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Reviving the Invisible Hand
That is Deepak Lal's new book, the subtitle is The Case for Classical Liberalism in the Twenty-First Century. I rarely call myself a classical liberal, for fear the title has become musty and for realization that the feasible set today is quite different from that faced by Cobden and Bright. That aside, here is what I think classical liberalism should become for the 21st century.
1. The welfare state is not going away. But it is imperative that we avoid Western European levels of taxation through the explosion of Medicare liabilities. Don't forget that the United States is a -- should I say the -- generator of global public goods par excellence. Going down the path of France or Sweden would mean disaster.
2. What recipes lead to both strong markets and decent governance? The not-yet-developed countries of the world all face this problem. Simply deregulating does not itself solve the governance problem, as we have discovered many times in the last fifteen years. Our understanding here is backward but much is at stake.
3. We face a variety of critical issues involving decentralization: how to deal with pandemics, natural disasters, or terrorists with nuclear weapons, to name but a few. None of these are areas for laissez-faire. Yet for all the squawking about the need for government, most of the real solutions "on the ground" will emphasize voluntary action and the private sector. When faced with these problems, how can we do better rather than worse? Note the close connection between this problem and #2; for instance in Indonesia the government won't allow transparent communication about the nature of the avian flu problem.
Overrated classical liberal ideas are privatization (sometimes useful, but it often replicates old problems in a new regulatory guise) and abolishing foreign aid.
Your take, Alex? Other classical liberal bloggers?
For Lal's vision, well...you have to read his book. You can start with the book's web page and sample chapter here.
Posted by Tyler Cowen on July 5, 2006 at 08:18 AM in Books | Permalink
Comments
Have you read Brin's 'The Transparent Society'? I'm not entirely comfortable with his ideas, but massive transparency (enforced at all levels) does solve a lot of governance problems...
Posted by: bbartlog at Jul 5, 2006 9:55:34 AM
I'm curious why you didn't say "global warming" driectly (if indeed it is a subset of "natural" disasters).
My belief is that some people don't wanna think about GW because doing so leads them to certain solutions ...
Posted by: odograph at Jul 5, 2006 10:25:40 AM
Maybe you need to define better what you think "classical liberalism" means. Does it just mean "libertarianism"? If it does, then using the term "classical liberalism" is pointless becaues a better word to describe it exists.
Unless it means something more. Was Teddy Roosevelt a "clasical liberal"? Or just a regular modern "liberal"?
Posted by: Half Sigma at Jul 5, 2006 10:44:42 AM
How about trying to avoid European tax levels by keeping the rest of medicine (non-Medicare) out of the hands of the government? That means maintaining the viability of private health care insurance. Of course, that means a labor market where employers have to offer health insurance to retain their workforce. Now what does that mean? Real borders? Zero tolerance for illegal immigration? Zero unskilled immigration? All of the above? No doubt.
Like it or not, socialized medicine is the inevitable consequence of Open Borders.
Posted by: Peter Schaeffer at Jul 5, 2006 10:59:00 AM
I'm not sure that we don't *have* Western European levels of taxation, when all of the different types of taxes that exist in the US are taken together, at least here in NY.
Posted by: michael vassar at Jul 5, 2006 11:01:09 AM
1. The welfare state is not going away. But it is imperative that we avoid Western European levels of taxation through the explosion of Medicare liabilities.
There are a lot of people on Medicare, and there will be a lot more. They have nothing but time, and they vote. Medicare will consume the budget and eventually "necessitate" socialisation. We can thank folks like you who basically said #3, but about healthcare.
3. We face a variety of critical issues involving decentralization: how to deal with pandemics, natural disasters, or terrorists with nuclear weapons, to name but a few. None of these are areas for laissez-faire.
Yes, after all, the state has done such a magnificent job with all of these problems so far.
Pandemics should be dealt with by NGOs, which could easily be funded by foundations and charity. Natural disasters can't be dealt with well by much of anyone - we humans underestimate the power of low-probability, high-damage events. But, time and again, private charity and market forces work much better in dealing with natural disasters. Compare FEMA to Wal-Mart in Katrina.
Terrorists with nuclear weapons is a boogeyman. They don't exist. Of course, who researched and manufactured the nuclear weapons? It wasn't the market, but the state. What next wondrous state development will be used for profound evil and mass murder?
- Josh
Posted by: Wild Pegasus at Jul 5, 2006 11:53:44 AM
"The welfare state is not going away."
Not with that attitude it's not. :)
Posted by: Al T at Jul 5, 2006 11:54:14 AM
What public goods par excellence did you have in mind?
Posted by: asg at Jul 5, 2006 11:58:29 AM
When you say "global public goods" (GPG), what do you mean? A lot of the banality that comes from Hollywood? Mission Impossible 3 et al. can be said to be boring! A lot of innovative American movies, books, etc. come from small firms that are easily reproducible (if they
don't exist already) in the neighbourhoods/regions of metropolitan Milan or Osaka or Winnipeg.
The NIH research apparatus in Bethesda may be an ideal example of GPG. However, given that this is a government initiative does it not violate the ideal of small-scale individual initiative that
it supposed to represent the "best side" of libertarianism.
Frankly, the pattern of US government use military has been a disaster after 1945 --bloated, predatory, unable to comprehend or counter Third World nationalism. The US seems far more
willing to use its military to bolster regimes it favors (South Vietnam, pre-1979 Iran) or overthrow those it doesn't like (Grenada) than for truly humanitarian efforts (Bosnia comes
the closest). The US has cried wolf one too many times (Gulf of Tonkin, linking Saddam to Osama, etc.).
How do US (or British/Canadian/Australian) libertarians who vote Republican (Tory, etc.)
reconcile their supposed love of small government with spending tens of billions (if not
hundreds) on an oversized national security state?
Posted by: Chris Pepin at Jul 5, 2006 3:26:14 PM
"Going down the path of France or Sweden would mean disaster."
Specifically what kind of disaster?
Posted by: Jim at Jul 5, 2006 4:28:27 PM
"Going down the path of France or Sweden would mean disaster."
Sure, especially if your not one of the millions of uninsured. I guess all of the people who have had to file for bankruptcy due to overwhelming medical costs should take comfort in the terrific R&D being done.
Posted by: Roscoe at Jul 5, 2006 6:42:32 PM
I guess all of the people who have had to file for bankruptcy due to overwhelming medical costs should take comfort in the terrific R&D being done.
When scientists find a new treatment for XXXXX hits the news, where do you think those scientists work, who do you think provided the fundsing for the basic research that made those cures possible. Technology does not come down to us like mana from heaven.
Posted by: Karl Smith at Jul 5, 2006 7:39:04 PM
Global public goods will ultimately have to be supplied by a global government. The confusion implied by your vision of the future comes out of 2 contradictory trends that are both operating today. One, the key “public goods” like defense have to be supplied globally not nationally to work. Two, the welfare state is failing to supply adequate health care, education, etc. while progressively strangling the economies where it is well developed.
The effective units of government are going to have to get bigger, if not global, but government has to reduce the range of problems it tries to address. Fair or unfair, good or evil, the welfare state will go the way of the communist economy. It is just a question of how fast and with how much suffering. Certainly communism fell with much less violence than everyone feared.
Posted by: Dan Landau at Jul 5, 2006 8:35:22 PM
"1. The welfare state is not going away."
Maybe not entirely but it will shrink. The Old European economies (excluding the UK) are doing so poorly that the only way to fix the errors of our Social Model is to liberalize. However, it will be difficult since the majority of the people in France, for example, seem to blame (http://m-sandt.blogspot.com/2006/04/wtf-is-going-on-in-chinafrance.html) capitalism for their current economic/societal problems. What makes it all so laughable is that France has all along been the least capitalist nation in Western Europe.
The best bet is for the US and the emerging Eastern European nations (especially Estonia) to hold on to their more liberal economic systems. This way they'll set an example of an economic success when things fall apart in Western and Northern Europe.
Posted by: Mikko Sandt at Jul 6, 2006 8:20:46 AM
I still find it remarkable that anyone would have swallowed ANY recipe for number 2, much less the one that believes that deregulation would solve governance problems! You would simply have to be ignorant of all history and psychology. It is a clear-cut case as any, of scientists taking one equation for a whole system. The hedgings and provisos throughout Milton Friedman's "Capitalism and Freedom" should have been clues enough.
This page has also had recent postings about Coase, and about what economics will do in the future. I think it is going to go partly in his direction. But as Coase wrote, the understanding will be far different than economists now believe it to be.
Coase argued that "institutions" can greatly reduce frictions and transactions costs, and increase productivity. That was his explanation for the existence of "business firms." Because otherwise, if market transactions are always the most efficient, then employees would self-organize via market transactions, and the firm would not be necessary. Nobody would ever think of creating a firm. ("The Nature of the Firm," 1937.)
As Coase later pointed out, the government itself is an institution, a sort of "super-firm" he called it -- enormously dangerous to think so, perhaps, but still sometimes providing clear advantages:
"...From these considerations it follows that direct governmental regulations will not necessarily give better results than leaving the problem to be solved by the market or the firm. BUT EQUALLY, THERE IS NO REASON WHY, ON OCCASION, SUCH GOVERNMENTAL ADMINISTRATIVE REGULATION SHOULD NOT LEAD TO AN IMPROVEMENT IN ECONOMIC EFFICIENCY." ("The Problem of Social Cost," 1960, Part VI, my emphasis.)
I would guess that we are about to see an explosion along this avenue of thought, for distributional and external reasons. Why? Distributional: we are 250 years into our new era of plenitude, and some people are still left behind. External: innovation and raw-material substitution appears to be staying ahead of population growth (though perhaps barely,) BUT we are already clearly running out of "waste sink" to receive our energy waste -- while erasing the remainder of wild nature under the human footprint.
So I believe we're going to see targeted social programs in profusion: Social Security, Medicare, global warming, energy use, etc. They will be constantly re-evaluated, in the press and at the polls. But it should be very clear that institutions can greatly reduce frictions and transactions costs, especially non-monetized costs of space and time, and increase everyone's productivity, even while providing more equal outcomes on life's necessities.
The "need for government" vs "voluntary action" is an argument never to be concluded; or rather, it will be evaluated and re-evaluated for each separate issue in each new time period. Because when information changes, it also reorganizes. Human beings, and their outer environment, are not as simplistic as economics would wish to have, for its classical mathematics.
Posted by: Lee A. arnold at Jul 6, 2006 1:14:24 PM
"the -- generator of global public goods par excellence"
That phrase strikes me as perhaps needing a little justification. I can think of the internet, but what are the other things ?
Posted by: still working it out at Jul 6, 2006 9:36:22 PM
Dan Landau writes, "Global public goods will ultimately have to be supplied by a global government."
Why do you believe the people in a global government would actually provide public goods? Recall that the economic theory of public goods suggests that people will free ride when they can. Does this theory only pertain to people outside of the government?
Posted by: James at Jul 9, 2006 4:54:07 PM
"Going down the path of France or Sweden would mean disaster."
I wonder what this disaster is. Is France and Sweden third world countries or something? No they are not. They are both highly developed countries, so they must have done something right.
There are many factors that affect a countries economic performance. Even though policies in France and the US was similar 2 decades ago France was outperforming the US economically. Look at Japan, they were outperforming the US before. Now they are not. There policiy is not substantially different today. It just shows there are many ways to success.
All nordic countries have higher taxation level than the big European countries and are still outperforming by a big margin. E.g. Sweden has economic growth over 4.0 percent this year.
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Posted by: levan at Sep 11, 2006 2:55:29 AM
Tyler, look at the history of the Johnstown Flood. People committed funds at the drop of a hat. Or for that matter, look at the 9/11 or tsunami fund-raising activities. People respond to disaster in proportion and don't need to be forced to help. Or for a counter-example, look at how the USG response to Katrina was pitiful, and how governments at every level interfered with citizen organization.
Posted by: Russell Nelson at Jan 17, 2007 11:42:33 AM
Maybe he's saying that wellperforming socialist European economies are freeriding the global public goods produced by capitalist USA?
Posted by: Sune at Dec 21, 2007 5:29:16 PM
Posted by: at Oct 14, 2008 1:45:39 AM
