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- America’s Fiscal History: From Liberty to Paternalism - September 23, 2021
The competitive market economy is a powerful institutional mechanism for bringing human ingenuity, energy and creativity to bear to improve both the material and cultural circumstances of multitudes of people around the world. Wherever relatively free market capitalism is operating, it succeeds in ending human poverty and brings about rising standards of living for hundreds of millions, indeed, now billions of people. Yet, it is argued that there are some things – “public goods” – that only government can effectively supply to everyone in society.
Private property has long been understood to be a great incentivizing force to motivate individual self-interest in the form of peaceful and productive work, savings and investment. Under the social system of division of labor, each participant sees the chance for personal gain and profit by directing his efforts to producing those goods and services that others may want, so as to obtain through exchange what they can reciprocally provide.
Indeed, many of the classical economists of the nineteenth century considered private property to be the fundamental and most essential institution for a peaceful and prosperous society. For instance, John R. McCulloch (1789-1864) explained in his widely read Principles of Political Economy (1864):
Let us not, therefore, deceive ourselves by supposing that it is possible for any people to emerge from barbarism, or to become wealthy, prosperous, and civilized without the security of property . . . The protection afforded to property by all civilized societies, though it has not made all men rich, has done more to increase their wealth than all their other institutions put together . . .
The establishment of a right to property enables exertion, invention, and enterprise, forethought and economy to reap their due reward. But it does this without inflicting the smallest imaginable injury upon anything else . . .Its [property’s] effects are altogether beneficial. It is a rampart raised by society against its common enemies – against rapine, and violence, plunder and oppression. Without its protection, the rich would become poor, and the poor would be totally unable to become rich – all would sink to the same bottomless abyss of barbarism and poverty.
The market order is a social arrangement for “positive sum” outcomes in which each and every participant in the market network of voluntary exchange betters his own circumstances in the transactions into which he enters as both producer and consumer. As a producer, the individual participates in the manufacturing and marketing of various goods that earns him the financial wherewithal to reenter the market as a consumer and receives in trade the goods he wants from those who he had previously served as a seller.
But since the time of Adam Smith in his The Wealth of Nations, it has often been argued that there may be some goods, “which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”
This has been the basis for what has become known in the jargon or lingo of the economist as “public goods.” They have usually been defined as goods that have especially two distinctive qualities: Non-excludable access and non-rivalrous consumption or use. What do these terms mean?
Public Goods – Non-Excludability and Non-Rivalrous Use
A non-excludable good is one that someone does not pay for, or can avoid paying for, to use or consume. It is said to be “impossible” or highly difficult or costly to exclude such an individual from having access to it, even though without payment on his part to have it. Thus, such an individual can benefit from its supply without having paid anything to cover some portion of its production costs in making it available on the market.
The standard example often given is national defense. A “defense shield” of military aircraft, missiles, and naval ships surround and protect all or large portions of the United States from foreign attack. Such a military shield provides protection not only to the citizens who may have contributed to pay for it, but all others who may have not contributed to cover its costs but who live under the protection of this “defense shield.”
If Pierre is visiting from France, for the time he is in the U.S. that defense shield protects him from any potential foreign military attack, though others, the American taxpayers, have paid the costs of providing it, to themselves and to Pierre. There is no way to exclude Pierre from that protection in case of foreign attack. A hole cannot be left in the defense umbrella in the sky into which an incoming missile can vaporize poor Pierre, but no one else who has helped pay for the system.
Non-Rivalrous consumption refers to the idea that the numbers of those who benefit from the use or enjoyment of such a public good does not, necessarily affect the cost of providing it. For instance, an increase in, say, an extra 10,000 people living in the United States does not impact the marginal cost of providing that defense shield to that marginal addition to the country’s population.
If people are watching a fireworks display in a large open field on the fourth of July, an extra person standing in the field enjoying the display does not impact the cost of supplying the fireworks or the launcher equipment, given the planned size of the display. Assuming a relatively large field with unimpeded vision of the sky, whether twenty people are standing watching the illuminations or two hundred (each with an assumed comfortable amount of elbow room around them), does not influence the cost of providing the holiday entertainment to the viewers.
The Problem of the “Free Rider”
Limited government classical liberals since the time of Adam Smith have taken for granted that such things as “national defense,” “police” and the “justice system,” are examples of “public goods” for which government funding by compulsory taxation is essential.
A primary reason, it is argued, is that, otherwise, there is created a “free rider” problem, the result of which is an “undersupplying” or less than “optimal” production of defense, police or justice. Suppose that there are 100 million people in a country but payment for national defense is a matter of voluntary contribution by the citizens. Since a resident of the country is not forced to pay for being militarily protected from a foreign attack, he might conclude that he won’t send in a voluntary contribution, and, yet, enjoy whatever degree of funded national defense ends up being supplied; after all, he can’t be excluded from its production, though he will not have contributed to its provision.
Furthermore suppose that each citizen is asked to pay a voluntary contribution of $100, and 75 million of them actually send in that sum, resulting in the government having $7.5 billion to spend on national defense. If the remaining 25 million citizens had not decided to free ride on the contributions of the others and had also sent in their $100 contributions, the government would have had an additional $2.5 billion for defense spending, for a total of $10 billion. It is argued that this shortfall reflects and measures the degree to which there has been an “undersupply” of national defense in that country.
No Way to Know a Free Rider’s Valuation of a Public Good
The theory of the free rider assumes an ability to estimate or calculate the amount of “undersupply” there is of a particular “public good.” However, there is no “objective” or accurate way of knowing by how much such a “public good” may be undersupplied, since there is no way of knowing what value the “free rider” would have placed on this good if he had to actually pay for access and/or use of it.
Of course, it would be possible to ask such “free riding” individuals what value they might attach to this good if they had to pay for it. But the problem is: talk is cheap.
That is, a person could say anything in the abstract about by how much he values this good, and some hypothetical price he might be willing to pay to gain access to it. How you imagine or publicly state you might spend a million dollars if you won it in a lottery, and how you would end up actually spending that million dollars if you did win a lottery could be two very different things.
An individual only demonstrates (“reveals”) his actual valuation for a good when he is confronted with the need to make a choice and shows whether he really wants to buy this good, and the price he would be willing to pay for access and use of a particular quantity. Contrary to how some economists think and conceptualize about such things, people do not formulate and walk around with a clear and formalized “preference map” of their wants and desires in their head that traces out all the possible exchange opportunities and situations that might confront them, and from which it is possible to simply “read off” how and what they would do in any present or future market setting.
Unless there is an actual market on which interested buyers, some of who may have been “free riders,” can be excluded if they do not pay some price for access and/or use of this good, there is no way of knowing whether or not this good is, currently, undersupplied or oversupplied, or is “just right.”
Informed observers and economic policy analysts can have very different and inconclusive interpretive judgments about any such claims and assertions.
For instance, is there too much or too little spent on “national defense” and “Homeland Security”? And what would be the real market-determined value of them as expressed in a competitively generated price system? There is no way of determining this because there is no market for the direct buying and selling between citizen-consumers and supply-side producers of defense services or “security” against terrorist threats.
Central Planning Qualities of Government-Supplied Public Goods
As a result, government-provided national defense and homeland security that is funded through compulsory taxation suffer from an aspect of the famous “Austrian” critique of socialist central planning as made by Ludwig von Mises, Friedrich A. Hayek, and others. It is true that in a “mixed” or interventionist economy, government still has to purchase on a market the goods and services it wishes to employ in its activities, including national defense. Thus, the government may be able to make reasonable estimates of the monetary costs required to undertake a certain level and type of national defense or “homeland security.”
But is any government-chosen amount and type of national defense and homeland security worth it? We don’t know. In a free market economy, there is two-sided competition. Demanders must decide how much they are willing to bid and pay to purchase desired goods in competition with other buyers also interested in purchasing them. Suppliers judge what monetary costs they might be willing to incur to bring certain types and amounts of goods to market, in competition with other supply-side rivals also interested in purchasing or hiring some of the scarce resources, capital and labor services, based on what they estimate willing demanders might pay when the various goods they produce are ready to be offered on the market.
But with a “public good” such as national defense or homeland security, it is a group of politicians, bureaucrats, and private sector special interest groups interested in getting government contracts or indirectly benefiting from such government spending who interactively decide how much and what type of national defense and homeland security will be provided at taxpayers’ expense. They are the joint “central planners” deciding on the quantity and forms of such “public goods.”
It is not the actual citizens of the society demonstrating their preferences and valuational judgments about the amount and types of these “public goods” they think are needed and worth it by choosing how much they want to spent for types and combinations of defense and security. There is no way, therefore, to be certain or to calculate how much defense and “security” are desired and reflective of the citizenry’s values and preferences since they do not “vote” for them in the same way that they do as everyday market participants. In the marketplace, we “vote” with our voluntarily spent dollars, with each of us choosing the types and combinations of the goods and services that serve our ends and purposes, even when this differs noticeably from the market choices of many others in society.
That is what makes the market an arena of real and actual “diversity” and “inclusiveness.” In a functioning free market economy, minority and majority choices can be and are satisfied, all the way down to narrow and limited “niche” wants and desires. As long as those wanting some marketable good are willing and able to offer some minimally sufficient price to make it profitable for some producers to specialize in its provision in the system of division of labor, then it gets produced and supplied. Multitudes of diverse demands are satisfied, and each of these are included in the production “mix” of goods produced out of the available scarce resources in the society.
The Politics and Economic Irrationality of National Defense
Now, it may be the case that only government can supply and provide national defense (setting aside in this discussion the argument of those advocating non-governmental provision of such “public” goods and services). But if this is true, then there is an inherent and inescapable economic “irrationality” in the provision of national defense, compared to the producing and buying of normal market-supplied goods and services.
In the case of a country such as the United States, defense spending (its amount and its form) becomes a matter of government central planning, albeit one in which the politician “planners” have been democratically elected. And it is “one-size fits-all” for the nation as a whole. To the extent that voters have given attention to the foreign policy portions of the platforms that political parties and politicians have run on, those who disagree with the foreign policies initiated by the winning presidential and Congressional candidates are forced to both pay for them, and bear the risk and uncertainty of their implementation.
The citizen-voter may consider that he is being taxed “too much” or “too little,” given the global defense threats he thinks are facing the country. He may disagree with sending troops abroad for foreign interventions and he may want to end the stationing of any American armed forces in other countries. Or he may think there needs to be on-going foreign interventions in the name of national security or “building democracy” in other lands, but he may disagree with the types of such interventions undertaken by the administration in power in Washington. Other than his individual vote in the next election – and its minuscule impact on any outcome as a single voter – he has no way to demonstrate and try to bring about any other “supply” of national defense other than the one in place and under the control of those in political power.
Instead, it is the “professionals,” the “experts” in foreign affairs and national security who advise presidents and congressmen. And which of these are “right” about “threats” to America and the “appropriate” stance and response? In effect, defense and foreign policies, and the accompanying tax-funded spending, becomes the outgrowth of the ideas of ideological and “strategic” central planners who claim and assert they know how to manage America’s place in the world. Whether they are “hawks” or “doves,” or proponents of “realpolitik” or global “idealism,” they all claim to know how to “plan” America’s global presence.
At the same time, these “experts” interact with or are part of the defense, national security and foreign policy bureaucracies in the government. At the end of the day, those in these bureaucracies may in their own minds view themselves as trying to “do good” as they define and see it, but underlying this, nonetheless, is a self-interest in the maintenance and growth of the bureaucratic structures upon which their incomes, positions, and chances for promotion and influence are based. You do not demonstrate the importance of your place in the bureaucracy, and why you should be promoted up the civil service chain, by “doing nothing.” By being “non-interventionist.” That stance easily could lead to no promotions and reassignment to dead end tasks and responsibilities. You are not showing that you’ve gotten “on board with the program,” without which that bureaucratic department or agency has no rationale for existence or funding.
And, finally, there are the private sector corporate and business interest groups whose profit margins and market shares are often heavily dependent upon government contracts for military and national security equipment and tasks. Their “consumers” are not the citizen-taxpayers but the politicians and bureaucratic procurement departments that determine how much will be spent on defense and national security, and on which particular goods and services those tax-based dollars will be spent. Foreign policy and national security threats are their bread and butter in the form of tens of billions of dollars of revenues from the Defense Department, the Department of Homeland Security and other complementary agencies and bureaus in the federal government. Non-intervention or demonstrations of a “threat free” world are not the ways to maximize the potentials from doing business with the defense and national security parts of the government.
Costs of Public Goods Like National Defense
Classical liberals and conservatives strongly believe, as did the Founding Fathers and Adam Smith, that there are some goods or services, such as national defense, that must be supplied by government through compulsory taxation due to their claimed “public goods” qualities and characteristics. And this may be correct, as most others in society also believe.
But, nonetheless, if the buying and selling of any goods or services are taken out of the arena of competitive free markets in which demanders directly make their voluntary choices as to which of those goods and services they desire and are willing to pay for, and in response to which supply-side rivals must effectively and efficiently strive for profits and market share by offering what a diversity of buyers are interested in purchasing, then the decision-making passes into the central planning hands of those in and around political power.
Inevitably, like all other forms of central planning, the results from “public goods” such as national defense are reduced individual freedom of choice, persistent inefficiency and waste, and the arrogance and corruption of politicians, bureaucrats and the interest groups living off government spending, as their interactions determine the direction of the country. Plus, in the case of national defense and homeland security, this also includes a threat to the lives, property and privacy of the entire population of the country.
[Originally Published at the Future of Freedom Foundation]