justification for a property regime like this, but it isn't "natural."
Many other examples of property rules important to capitalism, but not rationalizable within a theory of natural property could be cited--for example, bankruptcy (which discharges an insolvent debtor's debts, thereby abrogating the "natural" property claims of creditors), the rule against perpetuities (some version of which is needed to ensure that property rights ultimately vest entirely in living people, to prevent the dead hand of the past from permanently weighing down future uses of property), anti-commons rules (which prevent owners from dividing their property into uselessly small bundles), and rules against shareholder oppression (which limit what majority owners can do to undermine minority shareholder interests). Some version or other of these types of artificial property rule are vital for dynamic economies. (I don't pretend to defend the details of the ones currently in force.) Of course, one person's modus ponens is another's modus tollens. One might reject these types of property on the ground that they violate natural property rights. But don't pretend that one's preferred system would still be able to sustain capitalism or preserve its observed advantages.
(2) Natural property systems do not generate the distinctive form of property essential to capitalism, namely, capital.
Natural property exists, in the sense that people do successfully establish private property regimes, based on local conventions, that are independent of and often in opposition to the state. (Like my fellow-blogger Don Herzog, I happily embrace distinctions between state and society!) Indeed, natural property is by far the dominant form of property in the developing world. The great Peruvian economist Hernando de Soto has documented that in major regions of the developing world, 65-85% of housing is extralegal (that is, it consists of squatter settlements). The vast majority of retail markets and mass transportation in these regions also exist outside of the formal sector.
Since natural property systems exist as an empirical reality, and not just in the state-of-nature fantasies of philosophers, we can compare their performance with artificial property systems established by capitalist states. De Soto's verdict is clear: natural property is inferior to artificial property. The people who have only natural property are poor. Moreover, they are not poor because the state actively interferes with their natural property systems. For the most part, developing countries acquiesce in their formation. Rather, they are poor because natural property systems cannot convert property into capital. The distinctive feature of capital is that it has market value to strangers, to people who do not belong to the parochial community in which the property exists. Capital can be sold to strangers and used as collateral on loans. Capital's value rests on the fact that it is the locus of a massive expansion of the scope of cooperation and trust, beyond the face-to-face community, ultimately encompassing the whole world. It is a great engine of cosmopolitanism, which is one reason why I support it.
The natural property theorist might insist that all that natural property lacks is formal recognition by the state, exactly as it has been created by the locals. This ignores the fact that natural property systems are profoundly idiosyncratic. They vary in innumerable details from one locale to another, just as languages vary. And just as language variation puts sand in the gears of cooperation and trust across linguistic groups, variations in natural property conventions impede the conversion of natural property into capital. Strangers are reluctant to buy it, or accept it as collateral, and not just because they lack confidence that their property claim will be enforced (by either the state or the locals) if a dispute arises. They are reluctant also because they literally don't know what they are getting. The local conventions that define and encumber the property are not written down. Even if they were, they are too idiosyncratic in form to enable effective comparison with other parcels of natural property. Without easy comparison with other parcels, natural property lacks fungibility and so lacks a market value to strangers.
When the state grants legal recognition to natural property, as when it issues squatters title to the land they have been occupying extralegally, it incoporates that property into a vast system of artificial rules that are not of local making and that may well contradict the local conventions that previously defined the property. Of course, as Robert Ellickson has shown in his wonderful Order Without Law, the locals remain free to observe the local conventions instead of the formal property rules. But, as his work also shows, those conventions lose their force when strangers, who care little for local opinion, buy the property. This is the price of the conversion of natural property into capital. But the price is worth it. This means that the state is not, and ought not to be, bound to respect natural property.
This is not to say that there cannot be a compelling case at times for the state to formalize natural property. My point is rather that the case cannot be made on the ground that people have a fundamental right to whatever property they have acquired naturally. This can't be the ground, because formalization does not merely recognize the property that was already there, but subjects it to a distinct and often contradictory artificial regime. The case for formalizing natural property--incorporating it into the artificial capitalist regime--is rather that in many cases this is the best way, of the available alternatives, to enable the owners to escape poverty, provide for their needs, and gain prosperity and a wider range of opportunities.
Now here's the rub: those very same grounds also justify, at times, infringing on natural property and instituting new artificial property rights, such as social insurance entitlements, and hence the taxes to support them. The general justification for any property regime rests on its ability to enable, to the highest feasible degree, everyone under it to live a decent life, enjoying dignity, personal independence, freedom from poverty and oppression, a wide range of opportunities, and the effective power to participate in the social and economic life of the community. No one has a right, "natural" or otherwise, to a property regime that in fact deprives others of effective access to such a life, if there is an available alternative property regime that does effectively secure these others such a life. Such alternatives have been found through experience to require measures such as social insurance entitlements and the taxes needed to support them.
(3) A pure system of freedom of contract, in which all property is fully alienable, tends to degenerate to feudalism. Capitalism therefore needs restrictions on freedom of contract.
Feudalism is based on the principle that private property in land confers political power over whoever is on the land. One's landlord is one's lord. Feudalism permits the conversion of property over things into subjection over people. Theories of natural property rights, which suppose that people have property in themselves, and that all property is alienable in contracts, permit the same conversion. If the state places no limits on such conversions, then, given the volatile nature of capitalism, many people will be pushed into a poor bargaining position. In such a position, many will sell their personal independence for subsistence. Thus arise oppressive forms of contract feudalism such as those into slavery, bonded labor, and debt peonage. Thus arose company towns in the U.S., which issued scrip instead of cash wages to their workers (redeemable only in company-owned stores), required workers to rent company-owned houses (with leases enforcing what the company deemed a proper lifestyle), and crowned the firm owner as mayor for life (without those pesky elections). Thus arise modern factories in quasi-capitalistic China today, which keep their workers locked up in factory-owned dormitories, forbidden by contract to wander outside, lest they hire out their labor (enhanced by the training provided by the firm) to competitors.
Theories of natural property misidentify the objection to feudalism. They suppose that what made feudalism objectionable is that the landlord's political power lacked the consent of the people. On this view, contractual forms of feudalism, such as debt peonage and company towns, are legitimate. But if fedualism is objectionable, it is not for lack of consent. As Hume observed, the people did consent to the rule of their lords. Their consent, however, had no legitimating force, because they had no reasonable alternative:
Can we seriously say, that a poor peasant or artisan has a free choice to leave his country, when he knows no foreign language or manners, and lives, from day to day, by the small wages which he acquires? We may as well assert that a man, by remaining in a vessel, freely consents to the dominion of the master; though he was carried on board while asleep, and must leap into the ocean and perish, the moment he leaves her.
The same objection applies to contemporary forms of contractual feudalism. But even this objection does not get to the core of the issue, which is not consent, but rather the content of the relationship. Feudalism, whether contractual or not, is objectionable because it constitutes a relation of personal subjection, in which one party enjoys arbitrary power over another. Because personal independence is essential for liberty, it should be considered an inalienable right.
This entails limitations on freedom of contract that go well beyond the abolition of contract slavery, debt peonage, and company towns. It justifies legal regulation of rental contracts, for instance, so as to guarantee tenants a right to privacy against unannounced or too-frequent invasions by their landlord. It justifies laws against quid-pro-quo sexual harassment. (In light of this analysis, quid-pro-quo sexual harassment should not be viewed as any ordinary contractual term, but as contract feudalism's analogue to the droit du seigneur, now applied directly to the vassals, whether male or female, rather than their wives.) It even justifies laws restricting corporate contributions to politicians. Without such restraints on contract, we don't get capitalism. We get contract feudalism. Capitalism can't survive as a distinctive formation without restrictions on the conversion of property into political power.
Under the capitalist system we have today, people's claims to property arise from a vast artificial system that has no natural foundation, and that rightly contradicts many natural property claims. The system couldn't be capitalistic if it didn't. Within such a system, people have no property claim against other parts of the artificial property system, including social insurance entitlements and the taxation needed to support it. Since their prosperity arises from artificial property, no less than the economic security of those receiving social insurance entitlements does, their property claims enjoy no superior or prior status that could constrain the state's constitution of new entitlements and taxes that advance the proper goal of any property system--effectively securing a decent life for all.
January 26, 2005
How Not to Complain About Taxes (III): "I deserve my pretax income"
Anderson on Political Economy, Elizabeth Anderson: January 26, 2005
Today's post is a tribute to F. A. Hayek. I was going to commend Hayek earlier, for nailing the economic case against comprehensive planning, but fellow-blogger Don Herzog beat me to it. This is the third installment in a series of posts on the justification of taxation for social insurance. Instead of launching directly into a positive argument for social insurance, I've been clearing the ground by explaining why certain sorts of arguments against such taxation don't work. The question at stake is whether there are sound arguments for the proposition that individuals have such a strong claim to their property that the state cannot justly tax them for the purpose of funding social insurance. In my first post, I explained why the claim "it's my property" does not constitute a sound argument against taxation. In my second, I explained why claims based on natural property rights don't do so. In this post, I'll explain why the claim "I deserve my property" doesn't do so, and on the way, start to build the positive case for social insurance. Throughout this series, I am presuming the superiority of capitalism as a mode of organizing economic life. So, arguments against taxes that are incompatible with capitalism I take to be refuted for that reason.
The claim "I deserve my income," as applied to an individual's pretax income in free market economies, has considerable intuitive force. If true, it suggests a powerful moral claim against taxation for redistributive purposes, on the intuitively plausible supposition that a just economic order ought to ensure that people get what they morally deserve.
But, however intuitive these claims may be, they are unjustified. In two of his important works of political economy, The Constitution of Liberty (see esp. ch. 6), and Law, Legislation, and Liberty (vol. 2), Hayek explained why free market prices cannot, and should not, track claims of individual moral desert.
1. Let's consider first Hayek's claim that prices in free market capitalism do not give people what they morally deserve. Hayek's deepest economic insight was that the basic function of free market prices is informational. Free market prices send signals to producers as to where their products are most in demand (and to consumers as to the opportunity costs of their options). They reflect the sum total of the inherently dispersed information about the supply and demand of millions of distinct individuals for each product. Free market prices give us our only access to this information, and then only in aggregate form. This is why centralized economic planning is doomed to failure: there is no way to collect individualized supply and demand information in a single mind or planning agency, to use as a basis for setting prices. Free markets alone can effectively respond to this information.
It's a short step from this core insight about prices to their failure to track any coherent notion of moral desert. Claims of desert are essentially backward-looking. They aim to reward people for virtuous conduct that they undertook in the past. Free market prices are essentially forward-looking. Current prices send signals to producers as to where the demand is now, not where the demand was when individual producers decided on their production plans. Capitalism is an inherently dynamic economic system. It responds rapidly to changes in tastes, to new sources of supply, to new substitutes for old products. This is one of capitalism's great virtues. But this responsiveness leads to volatile prices. Consequently, capitalism is constantly pulling the rug out from underneath even the most thoughtful, foresightful, and prudent production plans of individual agents. However virtuous they were, by whatever standard of virtue one can name, individuals cannot count on their virtue being rewarded in the free market. For the function of the market isn't to reward people for past good behavior. It's to direct them toward producing for current demand, regardless of what they did in the past.
This isn't to say that virtue makes no difference to what returns one may expect for one's productive contributions. The exercise of prudence and foresight in laying out one's production and investment plans, and diligence in carrying them out, generally improves one's odds. But sheer dumb luck is also, ineradicably, a prominent factor determining free market returns. And nobody deserves what comes to them by sheer luck.
2. If free market prices don't give people what they morally deserve, should we try to regulate factor prices so that they do track producers' moral deserts? Hayek offered two compelling arguments against this proposal. First, if you fix prices on a backward-looking standard, they will no longer be able to perform their informational function. Producers will produce for what was demanded last quarter, even if it isn't demanded today. This creates enormous waste and generates huge opportunity costs. We'd be much poorer in an economy that worked like this.
One could imagine a way around this problem. Let prices move according to the free market. But set up a government agency to compensate people for their undeserved bad luck, from taxes raised on that part of people's property that they receive on account of their undeserved good luck. This way, prices would retain their informational function. This idea, which I have dubbed "luck egalitarianism," now dominates contemporary egalitarian thinking. I have argued in print that it's a very bad idea ("What is the Point of Equality?," Ethics 109 (1999): 287-337), for numerous reasons. One is that there is no coherent way to determine how much of what people get is due to luck, and how much is truly their responsibility. (To see some of the complexities involved, consider work by Mathias Risse, here and here.) Hayek focused on a more fundamental reason: any attempt to regulate people's rewards according to judgments of how much they morally deserve would destroy liberty. It would involve the state in making detailed, intrusive judgments of how well people used their liberty, and penalize them for not exercising their liberty in the way the state thinks best. This is no way to run a free society.
Hayek was right. It might sound like a compelling idea, to make sure that people receive the income they morally deserve. But orienting the economy around this goal, assuming it is achievable at all (and there are principled doubts about that), would doom us to poverty and serfdom. It would abolish capitalism, along with its chief virtues. It isn't worth the draconian costs.
3. Several implications follow from Hayek's insights into the nature of capitalism.
(a) The claim "I deserve my pretax income" is not generally true. Nor should the basic organization of property rules be based on considerations of moral desert. Hence, claims about desert have no standing in deciding whether taxation for the purpose of funding social insurance is just.
(b) The claim that people rocked by the viccisitudes of the market, or poor people generally, are getting what they deserve is also not generally true. To moralize people's misfortunes in this way is both ignorant and mean. Capitalism continuously and randomly pulls the rug out from under even the most prudent and diligent people. It is in principle impossible for even the most prudent to forsee all the market turns that could undo them. (If it were possible, then efficient socialist planning would be possible, too. But it isn't.)
(c) Capitalist markets are highly dynamic and volatile. This means that at any one time, lots of people are going under. Often, the consequences of this would be catastrophic, absent concerted intervention to avert the outcomes generated by markets. For example, the economist Amartya Sen has documented that sudden shifts in people's incomes (which are often due to market volatility), and not absolute food shortages, are a principal cause of famine.
(d) The volatility of capitalist markets creates a profound and urgent need for insurance, over and above the insurance needs people would have under more stable (but stagnant) economic systems. This need is increased also by the fact that capitalism inspires a love of personal independence, and hence brings about the smaller ("nuclear") family forms that alone are compatible with it. We no longer belong to vast tribes and clans. This sharply reduces the ability of individuals under capitalism to pool risks within families, and limits the claims they can effectively make on nonhousehold (extended) family members for assistance. To avoid or at least ameliorate disaster and disruption, people need to pool the risks of capitalism.
This fact does not yet clinch the case for social insurance--that is, universal, compulsory, government-provided, tax-funded insurance. For all I've said so far, maybe private insurance would do a better job meeting people's needs for insurance in the event of unemployment, disability, loss of a household earner, sickness, and old age. That depends on the relative performance of social and private insurance with respect to each of these events. Or perhaps some kind of mixed system, combining social and private insurance, would be optimal (I'm inclined to this position).
I do think, however, that the arguments I have provided so far go a considerable way towards justifying the view that, whether the insurance provider is public or private, not all individuals can reasonably be expected to pay for their insurance premiums out of their pretax incomes. For the reasons just discussed, pretax incomes provide a morally arbitrary baseline for determining the means within which people may reasonably be expected to live. Equilibrium factor prices may well be below subsistence or a decent life for millions. (This doesn't mean we should seek to institute a morally deserved baseline. My goal is not to ensure that people get what they morally deserve. It's to avoid gratuitous suffering, and to ensure that everyone has effective access, over their whole lifespan, to the means needed for a decent life.) And so far, no argument that people have a moral claim to their pretax incomes, sufficient to preclude taxing it for insurance purposes, has survived critical scrutiny. Certainly, "I deserve it" doesn't.
February 05, 2005
Social Insurance and Self-Sufficiency
Anderson on Political Economy, Elizabeth Anderson: February 5, 2005
Many people are troubled by social insurance not so much from considerations of justice as of virtue. They worry that social insurance debases people by making them dependent on government. It saps people's self-sufficiency and makes them a burden on others. People should provide for their own futures and not expect other people to step in and support them if they haven't set aside enough to do so.
I think this view is fundamentally misguided. Social insurance does not offend any worthwhile ideal of self-sufficiency.
It might be thought that self-sufficiency requires that each individual build their own personal savings and live exclusively on that. The offensive feature of social insurance is the pooling of assets and risks. But that can't be right. Private insurance also pools assets and risks. No one holds that it saps one's self-sufficiency if one purchases private insurance to provide for oneself and one's family in the event of disability, death, sickness, retirement, and the like. The fact that one has pooled one's personal risk with others does not offend any reasonable ideal of self-sufficiency--even if it does mean that, if things go badly, one will end up drawing more from the pool of assets than one contributed in the first place. So what is supposed to make social insurance any different? One pays one's contributions--in the U.S., mostly in the form of wage taxes--thereby pooling one's risk with everyone else. And one receives medical care, a retirement pension, income in the event of disability, etc., in return.
Perhaps the objection is that the contributions of the less well-off to social insurance yield benefits greater than what they could have obtained from willing private insurance providers. They lack self-sufficiency and hence are a burden on other payers into the social insurance system, in that the benefits they receive are more than what private insurance would have given them for their contributions. Note that this objection contradicts the more common argument on behalf of private insurance--namely, that it provides higher benefits for everyone than social insurance, whatever their level of contribution. Note also that this objection does not condemn all recipients of social insurance for lacking self-sufficiency, but only those who would have gotten a worse insurance package under a purely private system. More fundamentally, the argument ignores the distinction between virtue and luck, noted in my earlier post on Hayek. If one's risk is known to be high, one may not be able to obtain private insurance at any price within one's budget constraint. For private insurers need to guard against adverse selection, lest they fail. But the fact that one's risk is known--say, one is older, has a pre-existing condition, or works in a dangerous occupation, such as firefighting, farming, or metal stamping--is typically independent of any considerations of virtue. Being subject to a known high risk does not make one a degenerate dependent, but it may make one uninsurable on the private market. That's why social insurance is needed: it's the only way to ensure that everyone has access to insurance. Because social insurance is universal, it doesn't suffer from adverse selection.
Perhaps the self-sufficiency objection applies specifically to Social Security's pay-as-you-go system. Each generation pays for the next, instead of putting away savings on its own account, and spending those savings upon retirement. Hence, the older generation is objectionably dependent on the younger generation, when it ought to have provided for itself.
Consider by analogy the Amish practice of community barn-raising. When a young farmer starts out on his own farm, he does not build his barn all by himself, nor does he pay others to help him build it. Instead, he enlists his community to build it without pay. This is no offense against self-sufficiency: he will reciprocate when other members of the community need their barns raised. This system involves an intergenerational transfer from older to younger farmers, since the older ones got their barns raised before the younger ones had a chance to help them. Nevertheless, no participant is a net burden on others over the course of an entire life, since each farmer receives and gives in turn. So no participant lacks self-sufficiency. The fact that the generation that gives is different from the one that receives is irrelevant to the virtue of self-sufficiency.
Social Security simply reverses the timing of the giving and receiving, with the each generation paying for the retirement of its parent's generation. From the standpoint of intergenerational reciprocity, this is even better than the barn-raising case, since the parent's generation already endowed the tax-paying generation with most of its capital, human and fixed, without charge.
Why ask each generation to pay for the retirement of its parent's generation, instead of asking each generation to pay for its own retirement? The immediate demands of relieving poverty among the elderly had to be met when Social Security began. That locked the intergenerational transfer in place. This has always been the intergenerational social contract. When parents became too old to work, they relied on their children to support their retirement. Social Security merely pooled the children's responsibilities in this regard, rather than leaving each family to fend for itself. And we've already seen that the mere fact of pooling risks and benefits does not offend the virtue of self-sufficiency, since private insurance does the same thing.
One might think that the demographics of the baby boom retirement fundamentally disrupt the general pattern of intergenerational reciprocity inherent in demographically stable pay-as-you-go systems. The thought is that under today's system, current and near-future retirees are making out like bandits at the expense of their children, who will be left with a much poorer retirement than their parents enjoyed. I agree that if this were true, a significant question of intergenerational justice would arise. But it isn't true. Even under the Social Security Administration's pessimistic assumptions about productivity growth (without which there would be no projected "crisis" at all), the real value of the retirement benefits future generations can expect after the misnamed "bankruptcy" year of 2042 is higher than the benefits retirees enjoy today. This doesn't settle all questions of intergenerational justice that arise under Social Security. But it does suggest that they are much less urgent than has been made out. (Medicare is different. As I've noted before, I do believe that, unlike Social Security, the current Medicare system does raise gave issues of sustainability and hence of intergenerational justice. That's due to features peculiar to Medicare, rather than to social insurance in general.)
It could be objected that the Amish system is voluntary, while the Social Security system is coercive. But the Amish system isn't voluntary. Ever been shunned? Private associations have their own legal means of coercion. One might object to the coercive character of both systems. All right, but It's not clear why that would mark a difference between self-sufficiency and dependency. It's not an objection from virtue. (Later, I'll be posting on why the coercion involved in social insurance is no different in kind or character from the coercion involved in any private property system.)
Some people feel that relying on a check from "government" makes one dependent. But in a democracy, government is nothing more than citizens acting together, through state officials functioning as their agents. It's no different in principle from the barn-raising system. It's just on a vastly larger scale that, due to its size, requires an intermediary administrative apparatus. If the Amish aren't a bunch of degenerate dependents in running their barn-raising system, then neither are citizens at large in contributing to, and receiving from, social insurance.
Many important questions remain about the justice and wisdom of social insurance. But worries about sapping the virtue of self-sufficiency are not among them.
P.S. Numerous comments and trackbacks to my post on Hayek suggest that I missed the boat, since the best arguments against taxation don't suppose that anyone morally deserves their income as a reward for their virtue. They claim that people are entitled to their income because they obtained it through a system of voluntary, uncoerced exchange. I'm familiar with this argument, and never supposed or suggested that my post addressed it. Readers, there's only so much one can do in a single post! This isn't a scholarly paper, where one can blather on for 30 pages, much less a law review paper, where one can blather on for more than 100 pages. I'll be posting on the entitlement argument soon . . . .
February 08, 2005
Understanding Social Security
Anderson on Political Economy, Elizabeth Anderson: February 8, 2005
Go over to the Heritage Foundation's Social Security Calculator and you can indulge your outrage at how little retirement income you will get from Social Security compared to what you would get if you invested your Social Security tax contributions in private stocks and bonds. Then you can sober up by reading Pandagon's debunking of the economic assumptions behind the calculator. (Matthew Yglesias does a similar debunking of the Cato Institute's Calculator).
I've got a different criticism of the calculator. It forgets that Social Security is a form of social insurance, not a simple retirement plan. So it's comparing apples with oranges.
This might seem puzzling. Insurance is supposed to shield us against risks, not against certainties. Against certainties, individuals should be expected to save up and provide for themselves. Retirement is a near certainty. So how can Social Security count as a form of insurance?
The answer is that Social Security isn't a simple retirement program. The purpose of Social Security is to insure against a whole battery of risks that are difficult or expensive for many people to insure on the private market, especially if they have modest means or lack financial sophistication. Some of these risks are inherent in strategies that rely exclusively on private sources for retirement (IRA's, 401(k) plans, corporate pensions, etc.). What are the risks Social Security shields us from?
Let's count them up:
1. The risk that you will outlive your retirement savings.
2. The risk that inflation will eat away at the real value of the income derived from your retirement savings.
3. The risk that your private investments will go sour.
4. The risk that your lifetime income will be too low to accumulate enough savings to avoid poverty in retirement.
5. The risk that you will lose your prospects for a decent retirement due to personal bankruptcy. (Some private retirement accounts, particularly those available to the self-employed, are not protected from bankruptcy proceedings).
6. The rapidly increasing risk that your post-retirement standard of living will plunge precipitously because your employer ran your pension plan into the ground. (Although there is an independent federal program that takes over bankrupt corporate pension funds, it offers a far lower payback than promised by these plans, making additional guaranteed sources of income more important for retirement security).
7. The risk that you will become permanently disabled during your working years, leaving you and your family without your income, and hence also without retirement income, given your inability to save up for old age. (Workers' comp only covers disability due to work-related causes, and ends upon reaching retirement age.)
8. The risk that you will die, leaving your spouse and dependents without support from your income.
Social Security protects you against all of these risks, either directly or indirectly. These protections are substantial. Considering just the last 2 risks, it's worth noting that about 1/3 of the current beneficiaries of Social Security, and 1/3 of its expenditures, go to survivors of deceased working-age contributors and to disabled workers, not to retirees.
Social Security calculators like Heritage's compare a fairly pure retirement investment against a package that combines a modest retirement supplement with ample insurance against multiple risks. They assume that nearly all of the dollars you contributed to Social Security are dedicated to retirement. This means that they assume that you aren't going to die, leaving survivors in need of support. They assume that your retirement accounts are protected from bankruptcy proceedings, and that you aren't going to go bankrupt. In assuming steady, high rates of return on your private investments, they also assume that your private investments will not go sour, either through poor investment strategies or through a general fall in the market before retirement. And they pretend that the life annuity you can buy on the market is inflation-indexed, as Social Security's is, even though their figures are unrealistic even for a non-indexed annuity.
(The Heritage Foundation claims that its calculator is for an inflation-indexed annuity. However, when I asked for data on a generic 45 year old female, it popped back a current salary of $31,592 and claimed a lifetime SS contribution nestegg of $559,111 if privately invested, yielding a $4,554 inflation-indexed lifetime monthly annuity. Go over to TotalReturnAnnuities.com, which actually has to make a living selling these things, and you get a different story. Buy a non-inflation-indexed single life annuity for $559,111 for a 67 year old Michigan female, and they'll pay her $3,618 per month for life. The more responsible and cautious Cato calculator claims to preserve insurance against most risks and presumes workers may invest only 1/2 of their SS taxes in private accounts. But its annuity estimates are also optimistic. It claims a 45 year old female earning $31,592 and investing 1/2 her SS taxes privately will retire at 67 with a nestegg of $262,142, which can buy an inflation-indexed annuity of $21,237/year or $1,770/month. TotalReturnAnnuities will offer a lifetime annuity of only $1,696/month for that lump sum--not so bad, only their annuity is not inflation-indexed.)
It's a trivial exercise to show that, if nothing goes wrong, you'll be better off never having paid for insurance than having paid for it. I could produce a calculator like Heritage's, showing how much better off you'd be if you never bought home or medical insurance, on the assumption that your home never gets destroyed and you never get sick.
A true comparison of Social Security with privatization would compare Social Security benefits with the package of retirement + multiple types of insurance that you could get on the market. The comparison would not be easy, however, because some of the types of benefit provided as a matter of course by Social Security are very hard for many workers to match in the private sector. Inflation-indexed life annuities, for example, are rare and expensive. Most disability insurance companies aren't willing to insure blue-collar workers, perhaps because of the problem of adverse selection (they are more likely to become disabled). (Maybe this is why the Heritage Foundation shrinks from advocating the privatization of the disability portion of Social Security.) Most financial institutions don't want to bother with dozens of minute payments per year into millions of low-balance accounts. Without tight regulation, they would either not offer retirement accounts to low-income workers, or charge draconian fees for administering them. (This is true for Bush's favored TSP model for partial privatization of Social Security.) A few years ago, Dean Baker (now at the Center for Economic and Policy Research) calculated the insurance value of Social Security and found that it compared favorably to what low- and medium-income workers would be able to get in the private sector, even if the Social Security Trustees are right in their gloomy predictions for Social Security a few decades from now. (High-income workers will not do as well, because of the progressivity of Social Security benefits, which are skewed toward lower-income workers to keep them above the poverty line.) Baker shows us the substantial value of Social Security as an insurance package. Check it out.
February 10, 2005
Adventures in Contract Feudalism
Anderson on Political Economy, Elizabeth Anderson: February 10, 2005
"Commerce and manufactures gradually introduced order
and good government, and with them, the liberty and security of
individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects."
That's Adam Smith, in The Wealth of Nations (III.4.4), contrasting the feudal economic order with the emerging industrial order of the towns. Under feudalism, wealthy landlords employed hundreds of retainers, servants, and tenants who depended on them for subsistence. The price of dependence was servility: the duty to obey any arbitrary whim, however humiliating, called out as an order to them by their lord. Commerce and manufactures liberated individuals from such abject servility, by enabling people to live off sales to thousands of customers instead of one master. It enabled large numbers of people to enjoy personal independence for the first time. This was "by far the most important of all" the effects of commerce and industry: not economic growth, not efficiency, but the growth of personal independence from servility to masters (along with "good government").
Of course, matters were different for wage laborers than for independent shopkeepers and craftsmen. Wage laborers did
have to obey an arbitrary master on the factory floor. But two
features of industrial life tempered the humiliations of the factory
regime. The first was the profit motive. Self-interest and pride are
distinct motives, and sometimes come apart. Under pressure of
competition, the pleasures of ordering around and abusing inferiors
just to swell one's pride had to take a back seat to productive
efficiency. And as Max Weber reminds us, publicly verifiable claims to
efficiency legitimate the exercise of authority, reducing the sting of
the obligation to obey through its service to an impersonal goal. We
should not make much of this factor in the early phases of
industrialization, when wage laborers were in too weak a position to hold out for decent treatment. But it was eventually to have its effects, especially with the advent of labor unions, one of whose critical functions on the factory floor has been to guard the dignity of workers against bosses who see their authority as an opportunity for the indulgence of pride.
The second, more important feature of industrial life that promoted the personal independence of workers from their employers was the separation of work from the home. However arbitrary and abusive the boss may have been on the factory floor, when work was over the workers could at least escape his tyranny (unless they lived in a factory town, where one's boss was also one's landlord and regulator of their lives through their leases). Again, in the early phase of industrialization, this was small comfort, given that nearly every waking hour was spent at work. But as workers gained the right to a shortened workday--due to legislation as well as economic growth--the separation of work from home made a big difference to workers' liberty from their employers' wills.
Nevertheless, to the extent that this liberty is secured by competition for workers and convention alone, rather than by legal right, it is vulnerable to invasion. This is the lesson to be drawn from the story of Howard Weyers, the president of Weyco, a firm in Okemos, Michigan. According to the New York Times (Feb. 8, 2005, p. C5), Weyers banned smoking by his employees not just at work but anywhere else. Now they have to submit to nicotine tests as a condition of holding their jobs. Four employees have quit rather than suffer this invasion of their privacy.
Weyers claims that he is simply trying to keep health insurance costs down, since smokers cost more to insure. Such a rationale could just as easily be used to justify taking daily sperm samples from female workers to control their sexuality, on the ground that sex with multiple partners puts them at risk for expensive STD's. In any event, not just efficiency but personal pride was at stake for Weyers, who once coached college football. "I spent all my life working with young men, homing them mentally and physically to high performance. And I think that's what we need to do in the workplace," said Weyers to the Times. He wants to relive his glory days as a coach to late adolescents and young adults, enjoying the power and adulation of that role.
It doesn't have to be this way. Thirty states (not including Michigan) protect workers from being fired for smoking off the job. The issue here is not a "right to smoke." Smoking is hardly such a core liberty interest that it could deserve dignification in the form of an inalienable right. Rather, it's the right to conduct one's life outside of work independently of one's employer's arbitrary will. It's the right not to be subject to contract feudalism. Or, as Anita Esposito (one of the Weyco employees who quit rather than take the drug test) put the point, "it had nothing to do with smoking. It had to do with my privacy in my own home."
March 12, 2005
How Not to Complain About Taxes (IV): Productive Contributions, Self-Sufficiency, and Individualism
Anderson on Political Economy, Anderson on Taxes, Elizabeth Anderson: March 12, 2005
My previous posts on taxation have been negative: they've argued that certain arguments against taxation don't work. It doesn't follow from them (nor do I believe) that the state really owns everything or that it can tax as much as it likes. Despite having embraced capitalism, along with a list of Lockean constraints as a minimal starting point, it seems I must say something stronger to prevent readers from leaping to conclusions like this. So, I'll drop a hint as to my positive view: while pre-tax conceptions of property do not set legitimate constraints on taxation, the practical requirements of establishing a free society do set constraints on taxation. More precisely, we can move from considerations of what it takes for each person to live freely, to a joint specification of constraints on both private property and taxation. I hope that's tantalizing enough to keep you reading my subsequent posts on political economy, without trying to stick me with crazy views. (Further hint: I'm going to endorse F. A. Hayek's argument for a system of pure procedural justice.) For this post, however, I'm still clearing the ground with a negative argument.
In my series of posts on taxation, I've also been exploring the nature of capitalism and the rationale for social insurance. I've been looking for a sound argument that people have such a strong claim to their pre-tax income that it would be wrong to tax it to fund social insurance. I have previously argued that the none of these claims support that conclusion: that "it's mine," that "it's mine by a natural property right," and that "I deserve it." This time I'll be looking at 2 related arguments for the same conclusion. One asserts a claim of justice, based on a quasi-Lockean labor theory of value: "I'm entitled to my pre-tax income because it's what I've produced." The other asserts a claim of virtue: people ought to be self-sufficient. On this view, which I have criticized before, social insurance is bad because it undermines individual self-sufficiency.
My argumentative strategy is the same as with the prior claims: I'll argue (1a) that our capitalist economic system does not in fact reward people according to the proposed principle--in this case, according to their individual productive contributions. Far from tying each individual's fate solely to his or her own personal productive contribution (or to the pooled product of each individual's family, plus whatever they can beg from charity), capitalist markets commit us, at a deep structural level, to (b) extracting uncompensated benefits from others, (c) imposing involuntary costs on others, and (d) sharing our fates with one another. (2) Nor should we revise the system of rewards so that it does conform to the proposed principle, because such revisions (supposing they were possible) would be incompatible with advanced capitalism and destroy its virtues. (3) The self-sufficiency critique of social insurance implicitly relies on the view that the market rewards people in accord with their productive contributions. Since that view is mistaken, so is the self-sufficiency critique.
1a. The claim that people are entitled to what they have made has strong intuitive support. In a world of independent, non-cooperating producers, it's easy to see what this entails: as Locke famously argued (Second Treatise of Government, ch. 5, par. 27-30), I'm entitled to the nuts I have harvested from trees in the commons, to the previously unowned land I have cleared and prepared for cultivation, etc. (This principle is distinct from the principle of desert, since it allows the justice of claiming a bumper harvest produced with the help of undeserved good weather.)
How do we translate this principle to cooperative production under an extensive division of labor? How do we measure each person's productive contribution to the outcome jointly produced by all participants working together? P.T. Bauer, in Reality and Rhetoric: Studies in the Economics of Development, argued that individual productive contributions are measured by the marginal product of their factor (labor, land, capital) times the number of units of that factor they dedicate to production. Since, in equilibrium, markets equate the price of a factor with its marginal product, markets therefore reward people in proportion to their productive contributions.
This idea doesn't work. The sum of the marginal products do not add up to the total product under increasing or decreasing returns to scale. Moreover, the ubiquity of declining marginal returns means that the nth unit of labor generally contributes less than the (n-1)th unit. More fundamentally, the function of factor prices is to direct production decisions at the margin, not to reward people for their total productive contributions.
b. When the division of labor is efficient, we are systematically enhancing each other's productivity. The situation is like that observed by a high school field hockey coach, who once had the top two players in the league on his team. While both were fine players, he thought the second-ranked player was not as good as she was ranked: she was scoring lots of goals because the defensive players on the other team were ganging up on her first-ranked teammate, giving her more opportunities to score. On a more mediocre team, she wouldn't have ranked that highly. In the economy at large, lower-ranked workers enhance the productivity of higher-ranked ones as well as vice-versa: big-time executives couldn't be cutting so many lucrative deals if they didn't have secretaries to screen their calls. Even the unemployed contribute to the productivity of employed workers. If firms couldn't count on being able to hire quickly from a pool of readily employable people, they'd have to hire more of them up front in anticipation of expansion, so as to avoid bottlenecks later on. But doing so would dilute the productivity of all workers in a firm before the expansion has taken place. Many people not in the labor force also contribute. Full-time homemakers relieve their partners of the time, stress, and bother of managing the household themselves, thereby enabling them to be more productive at work. Full-time parents contribute to production by raising the next generation of workers.
It might be argued that these positive productive externalities that people are conferring on others are captured by each person's market wage. The cases of the unemployed and unpaid homemakers and parents show otherwise. Their productive contributions are not rewarded by the market. The contributions of the unemployed are not rewarded by any private orderings.
More generally, market wages don't track any physical measure of positive productive benefits conferred on others, since they vary with factors independent of the firm's production technology. Wages vary with the number of other people competing for the same job, the power of competitors to hold out for better terms, the costs to the worker of changing jobs, the availability of alternatives, and the costs the worker can impose on the firm by quitting. These factors don't track physical measures of a worker's contribution. Rather, they track people's bargaining power. "It's my productive contribution" sounds like an intuitively compelling ground for recognizing an entitlement of people to keep their market-derived income. "It's my threat advantage" doesn't sound so compelling. (Thanks to fellow-blogger Don Herzog for that phrase).
c. Not only are we systematically contributing benefits on one another, many of them uncompensated, we are also imposing involuntary costs. Negative externalities such as pollution and traffic jams are pervasive. Notably, capitalism imposes its worst negative externalities on those least able to avoid or afford them. Poor people are subject to considerably higher levels of pollution than the well-off. Our negligence system of torts entails that people are imposing costs on others without having to pay for them, as they would in a system of strict liability.
d. Capitalism, through its business cycles, forces us all to share each other's fates. Our fortunes rise and fall together (albeit unequally) in virtue of our interdependent interactions.
2. Should we try to arrange our laws so as to ensure that people reap only the productive contributions attributable to their own factor inputs, and internalize all their negative externalities? Such a system would promote the individualist dream of each living only off of their own production, none being a net uncompensated creditor or debtor to others. The objection to this is the same as Hayek's objection to distributing rewards according to deserts: trying to jigger rewards according to an external standard of justice such as productive contribution will distort prices away from their critical informational function. It would destroy the virtues of capitalism. Moreover, just as Hayek argued that the idea of just deserts is illusory in the case of factor compensation, so is the idea of individually assignable productive contributions. There is no physical fact of the matter regarding what any individual's productive contribution is, in an economic system structured by an extensive division of labor rather than by indepedent producers.
The libertarian Richard Epstein, following through on individualist intuitions about justice, has argued in favor of replacing our negligence system of torts with a system of strict liability ("A Theory of Strict Liability," 2 Journal of Legal Studies 151 (1973)). Such a system would ensure that whenever one person caused damage to another, they'd have to compensate them for it. Long before we reached this point, I'd be joining the critics of the tort system in crying "crisis!" The problem wouldn't be frivolous lawsuits. It's that when negative externalities are systematic, it's grossly inefficient to deal with them on a case-by-case basis, as the tort system does. The costs of litigation are too high, not in the amounts of judgments, but in lost production opportunities, as the valuable time of defendants and plaintiffs gets sopped up in lawsuits. That's why I prefer alternatives to litigation, such as regulations for worker safety and pollution, workers' compensation, and no-fault auto insurance, to cover systematic costs imposed on people by our advanced capitalist system of production. Excessive reliance on Individualized solutions puts too much sand in the gears of capitalist production.
3. These reflections offer support for my much-maligned post on social insurance and self-sufficiency. The self-sufficiency critique of social insurance implicitly relies on a rugged individualist ideal. According to this ideal, each person should rely only on their individual production, none being a net lifetime debtor to others. The self-sufficiency critique supposes that pre-tax capitalist distributions embody this ideal, in that they reward people according to their personal productive contributions. If this were true, and the ideal were sound, then it could make sense to call upon each person to rely only on their market income to survive. But as Hayek has argued, market prices don't track any notion of virtue. Once we detach market rewards from any moralized conception, such as deserts or productive contributions, it's hard to see how they could set a coherent standard of self-sufficiency. What's the virtue in living within the constraints of one's threat advantage? (What's the virtue in exercising one's threat advantage so as to drive the less fortunate to the wall?)
The self-sufficiency critique imagines that capitalism embodies a society of rugged individualists, like some imagined self-sufficient isolated producers in the state of nature. In fact, capitalism embodies a society of deeply interdependent people who share one another's fates. Social insurance simply makes this fact explicit.
May 27, 2005
So You Want to Live in a Free Society (1): What Hayek Saw
Anderson on Political Economy, Anderson on Taxes, Elizabeth Anderson: May 27, 2005
So far in my posts on taxation and political economy, I've mainly been making negative arguments--that this or that case against taxation to support social insurance doesn't work. It's time now to start building a positive case for social insurance and the taxation needed to support it. Most of you have heard arguments for social insurance based on ideas such as equality and compassion for the less fortunate. For many, such arguments cut little ice because they view the system being defended as incompatible with freedom. Ok, then, let's take freedom as our starting point and foundational value. Suppose you want to live in a free society--one in which everyone is free. What institutions, what types of distributive rules, what kinds of constraints on coercive action, what sort of property regime, should you support? Over this new series of posts, I'm going to lay out my view of what's needed to have a free society.
This first post in the series is dedicated to F. A. Hayek, who had a deep insight into what's needed. In Law, Legislation, and Liberty, vol. 2, Hayek argued that, for a society to secure the liberty of all, its distributive rules cannot aim at achieving some pre-established pattern of distribution based on individual need, desert, or merit. Instead, they should be purely procedural in form. Set up a system of fair, impersonal rules governing our interactions and applicable to all, let people choose freely from among the opportunities generated by acting within the constraints of the rules, and whatever distributions of goods result from following the rules will be just.
Hayek likened the procedural rules constitutive of a free society to the rules of a game:
namely a game partly of skill and partly of chance. . . . It proceeds, like all games, according to rules guiding the actions of individual participants whose aims, skills, and knowledge are different, with the consequence that the outcome will be unpredictable and that there will regularly be winners and losers. And while, as in a game, we are right in insisting that it be fair and that nobody cheat, it would be nonsensical to demand that the results for the different players be just. They will of necessity be determined partly by skill and partly by luck. Some of the circumstances which make the services of a person more or less valuable to his fellows, or which may make it desirable that he change the direction of his efforts, are not of human design or foreseeable by men. (Law, Legislation, and Liberty, vol. 2: The Mirage of Social Justice, p. 71)
In this passage, Hayek denies that the concept of justice can even apply to the outcomes of procedurally fair rules, for two reasons. One is that, because luck is inevitably involved in the outcomes of actions following fair procedures, the outcomes can't be relied upon to track individual merit or desert. The other is that the concept of justice can apply only to things that are deliberately willed, but the outcomes of free individual interactions within procedurally fair rules are unintended consequences of everyone's behavior. I think Hayek was mistaken on the latter point of usage. When we say that the winner of a contest won it "fair and square," we imply that justice would be served by awarding the prize to her, so it is just that she receive it. This is just a verbal quibble, however. The key point, on which Hayek was correct, is that the just outcome can't be determined ex ante, before people have played the game.
Why ought a society, to be free, distribute goods according to purely procedural rules? First, consider the leading alternative: what would a society be like if it tried to distribute goods according to some notion of individual merit or desert? Given that the outcomes of free exchanges inveitably include some element of chance, to adjust the outcomes so that they reflect some prior notion of merit or desert would require that the state look over everyone's shoulders to see how they are using their liberties. If, in the state's judgment, an individual used her liberties poorly or irresponsibly, then she is responsible for whatever disadvantages come her way and society will not compensate her for them. But if the state judges that her disadvantages were the result of mere luck, which is undeserved, then society will compensate her. There are of course other ways to draw the line between deserved and undeserved outcomes--indeed, too many ways, which put people into endless disputation over which way is the right way. (A look at recent literature on egalitarianism, full of disputation about how to draw the line between luck and desert, confirms this.) But all of the ways of drawing the line and redistributing goods accordingly require the state to make and enforce intrusive judgments about how people are using their freedom. People can't be free under such a system, where the state is monitoring their choices and passing moral judgment on them, with attendant material consequences. This is the ultimate busybody state.
Of course, not any random set of procedural rules will enhance freedom. Distributing all income according to a lottery, for instance, would be an instance of pure procedural justice. But that would be a crazy system to implement. What is needed is a set of rules that leave people free to offer mutually advantageous exchanges, so as to systematically give people incentives to behave in ways that overall enhance the liberty and opportunities of everyone else. Markets play an indispensable role in this, because prices signal to people where their productive efforts will be most valued by other people. In contrast with a command economy, individuals in a market system are free to take or leave any particular opportunity open to them, free to respond to or ignore any particular bargain or incentive offered to them. Moreover, market prices reflect the aggregate result of everyone's free decision to demand this or that, rather than some bureaucrat's notion of what they ought to be consuming. These are two extremely important ways in which a system of procedural justice based on voluntary market exchange secures everyone's freedom. However, the most important way in which reliance on markets enhances everyone's freedom concerns the dynamic effects of market competition in a private property regime in producing ever-expanding opportunities. I'll postpone to a later post an explanation of this, which I believe gives us the core freedom-based argument for private property.
A market system does not preclude all consideration of individual deserts. Importantly, when people violate the rules of a free society, we enter the realm of retributive justice. Here, we do know ex ante what the just results of a trial should be: namely, that all and only those guilty of violating the rules be punished (or, in a civil trial, compensate those they have harmed). The quality of a person's intentions--whether they did something intentionally, or unwittingly--matter here. But as long as people are abiding by the rules, the state takes no interest in their individual deserts. Consideration of individual deserts may also play a role in local distributions--say, within a firm. Employers often voluntarily implement merit-based pay structures, for example. But in a market system, that one's rewards reflected one's merits relative to the other employees in one's firm is no guarantee that one's rewards reflect one's merits globally--that is, relative to employees of other firms. For the size of the total compensation pie available to any given firm to divide among its employees is typically determined by chance factors--for example, an unanticipated shortage of some input, or sudden surge in demand for a product--independent of anyone's merit.
It might be thought that a system of pure procedural justice must place no constraints on possible outcomes for individuals, lest the constraints intefere with individual liberty. So pure procedural justice must permit catastrophe to befall the unlucky. Robert Nozick famously argued for this position in Anarchy, State, and Utopia (1977), encapsulated in his slogan that "liberty upsets patterns." This is the main reason (concern for individual deserts aside) that many egalitarians have objected to letting free markets determine distributions. But there is nothing in the idea of pure procedural justice, nor in the liberty it secures--to freely choose any of the opportunities generated by spontaneous interactions within the constraints of the rules--that precludes placing constraints on the outcomes.
To see this, we can pursue Hayek's analogy of markets with games by looking at the rules of some actual games. Games provide the paradigm of pure procedural justice, because there is no notion ex ante of who should be the winner, the same rules apply to all, and the rules are designed to be fair to all, in the sense of giving everyone a basically equal ex ante chance to win, supposing they play with equal skill. (Sometimes unavoidable asymmetries in a game give a slight advantage to a particular player--for instance, the one who gets the first move. But the rules of games are typically designed to prevent this advantage from being decisive, lest the game be boring for lack of uncertaintly about the outcome; and access to that advantage is itself typically allocated by a fair procedure, such as a coin toss or roll of the dice.)
The game of Monopoly illustrates a system of pure procedural justice that matches Nozick's ideal of unconstrained outcomes. In Monopoly, each player's objective is to drive all of the other players into bankruptcy, and to end up owning all of the property in play. Monopoly is a game that does not constrain how low people can go, or how high they can go, within its rules.
Milton Bradley's game of Life illustrates a system of pure procedural justice with constrained outcomes. In the game of Life, each player's objective is to retire with the most money. Although wealth inequality is inherent to the game of Life, it constrains the outcomes in three ways. First, nobody goes bankrupt; everyone retires with something. (I suppose it's technically possible to retire with a negative net worth, but I've never seen it happen. I suspect that that the rules are designed so as to virtually preclude this possibility.) Second, in the course of the game, players collect "Life tiles," which give them windfalls. When the draw pile of Life tiles runs out, a player who lands on a "Life space" gets to take a Life tile from any opponent. Strategically rational players will take their tiles from the richest opponent. Thus, the game of Life contains a redistributive element that in practice constrains how wealthy the richest player will get. Third, once people acquire assets (a house or a car), they can protect them by buying insurance. Insurance is a device that constrains middling outcomes by means of a ratchet--that is, it protects people who have already acquired some assets from losing them.
The game of Life illustrates how a system of pure procedural justice can consistently constrain outcomes at the bottom, at the top, and in the middle. It can even implement these constraints by way of redistributions from the top to those below. I don't pretend to have offered an argument that we should prefer a system that implements such constraints. I just want to point out that there is nothing in the idea of pure procedural justice, even one based on granting free markets a large role in determining distributions, that precludes setting constraints on possible outcomes.
Robert Nozick famously objected to John Rawls' egalitarian Theory of Justice that it was a "pattern-based" theory of justice that, because it identified just distributions independently of how people play by the rules, is incompatible with a free society. He was wrong. Rawls, the leading egalitarian theorist of the 20th century, in fact endorsed a system of pure procedural justice that insisted on constraining the top and bottom outcomes of a market-based "property-owning democracy." As he made clear in the revised edition of his book, the idea of a "property-owning democracy" is to use devices such as progressive taxation and rules promoting competition so as "to disperse the ownership of wealth and capital, and thus to prevent a small part of society from controlling the economy and indirectly political life itself" (Theory of Justice, rev. ed., xiv-xv; thanks to Amit Ron for drawing this passage to my attention). (By the way, Rawls on these pages contrasted his preferred system of "property-owning democracy" with a "welfare state," which aims to protect the unlucky from the worst misfortunes. The goal of a property- owning democracy is rather to secure the material conditions for democracy, in part against the threat of plutocracy. I'm not arguing for Rawls' position here; just highlighting the fact that egalitarians have more than one reason for constraining market outcomes. A concern for protecting the material conditions of democracy and equal citizenship is utterly distinct from compassion for the less fortunate.)
Hayek saw what Nozick failed to see: that Rawls' egalitarianism, while it contrained possible outcomes at the top and bottom, is in fact a system of pure procedural justice. It was not a "pattern-based" theory, and hence not subject to Nozick's objection that a free society will invariably upset patterns. Here's what Hayek said about Rawls' Theory of Justice:
the differences between us seemed more verbal than substantial. Though the first impression of readers may be different, Rawls' statement which I quote later . . . seems to me to show that we agree on what is to me the essential point [that distributive justice in a free society must take a purely procedural form]. Indeed . . . it appears to me that Rawls has been widely misunderstood on this central issue (L, L, L vol. 2, xiii).
Widely misunderstood, not least by Nozick. Hayek continued his observations on Rawls as follows:
there unquestionably also exists a genuine problem of justice in connection with the deliberate design of political institutions, the problem to which Professor John Rawls has recently devoted an important book. . . . I have no basic quarrel with an author who, before he proceeds to that problem, acknowledges that the task of selecting specific systems or distributions of desired things as just must be "abandoned as mistaken in principle, and it is, in any case, not capable of a definite answer. Rather, the principles of justice define the crucial constraints which institutions and joint activities must satisfy if persons engaging in them are to have no complaints against them. If these constraints are satisfied, the resulting distribution, whatever it is, may be accepted as just (or at least not unjust)." This is more or less what I have been trying to argue in this chapter. (L, L, L, p. 100, quoting Rawls, "Constitutional Liberty and the Concept of Justice," Nomos IV: Justice (New York, 1963), p. 102)
It's worth noting that Hayek's preferred system of pure procedural justice, while it differed from Rawls' in rejecting constraints on the top outcomes, did, unlike Nozick's system, insist on constraining the worst outcomes for individuals. He supported state action to abolish poverty in the sense of deprivation relative to objective needs (as opposed to relative to what others have) (L, L, L, vol. 2, p. 139).
I want to stress again that I'm not arguing for Rawls' system. It isn't, in fact, my preferred system. What I've argued for is the following:
1. Hayek was right to insist that the rules of distributive justice for a free society must take a purely procedural form.
2. Free market exchanges among private property owners play an indispensable and central role in any system of pure procedural justice that aims to secure and increase freedom for all.
3. A system of pure procedural justice in a system of private property and free exchange is consistent with rules that constrain outcomes at the top, at the bottom, and in the middle of distributions, and that implements those constrains by means of redistributive mechanisms.
June 03, 2005
So You Want to Live in a Free Society (2): Two Concepts of Liberty
Anderson on Political Economy, Elizabeth Anderson: June 3, 2005
In my previous post, I proposed that we undertake the following inquiry: suppose we accepted, as our primary and foundational value, the freedom of everyone as the basis for assessing institutions of government and property. What institutions and rules would we find compelling? Well, that would depend a lot on how we understand freedom. In this post, I'm going to lay out two conceptions of freedom that I think are indispensable for answering our question.
No, these are not quite Isaiah Berlin's famous "Two Concepts of Liberty," (see here) in which Berlin distinguished "negative liberty," understood as the absence of external constraints, from "positive liberty," understood as . . . well, that's the problem with the dichotomy. "Positive liberty" has been taken to mean so many things that it's an incoherent jumble. To some, it means the actual ability to achieve one's goals; to others, self-mastery (autonomy, control over irrational impulses in the self); to others, participation in collective decisionmaking (direct democracy); to others, union with fellow members of one's "nation" into an autonomous state (whether or not this takes a democratic form), and on and on in no logical unfolding of any unified concept.
So I'm going to set aside the hoary negative/positive liberty dichotomy and offer two other notions:
1. Freedom as opportunity.
2. Freedom as non-domination.
By freedom as opportunity, I mean the economist's notion of one's opportunity set: all of the options available to one, which are inside one's budget constraint and whatever other constraints--legal, customary, technological, natural, etc.--apply in one's situation. Options include not just opportunities for consumption of commodities but for all kinds of action--travel, association, speech, worship, sports, sex, whatever. These are the options one is free to choose from, the options that are effectively accessible to oneself, by deploying the skills and resources that are at one's disposal.
By freedom as non-domination, I mean not being subject to another's arbitrary will, not living at another's mercy, as a servile dependent. Philip Pettit, one of the leading contemporary advocates of this notion of freedom, calls this the "republican" (small r) conception of freedom, going back to Cicero, Machiavelli, Harrington, and the American revolutionaries. He contrasts it with what he calls the "liberal" conception of freedom, which is Berlin's notion of negative liberty as the absence of external interference. But freedom as non-domination was a central value for Locke, Smith, and Mill, who are all canonical liberals. Locke said, "freedom of men . . . is . . . not to be subject to the
inconstant, uncertain, unknown, arbitrary will of another man" (Second Treatise, Bk. IV, par. 22). Smith argued that the leading virtue of the emerging commercial economy of his day was to liberate people from "servile dependency on their superiors" (Wealth of Nations, Bk. III, ch. 4). Mill attacked the common law institution of marriage, which dissolved the legal personhood of a married woman into that of her husband's, precisely for putting women under men's arbitrary power, thereby reducing them to a condition of abject servitude little different from slavery (The Subjection of Women). We even find the classic formulation of liberty as non-domination echoed by Hayek: freedom is "the state in which a man is not subject to coercion by the arbitrary will of another" (The Constitution of Liberty, p. 11).
These two conceptions of freedom overlap at the point where the exercise of one person's arbitrary will over another causes the other's opportunity set to shrink. But they are nevertheless distinct notions, as Pettit has rightly stressed in his book, Republicanism. A person could be undominated, and yet have poor opportunities. Consider, for example, a group of peasants who have acquired title to their land and thereby liberated themselves from their landlord, who previously was free to barge into their homes, rape their brides, command them to work for free on his fields, and make them grovel before him. The peasants would have cast off lordly domination, but still, as measly hardscrabble farmers, have few opportunities in their low-tech rural economy.
A person could also be dominated, and yet have rich opportunities. Consider a courtier who enjoys the King's favor. The King, just because he likes his toady, has granted him a sinecure; he has an open invitation to eat and sleep grandly in the King's palace, a summer estate, and access to the royal hairdresser (a very important perk: all those powdered wigs need tending!). His opportunities are wide, but there's a catch: the King could swipe them all away in a fit of distemper and even send him to the dungeon without a trial, for any or no reason. Now, so long as the King doesn't do this, the courtier enjoys a high degree of opportunity freedom. Yet he is still dominated, still subject to the King's arbitrary will. Knowing this, the courtier adopts a slavish manner: he fawns and flatters the King, bowing and scraping before him, in order to stay in the King's favor. He is very careful with his words. Dependent on the King's arbitrary will, he is servile and hence unfree in an important sense, even if the King is unlikely to take away his privileges. He lives at the King's mercy. A free person, by contrast, would enjoy personal independence, in the sense that his opportunities are not held hostage to another's arbitrary will.
Now I contend that if you want to live in a free society--one in which everyone is free to the extent possible--you ought to be deeply concerned with both opportunity freedom and with freedom as non-domination--what I shall subsequently call "personal independence." You'll want to evaluate the institutions of government and property, as well as the culture of civil society, to see how well they secure and advance everyone's freedom in both senses.
So far, this is just set-up. Subsequent posts will develop their implications.
June 15, 2005
So You Want to Live in a Free Society (3): The fundamental freedom-based argument for private property
Anderson on Political Economy, Elizabeth Anderson: June 15, 2005
In this series of posts, I've been developing a view about the rules we should institute if we want to live in a free society. On the view being constructed, we take freedom as our foundational value, in terms of which institutions, including property rights, are justified. In taking freedom as our starting point, we treat property rights as instrumentally valuable for promoting freedom. Particular property rules are to be justified according to how well they promote freedom. This approach is distinct from one that starts with certain assumptions about what we own, as natural rights theories do, or that assumes that we are entitled to certain property rights in virtue of moral desert or productive contributions. I've already argued that such approaches are incompatible with capitalism. Arguments for private property rights based on freedom, however, are compatible with capitalism.
Of course, it matters how freedom is defined. In my last post, I explained two conceptions of freedom: as one's opportunity set, and as personal independence (non-domination). In this post I'll just be looking at the notion of freedom as opportunity sets, and see where it takes us. I'll be arguing that this notion of freedom delivers, fairly straightforwardly, a strong case in favor of institutions of private property, in a way that narrower notions of freedom as bare non-interference cannot do.
Some commentators to my last post suspect that I've stacked the deck already with this notion of freedom as opportunity sets. Rob Perelli-Minetti claims, for instance, that "I don't think most economists who are neither socialists nor some sort of Marxist would find the notion of liberty as opportunity set either helpful or meaningful." To the contrary, it's a conventional way of representing freedom among non-Marxist, non-socialist economists. Amartya Sen has done the best work formalizing this notion of freedom in the mathematical language of economics. He shows how it yields a neat freedom-based argument for free markets. (See Sen's extensive discussions of representations of freedom in terms of opportunity sets in his Rationality and Freedom. Note especially ch. 17, where he presents a nice proof of certain freedom-optimizing properties of competitive market equilibria. His proof moves neoclassical analysis from its traditional focus on welfare to a focus on freedom--something any libertarian should welcome.)
Arbitrary Aarvark worries that I've strayed too far from Hayek with my account of freedom as opportunity sets. But Hayek clearly stated that the fundamental justification for private property rights and free markets lies with the expansion of freedoms, understood as opportunities, that it provides. The proper aim of legislators in passing laws, he says, is "increasing the chances for all . . . in the sense . . . [of] increasing the opportunties that will become available to some unkown persons." (Law, Legislation, and Liberty, vol. 2, p. 126). It's worth quoting him at length:
Since rules of just conduct can affect only the chances of success of the efforts of men, the aim in altering or developing them should be to improve as much as possible the chances of anyone selected at random. . . . All the law can do is to add to the number of favorable possibilities likely to arise for some unknown person and thus to build up an increasing likelihood that favorable opportunities will come anyone's way. (L,L,L, 129-130).
For Hayek, the fundamental justification of property rights and rules of free exchange is to expand the "range of [favorable] opportunities" (p. 130)--that is, freedoms--that people have. I heartily agree.
Still, suspicion lurks of a stacked deck, and appeals to Hayekian authority may not be enough to allay them. Some people think that the freedom that matters is a formal notion of freedom as non-interference with whatever opportunities one has, however few and undesirable those opportunities may be. They suspect that if we go beyond this notion of freedom as non-interference, toward the alarmingly "positive" notion of freedom as actual opportunities to which people have effective access, we'll move inexorably toward some awful "redistributive" policies that libertarians hate.
The latter suspicion, that notions of opportunity freedom lead us toward "redistributive" policies, is correct, as I'll be arguing in later posts. But the former suspicion, that I have stacked the deck by selecting a conception of freedom tailored in advance to lead to that conclusion, is mistaken. You can't head these developments off at the pass by insisting on evaluating institutions strictly by the formal notion of freedom as non-interference. For that path leaves one unable to defend capitalist private property, too.
Fellow-blogger Don Herzog alluded to the reason why freedom-as-non-interference is an inadequate conception of freedom in a recent post. If the only kind of freedom that matters is that no one intentionally interfere with one's formal freedom of action, and not that one's opportunity set be large and full of worthwhile options, then freedom-lovers would have to oppose traffic laws, stop lights, and so forth, for interfering with freedom of movement. The result of a lack of such laws, however, is not actual freedom of movement, but, in areas of high traffic density, gridlock. (And, in areas of high traffic flow, grave danger.) To be sure, in a state of gridlock, one has the formal freedom to choose any movement in one's opportunity set--which amounts to being able to rock forward and back a couple of inches from bumper to bumper, getting nowhere. Some freedom! By contrast, if we give up certain formal freedoms--to run red lights and stop signs, to drive indiscriminately across lanes--we get in return a vastly expanded opportunity set, including the ability to actually get to places one wants to go, more safely and quickly than if we hadn't given up those freedoms. The point of formal freedom of movement--the right to move around, without coercive inteference by the state or other people--is that it is instrumental to expanding actual opportunities to move around where one wants to go. Merely formal freedom of movement, with nowhere to move to, or nowhere worth moving to, is not an end in itself. Different configurations of formal freedom of movement--different traffic laws--are justified by the extent of the opportunities for safe freedom of movement they enable. Give up a little freedom-as-non-interference, get a big bundle of freedom as real opportunities to move around to worthwhile places in return. A pretty spectacular bargain in terms of freedom, if you ask me.
Now here's the rub: the fundamental freedom-based justification for private property has exactly the same form as tbe freedom-based justification for traffic laws. So it depends on accepting a conception of freedom as opportunity, rather than freedom in the formal sense of non-interference. For suppose our conception of freedom were simply that of non-interference. Then the state of perfect freedom would be the earliest stage of Locke's state of nature, in which all the earth is held in common and everyone has a right to take whatever they want from it. No one would have the right to coercively exclude anyone else from the use of any part of it, since that would involve interference with their freedom of action. This entails that in the state of perfect freedom-as-non-interference, no one would be entitled to private property.
(Remember, if freedom is to be our foundational value, then private property has to be justified in terms of freedom, and we can't help ourselves to any prior notion of natural rights to property, against which we define a moralized notion of non-interference with antecedently given rights. That would be begging the question. Granted, in the perfect state of freedom-as-non-interference, people couldn't seize your body, or take what you are physically holding or wearing, without coercively interfering with your freedom of action. But if they just seized those acorns you had gathered and left on the ground for a moment, they would not be interfering with you. No coercion would have taken place, since they would not have achieved their aims by bending your will to their desires. Locke didn't start with any antecedently given conception of natural rights to property, either. Rather, he justified natural rights to property in terms of their instrumental value in enabling people to advance their moral duties under the fundamental moral law--to protect, preserve, and promote human life.)
The trouble with trying to justfy private property in terms of freedom-as-non-interference is that private property essentially involves securing the owner's opportunity freedom at the expense of everyone else's freedom-as-non-interference. This has to be a losing argument, if freedom-as-non-interference is the freedom that matters. For private property essentially involves the use of coercive power to exclude others from using it. It essentially involves coercive interference, or the threat of interference, with everyone else. Common property in the earth and in things does not have this feature. Viewed from the static point of view of freedom-as-non-interference, the institution of private property involves a net loss of freedom.
This is a reductio of the conception of freedom as non-interference as the fundamental measure of freedom, not an attack on private property. (As I've mentioned several times before, I'm an enthusiast for private property! I want everyone to have effective access to it!) What matters more fundamentally than freedom-as-non-interference is opportunity freedom. Once we shift to a conception of freedom as opportunities, the case for private property is evident. A society containing nothing but common property would be utterly impoverished and insecure. People wouldn't make productive investments, for fear that others would just seize the results, leaving them poorer than before. Others would find it easier to simply take things, rather than to try to get access to valued items by being of service to others. Properly designed private property regimes massively expand everyone's opportunity freedom by reversing these perverse incentives. They establish entitlements that dramatically increase the probability that individuals will gain from making productive investments. They structure incentives so that people do better by being of service to others--thereby expanding others' opportunity freedom--than by taking what others have made, and thereby reducing their opportunity freedom in some zero-sum (or even negative-sum) game.
The fundamental freedom-based argument for private property is dynamic and opportunity-based, not static and formal. From a static point of view, private property entails a net loss of formal freedom of action, just as traffic laws do. From a dynamic, opportunity-based point of view--one that considers the consequences for future freedoms of these sacrifices of formal freedom--properly designed private property regimes dramatically expand people's real freedoms (opportunities). Give up a little formal freedom-as-non-interference, and get a big and growing bundle of opportunity freedoms in return. Hayek was right: this is a spectacular bargain. But to grasp it as a bargain from the point of view of freedom, you must embrace a conception of freedom as opportunities, not merely as non-interference.
To sum up, I've argued in this post that:
1. Opportunity freedom is a more fundamental and important type of freedom then freedom-as-non-interference.
2. Private property in things can be justified in terms of opportunity freedoms, but not in terms of pure freedom-as-non-interference.
3. The fundamental form of a freedom-based justification for a coercive law is: if you give up this freedom, you'll get a much more valuable set of freedoms in return.
July 27, 2005
So You Want to Live in a Free Society (4): Personal Independence and the Rule of Law
Anderson on Political Economy, Elizabeth Anderson: July 27, 2005
In this series of posts, I've been developing a view of the requirements of a free society. I've introduced two notions of freedom--as opportunity, and as personal independence or non-domination. Last time I argued that freedom-as-opportunity is needed to justify private property, and is an indispensable idea for assessing social arrangements from the perspective of freedom. In this post I'll argue that freedom-as-personal independence is also a necessary part of a free society. Recall that to be free in this sense is to be in a state in which one "is not subject to coercion by the arbitrary will of another" (F. A. Hayek, The Constitution of Liberty, p. 11). Despite my fealty to Hayek's own formulation (which in fact follows a very long tradition), some might suspect that I have tried to stack the deck with some left-wing, radical notion of freedom that capitalist freedom-lovers can do without. Once again, the suspicion is right that this notion of freedom-as-personal-independence has some political implications that laissez-faire theorists will not like, as I plan to show in later posts. But once again, freedom-lovers can't do without this notion, because it's necessary for the rule of law, without which capitalism cannot flourish.
Imagine a state in which people have wide opportunities, but enjoy them only at the pleasure of a dictator. The dictator is easy-going and mostly lets his subjects do as they please. But every so often he gets cranky and orders the arrest of a subject who has displeased him, or he gets greedy and orders the confiscation of a subject's possessions. He doesn't have to prove that his subjects broke any laws that could warrant such punishment. He can throw people in jail or take their possessions without a trial. He can do this to any of his subjects at his whim.
What does this say about the subjects who have not been arrested or had their possessions seized? Are they free, or not? In the opportunity sense of freedom, they are still free. But their opportunities are implicitly conditioned on the permission of the dictator. They enjoy them as a mere grant of privilege from him, not as a right against him. This has consequences beyond the relative insecurity of their freedom. It also means that they had better toady up to the dictator, lest he take away their opportunities. People who must grovel in order to retain their opportunities are not fully free. They lack freedom in the sense of personal independence.
There is a way to secure people's personal independence from state agents. It's called the rule of law. In a state governed by the rule of law, the agents of the state can act only pursuant to prior, duly enacted, publicized laws of general application specifying what may be done to whom and for what reasons. People's liberties can only be taken away by due process of law. The point of the rule of law is to limit the discretionary power of state agents within tight bounds. When acting for the state, they cannot do as they please, but only as publicized, general, duly enacted laws authorize them to act.
Without the rule of law, private property rights, and hence capitalism, cannot flourish. We see this point being made in China today, where oil prospectors have filed suit against the state for seizing their wells and paying them a small fraction of what they are worth. Here's the background: In 1994, China, eager to develop its own energy resources, wisely decided to permit private oil prospecting. Its bet on private enterprise paid off hugely when thousands of people of very modest means signed development contracts with the Oil Ministry, scrimped together their savings along with that of their family, friends, and neighbors, and drilled over 2,000 productive wells in Shaanxi Province. State officials, once they saw how profitable these investments were, seized the wells for the government, paying investors a fraction of their investment--and more importantly, a fraction of the market value of the wells. Given the quasi-feudal mode of state governance in China, where local officials treat their governmental domains as integrated with their private property, and tax the locals to generate revenue for their firms, it is reasonable to assume that the officials plan to skim the profits of the oil wells for themselves. "Let the people take the risks; we'll take the profits" is the best translation of the explanation by the mayor of one Shaanxi town, who called the experiment of allowing private prospecting "a beautiful mistake." Beautiful for him, a mistake for the poor prospectors who did all the work, relying on the state's lying promise to recognize their claim to property. The people are fighting back with an unprecedented class action suit against the government, demanding either full restitution of their wells or better compensation for their investment.
What's emerging is a major test of the rule of law and hence the future of capitalism in China. So far, the rule of arbitrary state will appears to be winning over the rule of law. The lead lawyer for the prospectors has been arrested, some of the plaintiffs have been arrested, others are in hiding, and the state has banned the plaintiffs' lawyers from talking to the press. The choice is stark: shall it be klepto-capitalism for the ruling class, feudalism for everyone else, or shall all be free to become capitalists, with rights to private property? The irony is heavy: can today's Communist Party/company town ruler-owners point to anything that distinguishes them, morally, from the oppressive landlords the original Communists fought to overthrow? More and more frequently, rioting peasants and villagers don't see much of a difference. Their vision is 20/20.
No doubt, the readers of this blog will join me in expressing outrage at China's actions. But we may differ in our grounds. For some, the outrage consists in its violation of a sacred and inviolable natural right to private property. For me, the outrage consists in exploitative lies, corruption, and gross violations of the rule of law. The two concerns converge in a common condemnation of the state's oppression of its people in this case. But they diverge in other cases, notably concerning the scope of the state's power of eminent domain. More on that in my next post.
August 02, 2005
So You Want to Live in a Free Society (5): Common Property, Common Carriers, and the Case of the Conscientious Objecting Pharmacist
Anderson on Political Economy, Elizabeth Anderson: August 2, 2005
Imagine that you lived in a place where you had to ask someone else's permission to leave your property. Even if the other person always gave permission, you wouldn't be free. You'd be under conditional house arrest, with the other person your discretionary jailor. The case wouldn't be much better if you had a choice of 5 people to ask, any one of whose permission would let you leave your property. Then those 5 would be your joint jailors. You'd have somewhat wider opportunities, assuming their decisions were not coordinated. But you'd still be dominated by them. To be fully free, it's not enough just to have wide opportunities. People must be free from the prospect of domination--the power of others to arbitrarily put them in a state of subjection, where they must beg to get an opportunity critical to living a free life. It's worse, from the perspective of freedom, to be deprived of a critical opportunity by the arbitrary exercise of another's will, than to lack it due to natural causes or lack of technological development. It's worse to be unable to cross an unnavigable river because others arbitrarily forbid one from using the bridge, than because the technology for building a bridge at that point is lacking. In the first case, one lives in a state of subjection to others; in the second, one is merely technologically poor.
The "house arrest" case does not require that the "jailors" be state agents. They could be private property owners, in a property regime that enforces an absolute right against tresspass, and in which an entire territory is completely privately appropriated, such that some parcels of private property are wholly surrounded by other parcels. Then the owners of the surrounded parcels would all be effectively trapped by the owners of the surrounding ones. They'd be unfree. They'd be unfree even if helicopter travel were feasible, and private property owners didn't have airspace rights, so one could fly over their property. A property regime that makes escape from one's property either massively expensive, inconvenient, rarely scheduled, and likely beyond one's budget, or conditional on someone's arbitrary will, is nearly as bad from the perspective of freedom as one that conditions it on someone's arbitrary will alone.
I'm going to argue that consideration of freedom in cases like these yields:
1. An argument in favor of keeping certain parcels of land in the commons;
2. An argument in favor of the common carrier rule (the common law rule that operators of transportation, communication, and hotel services offer their services to all, without discrimination);
3. An argument in favor of applying the common carrier rule to pharmacists and other providers of medical care.
Robert Nozick considered cases like these (Anarchy, State, and Utopia, p. 55). He rightly argued that in such circumstances, property rights against trespass should yield to the compelling liberty interest of trapped persons in being free to leave their property. Nozick's answer entails that the bundle of rights that should go along with a parcel of private property may properly vary with the impact the exercise of those rights has on the liberty of other people. It recognizes a point I made in an earlier post: in securing an exclusive right to the owner, private property takes away certain liberties of others. This raises the question of whose liberties should prevail in determining the proper scope of a property right.
Nozick answered this question by invoking what he called "the Lockean Proviso": a diminution of one's freedoms due to the private property appropriations of others is ok as long as it doesn't make one worse off than one would have been in a state of nature without any private property (Anarchy, State, and Utopia, p. 175). The case of being trapped makes one worse off than if one could move around, which one was free to do in the pre-appropriation state. So Nozick can claim that surrounded individuals have a right to an easement across the property of the surrounding owners under the Lockean Proviso.
Brad DeLong has offered a devastating internal criticism of Nozick's Lockean Proviso. The Proviso permits taking away people's natural rights (to use the whole earth freely--which they enjoy before there is any appropriation) just so long as this makes people no worse off in terms of utility. Utilitarians are of course happy with this. But the whole point of Nozick's system is to oppose such tradeoffs of rights against utility. DeLong argues that Nozick is inconsistent: he's got to allow such tradeoffs to get private property off the ground, but after that, he wants to prohibit them.
To be consistent, Nozick should have judged property regimes in the currency of freedom, rather than utility. Moreover, Nozick should have considered that the important comparison is not between having his specification of a private property regime and having no private property, but between alternative specifications of property regimes. If freedom is what matters, then we should choose the specification that best promotes the freedom of everyone. It is not sufficient to justify Nozick's specification of private property rights that it satisfies the Lockean proviso, if lots of alternative specifications would equally well satisfy it, but generate a superior package of freedoms for people generally. We should choose the specification that generates the best package of freedoms overall.
Given that every specification of a private property right secures some freedoms at the cost of others, we need a rough metric of the value of freedoms to determine which specification would be best. In general, the answer will depend upon two factors:
1) Whether each person has a more compelling interest in exercising a given person-specific liberty in himself (for example, P deciding whether P shall leave P's property) than in exercising that liberty in the person of another (P deciding whether S shall leave S's property); and
2) Whether permitting the liberty to be used, transferred, or constrained in the ways specified has dynamic effects that generally enhance people's overall package of liberties.
(Let me introduce a notation to help us compare the freedoms made available by rival specifications of property rights. We can ignore the liberties that the rival specifications have in common, and consider only where they differ. Since every property right trades off some liberties for others, we can denote property right X in terms of the ways it differs from Y as follows: X = [people have liberty a, and lack liberty b]; Y = [people lack liberty a, and have liberty b].)
Considerations of the first type typically speak to individuals' freedom in the sense of personal independence or non-domination. Some liberties in the person are so critical to freedom that each person has a more compelling liberty interest in possessing them in their own person than in possessing them in the person of anyone else. For each person P, P has a stronger liberty interest in having the freedom to determine what P shall think, whom P will befriend, when P will leave P's property, etc., than in having the freedom to determine what anyone else S shall think, whom S will befriend, whether S will leave S's property, etc. In short, the liberty package [I'm secured against being a slave to anyone, I can't own any slaves] is a more valuable package of freedoms than the package [I could be a slave to someone, I could own slaves]. Such considerations generate grounds not just for "self-ownership," but for inalienable rights in one's own person. (And no, dynamic considerations of free contract do not always override such arguments. Having the right to sell oneself into slavery does not make one freer than not having the right to sell oneself into slavery, because having that right weakens one's bargaining position and thereby shrinks one's opportunities. Opportunities others would have offered to one in a regime in which one enjoys an inalienable right against enslavement they may now offer only on condition of accepting enslavement.)
Considerations of the second, dynamic, type usually speak to individuals' opportunity freedom, and do most of the work in determining how to specify the bundles of rights properly attached to any parcel of property external to the self. Yet, as the "house arrest" cases show, considerations of non-domination or personal independence enter here as well. The liberty package [I can leave my property without having to ask anyone else's permission; others can cross my property if they need to do so to leave their own property] is superior to the package [I can't leave my property without asking someone else's permission; I can forbid anyone from crossing my property].
So far, I have shown that system B, in which all property is privately appropriated, combined with easements for everyone to cross their neighbors' property, secures more freedom than system A, in which all property is privately appropriated, and everyone has strict rights against trespass. Yet there are compelling liberty interests that B would not satisfy. Each of us has a compelling interest in being free to have visitors to our homes, without having to ask anyone else's permission. System C: [all property privately appropriated; anyone has the right to cross anyone's property en route to someone else's home] secures a superior package of freedoms than either A or B. Still, C could be faulted for its failure to limit easement rights. A few people crossing one's lawn is no big deal; but big crushes of people will invade one's privacy and leave one without the freedom to enjoy one's property in peace. C also fails to satisfy our compelling liberty interests in having spaces where we can freely meet larger groups of people than we can fit on our properties, and where we can meet lots of people who might gather spontaneously.
What we really need to have a free society is a system in which each property owner (and renter) has unconditional access to a network of common roads and parks, that links every parcel of private property to every other parcel, so that everyone has access to every place and to common spaces. Such a system could be instantiated in the following ways:
D: Property left in the commons (not privately appropriated, nor under formal collective ownership and management), and by convention dedicated to transport and communication;
E: Private property open to the public on non-discriminatory terms--that is, where any member of the public has a right of access to it, and the private property owner is not allowed to arbitrarily exclude anyone from using it, although they may charge a toll for its use. In other words, privately owned toll roads subject to a common carrier rule.
F: Public property collectively managed for purposes of public transport and communication, and funded by general taxes (not tolls).
There is no sound liberty-based argument for G: private ownership of all roads without a common carrier rule. That is the equivalent of letting some individuals arbitrarily trap others, unable to travel to a destination where they have a right to be. The possibility of competing private roads to the same destination doesn't change this calculation. That's like the case of being surrounded by 5 property owners rather than 1: having five jailors doesn't make it ok for any one of them to arbitrarily deny you the right to cross their property, if you need to do so to escape your own property. If private operation of public access roads is to contribute to a free society, it must be subject to the common carrier rule.
In general, F offers a superior package of freedoms to either D or E. F is more free than D because it allows improvements to common paths that can increase the traffic they can bear, as well as traffic lights and traffic rules than can vastly increase opportunities for mobility. F is more free than E because it doesn't tax communication with others at the margin, as toll roads do. (Thus, the poor and pedestrians generally have a superior package of travel opportunities under F than E, because they can walk on the roads for free; and we all gain opportunities from free communication with others, which would be discouraged if each personal interaction carried a toll.) There may be exceptions to the general superiority of F over E. Sometimes public toll roads can be justified (e.g., fast toll-based lanes designed to relieve highway traffic jams); sometimes privately operated toll roads are (e.g., if the state is too poor or fiscally improvident to manage construction of public roads, and too corrupt to be trusted with tolls). But these cases are peripheral.
F and E share a common feature: In a free society, it is impossible for private individuals to avoid supporting the freedom of others to do things of which they disapprove. Under F, we all pay taxes to support the public roads, which enable people to travel to the church of their choice, however much we may disapprove of their choice. There is no conscience exemption to withold that portion of one's taxes that supports a road to a church that one believes promotes a false religion. Nor would freedom be gained on net by modifying E (under the common carrier rule) to H: giving private operators of public road accommodations a limited conscience exemption to the common carrier rule, to prevent individuals from using their road to travel to the church of what they regard as a false religion. The package [I'm free to travel to the church of my choice; I can't prevent anyone from travelling to the church of their choice] is superior to the package [road operators are free to block me from using the roads needed to travel to the church of my choice; I am free to block others from using my road to travel to the church of their choice]. To those private road operators who would find it unconscionable to facilitate others' travel to the church of what they regard as a false religion, the proper response of a free society is not to let them block the travel, but to advise them that they had better get out of the road business.
There are many public accommodations that secure a superior package of freedoms under a common carrier rule than under a rule that permits arbitrary discrimination on the grounds of individual conscience, or other arbitrary grounds. The Civil Rights Act of 1964, barring discrimination in access to public accommodations such as buses, restaurants, and hotels on grounds of race, is based on the claim that the package [I am free from discrimination to use any public accomodation; I am not free to use my ownership of a public accommodation to advance a racial caste system] secures a superior set of freedoms than the package [others are free to try to make me an untouchable in civil society; I am free to use my ownership of a public accommodation to advance a caste system]. Note here that considerations of non-domination are important over and above opportunity. Even if someone else is willing to offer me a room at a hotel without regard to my race (so I don't lack the opportunity to stay overnight in some city), this does not remove the subjection inherent in anyone trying to make me a subordinate caste, by depriving me of a hotel room on account of my race.
This argument generalizes. The operators of a private telephone system should not be able to claim a right of religious conscience to eavesdrop on telephone conversations, so they can cut off blasphemous phone calls. The operator of an ambulance service that takes public calls, who is a Christian Scientist, may not claim a right of religious conscience to refuse to transport any emergency case to the hospital, unless it is for the treatments permitted to a Christian Scientist (bone setting, pulling an infected tooth). A Talibanesque taxi driver may not conscientiously refuse to serve women unaccompanied by male relatives, on the ground that he might thereby be facilitating their sinful consorting with the opposite sex. And similarly, a pharmacist may not claim a right of religious conscience to refuse to fill a prescription for birth control to women, or to single women, on the ground that he might thereby be facilitating the sin of fornication.
In the original debates over the Civil Rights Act of 1964, opponents claimed that operators of public accommodations had a sacred right to freedom of association, as if all that was at stake was the right to exercise one's idiosyncratic tastes over whom one wants to serve. (Even if that were all that was at stake, it should still have to yield to the common carrier rule, which underpinned the CRA.) But the "taste" for not serving blacks was inseparable from the desire to reduce them to an untouchable caste. Similarly, the "tender religious conscience" against filling birth control prescriptions is inseparable from a religious world-view that regards women as properly confined to a mothering caste (with their sexuality limited to reproductive purposes). The Christian pharmacist who refuses to fill birth control prescriptions differs only in degree and not in kind from the Talibanesque taxi driver who refuses to serve women who are unaccompanied by their male relatives.
The potential availability of competing pharmacists who assert no conscience exemptions is no argument in favor of allowing them in some cases. For there may be no such providers. (Recall the frequency of this situation for blacks in the U.S. before 1964, where they met comprehensive discrimination in many markets in the North, even in the absence of Jim Crow laws.) Even if there are some in a distant county, or on the Internet, this is like the person who can escape her property only by helicopter. Even if there are some in the same county, this is like the person who has five independent jailors rather than just one. If women in many towns and counties are not to be turned into a subordinate, unfree caste, limited to the opportunity package [motherhood, celibacy] by the dominion of others, then pharmacists must not have a right to deny them access to birth control. The freedom to use one's pharmacy as an instrument for promoting one's religious beliefs is nothing compared to the freedom of escape from subordinate caste status-- and even to the freedom of being branded with the badges of subordinate caste status (in the case where women have other easily accessible pharmacies willing to serve them, but still may be snubbed by this or that pharmacist).
There are some public accommodations of such vital interest to each person that each has a compelling liberty interest in unfettered access to it, without being subject to the arbitrary decisions of those who operate them. The right to operate a public accommodation is not the right to inflict one's religious beliefs on others. The pharmacist's license is a license to practice pharmacy for others, not a license to practice one's religion on others. The state, in the name of freedom, properly enforces a common carrier rule in such cases.
January 14, 2006
On Kelo: Barking up the wrong tree
Anderson on Political Economy, Elizabeth Anderson: January 14, 2006
After a semester hiatus, I resume my series of posts on the political economy of a free society. Let's take up the issue of eminent domain, through the controversial Supreme Court case, Kelo v. New London 268 Conn. 1, 843 A. 2d 500, which affirmed the constitutionality of compulsory state transfers of private property to other private owners for the purpose of promoting economic development. The case has sparked a lot of outrage, spurring many states to draft laws banning state-enforced private-to-private transfers of property.
I think the outrage is misplaced. The problem with the current construction of the power of eminent domain is not that it permits states to force private-to-private transfers. The problem is rather that current law undercompensates property owners for such takings.
First, some background: The city of New London has been suffering from what the Supreme Court described as "decades of economic decline," including the loss of its major employer. It decided to try to revive itself by authorizing a private nonprofit organization, the New London Development Corporation, to draw up economic development plans. The NLDC's plan for redeveloping several parcels of land integrated public and private functions, including a park, museum, parking, residential, retail and office space. Finely appointed private homes would be condemned to make room for the new development. The homeowners sued to prevent the condemnation, arguing that the 5th Amendment permits states to take property for "public use" only, whereas parts of the plan would involve merely "private use." New London successfully argued that "public use" should be construed as including any "public benefit," including economic revival of the city. The plaintiffs argued that "public use" should be limited to either public ownership of the property, or, if it is transferred to private ownership, uses that are open to the public, such as railways.
I want to abstract briefly from this constitutional question to consider the underlying political values at stake in the power of eminent domain. There are lots of bad arguments against New London's exercise of eminent domain in this case that need to be cleared away before we can get to the issues that matter. Such as:
The notion that compulsory private-to-private takings are ok if the taking eliminates a "harm to the public," such as blighted property, but not if the property in its current state poses no harm. (This was Justice O'Connor's claim in her Kelo dissent.) So, a city has to wait until it is utterly blighted before it can undertake a recovery effort? One may as well argue that it's ok to give medicine to a person who has collapsed from disease, but wrong to administer it in earlier stages of the disease, so as to prevent utter collapse.
The notion that allowing state compulsion of private-to-private transfers for generic economic benefit "guarantees" that the "losses will fall disproportionately on poor communities," as Justice Thomas objected in his dissent. Thomas' complaint is ironic, given that a central precedent for Kelo was Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984), which transferred property from wealthy landlords to poor tenants in order to break up an oligopoly in land and thereby increase competition. More importantly, that poor communities would suffer net losses at all depends on acceptance of a miserly standard of compensation, a point to which I shall return below.
The notion that New London's taking violates the rule of law. This objection would have us view the Kelo case as akin to the lawless seizure of private oil wells in Shaanxi, China, which I condemned in an earlier post. The rule of law is being flouted in the Shaanxi case, where the state's decisions were taken in an unaccountable and secretive way. It hasn't offered even a pretense of justification that the taking serves any public interest. The officials who seized the property are not subject to election or recall by people dissatisfied with their actions. They are suspected of corruption, seizing the wells so they can skim the profits. The revocation of rights to private prospecting was not publicized until after the state decided to take the wells. Oil development contracts with the plaintiffs have been summarily breached, plaintiffs' access to the courts and the press has been systematically threatened, and plaintiffs have not been compensated for anything close to the market value of their wells. In New London, by contrast, the city's development plans were publicized in advance. The city development commission undertook a careful study justifying the project in terms of the public interest: it would produce more jobs and economic development in a severely depressed city. Voters had the power to kick out city officials if they disapproved of their plans. There was no evidence of corruption by public officials. No contracts with private parties were breached; plaintiffs enjoyed full access to the courts and the press; and were offered compensation for their property in accordance with current law. City officials acted under a Connecticut statute explicitly authorizing their taking. Bracketing the constitutional question, then, they did not act arbitrarily, but in accordance with the rule of law.
The notion that New London violated "the sacred and inviolable rights of private property," as Justice Thomas objected, quoting Blackstone, in his dissent. On the Blackstone/Thomas reasoning, one should deduce the proper scope of eminent domain by scrutinizing the concepts of private property and the powers inherent in sovereignty, perhaps with some reference to the development of common law a couple of centuries ago. This methodology is flawed from the start, since the concepts of private property and sovereignty are utterly empty apart from judgments of what ends are to be served by these institutions, along with empirical assessments, which may change with circumstances, of how these institutions should be designed so as to best serve these ends. There is no immutable concept of private property: at various times, people have claimed that it includes purportedly sacred and inviolable rights to own slaves, to rape one's tenant's brides, to dictate to one's tenants how they shall worship, to throw one's defaulted debtors into prison, to prevent others from constructing buildings on their property that are tall enough to cast a shadow on one's own property, to maintain a monopoly on public transport across a river, and on and on. Each of these purported inviolable rights has been defended with an intensity and conviction at least equal to those who take Kelo's side today. Look at the libertarian literature today, and one can see right libertarians such as Robert Nozick develop their harshly inegalitarian views from their arbitrary notion of natural property, and left libertarians develop their surprisingly egalitarian views from their equally arbitrary notion of natural property. This is why testing a property claim against one's intuitions about "natural" property rights is worthless--not so much, as Bentham complained, because such claims of right are "nonsense on stilts," but rather because they are forms of what he called "ipsidixetism": passing raw assertion of opinions off as arguments. It doesn't help to pluck out a random date--Justice Thomas seems to favor property rules that preceded the full development of industrial capitalism--and claim that the common law rules recognized then constitute our sacred rights to private property. Private property rules are in continuous development, because the flourishing of capitalism requires this.
There has to be a more principled way to assess rival private property rules than this battle of intuitions and feelings of outrage dressing themselves up under the guise of "sacred and inviolable rights." Disputes over property rights do not have to be turned into a Holy War, with rival sides thumping their respective holy texts, or advancing their fervently held dogmas about what is or is not sacred. We can instead proceed as Hayek recommended we proceed, by judging property rules according to the value of the bundle of opportunities they provide to anyone at random:
Since rules of just conduct can affect only the chances of success of the efforts of men, the aim in altering or developing them should be to improve as much as possible the chances of anyone selected at random. . . . All the law can do is to add to the number of favorable possibilities likely to arise for some unknown person and thus to build up an increasing likelihood that favorable opportunities will come anyone's way. (Law, Liberty, and Legislation, vol. 2, 129-130).
The point of considering property rules from the point of view of a random individual is to ensure that one does not choose them solely with a view to how some particular person will fare under them, but rather with a view to how people generally will fare under them. This exercise could be formalized in the way Rawls did, with people choosing rules of justice from behind a "veil of ignorance." But I prefer to avoid the elaborate Rawlsian apparatus, which gets more questionable, the more details are packed into the "original position." At the same time, Hayek's standard is ambiguous: does it require, say, that we maximize average or median expectations from a property rule? (Note that a focus on raising median expectations, as opposed to average expectations, would guarantee that an acceptable rule benefits those in the bottom half of the economic distribution.)
Fortunately, in the particular case of the state's power of eminent domain, we have a stricter standard to which we can appeal in judging the justification of compulsory private-to-private transfers. Eminent domain is, unlike ordinary taxation, a particularly disruptive form of property rule. For such rules, it makes sense to insist that the "public benefit" be shared with those whose property is taken. The narrow construal of "public use," which allows a compulsory private-to-private transfer, provided that the property is, like a railway, operated as a public accommodation, is designed to capture this idea that the benefits of a state taking redound to all, including those whose property is seized. In other words, mere compensation--leaving property owners no worse off than before their property was taken--is not enough: in addition to having their losses compensated, they must share in the benefits achieved by the transfer.
It is evident that the current rule of compensation, which supposedly offers property owners "fair market value" for their property, is a cruel joke, leaving those whose property is taken net losers. It does not even cover their moving costs. Moreover, if the economic development project succeeds, property values may rise so much that those whose property was taken can no longer afford to live or operate their business in the city. There is an easy remedy that ensures that owners share in the economic benefits of a compulsory private-to-private transfer. The rule of compensation should be that owners receive the greater of:
(a) fair market value of their property prior to condemnation + reasonable moving costs (including possible net costs of refinancing, etc.), or
(b) fair market value of comparable property in the city after the economic development plan is undertaken.
(B) captures the thought that, if the transfer succeeds in promoting economic development, the benefits of this will be captured by all owners in rising property values. The compensatory standard should ensure that those whose property is taken enjoy an equivalent increase in their compensation, so that they could, if they wished, afford to stay in the city living as they did before, enjoying the externalities of the new development. (A) offers a hedge to owners in case the development plan fails. At least they will not come out net economic losers from the taking.
I would also accept the following standard:
(c) fair market value of the seized parcel as zoned for its new use.
(B) says that an owner should be compensated enough to be able to buy an equivalent house/commercial building in the city without suffering any net economic costs. (C) says that owners should share in the value added by and internalized in the new use of the property, not just in the positive externalities the new use offers to others.
When there are net expected economic benefits from compulsory private-to-private transfers,they would be allowed by the Hayekian standard. The "public benefit" standard requires, beyond this, that owners whose property is taken are entitled to share in these benefits ex post, not just ex ante (before it is known that their property will be taken).
It may be objected that I am being too optimistic in assuming that net economic benefits can ever be expected from a rule of eminent domain that permits compulsory private-to-private transfers: doesn't this leave politicians open to wholesale corruption and cronyism? I observe that even corrupt mayors may manage to bestow great benefits on their cities from redevelopment projects--consider, for instance, Mayor Cianci's stunningly successful redevelopment of Providence, R.I. However, I agree that there are dangers here. The proper remedy, however, is not to ban such projects altogether. The opportunity costs of an outright ban would be too high. It would also give desperate, declining cities a perverse incentive to try running economic enterprises on their own, retaining public ownership of the property, rather than enlisting private entrepreneurs, who are likely to do a better job. If the higher standard of compensation turns out, after trial, to be insufficient to deter corrupt and harmful deals, local governments could be required, upon petition from a significant portion of their electorate, to put their development plans up for public approval in a referendum.
Kelo's critics have been barking up the wrong tree. The problem is not the principle of compulsory private-to-private transfers for public benefit. It's that the current compensatory standard is too low to ensure that prior owners share in the benefits.
February 08, 2006
What Game Would You Rather Play?
Anderson on Political Economy, Elizabeth Anderson: February 8, 2006
Let's conduct a thought experiment. You have to play a mountain-climbing game. The higher you climb, the better off you are. Rarely, players climb solo. Most of the time, they climb in teams. The members of each team are connected by pulleys and gears in such a way that, if everyone climbs in a cooperative fashion, everyone in the team goes higher than if each just climbed the team rope in an uncoordinated way. The job of the team leaders--those highest on the rope--is to figure out how to get everyone to coordinate their climbing so as to get the maximum total lifting force for the whole team. However, depending on the gear setup, the lifting force of each member's step may accrue unequally to each team member. (In most setups, those at the top get lifted higher by any team member's step than anyone below.) The mountain face is swept by gales, although the winds tend to be milder at higher altitudes than at lower ones. Sometimes the gales blow you or even your whole team off your rope. Other times, the team leaders--those at the top of the team rope--eject you from the team and toss you off the team rope. If you are lucky, your mountain-climbing skills may be attractive enough to another team that they extend you a part of their team rope before you hit the ground. Or you will have family or friends who will toss you a saftey rope to catch you on your way down. But you may not find a team with an open place on their rope that they will offer you, and you may not have family or friends willing to offer a rope, or the rope they are able to offer may be too frail to stop your fall.
You don't know your initial place on your rope, nor which rope it is, nor your mountain-climing skills, nor how well-off, benevolent, and numerous your family and friends are. In this state of ignorance, you get to choose some of the rules of the game you must play. Which rules would you prefer to play by? Here are your choices:
1. Free Fall: if you are blown off or ejected from your rope, and find no family, friends, or other teams willing to toss you a rope, you hurtle to your death below. The dispersion of players is very large: some are at extraordinarily high altitudes, some are dead.
2. Safety-net: there is a safety-net placed somewhere between the ground and the lowest-altitude player that will catch you before you hit the ground. You will be worse off than anyone still on a rope--at a miserably low altitude--but you won't die. And you'll often, but not always, have a chance to find a new rope and start climbing again. There is a small price to pay for the safety-net: everyone will climb at a slightly slower pace than if the net were not there. The disperson of players is almost as large as in Free Fall, except that the worst-off players in Safety-net are better off than the worst-off players in Free Fall.
3. Long Bungee Cord: in addition to a safety-net for those who never get going on a rope, you have a bungee cord anchored to a point on the mountain equal to your highest achieved altitude. The bungee cord prevents you from falling more than 60% of the way down the mountain. That way, even if you never get another rope to climb, your previous climbing efforts will not have turned out for naught. There is a modest price to pay for the long bungee cord: everyone will climb at a modestly slower pace than if they were not supplied with the cord. The dispersion of players in Long Bungee Cord is almost as large as in Safety-net, except that the highest players are not quite as high, the lowest players are not as low, and there is not as much fluctuation of position for any given player. A few players are at gloriously high altitudes; many players are at comfortably high altitudes; some are at miserably low altitudes.
4. Short bungee Cord: this is the same as the long bungee cord, except that the cord prevents you from falling more than 30% of the way down the mountain. There is a correspondingly steeper price everyone must pay for this cord. The dispersion of players in Short Bungee Cord is considerably smaller than in Long Bungee Cord: the highest players are lower down, the lowest players are higher up, and there is little fluctuation of position for any given player. Almost everyone is at a comfortable altitude, few are at glorious altitudes, and it's harder than in Long Bungee Cord to climb much higher than or fall far below one's current altitude.
5. Maximin: in addition to a safety-net for those who never get going on a rope, all the ropes are equipped with a special gear assembly that works as follows: those higher on the rope don't get to ascend unless their ascent helps pull up the lowest-altitude climber to the highest altitude possible for a low-altitude climber. In this game, the lowest-altitude climber is higher up than the lowest-altitude climber in any of the other games. But the higher-altitude climbers are lower down than in any of the games above. No one is at a miserable altitude; nearly all are at a just-comfortable altitude, except for a few who are little higher than this.
6. Strict Equality: all the ropes are equipped with a special gear assembly that distributes the lifting force of everyone's steps exactly equally across all players. No matter how hard or skillfully you climb, or how well you coordinate the team if you are a team leader, you cannot get higher than those who are dead weight on the rope. Since everyone knows this, no one wants to do much climbing, so everyone is stuck at the same miserably low altitude.
7. No Rules Dictatorship: besides the teams, there is a marauding party high above which does no climbing itself, but issues orders to the teams from a central location on how they should coordinate the movements of their members. The party claims to have expertise in coordinating the teams, but its orders are in fact clumsy and unproductive, and wear down the mountain at a shocking rate. The party also keeps the teams in a state of terror. It can toss anyone or any team off the mountain at any time, for any reason or no reason at all. There are no safety nets, no bungee cords, no rules. You can try to keep your place on a rope by pledging to submit yourself completely to their orders. But even that may not keep you safe. Everyone but the marauding parties is at a low altitude.
How to choose among these games? We can use Hayek's rule: to choose the game that "improve[s] as much as possible the chances of anyone selected at random" (Law, Liberty, and Legislation, vol. 2, 129). It's pretty clear that by this standard you'd be crazy to play by the rules of Strict Equality or No Rules Terror. It's also pretty clear that Free Fall carries absurdly high risks for trivially small gains compared to Safety-net. So no one would rationally choose any of these games if they had a chance to play any of the others. I also think that Safety-net is a poor bargain compared to Long Bungee Cord: it's well worth it to pay a modest price for a guarantee that one will always have something significant to show for one's hard climbing--that, once having gotten even modestly high, one will never fall back to an utterly miserable altitude. So, the credible options are among Long Bungee Cord, Short Bungee Cord, and Maximin.
Speaking for myself, I'd probably prefer to play a game somewhere between Long Bungee Cord and Short Bungee Cord. I'd prefer to have a fairly solid guarantee that I'd never be at a miserable altitude; but I'd also like to have a reasonable prospect of being able to climb substantially higher than my initial placement, if it is low, even at some risk that I might fall significantly from a high placement. Still, I can see the case for any of these three games. They are all reasonable games to choose to play.
Let's draw some lessons from this thought experiment for different systems of political economy. No rules dictatorship is communism; Strict Equality is pure egalitarianism. Maximin is Rawls' preferred system in A Theory of Justice. Free Fall represents Robert Nozick's preferred system in Anarchy, State, and Utopia. Safety-net represents F. A. Hayek's preferred system. Here's a representative statement from The Road to Serfdom:
There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security [against physical privation] should not be guaranteed to all without endangering general freedom. . . . There can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. . . . Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance--where, in short, we deal with genuinely insurable risks--the case for the state's helping to organize a comprehensive system of social insurance is very strong. . . . There is no incompatibility in principle between the state's providing greater security in this way and the preservation of individual freedom [pp. 120-1].
Hayek contrasted this "first kind of security," which he endorsed, with a second kind, designed to protect people from any falloffs in their income, relative to what they were accustomed to receive, or which would change their accustomed position relative to others. This entails a rejection of any Bungee Cord game where the cord is of zero length, as well as any game that forbids some climbers from overtaking or falling below others. Hayek correctly argued that any game of the latter sort would return us to a status-based society, in which everyone has their position fixed. He also correctly argued that any attempt to fix incomes on the basis of some judgment of individual desert would violate the rule of law and be incompatible with a free society.
What's missing from our canonical list of major theorists of political economy in the post-WWII era is anyone who has defended, as a primary theory of justice, any form of Bungee Cord. This is ironic. For the capitalist democracies that currently exist have implemented social insurance schemes most closely analogous to games of this form. Anglo-American forms of capitalism are closer to Long Bungee Cord; continential European forms of capitalism closer to Short Bungee Cord. The structures of social security retirement, disability insurance, survivor's insurance, and unemployment insurance in nearly all of these countries pays more to those who earned more before retirement/ disability/ unemployment (in return for having paid higher taxes into the system), although all pay considerably less than 100% of previous earnings. The fact that all advanced democracies have converged on some form of Bungee Cord suggests that it has strong attractions. One main attraction seems to be that, once people get used to a particular standard of living, they have a very hard time adjusting to drastic falloffs. Another seems to be that once people have worked hard to attain a particular standard of living, they have a strong interest in protecting what they have built up. But these and other possible attractions of Bungee Cord have been undertheorized. Theorists to the left of Hayek, such as Rawls, have tended to jump toward some form of egalitarianism like Maximin, skipping over the inegalitarian elements of Bungee Cord.
Some Hayek fans I have talked to seem to think that any system beyond Safety-net will send us sliding inexorably down the slippery Road to Serfdom to No rules dictatorship. I have even heard one suggest that the difference between capitalism and communism lies somewhere between Long Bungee Cord and Short Bungee Cord--i.e., between the US and, say, France. These thoughts are absurd. The rule of law governs all systems up to and including Maximin. All of these systems implement a form of pure procedural justice (as Hayek himself recognized in the case of Maximin), in which what one receives is determined by the impersonal operations of the market as constrained by the rules of the game. That is why all of the social insurance systems from Saftey-net through Maximin are called entitlement systems: what one is entitled to is not up the discretion or judgment of any bureaucrat, but defined by impersonal rules set out in advance, independent of any moral judgments of desert or responsibility. All of these systems, including even Maximin, permit individuals' relative incomes to be influenced by their own choices and efforts, as well as by the outcomes of market competition. Individuals' incomes in all of these systems may change relative to others'. So none create a status-based society. In all of these systems, ownership of the means of production lies overwhelmingly in private hands.
Fans of Nozick and Hayek may complain that I have rigged my case by failing to consider the availability of private insurance to fill the role that Bungee Cord fills for all on a universal basis. Private insurance, however, cannot fill the role of Bungee Cord, as I have previously argued. In addition to the previously mentioned problems, complete reliance on private insurance suffers from the following defects:
1. To avoid the problem of adverse selection, private insurers either refuse to insure those judged to be most at risk of needing the insurance, or charge draconian premiums that are beyond the reach of lower-income workers. In general, the private deals available to lower-income workers are worse than those available to higher-income workers--exactly the reverse of social insurance.
2. The kinds of insurance that would be needed to substitute for social insurance are very complicated financial instruments that are difficult for the financially unsophisticated to understand. This opens up opportunities for insurers to bury complicated loopholes and rules in their policies, cast in legal language that is nearly unintelligible to most people, who have a hard time reading a 35 page single-spaced small print document while those capitalist gales of creative destruction are whipping around their faces and they are just trying to hang on. The loopholes and complicated rules are designed to enable insurers to deny or delay coverage for losses the insured were led to believe were covered.
3. The loopholes and complicated rules are different for each insurer, generating vast arrays of options. This seems like an advantage, since consumers supposedly can choose a set of options tailor-made for their tastes and circumstances. But in fact these complications make it very difficult for consumers to compare competing policies, especially given their relative ignorance of the risks they are likely to face in the future.
4. Even financially sophisticated consumers lack something insurers have: experience with the product before they need to use it. Consumers are very good at learning about products with which they have lots of experience. But they don't know how well insurance will work until the time comes to make a claim. By then, it's too late to switch to a better product if the purchased one didn't work out.
My point is not to deny the value of private insurance altogether. Often, it offers excellent value, especially for simple risks, as for life insurance. But the more complicated the risks, the worse the deals available through private insurance. We are witnessing problems 2-4 in spades today with respect to the botched private Medicare prescription drug plans.
My point is rather that, given the uncertainties and defects of private insurance, people have a strong interest in insuring against the frequent failures of private insurance to meet their needs at a reasonable cost. This is a major purpose of social insurance schemes that take the form of Bungee Cord.