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EconLog Book Club: For a New Liberty, Chapter 10

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Libertarians and Jonah Goldber... A Conversation With Judy Harri...
Summary
In this six-page chapter, Rothbard makes a sweeping economic case against "government in business."  He begins by noting the power of status quo bias:
People tend to fall into habits and into unquestioned ruts, especially in the field of government. On the market, in society in general, we expect and accommodate rapidly to change, to the unending marvels and improvements of our civilization. New products, new life styles, new ideas are often embraced eagerly. But in the area of government we follow blindly in the path of centuries, content to believe that whatever has been must be right.
Our status quo bias is so strong that "an attack on State financing appears to many people as an attack on the service itself."  To counter this bias, Rothbard presents his Fable of the Shoes, a short masterpiece of political ridicule:
The libertarian who wants to replace government by private enterprises in the above areas is thus treated in the same way as he would be if the government had, for various reasons, been supplying shoes as a tax-financed monopoly from time immemorial.. [H]ow would most of the public treat the libertarian who now came along to advocate that the government get out of the shoe business and throw it open to private enterprise? He would undoubtedly be treated as follows: people would cry, "How could you? You are opposed to the public, and to poor people, wearing shoes! And who would supply shoes to the public if the government got out of the business? Tell us that! Be constructive! It's easy to be negative and smart-alecky about government; but tell us who would supply shoes? Which people? How many shoe stores would be available in each city and town? How would the shoe firms be capitalized? How many brands would there be? What material would they use? What lasts? What would be the pricing arrangements for shoes? Wouldn't regulation of the shoe industry be needed to see to it that the product is sound? And who would supply the poor with shoes? Suppose a poor person didn't have the money to buy a pair?"
After shaking up the reader's anti-market prejudices, Rothbard then savages the inefficiencies of the public sector.  For-profit business has strong incentives to please the customer in the cheapest possible way; government doesn't:
On the free market, in short, the consumer is king, and any business firm that wants to make profits and avoid losses tries its best to serve the consumer as efficiently and at as low a cost as possible. In a government operation, in contrast, everything changes. Inherent in all government operation is a grave and fatal split between service and payment, between the providing of a service and the payment for receiving it.
As a corollary, government is unresponsive to demand shifts:
Thus, if consumer demand should increase for the goods or services of any private business, the private firm is delighted; it woos and welcomes the new business and expands its operations eagerly to fill the new orders.  Government, in contrast, generally meets this situation by sourly urging or even ordering consumers to "buy" less, and allows shortages to develop, along with deterioration in the quality of its service.
Rothbard scoffs at bureaucrats' "standard response to the mounting complaints of poor and inefficient service: 'The taxpayers must give us more money!'"
The proper counter-argument to the political demand for more tax money is the question: "How is it that private enterprise doesn't have these problems?" How is it that hi-fi manufacturers or photocopy companies or computer firms or whatever do not have trouble finding capital to expand their output? Why don't they issue manifestoes denouncing the investing public for not providing them with more money to serve consumer needs? The answer is that consumers pay for the hi-fi sets or the photocopy machines or the computers, and that investors, as a result, know that they can make money by investing in those businesses. On the private market, firms that successfully serve the public find it easy to obtain capital for expansion; inefficient, unsuccessful firms do not, and eventually have to go out of business. But there is no profit-and-loss mechanism in government to induce investment in efficient operations and to penalize and drive the inefficient or obsolete ones out of business.
What about trying to make government "run like a business"?  Rothbard's not buying it.  First, since government usually outlaws competition, there is little incentive to give the customer a good deal.  Second, capital markets' usual checks on inefficiency don't work if bond-holders know that the central government guarantees their investment.  And finally, Rothbard briefly highlights the Austrian "economic calculation" argument, assuring readers (in 1978!) that, "It is because central planning cannot determine prices and costs with any accuracy that the communist countries of Eastern Europe have been moving rapidly away from socialist planning and toward a free-market economy."

The chapter ends with a blunt declaration of the libertarian position: "The ultimate libertarian program may be summed up in one phrase: the abolition of the public sector, the conversion of all operations and services performed by the government into activities performed voluntarily by the private-enterprise economy."  That's why this should have been chapter 4 - it would have beautifully framed the rest of the book.

Critical Comments
In all honesty, I think that these are the best six pages of economics I've ever read.  Every sentence counts, and almost every sentence gleams with truth.  You don't need to be a libertarian to agree with me: On a good day, I don't see why Krugman or DeLong couldn't concede that this is a brilliant, compelling chapter.

Of course, they'd immediately add that chapter 10 ignores every anti-market argument ever made by a serious economist.  Fair enough.  What this chapter shows is that there is a mighty presumption against government that mainstream economists habitually ignore.  Consider: The typical textbook devotes multiple chapters to various kinds of market failures - including many - like adverse selection -  of dubious empirical relevance.  Almost none spends a chapter explaining why government might have higher average costs and lower responsiveness than private enterprise.

Let me add, moreover, that Rothbard's ridicule of the typical non-economist's rant against the market is entirely fair.  When I was a teen-ager attacking the inefficiencies of my public high school, I often faced an hysterical list of questions straight out of the Fable of the Shoes.  When you look at actual government operation, moreover, it seems to be guided far more by the public's anti-market rants than the sophisticated arguments of left-leaning academic economists.

Much as I love this chapter, I would like to close with two caveats:

1. This chapter paints such a bleak picture of government that it really makes you ask yourself: "Why isn't government ownership even worse?"  The USPS delivers my mail with 99% reliability - and its price seems far below a monopolist's profit-maximizing level.  As far as I know, its executives don't earn multi-million dollar bonuses for customer satisfaction.  So what's going on?

2. A few countries, most notably Singapore, really do run a lot of government enterprises "like businesses."  They're profitable even though they face legal competition by the private sector.  They set up strong performance-based incentives for executives and employees.  And if they keep losing money, they go out of business.  You could still object, "What's the point of government enterprises if all they do is 'mimic the market?'"  My point is simply that you don't have to abolish the public sector to make it work a lot better than it does.


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COMMENTS (17 to date)
Jayson Virissimo writes:

The Fable of the Shoes is absolutely dead on. Anytime I make the argument against government monopoly I am asked to formulate exactly how the industry would be run (down to the last minute detail), and when I am not able to supply such information I am dismissed out of hand. The reality is that I am ignorant of how almost every private industry functions, but they seem to work just fine most of the time.

Nathan writes:

Another kudos to the fable of the shoes. As for the last quoted paragraph, Rothbard is dead-on again. If you want to see the true difference between government and the free market, look at the ads. Every election cycle, you get tons of ads bemoaning the state of government services and begging for more money: our schools are in disrepair, please vote yes on proposition 5; we don't have enough police on the streets, elect Joe Schmoe and he'll fund the police department. By contrast, ads for commercial products and services universally tout how *good* the product is; you never see a Hertz ad stating that all their rentals are ten year old beaters with no AC or radio.

Zac writes:

I agree that this is the strongest and most memorable chapter of the book (do not think that I'd go so far to say its the best 6 pages of economics ever, I will go out on a limb and nominate Hayek's "The Use of Knowledge in Society" although that may be closer to 9 or 10 pages).

@Nathan, good point about the ads! I will use that.

"Why isn't government ownership even worse" I think is probably the great question of political economy. My best guess is that government fears it will lose popular support for certain monopolies if it 'abuses' the monopoly privilege, but public opinion polling suggests my populist anger hypothesis is weak. As for Rothbard, do others agree with me that the polemic style and unwillingness to address questions like the above ultimately weakens his argument? After all, the marginal reader of Rothbard sees that the government is not as bad as he claims, which may lead them to reject the explanation all together because his emphatic predictions of government failure seem contradicted, at least somewhat, by the evidence.

Of course I love the Fable of the Shoes, but invariably the statist response is: "but service X (defense, roads, health care) is a much more complicated case than shoes. That is why we need government to provide service X but not shoes." They might elaborate on why competition for service X will lead to ruin or inefficiency. While The Fable makes perfect sense to me, I find it utterly unconvincing in discussion.

Ejcó writes:

I think at an intuitive level most people see some kind of role for government in at the very least *intervening* in certain markets to help very poor people and people who are incapable of helping themselves. Of course, Rothbard has a response (quite correct in my view) to this objection in Chapter 8 but that is another argument altogether which requires more time to explain and which increases the likelihood of skepticism in such people towards the libertarian position.

One strategy I always make use of when arguing for educational freedom is this. Rothbard may be right about the Fable of the Shoes, but most people will doubt that a completely free market for education will not result in vast iniquity. After all, education is much more expensive than shoes and many parents and children do not see education as in their own self interest in the same way that they view the shoes on their feet. To better communicate the idea, I use the following analogy: In our society, we have a free market for groceries; agricultural subsidies aside, there is no longer any such thing as a public granary or a public supermarket. This ensures a variety of prices and qualities of the food products we can buy and consume. Of course, let us assume that there are some people who are very poor, sometimes through no fault of their own. What do we do to help them? We give them food stamps or vouchers that they can take to private supermarkets and choose the food they want to buy. This is much cheaper and better for those being helped than forcing them to go to public supermarkets. The same would be true of a free market for education with vouchers or subsidies: it is much cheaper for us the taxpayers to pay taxes for subsidizing certain poor individuals' education than paying for all the public school buildings and teacher salaries, and those who are truly poor would have a better quality product thanks to competition.

Notice that I haven't discounted the idea of a completely free market in education. Indeed, for the reasons Rothbard mentions in Chapter 7 this would be preferable in my view. All I've said is that the voucher program would be cheaper and better for those in need. In order to make progress with people, you have to try to get them to follow your basic line of reasoning before they can accept ultimate conclusions of more radical arguments. In other words, people are not likely to take arguments for the complete privatization of education seriously unless they can first understand the basic idea behind markets and the benefits of competition. Explaining to people the grocery store analogy and letting it sink in for a while I think will make most people more receptive to the idea of a free market in education. So far I've found this tactic to be surprisingly effective, even among some public school teachers!

FGH writes:

A closer inspection of the USPS I suspect would alter your description of its reliability and efficiency. Rather than suggesting it is an example of a well-run government operation, you might very well discover otherwise. In fact, it is such a poorly run monopoly that it has helped boost private competitors wherever possible, e.g., UPS and FedEX over Parcel Post, and encouraged the use of alternatives to first-class mail wherever feasible, such as the Internet.

Blackadder writes:

The status quo bias Rothbard highlights is so strong that I'm often tempted to despair. When I tell people, for example, that I would like to get rid of the Department of Education, their reaction is always a mix of outrage and puzzlement. "How can you be against education?!"

Maniel writes:

Bryan,

Writing about Rothbard's book, you say: "The chapter ends with a blunt declaration of the libertarian position: 'The ultimate libertarian program may be summed up in one phrase: the abolition of the public sector, the conversion of all operations and services performed by the government into activities performed voluntarily by the private-enterprise economy.'"

It seems to me that if we were successful in abolishing the public sector, we would have to re-invent it. There is a tendency in "developed" countries like our own to identify the public sector as the federal government. In fact, most public sector services of any value happen at the local level (ironically, the federal government takes most of our money). Suppose (starting from today) I felt a need to own and drive a car. I might want to have some assurance that there would be agreed-upon rules of the road, that there was some way to enforce those rules, to say who is qualified to drive, etc. While I suppose that a private company could be hired by some aggregate of concerned drivers to set up the requisite governance, unless everyone, in a surge of public spirit, agreed to pay for the service, the private company would seek to impose its will on all drivers and begin to look more or less like a public entity.

This argument can be easily extended to all kinds of services which, while they can be opened to competition, are more about regulation than about markets: zoning; environmental protection; police protection and the courts; sanitation; etc.
While I classify myself as libertarian, I am cautious about advocating the abolition of the public sector. I believe that in our society, there are functions that serve us all. In our country, the vast majority of those functions are at the state and local levels. Our federal government is the genie that has escaped the constitutional bottle and is now devouring the economy.

Joshua Lyle writes:

Maniel,
happily our host has written an article on just that subject: A Practical Proposal for Privatizing the Highways (and Other Natural Monopolies).

It's neat.

Zac writes:

Maniel- Beyond Bryan's essay that Joshua recommends, you should read David Friedman's Machinery of Freedom. I was first introduced to the ideas of anarcho-capitalism through the Austrians but it was Friedman's book that convinced me that the state was entirely useless and impractical. It really takes the "necessary" out of "necessary evil."

John Singleton writes:

Read it:

http://faculty.msb.edu/hasnasj/GTWebSite/MythWeb.htm

The Snob writes:

Yes, but you see, those poor people get their welfare checks and use them to buy Air Jordans, and spend their food stamps on Lucky Charms instead of store-brand cornflakes. If they can't make those choices well, how ever could we trust them to spend school vouchers wisely?

I'm only being half-satirical here.

Maniel writes:

Joshua and Zac,
Thank you for responding to my comment. In principle, I agree with your inclinations. And in limited practice, e.g., the privatizing of highways, I also agree. However, in general practice - again, starting from today - I am skeptical of the value added by privatizing an agency such as the department of motor vehicles, which licenses both cars and drivers (in my state). The problem I see is that unless access were limited to all highways and byways, trails and streets - which would seem to be a necessity to make the private (DMV) company viable - you would be highly likely to have a strong component of non-compliance with the resulting risk.
I see similar problems in areas where the common good may depend on tempering individual desires (environmental protection is an example).

Anonymous Coward writes:

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El Presidente writes:

Bryan,

My point is simply that you don't have to abolish the public sector to make it work a lot better than it does.

And this is why I believe you are an utterly reasonable person. Bravo! I grow weary of less sophisticated arguments against government that paint with a broad brush and lose focus on the supposed goal of economists: efficiency. There are many things we might reasonably choose to have government do. There is no good cause that I am aware of why government cannot strive do them well and efficiently. Whenever possible, I think we ought to _consider_ using pricing mechanisms for government goods and services. If nothing else, it gives us information about relative preferences and thus a guide for some allocation decisions.

Zac writes:

@ElPresidente- "There is no good cause that I am aware of why government cannot strive do them well and efficiently."

Because it has no motivation to do them well and efficiently? Because it does not have the relevant knowledge and expertise to do them well and efficiently?

"Can" is a tricky word here. If you reject the economic calculation argument, central planning is "possible." That doesn't mean that it is good, or that any reasonable person would expect it to work "well and efficiently" without the proper incentives. "Ought" presupposes "can" but the converse is not true.

And for anyone to "reasonably choose to have government [provide some service]", what is your criteria for the adverb "reasonably" here? You mean they have used reason and determined that government ownership is preferable to private?

I think a model like Singapore, where government enterprises are run "like businesses," would be a huge improvement over the status quo in the West and a big step toward eventual anarchy. After all, once something is actually running "like a business" its pretty trivial to privatize it, right?

El Presidente writes:

Because it has no motivation to do them well and efficiently? Because it does not have the relevant knowledge and expertise to do them well and efficiently?

Is profit the ONLY motivation known to man? According to Bryan's USPS example, apparently it is not. Is government incapable of hiring people that have expertise? I have training and formal education in political science, management, and and economics and I work for government. These are valuable to private firms. Why would they pay for skills and knowledge that are worthless? Did I suddenly become incompetent when I was hired by government? It seems to me that the issue is not as much the skills of the workers as the nature of the tasks they are given. I am always willing to debate public policy, but I see no need to disparage public servants.

This is precisely my concern with generic canned criticism. It is not only frequently inaccurate, it is almost pure bias. There are instances in which the criticism is valid, and it is certainly more true of government than of private industry. However, it is nowhere near as true or extreme as libertarian ideologues often express or imply. The burden of academia is to investigate, deliberate, and report, not to swallow and regurgetate. It's alright to say that government does some things much worse than the private sector. It's also alright to acknowledge when government does some things better or when only government can do them in the manner we would like them done. If you would like to debate economies of scale and scope, I think that's a very worthwhile discussion.

El Presidente writes:

Zac,

"Can" is a tricky word here. If you reject the economic calculation argument, central planning is "possible." That doesn't mean that it is good, or that any reasonable person would expect it to work "well and efficiently" without the proper incentives. "Ought" presupposes "can" but the converse is not true.

Central planning? I'm not talking about a command economy. I am talking about a mixed economy in which government plays an important role, including providing some goods and services.

What is good? If we have just stepped into the realm of metaphysics, then economic efficiency (teleology) will have to hold its own against at least two other concerns: justice(deontology) and duty (virtue). This is another area where I am willing to go, but it means we have to expand the conversation.

My point in saying that government can strive to provide goods and services efficiently is simply that we are all pursuing constrained optimization, but the constraints change and the optimal outcome is not static. The tools economists use are available to governments as they are to firms. The constraints are different and optimality is often distinct in the areas where government operates; it is often the reason where government is there in the first place. Once the constraints are understood and optimal is defined, the rest is mechanical. Saying that government is de facto worse than the private sector because it is inefficient is saying one or more of the following:

1. The constraints applied to government are wrong
2. The definition of optimal is wrong
3. Government executes the mechanical application poorly

The first two are a matter of debate, discussion, and some sort of public choice. The third is empirical and the place where efficiency can be had just as easily as if pursued by a firm.

. . . [W]hat is your criteria for the adverb "reasonably" here? You mean they have used reason and determined that government ownership is preferable to private?

I mean deliberately. If we choose to have public institutions because they offer what private institutions cannot (i.e. minimizing free-riders, a baseline of equality, a common system/body of law and process of resolving disputes, unified and controlled military force, redistribution of income, etc.) then I would call that reasonable. We have preferences with reagard to the form of public institutions and quality of the services and goods they provide. I know of no reason why we ought to discount those preferences in a prima facie manner. Some disagree with the notion that a state has any reasonable purpose (sometimes except for military defense). That's fine. Most people think the state has a number of reasonable purposes, and not from ignorance, but as an expression of preference. If they find that their overall utility (not simply that measured in terms of average material standard of living) is enhanced by the presence of government and the goods and services it provides, I wonder how we could say their preference is not reasonable. Would you?

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