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Wednesday, November 23, 2011

Libertarian Slogans That Are False: II

So, in part I of our series, we established that the proposition "Involuntary exchange always makes at least one participant worse off," is only true with certainty ex ante. Ex post, we can only say, "Well, it seems likely that the proposition is true, but we can have no certainty about it -- there surely will be exceptions." (If you recall, I got the libertarian trifecta agreeing with me here: Mises, Rothbard, and Murphy all concur that this statement is only apodictically true ex ante.)

This is an important initial result to establish along the way to debunking a second libertarian slogan as demonstrably false:

"The government doesn’t create resources or wealth, it simply redistributes them." (Now, don't tell me this slogan is a straw man!) What can this mean?


The first thing we have to deal with is what does the statement "creates wealth" mean? Let us begin by analyzing what it means in common speech. In the parable of the talents, Jesus describes a master who gives three of his slaves a certain number of talents (a talent was a unit of money at the time), and leaves on a journey. On his return, he finds two of them have invested the talents and can give him back more than he left them. He is happy with that result: they have created wealth. The third merely buried his, and earned nothing, and he is punished. In a more modern context, when people say, "Steve Jobs created a great deal of wealth by founding Apple Computers," they mean he started with a small amount of funds, and turned it into a much larger amount, based on the market value of Apple.

So, in general, when people say "X created wealth," they are performing an ex post, accounting judgment of the returns of an activity. Here are two, alternative interpretative frameworks that I think make claiming "X created wealth through Y" nonsensical (and which therefore make the claim "X didn't create wealth through Y" equally nonsensical):

1) It cannot be taken as an ex ante statement. First of all, there is the very obvious point that it is framed in the past tense! But even if we modify the statement to "X plans to create wealth through Y," it doesn't help: all people always plan that at least they will be better off after their plans go through, so everyone plans to "create wealth" (at least for themselves) with every plan they make. So in this case, it would be trivially true.

2) It cannot mean "creates wealth net of opportunity costs," since in that case, we could never assert it: we never know that some other plan might not have done better than the actual plan. Perhaps if Steve Jobs had only invested in a networking rather than a hardware company, he would have made even more money. Perhaps if the first two slaves in the Parable of the Talents had made a different investment, they could have quadrupled, rather than doubled, their master's talents. If we try to take opportunity costs into account, then we will be left saying "We never really know if anyone has ever created wealth; after all, there is always the possibility they could have done better!" If we never know if anyone creates wealth, the libertarian certainly can't claim that government never does so. No, we must rely on an accounting interpretation of profit (money invested is less than money earned) if we want these statements to be matters of dispute at all.

So, taking 1) and 2) into account, what the libertarian asserting "The government doesn’t create resources or wealth, it simply redistributes them," has to be claiming is that no government project ever returns an accounting profit. And that is an extraordinary claim, given, say, that several of the TARP investments seemed to have clearly resulted in large accounting profits, as did the Mexican bailout. And throughout history, we can think of many more examples where we might not be able to total up the exact profit and loss, but our intuitions should tell us that some government project did, indeed, earn a large return. Didn't Henry II's investment in establishing the Common Law in England result in huge returns over eight centuries, especially when you consider the entire revenue of the Crown at that time was only tens of thousands of pounds per annum, so whatever he spent on the project must have been on the order of a few thousand pounds? Didn't the Roman government's investment in establishing a huge Roman law, common market, and common language area in the Mediterranean basin yield continuing returns that must far exceed its investment, down to our day? Wasn't DARPA's investment in the Internet more than amply repaid? And remember, all we need is for a single case like these or the many others that could be brought up to represent a creation of wealth for the statement we are examining to be falsified.

Now, we established our first result to foreclose a possible objection to these examples, an objection which runs, "Well, OK, but the money to fund these projects was extracted involuntarily [we here bracket the question of whether tax payments are involuntary], so that must have made at least one party worse off, so we cannot call this wealth creation." But, as we saw, that principle only applies ex ante, a limitation on it agreed to by leading libertarians, and so is irrelevant to our ex post accounting of the results of various government programs.

Where does all this leave those who still wish to object to government programs? Well, rather than trying to make an indefensible apodictic claim, you should argue based on the odds: "OK, you can cite a few government programs that have created wealth, but how many more have wasted it? And how much more likely are private entrepreneurs to really be motivated to seek out profit-making opportunities?"

With that, we now have a rational basis for  discussion. We can examine if there are or are not particular projects that a government could reasonably be expected to perform better than a private enterprise. And I think these questions indicate that we really ought to have a predisposition towards handling matters of investment with market solutions rather than government programs. But we have demonstrated that the proposition, "The government doesn’t create resources or wealth, it simply redistributes them," cannot be defended on economic grounds, but is merely a propaganda slogan.

And, of course, nothing in this post should be taken to be contrary to the moral case against taxation. Libertarians could very well concede, "OK, various government projects at times may have created wealth: that in no way justifies the rights violations involved in taxation." That is a separate argument. And here, I think I have done libertarians a favor: just abandon the weird hybrid arguments that are consequentialist but pretend to have some apodictic basis: you can argue that generally the consequences of government investments will be inferior to those of private investment, or you can argue that taxes are unjust even if they result in wealth creation, but saying "The government doesn’t create resources or wealth, it simply redistributes them," is an incoherent oscillation between the two types of objections to state activity.

A NOTE TO THOSE ON THE LEFT: Praxeological reasoning has often been derided by non-libertarians as simply being a way to shield libertarian conclusions from empirical evidence. That is a mistake! Yes, it has been abused in the way you deride. But almost the entirety of this post is praxeological reasoning, and that reasoning has been used to debunk a bit of libertarian sloganeering.

There is no reason to take praxeology as the whole of economics. But, if not abused, it is a perfectly valid part of economics.

18 comments:

  1. I accept your view that ex post some govt spending(financed by forced taxation) may indeed turn out to have created more wealth than the alternative private spending would have done.

    However it seems that this could only be because the spending decisions made by the individuals (had they not been taxed) would have turned out to be wrong.

    Given perfect knowledge about the future then at best the government would spend the money in the same way as the individuals would have done and generate the same level of wealth. However there would likely be overhead with collecting the taxes that would tend to favor the non-tax model.

    In addition: There is no such thing as "wealth creation" in the abstract. An individual will plan to maximize his wealth while the government will plan to maximize its. Assuming this leads to different spending plans then again the individual is better controlling his own spending on average other things being equal.

    So the only scenario I can think of where taxation would benefit the individual is where the govt always has better knowledge about the future than the individual and will use it to make decisions that the individual will benefit from.

    It strikes me if that was generally the case then the state could make itself a voluntary organization and would not need to use co-coercion.

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  2. Yes, it's possible that some marginal tax unit in the past was used to create a state of affairs which is Pareto superior to the alternative current states. For example, if I learn that paying $100 marginal tax dollars in the past led to a current road with no potholes, then I may feel that this was a good tradeoff. I may feel ex-post that I would rather lose the $100 than gain the pothole!

    However, the libertarian praxelogist need not dispute this in order to build a case against _future taxes_. This is an ex ante question, although it's possible for ex post considerations to inform my arguments [for example, if some pattern of behavior has a good track record, then maybe we shouldn't stop doing it just because we don't completely understand it].

    The libertarian praxeologist who wants to build an ex ante case against taxes can reason about what the taxpayer thinks _at the time_ of payment. The actor who pays taxes to avoid punishment values the state in which (1) he loses the privately held money, and (2) gains some corresponding government expenditures LESS than the alternative keep-money-and-no-punishment states. He only pays because he thinks that no such alternative states are possible. He thinks all the keep-money states involve punishment.

    Of course this analysis will not be applicable to everyone. There are many people who think a tax-funded state is better than the alternatives. [You are one of these, right?].

    If we take punishment out of the equation, the the actor under consideration is in the same boat as a businessman evaluating in investment opportunity. Choosing to not fund the government expenditure in the face of no punishment maps to the businessman who does not *think* that the investment is a worthy one. Of course, ex-post, the businessman _and_ the taxpayer may have regrets about their choice.

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  3. "However it seems that this could only be because the spending decisions made by the individuals (had they not been taxed) would have turned out to be wrong."

    But what does it mean for the decision to have been "wrong"? That there was a better available opportunity? Then I think we must suspect that every one of our decisions is wrong, since there probably was always something more profitable we could have done, if only we had thought of it.

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  4. "In addition: There is no such thing as "wealth creation" in the abstract. An individual will plan to maximize his wealth while the government will plan to maximize its. Assuming this leads to different spending plans then again the individual is better controlling his own spending on average other things being equal."

    OK, Rob, this is a dodge. Obviously, when people are discussing, e.g., did building the transcontinental railroad create wealth, they are speaking of societal wealth. If you think the concept is meaningless, then you certainly can't claim "The government doesn’t create resources or wealth, it simply redistributes them." That's a claim in welfare economics, and if you reject welfare economics, you must refrain from making welfare economics claims!

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  5. > But what does it mean for the decision to have been "wrong"? That there was a better available opportunity? Then I think we must suspect...

    The full space of human choices is quite large. We certainly can't define "optimal" without limiting the space in some way [maybe by iteration, maybe by constraining particular attribute values].

    I think when people talk about wrong choices, they usually mean something very specific. It involves (1) a _given set_ of choices and (2) particular states of knowledge. When we say that we picked the "wrong" choice, we say that if we had our current knowledge at the time of the choice, and needed to choose from a given set, we would act differently from how we acted. The "given set" may be the set of choices that were historically under consideration or some set that we're considering now.

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  6. I'll deal with this after I digest my Thanksgiving meal, Callahan...

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  7. Good evening, Dr. Callahan. Hope you and yours had a wonderful Thanksgiving.

    I have been giving this some thought, and the more that I think about it, the more confused I get.

    First, I think that you are making an improper jump from slogan #1 to slogan #2. I agree with slogan #1 as it pertains to involuntary exchange being, ex ante, not good for the forced actor, but possibly being, ex post, good for the forced actor.

    But the involuntary exchange described in slogan #1 only involved two people: you and your child. A present day example might be the government forcing people to buy health care. The person who is forced to buy might hate it ex ante but might really enjoy it ex post -- especially if said person has had a need for medical care after their forced purchase.

    But in slogan #2, there are three people involved. In order for the government to create wealth in industry x/company x, it must take the money that I was going to invest in industry y/company y. I absolutely agree that the government can achieve accounting profits and that the government can create wealth in industry x/company x. I don't see, however, how that is not redistribution (from x to y).

    The only way that the third party will not be worse off -- even ex post -- is when the government happens to take their money and create wealth in the industry that the person had already planned to support or later decides to support. (This, of course, assumes that there are no transaction costs and that the government has not skimmed a large chunk off the top.)

    Am I missing something here?

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  8. And, then Bob will poop out his answer. (jk)

    Seriously, I am interested in what Bob's argument will be because this one is certainly giving me a challenge. However, I can't help but feel that the statement as quoted cannot be proven merely by using voluntary/involuntary exchange argument. I somehow have the feeling that this deals more with the rational allocation of resources than whether the exchange is voluntary or involuntary.

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  9. I should be more clear. I think that the rationality of the allocation of resources is directly related to the nature of the exchange, but that I think that the quoted statement cannot be argued merely using the nature of the exchange as its basis.

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  10. You're nitpicking and making special case for government as usual: problem of ex ante and opportunity costs is always there for any human action. Yet we know what works and what doesn't on the basis of accumulated past experience. That's how science works: ex ante on large number of ex post data points.

    And that ex post research indicates pretty much that government never creates wealth. Pretty much as raising price never gets you more demand. I'm using that example purposefully: there are some toys of math-oriented economists where increasing price increases demand. It's being researched precisely because it is amusing. We'll never see this in real world, though. And the same is true re wealth-producing government.

    Yes, there is theroetical possibility that there will be some Steve Jobs in government that will create wealth, that is, he will undertake actions in state-owned enterprise that will lead to accumulating more economic value than the cost in taxation. There's also theoretical possiblity that Barack Obama is actually a rational angel who runs mysterious Lord's plan to surprise us all after being reelected.

    Strictly speaking, one can't prove the thesis "government can't create wealth" true because since advent of falsificationism we know that no statement about natural and empirical reality can be proven true, there are only standing hypothesis, that is, the ones that have not been proven wrong by empirical data, and the failed ones (proven wrong by empirical data).

    But what you are TRYING to create here is an impression that since it can't be proven true, there's a possibility that government MIGHT create wealth, and that is enough for those who want to grasp that thesis even though experience has repeatedly and systematically proven that wrong.

    After modification for falsificationism, yes, the statement "government never creates wealth" is true, as far as statement about empirical reality can be approximated as truth (typically meant in logical sense) at all.

    Re 2), that's outright silly: it's true that we never know precisely how two options would run ceteris paribus, being tried in two starting situations that are perfectly the same. There is, however, such a thing as comparing them ex post, normal scientific method. And that shows what I wrote above.

    "So, taking 1) and 2) into account, what the libertarian asserting "The government doesn’t create resources or wealth, it simply redistributes them," has to be claiming is that no government project ever returns an accounting profit. And that is an extraordinary claim, given, say, that several of the TARP investments seemed to have clearly resulted in large accounting profits, as did the Mexican bailout"

    That would get you F in economics freshman course. First off, it's not difficult to turn accounting profit if you have a govt (or other) monopoly. That in itself does not prove that govt created wealth: merely that it impoverished society for, say, $1 bln in taxation (or debt) in order to create monopoly producing $10 mln of wealth annually with $1mln EBITDA profit - "just" there is monopoly on that product, say, electricity or city transportation. There you go: accounting profit, and net loss of wealth. Accounting profit of an enterprise does not capture all the costs associated with it. People immediately point e.g. cost of negative externalities out when pointing to free market enterprises, but never point to opportunity cost of govt monopoly, subsidies, taxation and negative externalities of state-owned enterprises.

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  11. I wasn't really arguing in terms of welfare economics but only from the perspective of an individual tax-payer. Having conceded that ex post the tax payer may decide that the govt spent his money better than he would have done (he likes the new freeway better than the new car he had planned to buy) I was interested in seeing if there were scenarios where he could make the same judgment ex ante. I decided that other things being equal (access to knowledge and resources) this was unlikely because the govt would always have to use extra resources to collect the taxes and be likely to have a self-serving bias compared with a private option.

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  12. Phel, it certainly *is* redistribution. That's not the part of the original statement I was disputing.

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  13. Oh, and Phel, consider the creation of the Common Law: couldn't every English taxpayer have been better off, on net, in a world with Common Law and with the taxes that were necessary to pay for it, than in a world without either?

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  14. "You're nitpicking and making special case for government as usual:"

    Eurobagger, please read what I wrote: I am NOT trying to make any case for government in this post. I am showing that a particular slogan is false. If you'd like to address what I catually wrote, please try again.

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  15. Murphy: "I'll deal with this after I digest my Thanksgiving meal, Callahan..."

    Please understand, folks, Bob eats like a python, and may not be done digesting for a week or so.

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  16. Gene,

    Do you agree that the truism behind the sloganeering, I.E. government is less efficient in its use of resources than private enterprise, more or less holds true?

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  17. That's one long shit, Murphy. If you don't make a response by tomorrow, then I will.

    Damned the curses.

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  18. Warren, yes, certainly.

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