Why Libertarianism Can Never Work
Alternatively why Small Government Doesn’t Work
The libertarian idea of society is unworkable for the simple reason that it reflects neither realistic human behavior nor hyper rational human behavior.
We can explain why with a thought experiment: Imagine a world where everybody is a clone of each other. Everybody is equally talented, educated and wealthy. These people all live in an ideal libertarian state, meaning there is a minimum of government interference in their lives. No wealth redistribution systems. Government is primarily concerned with protecting property rights and national defense.
How would such a society develop over time?
Many wrongly assume that if everybody work equally hard and are equally talented, then they would be equally well off. However in reality that would not be the case. There is always an element of luck. One can argue about the magnitude of its importance but there is no denying that it exists.
Every day is a dice roll, which may bring you a good business deal, car crash or a lucky harvest. This size, shape and type of dice will be determined by your DNA, parents, environment etc. But in our thought experiment everybody has an identical dice. The chance of rolling a particular number is equal for everybody, but still random.
In experiments like this, the distribution of outcomes will have a bell curve shape (normal distribution), meaning the majority will get the average value of the dice, while two tiny minorities will get either very bad or very good outcomes.
How Inequality is Amplified Over Time
When we combine the normal distribution of luck with the economy of scale, we get a significant long term problem. A large factory or farm produce more value per dollar invested than a smaller one. This is due to economies of scale. Hence lager fortunes on average give a higher return than smaller ones. Economist Thomas Piketty demonstrated this in his book Capital in the Twenty-First Century.
This will cause small initial differences to amplify over time. Those who become wealthy can use their wealth to give better education and opportunities to their offspring which means they will get ahead of their peers, even if everybody in genetic terms are clones.
One must assume a libertarian society, will not have inheritance taxes. This means accumulated wealth can be keep growing over generations further cementing the position of the elite.
How Wealth Concentration Distorts Politics
But it gets worse, and this is where I think the core problem with libertarianism or small government ideology lies. In a system with a minimum of checks and balances, beyond enforcing property rights, there is nothing to prevent the wealthy from utilizing their power for political gains.
If people operate as rational individuals seeking optimal outcomes for themselves, then their natural inclinations would be to buy politicians through any legal means necessary to push policies benefiting them.
This is something I suspect libertarians never take serious. While they are all too ready to view the economy as something dynamic and always changing, they seem to think think politics is static. Even if a libertarian society is achieved initially, one must consider its long term stability. What direction will natural political forces drive it towards?
Libertarians rightly point out that the economy is dynamic, but forget that so is politics.
Why the Rich Will Not Champion a Truly Free Market
The rich and powerful will change the whole system to benefit them. You always get more profits from monopoly than in a free market. It is hence in the interest of the rich to limit and subvert the free market. Thus a truly free market system cannot survive in a thoroughly unequal society. Rather we end up with crony capitalism. How does this work in practice? We can see this in various forms in almost any capitalist country today. Among western democracies it is perhaps even more pronounced in the US.
Towards a Society of Privilege for the Rich
Copyright, trademark and patent laws get expanded ever more, so that the established players can gain de-facto monopoly powers. We see this play out in the pharmaceutical industry, telecoms and utilities. E.g. in Florida utilities managed to get politicians to push through laws which made it illegal to get power exclusively from roof top solar cells. Various states have banned the sale of Tesla automobiles, at the behest of established auto-dealers.
This is not very different from how the wealthy in medieval societies maintained their wealth. They had exclusive monopolies to trade with certain goods. Only certain people were allowed to operate a mill, which everybody had to use etc. These were privileges the rich and wealthy had. They lobbied the king to get these. Today the rich lobby politicians for privileges in the form of stricter patents, trademarks and copyrights. There are of course lots of other ways of creating a barrier for others to enter a market. One can insist on particular licenses to operate a certain type of business. By making this license onerous and complicated you keep out the small fish.
The Long Term Instability of Libertarian Society
A libertarian society, can not hinder such developments, because there are no mechanisms to balance wealth. Wealth means power, which means invariably that libertarianism has no mechanism for balancing power.
This is why we see no libertarian governments in reality. These societies are not stable. If anything close to them every appears they will either turn into crony capitalism or spark a socialist revolution. The reason being that there is no mechanism in libertarianism to hinder concentration on wealth.
Concentration of wealth will either cause the wealthy to rewrite the laws and change the system to crony capitalism or cause so much resentment among the lower classes than they revolt, either by violent means or by voting into office some sort of left wing extremist.
The closest thing ever to a libertarian economy was probably Hong Kong under British rule. However that was only possible because there was no democracy.
What a Stable Society Looks like?
Crony capitalism is naturally stable because those with wealth also have the power. It means both political power, media and markets. That means the elite in a crony capitalist society can easily manipulate the masses to maintain their system and hold onto power.
State capitalist systems such as found in the former East Block and the Soviet Union are not stable either, as we saw at the fall of the Berlin Wall. When skilled workers cannot start their own companies and get adequate compensations for their skills, they will invariably leave, leading to brain drain. To counter such effects one ends up with suppression and tyranny.
This leaves us with with democracy with a mixed economy as the only sensible choice. These are stable because political and economic power is not completely out of sync. There is some form of wealth redistribution which means the majority will not have a financial incentive to outright reject the system in the polls. Redistribution also means less power is concentrated with the elite which means an all out manipulation of the political system by the elite to benefit themselves will be more difficult.
Hence my claim will be that it is easier to maintain a free market when there is wealth redistribution, because consumers which represent those who truly benefit from free market competition will have the political power to maintain this system. They will have this power because redistribution mechanism will make sure they don’t lose so much income and wealth as to also loose political influence.
Ideally a stable society needs to offer a mechanism for different interest groups in a society to fight for influence and balance each other out.
Does Such Systems Exist in the Real World?
It is of course easy to criticize a system if you have no alternative to offer. But the idea of a more mixed economy where wealth is redistributed to some degree and/or where the bargaining power is between different groups is evened out more does in fact exists in many different countries at different degrees.
One can look at GINI coefficients for different countries. This is one measure of inequality. And we can look at historical developments. We see e.g. how Anglo-Saxon countries which has typically been most sympathetic towards the idea of a minimal state in the classic libertarian fashion has much higher inequality. Especially the US which has pushed the small government ideology furthest. It is not just high but growing.
Meanwhile countries which has sought more social democratic policies, where inequality is deemed a bad things such as Nordic countries, Germany, France etc have lower levels of inequality.
In fact many Nordic countries have managed to keep inequality remarkably stable over many years while inequality has grown rapidly in the US. The connection to policy is clear. The US had declining inequality since FDR and in the post war years when it had high taxations on the rich, stronger support for unions etc. It was a time when the US was closest to social democratic values in its history. But when the “small government” ideology of Ronald Reagan took over in the 1980s we saw how that development got reversed and inequality rose rapidly.
The point is that if you have no mechanisms in place to counter inequality it will simply keep rising until your society becomes a dysfunctional crony capitalist state which caters to the rich more than the average citizen.