Errors of Libertarian Economics

The economic philosophy that has dominated government policies and business practices since the 1970s contains many radical errors. Some of these date from the eighteenth-century origins of "classical" economics. Others developed more recently, with the rise of two distinct "schools" of modern economic thought:

The mainstream or neo-classical school, whose best-known figure is the late Milton Friedman (1912–2006); and the Austrian school, led by Viennese professors Ludwig von Mises (1881–1973) and Friedrich von Hayek (1899–1992).

Despite their differences, these schools have much in common. Both exalt the free market and seek to minimize the role of the state. Both share an exaggerated belief in the autonomy of the individual, as against the claims of society or community. Both can therefore be called "libertarian". Here we examine five basic errors of libertarian economics.

A Radical Misconception of Freedom

Hayek proposed a purely negative conception of individual freedom. For to him, freedom simply means not being subject to the will of other people. This rules out a state that regulates or protects, since the state is run by people (politicians and civil servants). The free market, however, is considered an impersonal force. So, according to Hayek, if we are harassed and oppressed by market forces, as all too clearly we are today, that in no way diminishes our freedom.So Hayek wanted to shrink the state and hand over most of its duties to the free market. As Friedman put it, "freedom is always freedom from the government".[note]Milton Friedman, lecture Liberty and Property (Princeton, 1958).[/note]Hayek’s notion of freedom also rejects any link between freedom and morality: "freedom is an opportunity to do good, but ... only if it is also an opportunity to do wrong."[note]Friedrich von Hayek, The Constitution of Liberty (1960), chap. 3.[/note] Or, in Friedman’s words, "freedom has nothing to say about what a man does with its freedom".[note]Milton Friedman, Capitalism and Freedom (1962), chap. 1.[/note]That, I need hardly remind you, directly contradicts Catholic teaching: the Catechism (no. 1733) tells us that "there is no true freedom except in the service of what is good and just". We can trace this idea of freedom as goodness and justice back through the history of Christian theology and indeed to the Old Testament.The Catholic theologian Bernard Häring wrote that "freedom is the power to do good; the power to do evil is not of its essence".[note] Bernard Häring CSSR, The Law of Christ (original 1951), trans. Kaiser (1961), Vol. I, chap. 4.[/note] Leo XIII wrote that "the possibility of sinning is not freedom, but slavery",[note] Leo XIII, encyclical Libertas Praestantissimum (1888), no. 6.[/note] echoing St. Thomas: "not to be able to sin does not diminish our liberty."[note]St. Thomas Aquinas, Summa Theologica II/II, qu. 88, art. 4.[/note] In the New Testament we read of the slavery of sin. It is because sin is likened to slavery, the opposite of freedom, that we use the word redemption to mean pardon; its original meaning is buying a slave out of bondage. In Psalm 130 we find the saying, "with the Lord is plenteous redemption ... and He shall redeem Israel from all his iniquities". Thus, in the Jewish and Christian traditions, freedom is firmly tied to justice and righteousness.Because libertarians hold that freedom includes the power to do wrong, it follows logically that they hate regulation. They do, of course, agree that outright fraud or theft must be prohibited, since for libertarians, private property is absolutely sacred. But they reject the whole idea that governments, or civil associations such as labor unions, should act against cut-throat competition, unjustly low wages, exorbitant inequalities, reckless speculation or grossly imprudent bank lending (a main cause of our current crisis). All these wrongs, they say, must be tolerated, since we cannot restrain them without destroying our own freedom.

Unlimited Freedom of Contract

The doctrine that any person has an inalienable right to enter into any willingly agreed contract with any other person forms the bedrock of libertarian economics. It dates essentially from the eighteenth century; an early form of it can be found in the original U.S. Constitution (article I, section 10): "no State shall pass any Law impairing the Obligation of Contracts." In Lochner v. New York (1905), the Supreme Court elevated the principle of freedom of contract to the level of a sacred constitutional principle [note]Lee Boldeman, The Cult of the Market (Australian National University, 2007).[/note] by striking down a state law limiting hours of work in bakeries. Justice Rufus Peckman condemned this law as an "unreasonable, unnecessary and arbitrary interference with the right and liberty of the individual to contract".Libertarians today insist rigidly upon this principle. Friedman explained that, in the ideal market economy, "individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary".[note]Milton Friedman, "Introduction," Capitalism and Freedom (1962).[/note] Edward Younkins, another ardent free-marketeer, puts it even more strongly. He insists that we must be "free" to make bad contracts: "legislators and judges should refrain from substituting their own judgments in cases where they believe there is unequal bargaining power or where they think that certain contracts are not in the 'public interest.'"[note]Edward Younkins, Freedom to contract (2000), see Liberty Free Press on www.quebecoislibre.org.[/note]Thus, you must be allowed to enter into whatsoever contract you please with anybody else, provided you can persuade the other party to accept it (or vice versa); even if the contract is unfair to the person you are dealing with, or unfair to you, or immoral, or annoying to your neighbors, or damaging to the environment.The basic problem with this doctrine is, of course, the unequal bargaining power that fails to worry Younkins. A contract between a laborer and a big corporation is clearly a bargain between parties of very unequal strength, so it may well be unfair to the laborer; likewise, a deal between a small coffee-planter and a multinational agribusiness, or an individual tenant and a dominant landlord. Libertarians simply assume that a free market will enable bargains like these to be struck on terms that are acceptable to all parties concerned. Indeed, they flatly deny that such bargains may be unjust. For Hayek, the free market is like a game in which "there is no sense in calling the outcome just or unjust".[note]Friedrich von Hayek, The Mirage of Social Justice (1973), chap. 10.[/note]Catholic teaching explicitly rejects this theory: "agreement between the parties is not sufficient to justify the amount to be received in wages" (Catechism, no. 2434). Cardinal Henry Manning argued "that there can be no real free contract between the capitalist and the worker. The capitalist wears golden armor; and the worker, if he remains obstinate, knows that hunger awaits him. Thus the ‘free contract’ has become the employers' gospel".[note]Cardinal Manning, The Labour and Social Question (London, 1891).[/note] The Compendium (no. 302) states that "natural justice [which requires the payment of a just wage] precedes and is above the freedom of the contract".

Our Obsession with Competition

In the world of libertarian economics, "competition is always good,"[note]Pascal Salin, Le Figaro (Paris), 2 February 2005.[/note] as a leading French free-marketeer, Pascal Salin, has put it. Or, in Friedman’s words, the more unfair competition, the better.[note]Milton Friedman, quoted by Michael Ignatieff, 20/20 (BBC Radio 4), 5 February 1997.[/note] Today, in many countries, any attempt to restrain competition is considered a crime and is severely punished. This attitude can be traced back to Adam Smith, who lambasted the anticompetitive craftsmen’s guilds of his day. Without them, he argued, "the wages of the workmen would be much lower ... the trades, the crafts, the mysteries, would all be losers. But the public would be a gainer, the work of all artificers coming in this way much cheaper to market".[note]Adam Smith, The Wealth of Nations (1776), book I, chap. 10, part 2.[/note]His dream was to make everything cheaper, so that we could all (apart from the impoverished workmen) buy and consume more. Though harsh on the workers, that dream was not entirely ridiculous in the 1760s, when world population was around 720 million[note]See www.worldhistorysite.com.[/note] and there were few worries about exhaustion of the planet’s resources. It makes no sense whatever today.In reality, competition does not always cut costs; it can inflate them. The exorbitant salaries and bonuses paid by Wall Street banks are the result of unrestrained competition between banks to employ the cleverest traders. In more gentlemanly times, it was "not done" for one bank to poach another’s staff; this informal restraint on competition kept costs down.The Compendium (no. 347) acknowledges that healthy competition is necessary for a flourishing economy. However, the role of competition in the economy is like that of certain hormones in the human body, which are vitally necessary, but pathogenic when present in excess.[note]Angus Sibley, "The Hyperthyroid Economy", in Journal of the Royal Society of Medicine (London), June 1995; available at www.equilibrium-economicum.net.[/note] Fierce competition between banks to expand their lending led to the subprime mortgage crisis of 2007. Unrestrained competition can make working life unhealthily stressful.Although the Bible hardly mentions explicitly the abuses of commercial competition, in several places it condemns the sin of hasagat gevul or "infringement of boundary", eg: "accursed be he who displaces his neighbor’s boundary mark" (Deut. 27:17). In the rabbinical tradition, this commandment has often been interpreted to cover predatory competition, which can damage a competitor’s livelihood, and is thus equivalent to encroachment upon a neighbor's land.[note]See Baba Bathra (Babylonian Talmud), chap. II, folio 21b, available at www.comeandhear.com; Rabbi Chaim Jachner, "Hasagat Gevul" in JewishLaw, available at http://jlaw.com.[/note]Pius XI (Quadragesimo Anno, no.88) insisted that "the right ordering of economic life cannot be left to a free competition of forces". John Paul II (Laborem Exercens, no. 20) emphasized the need for labor unions, which restrain competition between workers, as well as for professional and employers' associations: "organizations of this type are an indispensable element of social life, especially in modern industrialized societies".

Disregard for the Human Value of Labor

In libertarian economics, labor is treated simply as an input, like any raw material, in the process of production; its sole purpose is to serve the market, to produce what consumers want to buy. Smith argued that "the interest of the producer ought to be attended to only insofar as it is necessary for promoting that of the consumers".[note]Adam Smith, The Wealth of Nations (1776), book IV, chap.8.[/note] Mises insisted that "labor is a means, not an end in itself".[note]Ludwig von Mises, Human Action (1949), part I, sect. 7, part 3.[/note] But if the sole reason for work is to serve the market, it follows that there can be no objection to the instant extinction of work at the whim of the market. That is exactly what we see in free-market economies today.Where labor is regarded as a commodity, its price (wage rate) is determined simply by the balance of supply and demand in the market. Classical economists did indeed recognize that workers need to be paid enough to live on, at least a subsistence wage; but the more recent Austrian economists do not even accept that. According to the Viennese professor Carl Menger (1840–1921), founder of the Austrian school, "neither the means of subsistence, nor the minimum subsistence level, can be the cause or the principal determinant of the price of labor services".[note] Carl Menger, Principles of Economics (original 1871), trans. Dingwall & Hoselitz (1976), page 171.[/note]By contrast, in the Judaeo-Christian tradition, work is considered honorable and beneficial in itself. God Himself is seen as a worker: the firmament showeth his handiwork (Psalm 19:1). The labor of the righteous tendeth to life (Prov. 10:16); idleness leads to unchastity [and] to idiocy.[note]Kethuboth (Babylonian Talmud), chap. V, folio 59b, available at www.comeandhear.com.[/note] In the Catechism (no. 2427) we read that human work proceeds directly from persons created in the image of God and called to prolong the work of creation.Catholic theology refuses to see work merely as a means to an end, a burden we tolerate because we want the money and the goods it produces. "Through work, man ... achieves fulfillment as a human being" wrote John Paul II (Laborem Exercens, no. 9); Adam's work in the garden before the Fall, as St Thomas tells us, "was not laborious, but was joyful, being the exercise of his natural powers".[note]St Thomas Aquinas, Summa Theologica part I, quest. 102, art. 3.[/note]In the nineteenth century, German economists led by Gustav Schmoller (1838–1917) waged a bitter intellectual war against the Austrians. These Germans laid the foundations of the successful modern German economy, where workers have almost equal representation with shareholders on the supervisory boards of large companies. Schmoller’s view of work is far more enlightened than that of Menger or Mises: "man cannot do nothing but eat and make love, he needs other things to occupy his time and his soul ... all moral strength has its roots in work."[note]Gustav Schmoller, Grundriss der allgemeinen Volkswirtschaftslehre (1900/04), Vol. I, pages 21 and 39.[/note]This German school of economics had some influence in America at the beginning of the twentieth century, inspiring "institutionalist" economists such as Richard Ely and Thorstein Veblen. But that did not last; the Austrians and neoclassicals have long since eclipsed Schmoller and his colleagues, whose wise words have never been translated into English.

Rejection of Distributive Justice

Today, the human race as a whole is consuming many of the earth’s resources at unsustainable rates, even though much of humanity still lives in severe poverty. We cannot all persist in producing and consuming more and more. It should therefore be obvious that redistribution, combined with reduction in wasteful consumption, is the only possible route to a just overall distribution of the planet’s finite resources.But libertarians are blind to this fact. They stick to their view that the only way to eliminate penury is to press ahead with economic growth, to provide ever more goods for the infallible free market to distribute. We have seen how Smith’s classical economics called for unrestrained competition to encourage more and cheaper production. But that strategy has run into the buffers of global sustainability. It has ceased to be relevant, yet still it dominates our thinking and practice.Since libertarian economics became fashionable in the 1970s, replacing more interventionist state policies, inequalities have clearly widened practically everywhere. Thomas Piety, a French economist who is a noted specialist on this subject, writes that, over the 1980s and 1990s, "American inequalities seem to have reverted to the level at which they stood just before the First World War".[note]Thomas Piketty, Les hats revenue en France au XX siècle (Paris, 2001), 548.[/note]Most practical methods of reducing inequalities are repugnant to libertarians. Labor unions are hated because they obstruct the worker’s freedom to agree his own contract with his employer. Minimum wage rates are another blasphemy against the divine free market, whose worshippers assert, against much historical evidence, that fixed minima "inevitably" reduce the demand for labor and so cause unemployment. Redistributive taxation (higher tax rates on higher personal incomes) "is a mode of disguised expropriation of successful capitalists and entrepreneurs"[note]Ludwig von Mises, Human Action (1949), part VI, chap. 32, no. 3.[/note] according to Mises, while his admirer Murray Rothbard stated that "Taxation is Robbery" and that "the libertarian favors the right to unrestricted private property and free-exchange".[note]Murray Rothbard, For a New Liberty (1973) chap. 2.[/note]Hayek rejected outright the principle of distributive justice: "the results of the individual’s efforts are necessarily unpredictable, and the question of whether the resulting distribution of incomes is just or unjust has no meaning."[note]Friedrich von Hayek, The Constitution of Liberty (1960), 99.[/note]Catholic teaching flatly repudiates all that nonsense. Leo XIII (Rerum Novarum, no. 45) spoke of "a dictate of natural justice more imperious and ancient than any bargain between man and man, namely that wages ought not to be insufficient to support a frugal and well-behaved wage-earner", and he strongly commended (no. 49) workers’ associations, of which "the most important of all are workingmen’s unions." John Paul II (Centesimus Annus, §20) observed that "unions ... are indeed a mouthpiece for the struggle for social justice, for the just rights of working people."While many libertarians see taxes as immoral attacks on private property, "Christian tradition has never recognized the right to private property as absolute and untouchable" (Compendium, no. 177). John XIII (Mater et Magistra, no. 132) insisted that citizens should be taxed according to their ability to pay (ut tributa pro civiim facilitate imperentur) while Gaudium et Spes (no. 30) censures those who "resort to various frauds and deceptions in avoiding just taxes and other debts due to society".Catholic teaching inherits the Jewish tradition, based on the Mosaic law, that provision for the poor is primarily an obligation in justice (Hebrew tzedakah, a word whose basic meaning is justice), rather than a matter of voluntary charity. This does not, of course, mean that charity is superfluous. But, as Benedict XVI explains in Caritas in Veritate, no. 6, "I cannot "give" to the other ... without first giving him what pertains to him in justice ... charity goes beyond justice and completes it", echoing St Thomas: "charity does not abrogate justice, but complements it."[note]St. Thomas Aquinas, Summa Theologica part I, quest. 21, art. 3.[/note] This doctrine validates obligatory transfers via the tax system as means of legally administering justice.In these difficult times, it is worth noting that redistributive taxation offers a means of stimulating economic recovery without swelling our already excessive budget deficits. The very rich seldom spend all their revenue; they tend to accumulate. If the state transfers some of this unspent revenue to the very poor, it will certainly be spent, giving a boost to our morose economies.© Angus Sibley 2012. All Rights Reserved.