In Defense of the Minimal State

A recent debate with Owen (see here) has led to a rather stark disagreement, and I'm bemused because I think deep down we both agree. I'd like to sketch out a moderate position that I think Owen will agree with, and can therefore reconcile our debate.

It comes down to my claim that there's a distinction between two types of government activity: "creating the institutions necessary for a market economy to operate", and "seeking to alter the outcomes of a competitive market process".

I think this is a pretty intuitive and valid distinction, but Owen disgrees because:

If you define all government interventions of which you approve as "foundations of a market economy" and all government interventions of which you disapprove as "government interventions", then by definition you reach the conclusion that all government interventions are bad. But that is a conclusion with no content at all. 

The problem is that I am a classical liberal, and Owen is not. But despite this difference we should be able to agree on terminology - we can all agree about what a fish is, without having to all enjoy the taste.

If I say that I don't like the taste of fish, then the conclusion that "I don't like fish" does still have content. You may like the taste of fish, in which case your conclusion will be different. But we can agree on what a fish is, and establish that this is why we have different preferences at tea-time.

The whole point is that my goal is a competitve market economy, and therefore any government intervention is indeed "bad". Your goal may be income equality, and therefore think that government intervention is justified to achieve this. But in both cases we can make a distinction between government intervention, and government activity more generally.

To say that "government intervention is bad" is not even a radical statement, since "intervention" as we've defined it is only a subset of what the government does. Owen and I can agree with the vast list of functions of government which we agree with, and my opinion that "intervention" is bad does not make us oppositional - we're disagreeing on the finer points of what, specifically, counts as "intervention" and whether such activities are valid.

This brings us to whether the theoretical distinction is practically relevent. It's true, as Owen points out, that instances can exist where it's hard to distinguish between the two - a pollution tax is a fine example. It's also true that two different policies appear to deliver the same result. But just because the effect of manslaughter is the same as the effect of murder (a dead body) it doesn't make a distinction between the two irrelevent. On the contrary, it makes it more relevent.

It's the role of the economist to distinguish between the two, and say whether a proposed policy will help or harm the economy. It is then up to the general public to decide whether this effect on the economy is desireable. Minimum wage advocates may well think that the disemployment effects are outweighed by the rise in wages of those who keep their jobs, but it should be clear that these disemployment effects exist.

It is odd that Owen thinks politicians and bureaucrats possess enough knowledge about the consequences of policy to be able to deliver the results they intend, but doubts whether economist's understand the economy well enough to distinguish between the creation of markets and the obstruction of markets. It's true that some examples might lack a unanimous consensus, but since when was unanimity required? Good economists that understand the process of a market economy are able to tell the difference, and therefore a distinction is useful and valid.

Owen thinks that the conclusion has no content, but all it says is that if you want a competitive (free) market economy, you'll see government intervention as bad.

You don't have to agree with me that government intervention is bad, but you can agree that it's different to activity more generally, and that a classical liberal will think it's bad. You may believe that it's good, but your argument should be that an intervention in a free market will produce better results than would otherwise occur. Your argument shouldn't be that such an intervention may well be consistant with a free market and we just don't know.

The problem is that if you deny this distinction between government as providing institutions for a free market to operate (contract resolution, freedom of entry etc) and government as manipulating a competitive market for other ends (agricultural subsidies, aggregate demand management), then you are forced into one of two positions: either all government activity is consistent with free markets, or none of it is.

I know plenty of people who believe the latter, but few who think the former. Both seem untenable to me, and that's because there is a difference between the state as a referee, and the state as a participant. Regardless of your own political convictions, we can all accept this basic distinction, and make efforts to understand it as best we can.

Comments

[Joe Otten]

You take a long time to miss the point.

Enforcing property rights is a government intervention in society. It is also necessary for a market economy. Your conclusion is empty because it is saying that government interventions are wrong except when they're right.

To you there may be a clear distinction between creating necessary institutions, and altering competitive outcomes, but this is precisely because you are clear what sort of interventions you support. Your clarity, and therefore the distinction do rather less to win the argument.

Feudalism can be defended as a property right or abolished on the same grounds. Patent lifes can be reduced in the name of competitiveness, or new kinds of IP can be recognised and become patentable.

These are all government interventions.

[AJE]

In the post I dealt with the issue of examples that are hard to define. If you want to correct me your focus should be on my claim that a denial of the distinction i've made leads in only two directions: the claim that any government activity is conistant with a free market economy, or that none is.

Either enlighten me on why that conclusion is wrong (which it may very well be), or take one of those two positions and defend it.

you are clear what sort of interventions you support
Am I? What's my position on pollution permits?

[Joe Otten]

There are different possible distictions to be made that you are eliding:

1. Between activity and intervention
2. Between that which is necessary for or facilitates free markets and that which doesn't.
3. Between that which has good outcomes and that which hasn't.

I would argue that 1 is empty of meaning and that 2 is not equal to 3. (Largely because of the problem of freeloading on collective goods.)

Furthermore 2 is even less clear than your pollution example suggests - there are many possible market economies depending, for example, on how widely property is defined; on what kinds of rights are protected, whether by regulation or litigation.

One person's property right may be another persons excessive regulation.

[AJE]

I'm using an argument for 2, in order to claim that 1 is valid. (3 is irrelevent.)

What I don't understand is why neither Owen nor yourself will actually respond to what i've written. It's not meant as a trap, just an honest question: if you deny 2 then is all government activity consistent with a free market?

[Joe Otten]

2, as I said, is not a very clear distinction. If you want to make something of 1, then that is just an exercise in taxonomy - there is nothing in it to draw conclusions from. Government buys pencils: activity; government makes and sells pencils: intervention? Huh? (Perhaps government should make precisely the pencils that it uses.)

Universal provision of healthcare and education enhance the freedom of individuals including economic freedoms and capacities, and so facilitate a market economy - but they are interventions in the health and education markets. It's not much of a distinction if something can be on both sides of it.

I'm not sure what you mean by the validity of a distinction. A distinction is useful if it helps us sort and think about the things we are distinguishing.

These distinctions may be useful when thinking about things like state aid to industry, or barriers to trade, but rather less so when thinking about public services, roads, etc, the usual targets of the minimal staters.

[AJE]

if you deny 2 then is all government activity consistent with a free market?

[Joe Otten]

Does saying it is not clear constitute "denial"?

Does the distinction have to be perfect or non-existant? Or is that a false dichotomy?

[AJE]

My claim is simple: some actions definately facilitate a competitive economy, some actions interfer with one, and there's many that are hard to tell.

It's the job of the economist to analyse these non-obvious cases.

It's not a dichotomy between perfect and non-existant. It's just a dichotomy.

[Joe Otten]

...and there are actions that promote other (non-market) freedoms, that might have a negative first order effect on market freedoms, but positive second order effects, due to a synergy of freedoms.

And, yes, we could have economists pondering whether or not the second order effects outweight the first order effects. But I would be more interested in the analysis that included all freedoms, not just economic ones.

[AJE]

So take you economics advice from economists, and your ethics advice from ethicists, and your philosophical advice from philosophers.

Non-economic are indeed relevent, but not to the point where economic factors become irrelevent.

So back to the question - is their an analytic difference between facilitating a market economy and intervening in a market economy?

Fuck me, you're a very good politician (=evasive) considering you're a LibDem ;-)

[Joe Otten]

So back to the question - is their an analytic difference between facilitating a market economy and intervening in a market economy?

Usually.

[AJE]

as long as you accept that in theory at least we can distinguish between the two, you're accepting the premise of this post.

Maybe I haven't missed the point after all..