Reticent Man

We start with the libertarian or anracho-capitalist maxim that absolute utility of all economic activity is maximized by having no government interference at all.  Every coercive or governmental interference is a net negative.  Although I take this as true, I draw different conclusions from it than true anarchist because of other considerations which I will detail.  You can have some very interesting theoretical arguments about whether a true anarcho-capitalist society is economically stable, in which it will be argued that the incentives are aligned such that no entity grows powerful enough to take the place of government.  But I consider these arguments to be only theoretical because of psychological considerations.  Humans will submit to a hierarchical power structure against their best interests and incentives, due to our instincts and genetic makeup.  Therefore there will always and everywhere be government.

Taking these two points together we are left with what Thoreau paraphrased from others "That which governs least governs best".  I will get back to governing best in a minute.

In microeconomics 101 you will learn that there is a surplus to trading.  If I value your object at $20 and you value it at $10, I can give you $15 for it and we have both gained $5 in value.  You will also learn that in a perfectly competitive market, businesses will earn a market rate return on investment of capital, and labor will earn a market rate of pay, and all additional surplus will go to the consumer.  We take this simple model as true, but note that government interference makes the markets no longer perfectly competitive, and by doing so has impacts in two ways.  Firstly as discussed above it will reduce the total surplus available to all parties through its interference.  This effect can be very large (choking the market to nothingness) or very small.  Secondly, government interference can change the distribution of who receives the surplus and who even participates in the market and receives any surplus at all.  Note that no one receives negative surplus over time... instead they just stop participating in the market (see the choking comment above).   Therefore government interference over all markets will necessarily change the ROI of capital, the price of labor, and the surplus from trade to everyone.

Let's get back to governing best.  In order to decide how we want to govern best we need to define what 'best' is.  What are our goals?  Morally I want everyone to live comfortably if they are willing to work if able, and don't commit crimes against others. but I also want as much additional surplus above that as possible, and for it to be distributed somewhat in proportion to those who generate it, and somewhat to everyone.  This is a vague goal, but being more specific will not be helpful so I don't need to be.  It is enough that I can tell if any change is moving us closer to, or farther away from that goal.

Now that we have our goal, and a simple understanding of economics and government, it is simple to say that the way to govern best is to evaluate all government through two aims.  To minimize interference so as to maximize the surplus available to all.  And to direct the interference so that we are distorting the market in the direction of our goals.  This is the framework with which one could improve government.

How do we fail currently?  Virtually everyone agrees that our current government is massive failure.  That's why the easiest way to generate support is to be pro-change.

I believe the largest pathway of failure is the tendency for the rich to get richer.  As noted, governmental interference has the power to change the distribution of surplus gains from trade.  For example the people on the capital side of the equation can use the government to distort the market so that capital retains the lion's share of the surplus from trade... keeping labor and consumer's share small.  But it's not just capital vs labor. Skilled laborers and capital can both combine to keep the price of unskilled labor down, increasing income inequality.

On the flip side, attempts to increase the share of the less well off are usually clumsy and heavy-handed, and sometimes downright counterproductive.  You always run the risk decreasing the size of the surplus by more than you can redistribute to the poor.

But all is not lost.  Government can tip the scales towards my stated goal.     How it can do so is the subject for another post.

Labels: Thoughts