A Curious Miscellany of Items Philosophical, Historical, and Literary

Manus haec inimica tyrannis.

Friday, November 12, 2010

Life in the "Great Society"

Friedrich Hayek is usually classified as a libertarian thinker. But in Chapter 14 of his masterwork Law, Legislation, and Liberty (3rd volume, Chicago: University of Chicago Press, 1979), Hayek has some very un-libertarian — and rather refreshing — things to say about the respective roles of the public and private sectors in the provision of goods and services.

He begins with the observation that it is an article of faith among libertarians to regard almost all functions currently performed by the state as capable of being more efficiently performed by markets. The ideal form of government for libertarians is, to use the language of Robert Nozick, the “minimal state”, or what in classical liberalism used to be quaintly called the “night watchman state”. This would be a state whose areas of legitimate activity were largely confined to the maintenance of national defense, and the enforcement of contracts, property rights, and the criminal laws. Perhaps it might also build a few roads for its soldiers to march on. However, Hayek dissents from this faith:

“Far from advocating such a ‘minimal state’, we find it unquestionable that in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market.” (p. 41)

Indeed, he notes a number of areas where the state has an interest in providing services, even in the very name of preserving and enhancing the market order itself. An example would be the collection and dissemination of information in the form of statistics and education. Information helps to make markets operate more efficiently, and yet markets cannot in all cases adequately provide this vital service for themselves.

Indeed, the later Hayek, as he became increasingly conservative, added to this function the propagation of valuable cultural information (e.g. religion, art, and morality) from one generation to the next. What could be less libertarian than allowing government to play an active role in the inculcation of forms of worship, taste, and morals? And yet, my inner Tory applauds the move, at least with regard to the last two items.

Hayek on the “Taxation-as-Forced-Labour” Argument

In his Anarchy, State, and Utopia (1974), Robert Nozick (in)famously equated taxation with forced labour. It is a common mode of argument among libertarians to claim that some expenditure X amounts to theft or extortion from those citizens who don’t want X and who therefore would rather not pay for X. In a social order that respects people’s liberties, I should at least be able to opt out of paying for “my share” of X. By being taxed to support X against my will, some share of my labour is being taken from me to contribute to someone else’s ends. In other words I am compelled into forced labour. I am to that extent a slave. Or at least, that is how the argument is usually run.

Hayek has a very interesting alternative way of conceptualizing this situation. First of all, we live in what he calls a “Great Society”. By “Great” he doesn’t necessarily mean “powerful” or “hegemonic”. Rather, the term connotes extensiveness and complexity. For better or worse, our society has grown complex, and with this complexity comes certain trade-offs. A Great Society depends on many services that are unnecessary in more simple forms of social organization. For instance, only a numbskull would claim that we could live in sprawling modern cities without some form of mass transit, and for various reasons, such transit is a collective good that for various reasons is more efficiently provided by the agency of government.

“Collective” vs. “Public” Goods

Before proceeding, some clarification of terminology is in order here. I use the term “collective” good to refer to goods that everyone benefits from, whether directly or indirectly. Mass transit in a large city is a collective good because even those who do not use it benefit from it: If I drive my car, I benefit from less congested roads, from decreased costs of road maintenance, from decreased demand for the gasoline I need to fill my car, and so on. Since there is no way to stop me from benefitting from this good, if I do not contribute I am in essence a free rider (pardon the pun). Thus, a collective good is one from which there is no fair way of opting out, because even if you didn’t contribute to its provision, you would still benefit from it. This characteristic of collective goods has been used by some philosophers to justify requiring everyone to contribute. (I do not think it is a sound justification, but that is a subject for another day…)

I use the term “public” good to refer to those goods that are more adequately or efficiently provided by public rather than private agencies. This is obviously not the same thing as a collective good. We may all benefit from X (a collective good), while at the same time X can be provided by the market. On the other hand, Y might be most efficiently provided by a public agency, and therefore be a public good, while only benefitting a minority of the population.

Rather than looking at each item of government expenditure in isolation and judging its legitimacy according to whether or not one personally benefits from it, Hayek says we should view taxation in the aggregate, as everyone’s contributing to a common pool, out of which expenditures will be made for collective and public goods. Although I may not agree with or make direct use of some of the goods provided out of that pool, Hayek says that so long as I get at least as much benefit from what comes out of the pool as what I contribute to it, then taxation is a legitimate practice and not merely a form of forced labour or slavery.

Of course, none of this is to say that a government’s powers of taxation aren’t abused. No doubt, much of what comes out of the common pool could be spent more efficiently than it is, and could benefit more people than it does, rather than being spent on goods that are in truth neither collective nor public. Indeed, it could even be the case that a number of citizens do not receive as much benefit from taxation as they contribute to it. Hayek’s aim is merely to justify the principle that taxation by government is not ipso facto illegitimate or a violation of liberty.

How Collective?

I suppose the drift of Hayek’s argument so far is that in an ideal libertarian world, taxation is legitimate when it is expended on goods which are both collective and public, with some allowance for expenditures that do not meet this rather stringent requirement, so long as every taxpayer benefits at least as much from government expenditure as he or she contributes in taxes, taken in toto. Another way of putting this last point, in economists’ jargon, is that to be legitimate, taxation taken in the aggregate must be Pareto efficient; that is, it must make at least one person better off, without making anyone worse off.

(When we speak of taxation “not making anyone worse off”, opportunity costs must be taken into account. Let’s say that the benefits I receive from government expenditure exactly correspond to the amount of money I’ve contributed in taxes. But when I stop to think about all the things I could have benefited more from if I had been allowed to spend the money on my own rather than contribute it to the common pool, I might find that I’m actually much worse off. Pareto efficiency is more stringent than it sounds, and than Hayek would lead us to believe. In other words, for the bundle of goods X I receive through public expenditure, there is likely to be another possible bundle Y that, while containing some of the same goods, also contains other goods, and where in terms of benefits, Y > X.)

Using collectivity as a necessary condition for justified taxation can be tricky. For example, I’m sure that there are many goods we might wish to classify as collective that are not entirely so. There might always be some naysayer who would rather not spend his money on any given item, because he doesn’t personally stand to benefit enough from it.

Again, this worry is partly dealt with by Hayek’s requirement that we view taxation and expenditure in the aggregate rather than item by item. A certain item of expenditure might not be Pareto efficient, while a bundle of items that includes it might be.

Hayek’s strategy of assessing the collectivity of goods from the aggregate level is probably better than at least one obvious alternative method, which would involve adding a requirement to the effect that a good can be classed as collective if a certain threshold proportion of the population would benefit from it. We might call such a good imperfectly collective; it is “collective enough” to justify taxation. So long as it benefits enough people, the naysayer is legitimately required to “suck it up” and contribute for the good of the larger community.

This is a tricky move. First of all, what number should we set as the threshold proportion of the population we are justified in benefiting through the forced sacrifices of others? Second, we would also have to put limits on how much people can be required to sacrifice for the greater good. We could bankrupt the naysayer and spread his wealth among a lot of people who need it. We could create one have-not but also create several haves in the process. Should we be allowed to do this? I think not. Ideally, we would want to say that there is some “fair share” that we can commandeer from the naysayer. We cannot take everything.

And third, there is the problem of limiting the uses which can be made of what is commandeered, even if it is used on a good which is putatively collective. Imagine we could take all of the naysayer’s money from him, and make a reality television show that documents his subsequent skid row life, providing much satisfying entertainment for masses of people. I think the naysayer should not be required to contribute to this dubious sort of “collective good”. And this is not because it would bankrupt him. It is not the amount of the sacrifice that matters here. I don’t think he should be made to contribute a single dollar to minister to such depraved tastes. This is where morality has something to say to the calculations of economists.

How Public?

Besides some lack of clarity as to whether a good is really collective, there is also the difficulty of assessing whether a good is really public. For one thing, there are some goods that are currently viewed as public that might not be such at all. Hayek gives the example of postal delivery. In the US and Canada it happens to be publicly provided, even though it is relatively inefficient, and even in the face of a large amount of evidence that it could be better provided by the market. Indeed, most nations have now privatized their postal systems, almost all of them successfully. (I would like to say all of them, but I can’t be confident that there isn’t a counter example lurking somewhere that I’ve missed.)

Hayek says that we must be wary of considering something a public good merely because the government, as a matter of contingent historical fact, has happened to be the sole provider of that good. In the case of postal delivery, governments historically had their own raisons d’├ętat for instituting it, reasons having more to do with the aggrandizement of administrative power than with the good of the people. From this it does not follow that governments must continue to provide it.

He says we must also be careful of falling into the habit of too starkly delineating supposed classes of goods that are of necessity publicly provided. Such a view blinds us to the possibility of improvement. In many cases there may be good reasons for why a particular good can best be provided by government. However, in the future circumstances could change and those reasons may no longer be good ones. If that becomes the case, the government should cede that sphere of activity to market forces.

And lest you think I’m plumping too much for the libertarian side here, and driving at the claim that the natural development is unidirectional — i.e. a natural takeover by the private sphere of public functions — things could just as easily work the other way around. As a matter of fact, many of the things that are considered properly public goods were once exclusively private. Education would be an example. Health care (at least in Canada) is another. I know many libertarians would dispute classifying health care as properly public, but I see no evidence anywhere that the market can do a better job in that area (not to say that there is no possibility of some form of mixed system).

As a matter of fact, many historians and anthropologists have argued that in primitive societies the enforcement of rights was often done privately, through self-help, clan feuds, or other “private” security arrangements. In other words, in the beginning, all was private. At some point many of these societies came to see the obvious drawbacks of arranging the proto-legal order this way and ceded large areas of activity to some public body. This was the birth of the rule of law and maybe even of government itself. There is a delicious irony here, the tantalizing possibility that the public sphere itself was born of market failure! But much of this is speculation.

Social Security in the Great Society

There are many people in society who, through no fault of their own, are unable to participate in the market economy, perhaps because of old age or disability. Hayek says that such people must be provided with an income. (Actually, in his other writings he seems to indicate that perhaps everyone should be guaranteed some minimum income). He has more than one argument for this.

First, the things that make such people unable to participate in the market are such that they could in principle befall anyone. I could become gravely injured tomorrow. And sooner or later — if I live long enough — I will reach an age where I am no longer able to work. These are “common risks”, which makes the provision of an income to people disadvantaged by them a collective good. Of course, this argument only works if we add the assumption that we are all relatively risk averse. If we all have a rational fear of being disadvantaged by common risk factors, then we benefit by contributing some share of resources to a pool to insure against those risks.

In other writings Hayek buttresses this “common risk” argument with what we can call the “risk encouragement” argument. He says that in order to be successful, capitalism depends on a certain level of entrepreneurship, which by definition involves risk-taking. Another sort of risk-taking “entrepreneurship” also happens when I leave a job in the hope of securing a better-paying one. Such risk-taking makes for a flourishing economy, from which in theory we all stand to benefit. But people will be less willing to take such economic risks if the costs of failure are too high. This provides justification for things like lenient bankruptcy laws (which in effect subsidize debtors at the expense of creditors) and unemployment benefits. These provide a sort of “smooth landing” in case of failure.

Of course, more militant libertarians (e.g. Milton Friedman) would say that if there is a common risk, then everyone has an incentive to plan for it through, for example, an insurance scheme, and there is no reason why such a scheme shouldn’t be available through a market. In other words, even though social security might be a collective good, it is not a properly public good. And if you fail to insure yourself, maybe because you are not sufficiently risk averse, then you are responsible for the consequences. Perhaps a voluntary charity may help you, but the state should neither use its coercive powers to force you to insure yourself nor to force others into providing relief for your folly. This is the only consistent way to respect the autonomy of the individual. And after all, why should 95% of people be forced to pay for the other 5% of people who are improvident or reckless?

Hayek has an answer to this, at least in the “common risk” cases, although I am sure it wouldn’t satisfy the hardened libertarian. Every society has recognized a moral duty to help the aged and infirm, a duty not based solely on the personal virtues of the sufferer, but either on personal ties of affection or common humanity. Thus, traditionally this duty was most commonly fulfilled by family members or, where this was not possible, by those voluntary charities and religious foundations that libertarians seem so fond of. But, says Hayek, we no longer live in those simpler societies. We live in a Great Society, in which those ties of kinship and feelings of moral duty have weakened and can no longer be taken for granted. Although the duty to help the disadvantaged still stands (how so?), the old ways of fulfilling it seem to have vanished. The suffering individual no longer has a claim on others based on kinship or shared belief in a religious commandment. In its place, government must step in and help, as impersonal as that help must necessarily be.

I find this argument fascinating in its admission that capitalism has not been an unadulterated success. In order to live in the general prosperity that the Great Society provides, much that was meaningful has been traded away. Perhaps it was a good bargain, but it was a hard one, as those that suffer in our midst can attest.

It is a recognition that is very un-libertarian. But my inner Red Tory nods in agreement.

* * * *

To return to the above discussion about privatizing postal delivery, this past summer I was drawn into an argument about this very subject with two “progressive” friends (I didn’t start it). In the course of a conversation I made the barest suggestion that Canada Post could be privatized, and was immediately set upon. I was told in no uncertain terms that it would not work, that no country does it, and that where it has been tried it has failed.

I should mention that one of these two friends has the maddening habit of adamantly claiming an empirical statement to be true, and refusing to back this claim up with an authoritative source, leaving the disputant at a dead end as to how to refute him. If you don’t happen to have briefing notes on hand, you cannot dispute such a proffered “fact” conjured up out of thin air. On this occasion the “fact” he proffered was that Canada Post is a profitable enterprise.

The sheer emotionality and increasingly aggressive drift the argument was taking caused me to wisely drop the subject. However, I was not convinced by my opponents. I did some follow-up research. It turns out that (i) many countries have privatized their postal delivery, including most developed ones, (ii) that it has worked in these places, by any objective standard you care to use to assess it, and (iii) that there are few complaints about the market-delivered service.

Furthermore (iv), as for my friend’s vouchsafing Canada Post’s profitability, I looked up the latter’s annual reports, something which I was obviously unable to do during the heat of our discussion in the context of a backyard barbecue. In the fiscal year just passed, the corporation barely broke even. By its own admission, this accomplishment was due to certain unforeseen and one-time-only increases in revenue. Therefore, it would seem that Canada Post must have actually budgeted for a net loss and been pleasantly surprised when, despite its best attempts at fiscal incompetence, it actually ended up in the black (which, incidentally, it has consistently failed to do in previous years). Of course, this does not take account of the fact that much of their “revenue” in any given year consists of government transfers.

I hope my friend is reading this, because although I like to have the last word, I have no wish to return to that conversation and play the bear, to be baited by people who offer articles of faith in the place of reasoned argument.

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