The Pakistani Spectator

In graduate school, I shared an apartment with a very interesting fellow who argued in favor of the American Libertarian party. The Libertarians, in America, are a minor party that gets something like 1% of the vote in most elections, so they wield very little influence, but they make some interesting arguments in favor of government having the absolute minimal amount of power – at the extreme, their philosophy is almost in favor of anarchy, elimination of government, altogether. Their basic thesis is that even a democratic government cannot take rights or property (tax) from an individual without this amounting to armed theft or coercion by the majority against the minority. I disagree with most of what they favor, but I still believe that they make some important points that deserve consideration. (The major parties in the US, the Democratic and Republican parties, are strange in their mix of Libertarian and non-Libertarian perspectives; simplifying, somewhat, the Democrats are somewhat more Libertarian in their perspective of government’s role in social regulation, and the Republicans are more Libertarian in their perspective on regulation of business and on taxation (though the Republicans do not make the corresponding sacrifices in government spending, especially spending on the military, that would be necessary to sustain lower taxes indefinitely – instead they just pile up massive government debt!)

In a previous post, Capitalism versus Communism, I discussed the specific comparison of these alternatives, but I promised to come back for a discussion of fixing the imperfections of uncontrolled capitalism, and this post is my follow-up on that promise. In this post, I’ll focus on the Libertarian argument for “laissez-faire” capitalism, capitalism absolutely unregulated or taxed by government, and examine where the argument holds up, and where it needs modification. I’ll come back in a later post to discuss other issues of where government control is legitimate and useful, and where the individual should have complete self-regulation, in the Libertarian spirit.

At its core, the Libertarian argument for free capitalism is simple; if you create something (or some service) of value, or add value to what already exists, this act is a purely good thing, not something that should be penalized in any way by taxation, and as for regulation, the free market theoretically self-regulates in many ways, for example penalizing producers of dangerous or low-quality products. In its most primitive form, capitalism is just individuals creating products and performing services, and trading those products and services freely for mutual gain with other individuals. In the modern world, though, most products and services are created by corporations, but this is really just a logical form of teamwork; individuals voluntarily partner to create and mutually own these corporations, and employees freely contract with the corporations to perform useful labor at a mutually-agreed-upon wage. At every stage, in a free market, both parties to every transaction have alternatives, and neither party will agree to the transaction unless doing so is more attractive than any available alternative (such as doing nothing, or trading with someone else offering a better price or better product or service). Thus, at the end of each transaction, both parties should be better off (or at least believe themselves better off) than before the transaction, and government interference will just obstruct the potential for this mutual benefit.

The Libertarian credo is simple; the only legitimate role of government is to protect the rights of the individual – “Your right to swing your fist stops at my nose!” I once asked my college friend how this applied to government regulation of pollution; isn’t a polluter interfering with the rights of those (everyone, really) harmed by pollution? Now there is a dilemma! He saw two immediate Libertarian possibilities – either the government must not regulate at all, or it must utterly prohibit pollution, but neither option made practical sense to either one of us! Especially today, the world is waking up to the realization that even carbon dioxide, produced by burning almost any fuel, is a serious pollutant, so an absolute prohibition against pollution is basically a prohibition against fire, and that is in turn a call to end all of technology, without which the Earth cannot begin to support its current human population, and we would die by the billions. On the other hand, a person who contributes more than his or her share of pollution to the Earth (and I must admit that this includes almost every American alive!) can be seen as either vandalizing or stealing the common property (the air and water) of all the citizens of the planet, and this is clearly something that government has not only a right but a duty to correct!

So, what’s the right way to regulate pollution? Currently, most US regulation (where it exists at all, and where it is enforced) takes the form of preventing increases in pollution, with “rights” to pollute “grandfathered” to existing polluters, usually old, large corporations. An old corporation that wishes to build a new sulfuric acid plant, for example, which creates new sulfur-oxides pollution, would have to reduce its sulfur-oxides emissions somewhere else, perhaps by reducing production at a particularly old, dirty plant. This is ridiculously inefficient and unfair, of course. New companies, which may have more efficient processes, can’t even begin to enter the sulfuric acid business, for example, so the regulations have the effect of protecting old business and reducing competition. Old corporations even have a disincentive to retire old, dirty plants early because these old plants preserve their “rights” to pollute.

Economists have a clean solution to the problem, though – simply charge (tax) all polluters, proportional to the amount they pollute, for exactly as much damage as we calculate their pollution does, worldwide! This is the same principle that states that when you accidentally kick your soccer ball through your neighbor’s window, you are not forgiven without penalty, nor are you thrown in jail – you simply pay for the damage you’ve done! Correctly handled, a pollution tax would cause polluters across the board to find wherever pollution damage can be reduced for less cost than the damage done, and where the costs of reducing pollution exceed cost of the damage done, with current technology, we’d live with the damage, and pay the penalty, just like the fellow who plays soccer in the street knowing that he’ll sometimes have to pay to replace a neighbor’s window.

In a perfect world, the pollution taxes wouldn’t just go down a hole, either – they should go to help the people (and animals) harmed. For example, it is clear that the harm of global warming will be very unevenly spread, largely to poorer countries contributing little to the problem, so a carbon-dioxide tax should ideally transfer significant wealth from heavy consumers of fossil fuels (richer countries, mainly) to the poorer countries most harmed by global warming.

Pollution is an example of an old problem in capitalism, called by the economists the “Tragedy of the Commons.” The problem is usually described as follows: A town has a “commons,” a grassy area where all people are allowed to graze their livestock freely. The farmers realize that this is a great deal, since they can raise more sheep, goats, or whatever, if they use the commons than if they use only their own land. They may realize that the commons is being overgrazed, but they know that this will likely be the case even if they personally stop using it, so they have no incentive to stop grazing, there. On the contrary, they may even increase their commons grazing knowing that if they don’t use it, today, it will likely be worn out and useless, soon. In this way, the commons is soon ruined and made useless for all, a tragic waste. Land that is owned by the individual, on the other hand, is more likely to be protected by that individual, and used sensibly in a way that preserves its value for the future. The solution for the commons is simple enough: either allow no destructive use at all, or sell it off in fenced-off pieces, so the new owners will have an incentive to use it sensibly. The atmosphere and the oceans are “commons,” too, in this sense, but the simply solution doesn’t work, here; we can’t just fence off parts of the atmosphere and ocean – pollution travels freely and globally, nor can we survive if no destructive use (no pollution at all) is permitted, so the only reasonable solution is to regard these as common property of all, and to pay into a common pool for damage done, withdrawing from the common pool to help those harmed, in proportion to the harm done.

If this principle was applied well, we in America could all forget about ongoing arguments about what sorts of activities harm the environment, and how much, and just ask ourselves the simple question: Is this more expensive than it is worth to me? The cost of pollution taxes will be passed on to the consumer, of course, so consumption that is very harmful will be proportionately very expensive, even where the harm was not obvious to anyone, before. (It is, for example, not always obvious whether it is better for the environment to consume food grown “organically” (without artificial pesticides or fertilizers) or conventionally, but proper taxation would resolve the question – the least harmful alternative would likely be the cheaper one, and even if it was not, the consumer would be paying for any excess harm done!) Although there is much complaint to the contrary, gasoline consumption is still ridiculously inexpensive in the US, with the result that we live much too far from work, drive too-large cars, vans, and trucks that consume far more gasoline than necessary, and don’t bother with simple measures that could reduce miles driven and make our vehicles more efficient. Appropriate taxation would rapidly solve the problem: Stupidly wasteful choices would be not just harmful to the world, but to each individual making the (newly very expensive!) choices! No longer would making the right choices for the environment be an exercise in noble (and rare!) self sacrifice, combined with carefully worked out calculation of what even is the best choice for the environment – just choose what works out best for yourself as the individual, with proper taxes paid! Even those who still make the wrong choices would be paying the price of those poor choices, so the harm is only to them!

Naturally, it would be no easy matter to calculate harm done by a given amount of each pollutant, and this would undoubtedly be much argued about, with large changes to the best scientific estimates of harm, as we learn more, and with industry lobbyists arguing fervently for the comparative harmlessness of their pollutants, but it is better that this be debated democratically than that the problem simply be ignored! Where the tax for pollution was set too low for effective deterrence, and the apparent harm exceeded the amount paid, after all, the tax could always be raised until it drove pollution as low as desired.

The concept of the “commons” can also extend to fair-share payment for all sorts of “common” resources enjoyed by business along the way to making a profit, which contrary to Libertarian oversimplification does not come from making something out of absolutely nothing! If making a profit simply required access to physical resources, and a lack of government regulation and taxation, the best business environments would likely be in the least-governed countries of Africa, Somalia, for example! Why then, do American businesses do so well, compared for example with Somali businesses? Overall infrastructure is the “commons” that benefits American business, and it is much more complicated than most realize. Having a stable, fairly uncorrupt government is a vital piece of infrastructure – can government be trusted not to arbitrarily confiscate your wealth to enrich corrupt members of the government, not only today, but ten years and twenty from now? This stability in the business environment allows long-term planning vital to business growth, as opposed to a sort of rape-and-pillage approach to short-term business where long-term stability is impossible to expect. Government isn’t the only threat that can steal a business’s value, either! In the 1800s, in the US, the largest corporations were arguably more powerful than the US government (which was much closer to the Libertarian ideal, then), and where government lacked power, other entities such as giant corporations filled the vacuum, so true “anarchy” isn’t even possible – something will take control, or many somethings will war for control, and if that something isn’t a stable government, it will likely be something that does not even pretend to protect interests other than its own. So, government needs to be the strongest player within the country in the struggle for power, if it is to provide stability, and it even needs a reasonable-sized military (though nothing like the size of the current US military!) if it is to defend the country’s wealth from foreign plunder.

Good public education is another common good required for a healthy business environment, and this must be paid for, and ought to be paid for (through taxes proportional to profit) at least partly by the businesses profiting from that common educational infrastructure. Roads are another part of the common infrastructure. A predictable, non-arbitrary legal system is key, if only to enforce the contracts that are so vital a part of modern capitalism. Unlike air and water, these government-provided parts of the infrastructure need not be damaged as an inevitable part of modern production with current technologies, but they are not free, either – they are artificial parts of the infrastructure that can only provide lasting services to business where government collects enough tax to pay the price, tax that should rightly come from the profitable businesses enjoying the benefits of that infrastructure. In this light, taxation, correctly managed, is not armed robbery of the rich minority by the poor majority – it is simply paying a fair rent for the infrastructure vital to production of wealth, by those most enjoying the benefits of that infrastructure.

Apart from taxation or other charges so that businesses pay their fair share of the “commons” costs, capitalism has fairly little need of regulation. Government should also ensure that individuals retain true economic choice, that they are never forced into slavery-like situations, for example, where they can only find work with a single employer, or monopoly situations where they can only buy services or products from a single vendor. (Markets are actually fairly good at providing these choices, usually, even without regulation, but some laws are useful still to prevent loss of choice.) Perhaps the other major need is simply to provide consumers with honest information so that they may make informed economic choices – regulation of truth in advertising, and honest packaging, for example. Beyond these simple needs, I am actually quite sympathetic to the Libertarian position that capitalism requires no government regulation, and market forces can regulate the rest.

Last 5 posts by Dan Tow

• Just Taxation - October 31st, 2008
• New American Voters; Guilty Until Proven Innocent? - October 22nd, 2008
• Safety in “Big Daddy’s” Shadow? - September 8th, 2008
• Coping with Limits to Control in Politics, Life, and Bridge - August 26th, 2008
• The Right to Remain Silent - June 18th, 2008