# Unorthodox Economics: 2. Pitfalls

This is the second entry in what I hope will become a book-length series of posts. That result, if it comes to pass, will amount to an unorthodox economics textbook. Here are the chapters that have been posted to date:

A person who wants to learn about economics should be forewarned about pernicious tendencies and beliefs — often used unthinkingly and expressed subtly — that lurk in writings and speeches about economics and economic issues. This chapter treats seven such tendencies and beliefs:

• misuse of probability
• reductionism
• nirvana fallacy
• social welfare
• romanticizing the state
• paternalism
• judging motives instead of results

MISUSE OF PROBABILITY

Probability is seldom invoked in non-technical economics. But when it is, beware of it. A statement about the probability of an event is either (a) a subjective evaluation (“educated” guess) about what is likely to happen or (b) a strict, mathematical statement about the observed frequency of the occurrence of a well-defined random event. I will bet you even money that the first meaning applies in at least six of the next ten times that you read or hear a statement about probability or its cognate “chance,” as in 50-percent chance of rain. And my subjective evaluation is that I have a 90-percent probability of winning the bet.

Let’s take the chance of rain (or snow or sleet, etc.). You may rely heavily on a weather forecaster’s statement about the probability that it will rain today. If the stated probability is high, you may postpone an outing of some kind, or take an umbrella when you leave the house, or wear a water-repellent coat instead of a cloth one, and so on. That’s prudent behavior on your part, even though the weather forecaster’s statement isn’t really probabilistic.

What the weather forecaster is telling you (or relaying to you from the National Weather Service) is a subjective evaluation of the “chance” that it will rain in a given geographic area, based on known conditions (e.g., wind direction, presence of a nearby front, water-vapor imagery). The “chance” may be computed mathematically, but its computation rests on judgments about the occurrence of rain-producing events, such as the speed of a front’s movement and the direction of water-vapor flow. In the end, however, you’re left with only a weather forecaster’s judgment, and it’s up to you to evaluate it and act accordingly.

What about something that involves “harder” numbers, such as the likelihood of winning a lottery (where there’s good information about the number of tickets sold) or casting the deciding vote in an election (where there’s good information about the number of votes that will be cast)? I will continue with the case of voting, which is discussed in chapter 1 as an example of the extent to which economics has spread beyond its former preoccupations with buyers, sellers, and the aggregation of their activities.

An economist named Bryan Caplan has written a lot about voting. For example, he says the following in “Why I Don’t Vote: The Honest Truth” (EconLog, September 13, 2016):

Aren’t we [economists] always advising people to choose their best option, even when their best option is bleak?  Sure, but abstention [from voting] is totally an option.  And while politicians have a clear incentive to ignore we abstainers, only remaining aloof from our polity gives me inner peace.

You could respond, “Inner peace at what price?”  It is only at this point that I invoke the miniscule probability of voter decisiveness.  If I had a 5% chance of tipping an electoral outcome, I might hold my nose, scrupulously compare the leading candidates, and vote for the Lesser Evil.  Indeed, if, like von Stauffenberg, I had a 50/50 shot of saving millions of innocent lives by putting my own in grave danger, I’d consider it.  But I refuse to traumatize myself for a one-in-a-million chance of moderately improving the quality of American governance.  And one-in-a-million is grossly optimistic.

Caplan links to a portion of his lecture notes for a course in the logic of collective action. The notes include this mathematical argument:

III. Calculating the Probability of Decisiveness, I: Mathematics

A. When does a vote matter? At least in most systems, it only matters if it “flips” the outcome of the election.

B. This can only happen if the winner wins by a single vote. In that case, each voter is “decisive”; if one person decided differently, the outcome would change.

C. In all other cases, the voter is not decisive; the outcome would not change if one person decided differently.

D. It is obvious that the probability of casting the decisive vote in a large electorate is extremely small….

H. Now suppose that everyone but yourself votes “for” with probability p – and “against” with probability (1-p).

I. Then from probability theory:

J. From this formula, we can see that the probability of a tie falls when the number of voters goes up….

K. Intuitively, the more people there are, the less likely one person makes a difference….

IV. Calculating the Probability of Decisiveness, II: Examples

A. What is neat about the above formula is that it allows us to say not just how the probability of decisiveness changes, but how much….

I. Upshot: For virtually any real-world election, the probability of casting the decisive vote is not just small; it is normally infinitesimal. The extreme observation that “You will not affect the outcome of an election by voting” is true for all practical purposes.

J. Even if you were to play around with the formula to increase your estimate a thousand-fold, your estimated answer would remain vanishingly small.

What Caplan and other economists who write in the same vein ignore is the influence of their point of view. It’s self-defeating because it appeals to extremely rationalistic people like Caplan. One aspect of their rationalism is a cold-eyed view of government, namely, that it almost always does more harm than good. That’s a position with which I agree, but it’s a reason to vote rather than abstain. If rationalists like Caplan abstain from voting in large numbers, their abstention may well cause some elections to be won by candidates who favor more government rather than less.

Moreover, Caplan’s argument against voting is really a way of rationalizing his disdain for voting. This is from “Why I Don’t Vote: The Honest Truth”:

My honest answer begins with extreme disgust.  When I look at voters, I see human beings at their hysterical, innumerate worst.  When I look at politicians, I see mendacious, callous bullies.  Yes, some hysterical, innumerate people are more hysterical and innumerate than others.  Yes, some mendacious, callous bullies are more mendacious, callous, and bully-like than others.  But even a bare hint of any of these traits appalls me.  When someone gloats, “Politifact says Trump is pants-on-fire lying 18% of the time, versus just 2% for Hillary,” I don’t want to cheer Hillary.  I want to retreat into my Bubble, where people dutifully speak the truth or stay silent.

Thus demonstrating the confirmation bias in Caplan’s mathematical “proof” of the futility of voting.

Nor is his “proof” really probabilistic. A single event — be it an election, a lottery drawing, of the toss of a fair coin — doesn’t have a probability.  What does it mean to say, for example, that there’s a probability of 0.5 (50 percent) that a tossed coin will come up heads (H), and a probability of 0.5 that it will come up tails (T)? Does such a statement have any bearing on the outcome of a single toss of a coin? No, it doesn’t. The statement is only a shorthand way of saying that in a sufficiently large number of tosses, approximately half will come up H and half will come up T. The result of each toss, however, is a random event — it has no probability. You may have an opinion (or a hunch or a guess) about the outcome of a single coin toss, but it’s only your opinion (hunch, guess). In the end, you have to bet on a discrete outcome.

An election that hasn’t taken place can’t have a probability. There will be opinion polls — a lot of them in the case of a presidential election — but choosing to vote (or not) because of opinion polls can be self-defeating. Take the recent presidential election. Almost all of the polls, including those that forecast the electoral vote as well as the popular vote, had Mrs. Clinton winning over Mr. Trump.

But despite the high “probability” of a victory by Mrs. Clinton, she lost. Why? Because the “ignorant” voters in several swing States turned out in large numbers, while too many pro-Clinton voters evidently didn’t bother to vote. It’s possible that she lost some crucial States because of the abstention of voters who believed the high “probability” that she would win.

The election of 2016 — like every other election — isn’t even close to being something as simple as the toss of a fair coin. And, despite its mathematical precision, a statement about the probability of the next toss of a fair coin is meaningless. It will come up H or it will come up T, but it will not come up 0.5 H or T.

REDUCTIONISM

This subject is more important than probability, so I will say far less about it.

Reductionism is the adoption of a theory or method which holds that a complex idea or system can be completely understood in terms of its simpler components. Most reductionists will defend their theory or method by agreeing that it is simple, if not simplistic. But they will nevertheless adhere to that theory or method because it’s “the best we have.” That claim should remind you of the hoary joke about the drunk who searched for his keys under a street light because he could see the ground there, even though he had dropped the keys half a block away.

Caplan’s adherence to the simplistic, mathematical analysis of voting is a good example of reductionism. Why? Because it omits the crucial influence of group behavior. It also omits other reasons for voting (or not). It certainly omits Caplan’s real reason, which is his “extreme disgust” for voters and the candidates from whom they must choose. Finally, it omits the psychic value of voting — its “feel good” effect.

Economists also are guilty of reductionism when they suggest that persons act rationally only when they pursue the maximization of income or wealth. I’ll say more about that when I get to paternalism.

NIRVANA FALLACY

The nirvana fallacy is the logical error of comparing actual things with unrealistic, idealized alternatives. The actual things usually are the “somethings” about which government is supposed to “do something.” The unrealistic, idealized alternatives are the outcomes sought by the proponents of a particular course of government action.

There is also a pervasive nirvana fallacy about government itself. Government — which is a mere collection of fallible, squabbling, power-lusting humans — is too often thought and spoken of as if it were a kind of omniscient, single-minded, benevolent being that can overcome the forces of nature and human nature which give rise, in the first place, to the “something” about which “something must be done.”

Specific examples of the nirvana fallacy will arise in later chapters of this book.

SOCIAL WELFARE

Wouldn’t you like to arrange the world so that everyone is better off? If you would — and I suspect that most people would — you’d have to define “better off.” Happier, healthier, and wealthier make a good starting point. Of course, you’d have to arrange it so that everyone would be happier and healthier and wealthier in the future as well as in the present. That is, for example, you couldn’t arrange greater happiness at the cost of greater wealth, or at the cost of the greater happiness or wealth of those living today or their descendants.

It’s a tall order isn’t it? In fact, it’s an impossibility. (You might even call it a state of nirvana.) In the real world of limited resources, the best that can happen is that a change of some kind (e.g., the invention of an anti-polio vaccine, hybridization to produce healthier and more abundant crops) makes it possible for many people to be better off — but at a price. There is no free lunch. Someone must bear the costs of devising and implementing beneficial changes. In market economies, those costs are borne by the people who reap the benefits because they (the beneficiaries) voluntarily pay for whatever it is that makes their lives better.

Enter government, whose agents decide such things what lines of medical research to fund, and how much to spend on each line of research. A breakthrough in a line of research might be a boon to millions of Americans. But other millions of Americans — many more millions, in fact — won’t benefit from the breakthrough, though a large fraction of them will have funded the underlying research through taxes extracted from them by force. I say by force because tax collections would decline sharply if it weren’t for the credible threat of heavy fines and imprisonment tax collections.

A voluntary exchange results when each of the parties to the exchange believes that he will be better off as a result of the exchange. An honest voluntary exchange — one in which there is no deception or material lack of information — therefore improves the well-being (welfare) of all parties. An involuntary exchange, as in the case of tax-funded medical research, cannot result make all parties better off. No government agent — or economist, pundit, or politician — can look into the minds of millions of people and say that each of them would willingly donate a certain amount of money to fund this or that government program. And yet, that is the presumption which lies behind government spending.

That presumption is the fallacious foundation of cost-benefit analysis undertaken to evaluate government programs. If the “social benefit” of a program is said to equal or exceed its cost, the program is presumably justified because the undertaking of it would cause “social welfare” to increase. But a “social benefit” — like a breakthrough in medical research — is a always a benefit to some persons, while the taxes paid to elicit the benefit are nothing but a burden to other persons, who have their own problems and priorities.

Why doesn’t the good outweigh the bad? Think of it this way: If a bully punches you in the nose, thus deriving much pleasure at your expense, who is to say that the bully’s pleasure outweighs your pain? Do you believe that there’s a third party who is entitled to say that the result of your transaction with the bully is a heightened state of social welfare? Evidently, there are a lot of voters, economists, pundits, and politician who act as if they believe it.

ROMANTICIZING THE STATE

This section is a corollary to the preceding one.

It is a logical and factual error to apply the collective “we” to Americans, except when referring generally to the citizens of the United States. Other instances of “we” (e.g., “we” won World War II, “we” elected Barack Obama) are fatuous and presumptuous. In the first instance, only a small fraction of Americans still living had a hand in the winning of World War II. In the second instance, Barack Obama was elected by amassing the votes of fewer than 25 percent of the number of Americans living in 2008 and 2012. “We the People” — that stirring phrase from the Constitution’s preamble — was never more hollow than it is today.

Further, the logical and factual error supports the unwarranted view that the growth of government somehow reflects a “national will” or consensus of Americans. Thus, appearances to the contrary (e.g., the adoption and expansion of national “social insurance” schemes, the proliferation of cabinet departments, the growth of the administrative state) a sizable fraction of Americans (perhaps a majority) did not want government to grow to its present size and degree of intrusiveness. And a sizable fraction (perhaps a majority) would still prefer that it shrink in both dimensions. In fact, The growth of government is an artifact of formal and informal arrangements that, in effect, flout the wishes of many (most?) Americans. The growth of government was not and is not the will of “we Americans,” “Americans on the whole,” “Americans in the aggregate,” or any other mythical consensus.

PATERNALISM

Paternalism arises from the same source as “social welfare”; that is, it reflects a presumption that there are some persons who are competent to decide what’s best for other persons. That may be true of parents, but it is most assuredly not true of so-called libertarian paternalists.

Consider an example that’s used to explain libertarian paternalism. Some workers choose “irrationally” — according to libertarian paternalists — when they decline to sign up for an employer’s 401(k) plan. The paternalists characterize the “do not join” option as the default option. In my experience, there is no default option: An employee must make a deliberate choice between joining a 401(k) or not joining it. And if the employee chooses not to join it, he or she must sign a form certifying that choice. That’s not a default, it’s a clear-cut and deliberate choice which reflects the employee’s best judgment, at that time, as to the best way to allocate his or her income. Nor is it an irrevocable choice; it can be revisited annually (or more often under certain circumstances).

But to help employees make the “right” choice, libertarian paternalists would find a way to herd employees into 401(k) plans (perhaps by law). In one variant of this bit of paternalism, an employee is automatically enrolled in a 401(k) and isn’t allowed to opt out for some months, by which time he or she has become used to the idea of being enrolled and declines to opt out.

The underlying notion is that people don’t always choose what’s “best” for themselves. Best according to whom? According to libertarian paternalists, of course, who tend to equate “best” with wealth maximization. They simply disregard or dismiss the truly rational preferences of those who must live with the consequences of their decisions.

Libertarian paternalism incorporates two fallacies. One is what I call the rationality fallacy (a kind of reductionism), the other is the fallacy of central planning.

As for the rationality fallacy, there is simply a lot more to maximizing satisfaction than maximizing wealth. That’s why some couples choose to have a lot of children, when doing so obviously reduces the amount of wealth that they can accumulate. That’s why some persons choose to retire early rather than stay in stressful jobs. Rationality and wealth maximization are two very different things, but a lot of laypersons and too many economists are guilty of equating them.

Nevertheless, many economists do equate rationality and wealth maximization, which leads them to propose schemes for forcing us to act more “rationally.” Such schemes, of course, are nothing more than central planning, dreamt up by self-anointed wise men who seek to impose their preferences on the rest of us. They are, in other words, schemes to maximize that which can’t be maximized: social welfare.

If a person commits what seems to be an altruistic act, that person may seem to sacrifice something (e.g., a life, a fortune) but the “sacrifice” was that person’s choice. An altruistic act serves an end: the satisfaction of one’s personal values — nothing more, nothing less. There is nothing inherent in a supposedly altruistic act that makes it morally superior to profit-seeking, which is usually thought of as the opposite of altruism.

To illustrate my point I resort to the following bits of caricature:

1. Suppose Mother Teresa’s acts of “sacrifice” were born of rebellion against parents who wanted her to take over their business empire. That is, suppose Mother Teresa derived great satisfaction in defying her parents, and it is that which drove her to impoverish herself and suffer many hardships. The more she “suffered” the more her parents suffered and the happier she became.

2. Suppose Bill Gates really wanted to become a male version of Mother Teresa but his grandmother, on her deathbed, said “Billy, I want you to make the world safe from the Apple computer.” So, Billy went out and did that, for his grandmother’s sake, even though he really wanted to be the male Mother Teresa. Then he wound up being immensely wealthy, much to his regret. But Billy obviously put his affection for or fear of his grandmother above his desire to become a male version of Mother Teresa. He satisfied his personal values. And in doing so, he make life better for millions of people, many millions more than were served by Mother Teresa’s efforts. It’s just that Billy’s efforts weren’t heart-rending, and were seemingly motivated by profit-seeking.

Now, tell me, who is the altruist, my fictional Mother Teresa or my fictional Bill Gates? You might now say Bill Gates. I would say neither; each acted in accordance with her and his personal values. One might call the real Mother Teresa altruistic because her actions seem altruistic, in the common meaning of the word. But one can’t say (for sure) why she took those actions. Suppose that the real Mother Teresa acted as she did not only because she wanted to help the poor but also because she sought spiritual satisfaction or salvation. Would that negate her acts? No, her acts would still be her acts, regardless of their motivation. The same goes for the real Bill Gates.

Results matter more than motivations. (“The road to hell,” and all that.) It is arguable that profit-seekers like the real Bill Gates — and the real John D. Rockefeller, Andrew Carnegie, Henry Ford, and their ilk — brought more happiness to humankind than did Mother Teresa and others of her ilk.

That insight is at least 240 years old. Adam Smith put it this way in The Wealth of Nations (1776):

By pursuing his own interest [a person] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

A person who makes a profit makes it by doing something of value for others.

# The Social Animal and the “Social Contract”

Here we go again, into “all men are brothers” territory:

“Morality can do things it did not evolve (biologically) to do,” says [Joshua] Greene [author of Moral Tribes: Emotion, Reason, and the Gap between Us and Them]. How can it do this? By switching from the intuitive “automatic mode” that underpins our gut reactions to the calculating, rational “manual mode”. This, for Greene, means embracing utilitarianism, “the native philosophy of the manual mode”. Utilitarianism takes the idea that “happiness is what matters, and everyone’s happiness counts the same”, generating the simple three-word maxim, “maximise happiness impartially”.

Greene is not the first to think that he has found “a universal moral philosophy that members of all human tribes can share” and that those who disagree are simply not being rational enough. Many a philosopher will raise an eyebrow at his claim that “the only truly compelling objection to utilitarianism is that it gets the intuitively wrong answers in certain cases”.

At least one strong objection is suggested by what Greene himself says. He knows full well that the kind of absolutely impartial perspective demanded by utilitarianism – in which the interests of your own child, partner or friends count for no more than any others – “is simply incompatible with the life for which our brains were designed”. Greene takes this as a flaw of human beings, not his preferred moral theory. But when someone, for example, dedicates a book to his wife, as Greene does, this does not reflect a failure to be appropriately objective. A world in which people showed no such preferences would be an inhuman, not an ideal, one. A morality that values human flourishing, as Greene thinks it should, should put our particular attachments at its core, not view them as “species-typical moral limitations” to be overcome.

That’s an excerpt of Julian Baggiani’s commendable review of Greene’s book and two others (“The Social Animal,” FT.com, January 3, 2014).

Greene makes two errors. First, he assumes that it’s wrong to prefer those who are closest to one, geographically and by kinship, to those who are farther away. Second, he assumes that happiness can be added, and that what should matter to a person is not his happiness but the sum of all the happiness in the world. The errors are so obvious that I won’t dwell on them here. If you want to read more about them, start with “Liberalism and Sovereignty,” “Inside-Outside,” “Modern Utilitarianism,” “The Social Welfare Function,” and “Utilitarianism vs. Liberty.” And by all means read “The Fallacy of Human Progress,” which addresses Steven Pinker’s rationalistic thesis about overcoming human nature (The Better Angels of Our Nature: Why Violence Has Declined).

Yes, human beings are social animals, but human beings are not “brothers under the skin,” and there is no use in pretending that we are. Trying to make us so, by governmental fiat, isn’t only futile but also wasteful and harmful. The futility of forced socialization is as true of the United States — a vast and varied collection of races, ethnicities, religions, and cultures — as it is of the world.

Despite the blatant reality of America’s irreconcilable diversity, American increasingly are being forced to lead their lives according to the dictates of the central government. Some apologists for this state of affairs will refer to the “common good,” which is a fiction that I address in the third, fourth, and fifth of the above-linked posts. Other apologists like to invoke the “social contract,” another fiction that Michael Huemer disposes of quite nicely:

[I]t is often said that the government derives its powers from a “social contract,” whereby the people have granted these special powers to the government. The only problem with this theory is that it is factually false—I have not in fact agreed to have a government, to pay taxes, or to obey the government’s laws.

A number of suggestions have been made as to how, despite my protestations to the contrary, I really have agreed to all those things. Here I will just mention one, because it is the one most often heard in conversation. This is the suggestion that I have “implicitly” agreed to have a government merely by residing in the government’s territory. (“If you don’t want a government, simply move to Antarctica!”) Very briefly, the problem with this suggestion is that it presupposes that the state owns all the territory over which it claims jurisdiction, or that for some other reason it has the right to exclude people from that area. But there is no way to establish such a right on the part of the state, unless one has already shown that the state has legitimate authority. This therefore cannot be presupposed in an argument designed to establish the state’s authority. In this case, the statist’s claim seems analogous to the leader of a protection racket claiming that his victims have voluntarily agreed to pay him protection money, merely by living in their own houses. There are other ways in which social contract enthusiasts claim that we have accepted the social contract, but as I explain in the book, each of them falls to equally serious objections, which show that the social contract does not come close to satisfying the generally accepted principles of real, valid contracts.

Another popular suggestion is that, in democratic nations (about half the world today), the democratic process confers authority on the government. The motivation behind this view is initially puzzling. Recall that the problem is to explain why the state may undertake actions that would be considered rights violations if anyone else were to perform them. Typically, if some type of action violates someone’s rights—for instance, theft, kidnapping, or murder—the action will not be converted into an ethically permissible, non-rights-violating one if a larger number of people support the action than oppose it. If you’re in a group of friends, and five of them decide they want to rob you, while only three oppose robbing you, this does not make it ethically permissible to rob you. Similarly, even if every law were directly authorized by a popular referendum of everyone affected by the law, it is unclear why this would render legitimate a law that would otherwise have been a rights violation. Matters are only more problematic in a society in which a minority of people vote, and they vote merely to select representatives who may or may not keep their promises, and may or may not do what their supporters wanted.

But doesn’t the government have to coerce us in the ways that it does in order to maintain itself in existence, so that it can provide law and order? And without government, wouldn’t society degenerate into a constant war of everyone against everyone? The first thing to note about this argument is that it could at most justify a tiny minority of all the powers claimed by any modern state. Perhaps the government must make laws against violence and theft and provide a court system to adjudicate disputes, in order to prevent a Hobbesian war of all against all. But why must the government control what drugs you may put into your body, what wages you may pay your employees, how much wheat you may grow on your farm, and whether you buy health insurance? Why must they subsidize agribusiness, send rockets to Mars, fund the arts, provide college loans, and run their own school system? The question is not, “Why are those programs beneficial?” The question is, “How are those programs justified by the threat of the Hobbesian war that would supposedly result from anarchy?”

Granted, sometimes it is necessary to use coercion to prevent some disaster from occurring. But having done so, one is not then ethically permitted to continue using coercion beyond the minimal amount necessary to prevent that disaster. If we really stand in danger of some sort of all-out Hobbesian war, then the state would be justified in employing the minimum coercion necessary to prevent the state of war from occurring. This would not justify their continuing to employ coercion whenever it strikes their fancy, or whenever they think they can achieve some benefit by doing so. (“The Problem of Authority,” Cato Unbound, March 4, 2013)

A point that Huemer doesn’t make in his essay is to compare Americans with the “boiling frog“:

The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability or unwillingness of people to react to significant changes that occur gradually.

The metaphor is apt. Americans — or a very large fraction of Americans — have been “boiled” stealthily:

Power has been passing to Washington for more than 100 years, in defiance of the Constitution, because of … the Nirvana fallacy, unrepresentative government, logjams and log-rolling, fiefdoms and egos, and the ratchet effect and interest-group paradox. Thus Washington is able to exert its power on the entire country, bringing big government to places that don’t want it….

[G]overnmental acts and decrees have stealthily expanded and centralized government’s power, and in the process have usurped social norms. The expansion and centralization of power occurred in spite of the specific limits placed on the central government by the original Constitution and the Tenth Amendment. These encroachments on liberty are morally illegitimate because their piecemeal adoption has robbed Americans of voice and mooted the exit option. And so, liberty-loving Americans have discovered — too late, like the proverbial frog in the pot of water — that they are impotent captives in their own land.

Voice is now so muted by “settled law” (e.g., “entitlements,” privileged treatment for some, almost-absolute control of commerce) that there a vanishingly small possibility of restoring constitutional government without violence. Exit is now mainly an option for the extremely wealthy among us. (More power to them.) For the rest of us, there is no realistic escape from illegitimate government-made law, given that the rest of the world (with a few distant exceptions) is similarly corrupt. (“‘We the People’ and Big Government,” Politics & Prosperity, November 16, 2013)

And, no, “we” — that is all of “us” — don’t want it to be that way:

If there is an “American psyche,” it has multiple-personality disorder.

What do you think when a snobbish European generalizes about Americans — a bunch of crude, gun-toting, money-grubbers? Do you think that such generalizations are correct? You probably don’t. And if you don’t, why would you think (or speak and write) as if Americans are like ants, that is, of one mind and collectively responsible for the actions of government? …

There’s no need to look abroad for inapplicable generalizations about America…. [C]onservatives and liberals have been separating themselves from each other. Only a cock-eyed optimist — the kind of person who believes that living in the same (very large) geographic requires unity — would call this a bad thing. As if proximity yields comity. It doesn’t work for a lot of families; it doesn’t work for most blacks and whites; it doesn’t work for upper-income and lower-income groups. Why should it work for most conservatives and liberals? …

But aren’t “we all in this together,” as proponents of big and bigger government are wont to proclaim? Not at all. The notion that “we are all in this together” is just a slogan, which really means “I want big and bigger government” to “solve” this or that problem — usually at the expense of persons who have done nothing to create the “problem.” “We are all in this together” is a call for action by government, not proof of a mythical “national will.” If “we” were “all in this together,” we wouldn’t need to be reminded of it. Like a good sports team or military unit, we would simply act that way. (Op. cit.)

It’s true that most human beings crave some kind of social connection. But the gap between that craving and the faux connectedness of one-size-fits-all big government can’t be bridged by ringing phrases (“We the People”), by appeals to patriotism, or by force.

Government can take my money, and it can make me do things the way “technocrats” want them done — and it can do the same to millions of other Americans. But government can’t make me (or those other millions) love the recipients of my money or feel happier because I’m doing things the “right” way. It can only make my (and those other millions) despise the recipients and detest forced conformity. Only divisiveness can prevent the complete destruction of liberty in the name of “society.”

Social unity is found not in government but in genetic kinship:

[G]enetic kinship is indispensable to society, where society is properly understood as “an enduring and cooperating social group whose members have developed organized patterns of relationships through interaction with one another.” (“Genetic Kinship and Society,” Politics & Prosperity, August 16, 2012)

It takes overeducated dunderheads like Joshua Greene to denigrate the bonds of genetic kinship, even while openly prizing them.

*     *     *

# “We the People” and Big Government

This post incorporates three earlier installments and completes the series.

When the Framers of the Constitution began the preamble with “We the People” and spoke as if the Constitution had been submitted to “the People” for ratification, they were indulging in rhetorical flourishes (at best) and misleading collectivization (at worst). The Founders may have been brave and honorable men, and their work — as long as it lasted — served liberty-loving Americans well. But do not forget that the Framers were politicians eager to sell a new framework of government. They were not gods or even demi-gods. They served liberty ill when they invoked the idea of a national will — expressed through government. Their coinage lends undeserved credence and emotional support to the rhetoric of statist demagogues, a breed of which Barack Obama is exemplary.

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I make two basic points in this very long post:

1. It is a logical and factual error to apply the collective “we” to Americans, except when referring generally to the citizens of the United States. Other instances of “we” (e.g., “we” won World War II, “we” elected Barack Obama) are fatuous and presumptuous. In the first instance, only a small fraction of Americans still living had a hand in the winning of World War II. In the second instance, Barack Obama was elected by amassing the votes of fewer than 25 percent of the number of Americans living in 2008 and 2012. “We the People” — that stirring phrase from the Constitution’s preamble — was never more hollow than it is today.

2. Further, the logical and factual error supports the unwarranted view that the growth of government somehow reflects a “national will” or consensus of Americans. Thus, appearances to the contrary (e.g., the adoption and expansion of national “social insurance” schemes, the proliferation of cabinet departments, the growth of the administrative state) a sizable fraction of Americans (perhaps a majority) did not want government to grow to its present size and degree of intrusiveness. And a sizable fraction (perhaps a majority) would still prefer that it shrink in both dimensions. In fact, The growth of government is an artifact of formal and informal arrangements that, in effect, flout the wishes of many (most?) Americans. The growth of government was not and is not the will of “we Americans,” “Americans on the whole,” “Americans in the aggregate,” or any other mythical consensus.

Continued below the fold. (more…)

# Government Failure Comes as a Shock to Liberals

Richard Cohen of WaPo shares his disappointment in the god the failed:

Where is Casey Stengel when we need him? In 1962, as the manager of the brand new and determinedly hapless New York Mets — 40 wins, 120 losses — he looked up and down his bench one dismal day and wondered, “Can’t anybody here play this game?” That phrase kept coming at me recently as I watched the impressively inept performance of the Obama administration in both foreign and domestic policy. On a given day, this administration makes the ’62 Mets look good….

[Obama] has lately so mishandled both domestic and foreign policy that he is in mortal peril of altering his image. This unsettling and uncharacteristic incompetence became shockingly clear when Obama failed to come to grips with the Syrian civil war….

The debacle of the Affordable Care Act’s Web site raised similar questions about confidence….

Something went wrong. People could not sign up. Why? Not sure. Who’s at fault? Apparently no one. An act of God….

Poor Richard. He doesn’t get it. The problem isn’t just Barack Obama, it’s government. What Cohen is witnessing is government failure. It’s pervasive and inevitable — though its ill effects often go unremarked. (For example, the significant reduction of economic growth that has resulted from the growth of government spending and regulation.)

When government failure assumes spectacular proportions and can’t be ignored or explained away, it gets attention because it explodes the Nirvana fallacy about government that infects so many politicos, mediacrats, and real people (but not Americans on the whole).

What’s most striking about Cohen’s piece and similar outpourings from the media is that the target is a Democrat. I would say that a new dawn of realism is breaking, but that would be to indulge in the Nirvana fallacy.

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# Don’t Just Stand There, “Do Something”

“Activists” try my patience, and exhaust it. Their message — no matter the particulars of content or phrasing — boils down to this: Government should “do something” about “something.” This is a formula that has been invoked since the beginning of the Republic, though increasingly more often since the onset of the Progressive Era in the late 1800s. The exhortation betrays three beliefs, unconscious as they may be on the part of those who do the exhorting.

The first belief is that a particular phenomenon is so important — in the view of the exhorting person or group — that government should contrive to impose a particular outcome with respect to that phenomenon — regardless of the costs of that imposition, in treasure or liberty.

The second belief is a kind of prediction that proponents of government action usually cannot be bothered to test. This kind of prediction is known as the Nirvana fallacy: the logical error of comparing actual things with unrealistic, idealized alternatives. The actual things are the “somethings” about which government is supposed to “do something.” The unrealistic, idealized alternatives are the outcomes sought by the proponents of a particular course of government action. Thus legislation and regulation by mere mortals is taken as the functional equivalent of fiat lux.

This points to the third belief, which is that government — a mere creation of fallible, squabbling, power-lusting humans — is a kind of omniscient, single-minded, benevolent being that can overcome the forces of nature and human nature which gave rise, in the first place, to the “something” about which “something must be done.”

The evidence against these beliefs is so overwhelming that their persistence must be attributed to the psychological phenomenon summarized by Samuel Johnson as “the triumph of hope over experience.”

Proponents of government action will counter with the excuse that “something must be done” because of  “market failure,” which is the failure of markets to produce outcomes preferred by the proponents. And yet they overlook government failure, and often seek to rectify it by exhorting more government action, which leads to more government failure, and so on.

Here are some salient examples of government failure — and its correlate, misfeasance — that ought to (but will not) give pause to the “do something” crowd:

“Entitlements” (Social Security, Medicare, Medicaid, and their expansion through Obamacare) — These programs grew from an understandable (but ill-advised) urge to provide for the elderly who were seen as unable to provide for themselves. Through the predictable processes of constituency-mongering, the “social safety net” has acquired almost-inviolable status as a subsidy for millions of persons who could well provide for themselves. This dependency has discouraged thrift and, in the process, stripped away a key source of funds for investments in economic growth. The looming burden of taxation promises to cripple an already hobbled economy.

Welfare, the Minimum Wage, and Affirmative Action — Altogether, these programs have succeeded in breaking up black families, denying to many young blacks an opportunity to join the ranks of the economically productive (and to advance on their own merit), fomented crime, caused racial resentment, and positioned aspiring black students and professionals for failure.

The Great Depression and the Great Recession — These two devastating economic downturns, one of which became an excuse for the enactment of Social Security and the other of which still lingers, are quintessential examples of government failure. In the case of the Great Depression, the Federal Reserve’s monetary policies (first too loose, then too tight) caused a recession to deepen into a depression. That depression lingered for almost a decade (and ended largely because of a catastrophic war) because of interventionist, anti-business policies that began under Hoover and continued, with a vengeance, under Roosevelt. We owe the Great Recession to a combination of too-loose credit (the Fed again) and too-loose mortgage lending: a policy insisted upon by the Federal Reserve and influential members of Congress, and reinforced by their minions at Fannie and Freddie. “Wall Street” — as a willing maker of credit — deserves blame for the resulting financial meltdown and recession only in the way that a prostitute deserves blame for serving her clients.

Defense and Police Services  — These are public goods, but not for the reason advanced by believers in public goods, namely, that they would not be provided voluntarily because too many of their beneficiaries would try to take a “free ride” on paying customers, which would drive the prices of defense and police services too high to attract enough customers to pay for them. That is an unproved assertion, which runs counter to everyday experience (e.g., charitable giving and voluntarism) and ignores the very high stakes that could drive major corporations and very-high income earners to combine in a joint defense of their considerable interests in the U.S. and abroad — a defense that would unavoidably benefit free-riders. In this regard, it is noteworthy that in 2007 the combined pre-tax income of households in the top quintile was \$2.5 trillion and pre-tax corporate profits came to \$1.7 trillion. It is arguable that a consortium of taxpayers and corporations could underwrite the cost of defense and police forces (including courts, prosecutors, etc.), which in 2007 came to about \$900 billion (\$662 billion for defense and \$230 billion for justice). In 2007, for example, taxpayers in the top 10 percent of adjusted gross incomes paid more than 70 percent of federal income taxes collected from filers of individual and joint returns. Who do you think pays the lion’s share of the costs of defense and police forces? The answer, of course, is high-income taxpayers, directly and through taxes on corporate income.

Defense and police services are tax-funded not because they must be, but because there is something menacing about the thought of privately owned defense and police forces that could be employed in coups and oppressions. A main consequence of the “publicization” of America’s defense and police forces is that they afford a lucrative opportunity for various kinds of pork-barrel legislation (e.g., the location of military bases, the awarding of defense contracts, and patronage for political supporters), as well as the usual (and unavoidable) instances of waste, fraud, and abuse. Even worse are the fluctuations in political attitudes toward defense and policing, which in the ebb invite aggression and crime, and in the flow invite vast over-spending — though over-spending can be defended on the ground that it deters aggression and crime and thus the human and monetary costs that accompany them.

In any event, not even defense is a sacrosanct function of government, and its provision by government is far from an unmitigated blessing. If you think that I overstate the case against government-owned defense forces, consider that

• They fought only one “popular” war in the past 100 years — a war that became “popular” only after the surprise attack on Pearl Harbor.
• The thesis that Reagan’s defense build-up won the Cold War remains controversial.
• The size of the defense budget rides on political whims more than on hard-to-come-by cold facts. Would it be worse if those with the most to lose took a direct hand in the provision of defense forces and in decisions about when to employ them? I doubt it.

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Perhaps there are examples of “government success,” but these are hard to identify because the intervention of government usually forecloses the alternatives to which the “do something” crowd is blind:

• voluntary, cooperative solutions through the actions of markets, private charities, and other private institutions (family, church, club, close-knit neighborhood, etc.)
• benign neglect, where persons with a “problem” choose not to act on it because the cost of action is greater than its likely benefits.

Anyone who says that government can be “managed” by limiting it to certain kinds of activities (e.g., defense or welfare) while eschewing others (e.g., welfare or defense), merely deludes himself; “democratic” governments cannot and will not function without throwing money in all directions, in an effort to placate all constituencies. As a minarchist, I must admit to sharing this delusion, but I am beginning to think that anarcho-capitalism has merit, if only the right kind of anarcho-capitalists could be in charge of police and defense forces.

Anyone who says that such-and-such a government program will succeed in accomplishing a certain goal at a certain cost — and that the cost will justify the accomplishment — proves himself a presumptuous fool. I cannot truthfully say that government-provided police and defense forces are worth their cost in money and liberty, and I scorn anyone who believes that any other type of governmental endeavor is remotely worth its cost in money and liberty.
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For more posts related generally and specifically to this one, go to “Favorite Posts” and browse at will.

# The Planning Fallacy

David Brooks, sounding (unusually) like the conservative that he claims to be, writes about the planning fallacy:

…Most people overrate their own abilities and exaggerate their capacity to shape the future….

The planning fallacy is failing to think realistically about where you fit in the distribution of people like you….

Over the past three years, the [government of the: ED] United States has been committing the planning fallacy on stilts. The world economy has been slammed by a financial crisis. Countries that are afflicted with these crises typically experience several years of high unemployment. They go deep into debt to end the stagnation, but the turnaround takes a while.

This historical pattern has been universally acknowledged and universally ignored. Instead, leaders in both parties have clung to the analogy that the economy is like a sick patient who can be healed by the right treatment.

The Democrats, besotted by the myth that the New Deal ended the Great Depression, have consistently overestimated their ability to turn the economy around….

Combine the planning fallacy with the Nirvana fallacy — comparing actual things with unrealistic, idealized alternatives– and you have governance at its worst: politicians making an inevitably imperfect and messy world even less perfect and messier.

# The Ideal as a False and Dangerous Standard

This is from my post, “The Folly of Pacifism, Again“:

[T]he case for pacifism … is fundamentally flawed….

[I]t rejects the actuality of human nature for an idealized version that is impossible of realization. It is, in other words, an example of the Nirvana fallacy in operation. In this instance it is based on two assumptions — hopes, really — that run contrary to the actuality of human existence. There is the hope for a world without states, and therefore without the kind of state-sponsored violence known as war. But states are inevitable because statelessness invites warlordism, and if a supposedly stateless people join in self-defense against a warlord they will have created what amounts to a state for the purpose of committing violence — in self-defense. Then there is the hope that people — state or no state — will not band together against the “outside world,” but they will.

Bill Vallicella, Maverick Philosopher, in a typically thoughtful post (“Can What Is Possible to Achieve Be an Ideal For Us?“) says this about  ideals:

Ideals must be realizable if they are to be ideals.  The ideal ‘points’ to a possible realization.  If that be denied then it is being denied that the ideal stands in relation to the real when the ideal has its very sense in contradistinction to the real.  At this point I could bring in analogies, though analogies seldom convince.  The possible is possibly actual.  If you say X is possible but not possibly actual, then I say you don’t understand the notion of possibility.  Or consider dispositions.  If a glass is disposed to shatter if suitably struck, then it must be possible for it to shatter.  Analogously, if such-and-such is an ideal for a person, then it must be possible  — and not just logically or nomologically — for the person to realize that ideal.

I believe this is an important topic because having the wrong ideals is worse than having no ideals at all.  Many think that to be idealistic is good.  But surely it is not good without qualification.  Think of Nazi ideals, Communist ideals, leftist ideals and of their youthful and and earnest and sincere proponents.  Those are wrongheaded ideals, and some of them are wrongheaded because not realizable.  The classless society; the dictatorship of the proletariat; the racially pure society; the society in which everyone is made materially equal by the power of the state.  Ideals like these cannot be achieved, and if the attempt is made terrible evils will be the upshot.  The Commies broke a lot of eggs in the 20th century (100 million by some estimates) but still didn’t achieve their fabulous and impossible omelet.

Pacifists and anarchists, as far as I can tell, hold unrealizable ideals. And yet they insist on judging what is real and achievable against those ideals. The pursuit of peace, in the way that pacifists would pursue it, can lead only to subjection by those who do not want peace, except on their terms. The pursuit of absolute liberty, as anarchists would pursue it, can lead only to subjection by those who despise liberty, except as their personal liberty enables them to trample others.

Pacifism and anarchism, in other words, are delusions no less dangerous than “the classless society; the dictatorship of the proletariat; the racially pure society; the society in which everyone is made materially equal by the power of the state.” All are routes to oppression.

# The Perils of Nannyism: The Case of Obamacare

Nannyism is bad, even when it’s good. Suppose, for example, that Obamacare — as finally enacted by Congress — miraculously obtains the following impossible results:

• No one who had insurance before Obamacare will find the cost of his insurance rising because (for example) the law stipulates that insurers must ignore pre-existing conditions and must cover certain previously uninsured conditions.
• Everyone who is forced to buy insurance (or, alternatively, pay a tax penalty) will find that the additional cost is offset by insurance benefits.
• The costs of subsidizing those who cannot afford insurance will be defrayed by eliminating “waste, fraud, and abuse” in Medicare, Medicaid, and various other government programs — “waste, fraud, and abuse” that has heretofore been tolerated because it is a natural concomitant of government programs and cannot be eliminated without eliminated the programs themselves.
• Insurance subsidies will not be extended to illegal aliens, whose addition to the rolls would burden taxpaying citizens, even though Democrats relish the thought of converting those illegal aliens to Democrat-voting citizens.
• The prices of various drugs and medical services will not change by more than they would have in the absence of Obamacare. That is to say, the extra demands generated by government mandates and the addition of some 47 million persons to the insurance rolls will somehow be met with additional supplies of drugs and medical services, despite the disincentives created by government control of drug prices and fees for various medical services (via the government-run insurance program).
• There will be no rationing of medical care by government or government-approved bodies — no “death panels” — even though government control of medicine will choke off the provision of non-approved drugs and medical services.
• The federal government’s budget deficits will not become larger than they would have been in the absence of Medicare. Nor will federal spending on Obamacare, Medicare, Medicaid, and Social Security swell to well more than 50 percent of GDP in a few generations, thus — in combination with necessarily higher taxes and the usual accretion of regulations — giving government almost absolute control of the American economy.
• Because the federal government’s deficits will not rise any more than they would have in the absence of Obamacare, further tax hikes (above those already in store) will be unnecessary. It will especially unnecessary to further bleed “the rich,” whose incomes are an especially important source of funding for the business start-ups and capital formation that yield economic growth.
• The federal government’s almost-absolute control of the American economy, accompanied inevitably by various social dictates favoring certain groups, will not complete the work of undermining true social cohesion (which is attained through voluntary associations), personal responsibility, and entrepreneurial initiative.
• America, in short, will not be driven into the ranks of economically stagnant, morally bankrupt “social democracies” on the European model.

Given that those miracles occur — because Americans who care about such things have been promised (more or less) that they will occur — what could be wrong with Obamacare? Why are tens of thousands of Americans taking to the streets to protest it? Don’t they know a good deal when it’s offered to them?

Could it be that there are still millions of Americans who know instinctively and through observation (if not education) that those miracles will not occur? Could it be that those millions of Americans understand all too well that Obamacare will be just another well-intentioned program that paves our way to financial and bureaucratic hell?

Or could it be that millions of Americans value true liberty, the kind of liberty that is assured by the observance of social norms within a framework of government-protected negative rights? Is it possible that millions of Americans value true liberty and all it entails: the opportunity to make one’s own way in life, to make mistakes and learn from them, to choose from among alternative goods and services (including medical ones), and to choose even where the resulting choices may not be the “best” ones according to the calculations or preferences of academicians and bureaucrats?*

There’s the answer: Millions of Americans — even after decades of nannyism — simply want liberty because it is of value to them, in and of itself. (How unimaginably retro!) They prefer to decide for themselves what’s good for them, and are tired of having academicians, politicians, and bureaucrats make those decisions. In a phrase, they prefer liberty to nannyism.

(Related reading about “perfect” government oversight of economic affairs is here, here, and here. )

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* It is true, for example, that the portion of GDP going to medical goods and services has been rising, in part, because Americans want, and can afford, more and better medical goods and services. It is also true that prices of medical goods and services have risen, in part, because of government policies: the subsidization of consumption through Medicare, Medicaid, and the tax-favored treatment of employer-paid health insurance; the restriction of supply by the FDA and various licensing agencies, as discussed here, here, and here.)

# Monopoly: Private Is Better than Public

In this discursive post, I use the economic concept of perfect competition as a starting point from which to defend monopoly and to expose the folly and futility of governmental intervention in markets.

PERFECT COMPETITION AS A BOGUS STANDARD

I learned, in the standard microeconomics of my college days, that perfect competition is preferred to these three alternatives:

• imperfect competition, where there is some degree of product differentiation (real or perceived)
• oligopoly, where a particular product or service is sold by only a few firms (“product or service” is hereafter called “good,” in keeping with economic jargon)
• monopoly, where there is only one seller of a particular good.

The theoretical superiority of perfect competition rests on the belief that, compared with the alternatives, it yields the greatest output of goods and, therefore, the greatest degree of satisfaction to consumers; that is, perfect competition maximizes “social welfare.”

The standard analysis has many problems, the most fundamental of which is the observation selection effect. The observer, in this case, is the economist who views the world through the lenses of economic efficiency and “social welfare.”

The construct of economic efficiency involves gross generalizations about economic reality, which are based on ideal firms in an ideal world, not on the behavior of real firms in the messy world of reality. The construct, in other words, sets up an ideal world of perfect competition, divergences from which are judged less than optimal — as if unavoidable, real-world divergences are less valid than the perfections of an imaginary construct. (This is an instance of a Nirvana fallacy, “the logical error of comparing actual things with unrealistic, idealized alternatives.”)

Then there is “social welfare,” which perfect competition is purported to maximize. “Social welfare” is in fact a fictitious device whereby the person who invokes it assumes (implicitly if not explicitly) that the happiness of individuals can be summed, and that he knows just how to do it. The predictable result of “social arithmetic” is a call for some kind of governmental action that effectively redistributes income; for example:

• Affirmative action, on balance, redistributes income from shareholders, consumers, and more-qualified workers to less-qualified workers.
• Progressive taxation redistributes income from persons who earn a lot of money (the job-creators of the economy) to persons who earn less money. It also drives out high earners, to the detriment of the rest of us.
• Trust-busting (which is of particular interest here) amounts to a redistribution of income from the owners of a oligopolistic or monopolistic firm to consumers.

“Social welfare,” in other words, is a phony excuse for playing God — a variant of the Nirvana fallacy. (For more, see this, this, and this.)

HOW GOVERNMENT INTERVENTION DOES MORE HARM THAN GOOD

Why is it not a good thing for government to act in ways that redistribute income from the owners of firms to consumers? There are several reasons, beginning with the artificiality of perfect competition (or something like it) as a model of how markets ought to be organized.

Then, there is the arrogance of a mindset that judges consumers to be more deserving that the owners of businesses — owners who staked a lot of money (and created jobs) on business ventures that might have gone sour (and often do). Is it possible that trust-busting discourages business (and job) formation? You can bet on it.

Related to that, it is necessary to remember that business owners are humans, too — 160 years of communist-populist-“progressive“-“liberal” rhetoric to the contrary notwithstanding. Business owners’ desire for profit is no less legitimate than consumers’ desire for low prices. Government is in the business of penalizing oligopolistic and monopolistic business owners not only because economists have set up a false standard (perfect competition or something like it), but also because the act of penalizing appeals to the envy of many voters and interest groups toward persons with legitimately high incomes. Trust-busting is neither logically nor morally admirable.

It is true that not all industries lend themselves to perfect competition or something like it, but it is neither necessary nor desirable to regulate firms in industries that are characterized by oligopoly and monopoly. (pace Paul Krugman). Oligopoly and monopoly are not iron-clad. Consumers have alternatives: If the price of X is “too high” they can (and will) buy more of Y and Z; if the price of X rises a lot, relative to the prices of Y and Z, the producer of X is likely to find himself with a direct competitor. In the alternative, more consumers will abandon X in favor of Y and Z.

What about situations in which there seem to be no ready substitutes for a particular good? Lurking behind this question are fears of private monopolies controlling the supplis of water and medical goods. The case of medical goods is more straightforward, so I will deal with it before considering the supply of water.

Medicine

The supply of medical goods already is artificially low because of government, not in spite of it. Who licenses doctors and grants the A.M.A. a near-monopoly on the accreditation of medical schools? Who licenses and regulates hospitals? Who approves drugs and licenses pharmacists? The list of questions could go on and on, but the answer is always the same: government.

The average person will react along these lines: “Government has to be involved in the provision of medical goods, otherwise we would be taking our lives in our hands every time we go to a doctor or a hospital, and every time we use a drug.” I respond as follows:

The main effect of government regulation of certain goods (including medical ones) is to raise the cost of those goods by imposing costs on their providers and effectively barring additional providers from setting up shop. This unseen cost means that Americans consumer fewer medical goods than they would if government weren’t imposing costs on providers and barring prospective providers. (There is an argument that Americans, on balance, consume more medical goods than necessary because of Medicare, Medicaid, and tax-exempt, employer-subsidized health insurance. But given those distortions, it is true that regulation raises costs and restricts entry.) Is it possible that the net effect of regulations is to make Americans worse off rather than better off? A good case can be made for that proposition. (See this, this, and this.) The case of medical goods exemplifies Bastiat’s axiom that

a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

Water: The Hardest Case

No Inherent Need for Government Intervention

If the debate about government’s role in medicine evokes much emotion and little reason, any discussion of privatizing the water supply is certain to elicit the rawest of emotions: fear. A typical reaction goes like this: “If government doesn’t provide our water, greedy speculators will corner the market and we’ll all be at their mercy.” It is hard to imagine such a reaction in the 1800s, when a large fraction of the population lived in rural areas, where most water came from privately owned wells or was taken, by private means, from rivers and lakes. Government doesn’t have to provide water, and if it couldn’t stop a you from drilling a well in your backyard (which it can, thanks to its “police power”) many urbanites and suburbanites might be able to supply their own water.

In any event, there is no inherent reason for government to supply water. The simple fact is that “municipal water works” has acquired the totemic status of “public schools.” Both institutions have become so embedded that private alternatives (on a large scale) were unthinkable, until (in the case of public schools) failure became so obvious that it could no longer be ignored. (That the dominant solution to the failure of public schools is to throw more money at them is neither a negation of their failure nor of the widespread perception of failure.)

Scenario 1: “Accidental” Private Monopoly

Given that there is no inherent reason for government to provide water, I begin the analysis of water monopolies with the following hypothetical:

We have with a small, settled community of 25 homes, in which every home has a well (and has had one for generations). It is accepted by all members of the community that each homeowner is the owner of his well; that is, wells are not communal property. Further, every well provides an ample amount of water for such purposes as drinking, bathing, cooking, watering lawns and gardens, washing cars, etc.

Suddenly, because of some unforeseeable geological change, every well but one runs dry. And the owners of the  24 homes without functioning wells (the unlucky 24″) have no immediate or easy recourse to another source of water — a spring, stream, or lake — because there are none within a day’s drive of the community. The only convenient source of water is the 25th  home (“lucky 25”), whose well  seems to provide more than enough water for its owner — enough, in fact, to meet the drinking, bathing, and cooking needs of the “unlucky 24.”

Issues Arising from Scenario 1

How should the “unlucky 24” cope with the near-term problem of obtaining water for drinking, bathing, and cooking? Suppose that they have two practical options:

• Appeal to “lucky 25” by offering him a price for water that would just cover the cost of providing it (electricity, pump repairs/replacements, etc.).
• Buy water in large quantities from an out-of-area vendor — at a much higher price than they would offer “lucky 25.”

“Lucky 25,” the accidental water monopolist, has the following options:

• Accept the offer made by the “unlucky 24.”
• Make a counter-offer by setting a price that is somewhere between the offer made by the “unlucky 24” and the cost, to them, of buying water from an out-of-area vendor.
• Refuse to sell water to the “unlucky 24,” for one of the following reasons: (1) It is his right to do so. (2) He doesn’t want to be in the water-selling business, with its attendant distractions. (3) He fears that drawing significantly greater amounts of water from his well will cause it to run dry.

(You should understand that this is a law-abiding community whose residents are respectful of  property rights — unlike the typical government — so that the water monopolist doesn’t have to worry about defending his well and himself against a mob.)

I daresay that the average reader would expect “lucky 25” to accept the offer made by the “unlucky 24.” But why should the accidental water monopolist accept the offer? He might, out of compassion, help the “unlucky 24” while they make other arrangements. But his help would be given out of compassion, not obligation.

The Permissibility of “Good Luck”

Yes, the water monopolist may have been “lucky” with respect to water, but perhaps he has been “unlucky” in other respects. Why, if “luck” determines one’s obligations to others, shouldn’t the water monopolist’s neighbors compensate him for his episodes of “bad luck” — the dog that was hit by a car, the underground stream which provides him ample water but threatens to undermine the foundation of his house, an errant wife, incorrigible children, etc.? Must “good luck” be penalized or paid for, as an act of “social justice”?

The answer is “no.” Anthony de Jasay explains, in “Economic Theories of Social Justice: Risk, Value, and Externality“:

Stripped of rhetoric, an act of social justice (a) deliberately increases the relative share … of the worse-off in total income, and (b) in achieving (a) it redresses part or all of an injustice…. This implies that some people being worse off than others is an injustice and that it must be redressed. However, redress can only be effected at the expense of the better-off; but it is not evident that they have committed the injustice in the first place. Consequently, nor is it clear why the better-off should be under an obligation to redress it….

Since Nature never stops throwing good luck at some and bad luck at others, no sooner are [social] injustices redressed than some people are again better off than others. An economy of voluntary exchanges is inherently inegalitarian…. Striving for social justice, then, turns out to be a ceaseless combat against luck, a striving for the unattainable, sterilized economy that has built-in mechanisms…for offsetting the misdeeds of Nature.

Scenario 2: Deliberate Water Monopoly

Suppose, now, that our water monopolist came by his monopoly in an entirely different way — a way that (to most of us) seems to draw on entrepreneurship, not “luck.” Suppose that he (and he alone) drilled a well for the purpose of selling water to his neighbors, whom (he knows and they know) cannot (and never could) find water under their properties. What should the water monopolist charge his neighbors for water? Just as much as they are willing to pay, of course. Is there anything immoral in that? If there is, why is it not immoral for an auto dealer to sell you a car for just as much as you are willing to pay, even if you need that car in order to earn a living?

Why should the water monopolist (or car dealer or anyone else) be forced by a legalized mob (i.e., government) to sell his product for a prescribed price, when he is the person who took the financial risk of drilling a well, not knowing for certain that he would strike water, at what rate it would flow, how long it would flow at that rate, and whether another source of water might materialize because of unforeseeable geological or climatological changes?

The answer to the question is found in emotion, not reason. Emotionally, we hold water to be more precious than, say, automobiles. Yet, many persons consume a lot of water for what might be called non-essential reasons (e.g., watering lawns, washing cars, filling swimming pools), and many persons need cars in order to earn a living. Water, stripped of its emotional baggage, isn’t a sacred commodity; it is merely a commodity that has different prices in different places.

Which brings us to the essential question: Who should supply water?

Why a Government Monopoly Is Worse

Perhaps government should be in the business of telling everyone what kind of cars they can have (or not have). (Not far-fetched, admittedly.) Well, then, perhaps government should be in the business of telling us whom to marry, how many children to have, where to live, etc., etc., etc. If that’s an unappealing prospect, why step down the slippery slope toward it by allowing government to dictate the price of water, as it does by controlling most of the nation’s water supply through municipal and regional water authorities?

What can government do that entrepreneurs cannot? The answer is nothing, except to set prices for water that are unlikely to correspond to the prices that would be set by voluntary transactions between private sellers and their customers. Government monopolies prohibit entry where entry would be possible, for example, along large rivers and around large lakes.

Government monopolies cannot respond quickly, if at all, to changes in costs and variations in demand. The prices set by government monopolies must therefore result in the subsidization of some consumers who would be willing to pay more for their water by taxpayers and/or other consumers who are paying more than they would pay if there were private, competing suppliers of water.

What about the poor persons who, without subsidization, could not afford water for drinking, bathing, and cooking, unless they were to forgo other necessities (e.g., medical care)? So, the market for water should be monopolized by government and the price of water should be distorted for the sake of a relatively small fraction of the population? It would be better to rely on (a) private charity and (if you insist) (b) tax-funded vouchers for the purchase of water.

Scenario 3: Government vs. Private Pricing

Which leads to the next objection to the privatization of the water supply (which was mostly private for a long time in the United States). It goes like this: “Water monopolists would bleed their customers dry; they would conspire to control the supply of water and charge whatever the market will bear.”

To test those assertions, let us consider the extreme case in which the residents of a mountainous area have only one potential source of water (other than rain), which is a river that flows through the area. Suppose “greedy speculator” buys the land surround the river’s source and dams the river, at a place on his land. (I am  ignoring, for purposes of this post, the state of the law regarding such a practice.) “Greedy speculator” then pays for the installation of water pipes to various of his customers, meters their use of water, and charges them (perhaps at different rates) in such a way as to maximize his profit.

If you have been following along, you will have realized that there’ is no difference between “greedy speculator” and government, where it declares a local monopoly on the supply of water. There is, of course, a degree of (misplaced) trust in government, that is, trust that will “do the right thing,” which means robbing Peter to pay Paul. That trust amounts to nothing more than wishful thinking about government and misconceptions about the benefits of private action, spurred by the prospects of profit.

In the case of water, for example, government may not build enough capacity (to the detriment of consumers), it may build too much capacity (at the expense of taxpayers), or it may fail to keep its system in good repair (to the detriment of consumers). Private, unregulated providers, in the more usual instances where some degree of competition is possible, can respond more quickly than government to rises in demand, are less likely than government to overbuild, and are more likely than government to keep their systems in good repair.

But the provision of water a natural monopoly, is it not? That question (with its the implied answer: “yes”) arises from the belief that there is no room in a market for more than one supplier where an extensive infrastructure must be duplicated (as in the case of water plants and supply pipes). There are market solutions to such seemingly insurmountable problems, although — in the cases of electricity, natural gas, and cable TV — their implementation generally has been botched by regulatory incompetence and intent.

How could there be competition in a market for water? Consider the extreme case of “greedy speculator” who buy the land from which a river rises, and dams the river. If he sets the price of water too high, three things could happen:

• Some residents self-ration, reducing or eliminating the use of water for such things as watering lawns, washing cars, and filling swimming pools. (Remember, my example involves a “speculator” who is interested in making a reasonable return on a large investment, which requires that he set up shop in place that isn’t destitute.)
• Some residents leave the area for places where their total cost of living, relative to income, is lower than it becomes after “greedy speculator” sets up shop.
• Competition arrives in the form of a supplier who hauls water in large tank trucks and installs a water storage tank for each of the homes and businesses that subscribe to his service.

Lo and behold, “greedy speculator” forestalls competition, and perhaps some departures from the area, by setting his price “just high enough.” Is that fair?

Still No Role for Government

Well, ask yourself if it’s fair of government to keep a private individual from earning a profit by providing a product of value to consumers, or to restrict that profit in the “public interest.” Ask yourself if it is fair that such practices on the part of government lead to a general reduction in the willingness of entrepreneurs to establish and expand job- and growth-producing businesses of all kinds. (Remember “that which is not seen.”) Ask yourself if it is fair of government to circumvent the private sector and provide taxpayer-subsidized goods and services to the residents of an area, just because it lacks “good” supplies of water or electricity, or just because it is frequently and predictably devastated by fires, floods, hurricanes, or tornadoes. Ask yourself if it is fair of government to provide taxpayer-funded insurance against predictable natural disasters when private insurers won’t do so — with the result that the areas prone to natural disasters remain heavily inhabited, at taxpayers’ expense.

In other words, private action — however competitive or uncompetitive — alleviates a host of problems. Government action tends to exacerbate those problems, and to create unforeseen (and unseen) ones.

CONCLUSION

It is written nowhere (but in the imaginations of statists) that government owes us a green lawn, a residence on a flood plain, or anything else but protection from predators, foreign and domestic. As soon as government strays beyond its proper role, it begins to corrupt civil society and its essential mechanisms, which include free markets.

One of the ways in which government strays is to interfere in markets and to provide services that can be and should be provided through markets. Government — at the behest of politicians, bureaucrats, academicians, and meddlers-at-large — interferes in markets and sometimes becomes a provider on the pretext that certain markets (most of them, it seems) are insufficiently competitive or otherwise have “failed” because they fall short of measures of perfection devised by — you guessed it — politicians, bureaucrats, academicians, and meddlers-at-large.

Government intervention in markets exacts a very high price, in liberty and material goods. It strips us of the ability to do for ourselves what we think needs to be done — as opposed to what some politician, other meddler, or “aggrieved” group believes we ought to do or have done to us. It strips us — even the poorest among us — of the means to do for ourselves that which we need to do. It strips us — even the poorest among us — of the fruits of those labors which are permitted to us.  The degree of theft is so vast as to be unimaginable, but unseen and therefore (mostly) unlamented.

The bottom line: Private monopolies are superior to public ones, and should not be persecuted or prosecuted. Government monopolies are for the benefit of politicians, bureaucrats, academicians, meddlers-at-large, and the the majority of citizens who have been conned into believing that government action is preferable to private action.