Adam Fields (weblog)

For some time, I was a staunch Libertarian. That lasted until I started to examine the boundary cases where Libertarianism didn’t seem to offer a good answer. I still hold a lot of those principles dear, but I’m no longer convinced that complete Libertarianism can work in the real world. What follows are some of my recent thoughts on the free market.

The proponents of the free market often propose that private ownership gives people an incentive to make the most of resources, and that people with ownership incentive are likely to make the best decisions about the use of resources.

I tend to agree in many cases – the market does often work and find the best solution, but I’ve been mulling over some exceptions to that rule.

Some traps that individual decisions in the market can fall into:

1) Divergent interests: the interests of the owning party may not be the same as the general public.

2) Irrationality: people don’t always act rationally or in their best interest.

2a) Obscured Information: even in the face of good information, which is often not present, the right decision isn’t evident.

3) Vested Interest: ownership of a thing is not the same as stewardship of a thing, and if you don’t have a personal vested interest in the thing, your best use of it may be to divest yourself of it (i.e.: use it up, parcel it, consume it) in exchange for lots of short term money you can use to buy something you actually want.

4) Value dilution: the more stuff you own, the less you care about any given individual thing. Ownership of lots of things probably means that each individual one is less valuable, because the value of a thing must be measured not just against the external market value, but also its proportion to your total assets, difficulty to replace, your incentive to replace it if you lose it, sentimental value, subsidiary values (prestige from ownership, etc…), and a whole host of other things.

5) Lack of patience and susceptibility to fear: People in control of a thing may require immediate access to it (liquidity), and will sometimes act to preserve that liquidity at the expense of the health of the overall economy, and therefore at the expense of some value of the underlying asset. This happens even though the people controlling an asset may be able to see the writing on the wall – everyone will be fine if everyone sits tight, but if you wait and someone else moves first, you lose. I think this usually manifests as “private enterprise tends to seek short-term gains”, but it’s tightly tied to #6:

6) The Tragedy of the Selfish: this is a concept I’ve been toying with on and off for a few years. It’s not the Tragedy of the Commons, and it’s not quite the Tragedy of the Anticommons, though there are aspects of both in there, as well as an arms race component, and some Prisoner’s Dilemma. This is the situation that exists when an individual makes what is logically the best decision to maximize their own position, but the sum effect of everybody making their best decisions is that everybody ends up worse off rather than better. Libertarian capitalism hinges on the assumption that making everybody individually better off is the best way to maximize the happiness of the group, and it’s simply the case that there are situations where that assumption does not hold. The example I often use for this is buying an SUV to be safer on the road. You buy an SUV, then other people do, because they want to be safer too. Except that if enough people make that same decision, you’ve overall raised the chances that if you’re hit by a car, it’ll be an SUV, which will do much more damage than a smaller car. Everyone is better off if everyone else backs off and drives smaller cars. It’s a simplification, of course, but I hope that makes the point.

That’s what I’ve come up with so far. I’m sure there are more. Of course these don’t always apply, but I think at least one of them does often enough to warrant a better justification that “the market will solve the problem”. They’re certainly things to watch out for when getting out of the way and letting the market work.

What do you think?