6. Capitalism | Libertarian Public Policy with Jeffrey Miron

6. Capitalism | Libertarian Public Policy with Jeffrey Miron

Today we’re going to talk about capitalism,
in particular, the regulation of capitalism. As you know, market economies have all sorts
of regulations, in various ways, of various industries, broken into a broad number of
general categories – antitrust regulation, consumer protection laws, entry barriers,
licensing restrictions, environmental policies, health and safety regulation, and much, much
more. The standard defense of all this regulation
is that while markets may well be pretty good at producing goods and services at relatively
low prices and in a relatively efficient way, they’re imperfect. There are examples of
monopoly, of externalities, of imperfect information. Also are examples where consumers are not
good at making decisions on their own behalf. That, in some people’s view, justifies lots
of interference with lots of regulation of capitalism rather than just leaving it unregulated.
The libertarian response certainly accepts that markets are not perfect. Nothing is going
to be perfect outside of the textbook. There are going to be ways in which any private
market doesn’t do exactly what we would like it to do at every moment in time. But
the response is simply that regulation is often worse than whatever imperfections exist
in the market. So laissez-faire, defined more clearly in a moment, is the lesser of the
evil, and we’re going to discuss that in this lecture. We obviously can’t go over
every possible regulation, but we’ll talk about the main categories which I think illustrate
the kinds of arguments that libertarians make. The outline is as follows: We’re first going
to explain why the libertarian view is not properly understood zero regulation. There
are certainly some types of government involvement in capitalism, in markets. The libertarians
endorse and think they’re quite beneficial. Then I’ll go through five different examples
of broad areas of regulation: consumer protection, unions, antitrust, environmental policies,
and professional licensing as good illustrations of the pitfalls of regulation and why much
less is probably a better outcome. Libertarian views are often characterized
as being in favor of unbridled capitalism or no rules, just complete cowboy capitalism
and things like that. But that is not properly understood libertarian view. Libertarians
absolutely support what you might call rules of the road, various government interventions
that lay down some basic lines that people are not supposed to cross, so that the markets
can work efficiently. And libertarians view those minimal interventions as being necessary
for smoothly functioning markets. So what are these particular interventions?
First and foremost, defining and enforcing property rights. Unless people know who owns
what, unless that’s clear, and unless people know what when those property rights are infringed,
they have some recourse that allows them to claim that their property has been infringed
and collect damages as appropriate. You might see chaos as people make all sorts of claims
about each other’s property. Some of that dispute resolution will end up being violent.
People fear that they don’t have the right to the fruits of their labors, so they don’t
want to invest, they don’t want to acquire education, and so on. Therefore, defining
and enforcing property rights is certainly a crucial thing that probably does need government
intervention. Closely related – actually just a version
of the definition and enforcement of property rights – is contract enforcement. When people
enter into agreements, they want to know that if someone abridges the agreement, the person
who is injured has the ability to try to collect the damages that might’ve been inflicted,
and to do so in a way which is not usually disruptive, which is not violent, which doesn’t
have itself some negative spillovers. Limits on fraud is another example. If people
can’t rely on claims that others make, then you’re not going to get an efficient allocation
of goods and services, efficient production, and so on.
So the question is really not whether to have regulation. The view that libertarians are
for zero regulation is really just a spin to make it sound unreasonable. The question
is what kind of regulation and how much. Libertarians absolutely argue that we should have way,
way less and mainly different kinds of government involvement in markets than we currently have.
But we’re certainly not arguing for zero. With that general framework, let’s talk
about some specifics. One broad area of intervention is consumer protection policies. Restrictions
on advertising, i.e. bans against false and misleading advertising, government agencies
that try to prevent bad markets from getting into the marketplace in the first place, such
as the consumer product safety commission, warning labels on foods and all sorts of other
products that try to tell people that there might be negative side effects or some dangers-associated
particular products – those are all examples of consumer protection policies. The claim
behind those policies is that unscrupulous firms might try to take advantage of naïve
or irrational or stupid consumers, sell them things they don’t really need or want, sell
them things that are excessively dangerous so that they have side effects that the consumers
won’t be aware of and won’t think about. According to this argument, we need government
to protect consumers from themselves because firms are trying to systematically sell them
things that they don’t want or in ways that might not be actually in the consumers’
interest. Of course, there’s a teeny bit of truth
in that characterization. Some firms sometimes do unscrupulous things. Firms are of course
trying to make money, so they want to sell more things to consumers rather than fewer.
But that view that we need regulation ignores a whole bunch of realities that need to be
taken into account in balancing protection of consumers against having an efficient,
well-run marketplace. First of all, with respect to advertising,
there’s amazingly little evidence that advertising gets people to buy things that they don’t
want. The vast majority of advertising is trying to get people to buy one manufacturer’s
brand instead of another manufacturer’s brand. Think about Coke versus Pepsi. All
those ads are doing very little to get people to become cola drinkers. They’re mainly
trying to switch you back-and-forth between one brand and the other. And even all the
advertising encouraging brand switching seems to be surprisingly ineffective given the amount
that firms spend on it. But in any event, it does not seem to systematically con people
into buying things they don’t want and don’t need. Advertising also contains lots of information
that is useful to consumers. It would be very hard to try to prevent false, misleading advertising
without simultaneously preventing the good aspects of advertising.
A good substitute for advertising are private mechanisms like consumer reports or J.D. Power
and Associates or articles in local newspapers about new products or warnings about faulty
products and so on. It’s not the case that in the absence of government, consumers would
have no ability to get information. There are many sources already, even though the
government is trying to protect consumers. And there would likely be far more if the
government were trying to take over this role, so consumers would be able to learn from their
friends, from their family, from websites, from magazines, from all sorts of sources
about which products might be the best, which have the best relation between price and quality,
which might be dangerous, and so on and so forth.
Restrictions on advertising are also quite dangerous because they tend to reduce competition.
A key way that new businesses, new firms etc. can make inroads against established businesses
is by advertising. So any attempt to restrict advertising is going to tend to make firms
use weaker claims out of fear of false and misleading claims, and that’s unhealthy
for competition in the marketplace, closely related to the next item we’ll get to.
In addition, competition deters false claims. If one car manufacturer is saying things about
his cars that are clearly wrong, other than just drive our car because you’ll look good
in it, but factual claims about its speed, about its mileage, about whatever, the competing
car manufacturers have great incentive to try to debunk those claims. So that’s another
huge source of consumer information and protection without any government involvement.
Finally, there is a quasi, a partially government mechanism that helps discipline bad claims
and other bad behavior by firms which is toward liability. If you are injured by a product
that you’ve purchased, if it made claims that are clearly false and you haven’t been
able to benefit in the way the manufacturer promised, the seller promised, then you can
sue. Sometimes you can sue in class action suits if there are many people who’ve been
injured, and that exercises significant discipline on any business’s desire incentive to make
those claims in the first place. Lastly on consumer protection, it is really
hard to engage in this type of activity without creating a false sense of security for consumers.
If consumers think the government has done all these good things to make sure there are
no bad products in the marketplace, then consumers don’t feel the incentive to go in and use
their own brains and to think about what they’re buying and make sure that they are safe. That’s
a problem because the government can’t possibly think of all the possible negatives, can’t
possibly rule out all the problems. Consumers need to be using their own brains in order
to make sure they’re getting a reasonable deal, but the false sense of security from
government regulation tends to undermine that. Switching to another broad category, antitrust
policies are policies that try to prevent mergers which might create monopoly power,
try to prevent business practices which might tend to give businesses monopoly power and
so on. That is, antitrust tries to promote competition. Now this is an interesting area
for libertarianism because all of economics suggests that competition is a good thing.
We would like there to be a number of firms who are trying hard to get the consumers’
business. That’s going to tend to lead to a situation with a relatively low price, relatively
high quality. Prices will be driven down to cost, and consumers will benefit from that
competition. So it might seem as though antitrust policy really makes a lot of sense. However,
most of the evidence suggests that market power exercised by businesses is actually
fairly modest. And a huge amount of the market power we observe in market economies has been
created by government. Patents is one example, copyrights another example. Other cases where
government has imposed barriers of entry such as licensing, which we’ll discuss later,
are all things that government has done to create market power. The examples of strictly
privately created market power are few and far between. So the magnitude of the problem
that needs to be addressed is probably much smaller than what many people think it is.
In addition, some of the actions that are prevented or discouraged by antitrust policy
are potentially quite disadvantageous. The threat that your business might be acquired
by someone else and would fire the management and replace it with new management is an incredibly
powerful discipline device for markets. Businesses that aren’t performing well, that aren’t
doing what their shareholders want, that are trying to line their own pockets, or that
are just not very good at running their businesses, are going to get bought out in a world where
there are no restrictions on acquisitions, mergers, and the like. But antitrust gets
in the way of that by making businesses worry that they can’t acquire those firms because
they’ll be accused of an antitrust violation. Likewise, firms sometimes use antitrust as
a weapon. They tell the justice department to go after such and such a business because
that business is allegedly doing something that’s anticompetitive. What it’s actually
doing is just something that’s better than the business that’s complaining. So antitrust
has many times been used strategically by rivals simply to try to get a competitor out
of the way. The cases against Microsoft are classic example. Sun Microsystems played an
active role in encouraging the government to pursue those suits.
Finally, even if there is monopoly power for some industries at some times for some length
of time, that has a very useful benefit so long as it doesn’t last forever, which is
that monopoly power and profits that come with it create an incentive for innovation.
If you know that, say, PalmPilot has been created, and it’s this great handheld device
that combines all your personal affairs, your calendar, your phone, and all that, and people
really like it, and they’re paying huge amounts to get it, that gives all other firms
the incentive to go out and create a competitive device. And what we’ve seen is this mushrooming
of handheld devices that now do way, way, way more than the PalmPilot ever did, and
that’s because there were monopoly profits to be competed away. If the government is
always regulating those back towards zero, the incentive for the innovation is not going
to be there in the first place. So antitrust policy done very, very thoughtfully, in great
moderation, by a really competent, benevolent dictator, maybe there’s some role for a
little bit of that. But in practice, it seems to do much more harm than good. So libertarians
are quite suspicious of antitrust policies. Another broad category of government intervention
in markets is giving protections to unions. Libertarians of course have nothing against
unions per se. Libertarians are always in favor of people being able to freely assemble
and discuss and do whatever non-coercive things they wish. What libertarians oppose is government
protection of unions, i.e. laws, rules etc. that force companies to negotiate with unions,
that put restrictions on companies’ ability to deal with unions, such as by saying to
a union, “You guys are free to try to negotiate with me, but I don’t want to negotiate with
you. I’m going to negotiate individually with each of my employees,” or to say, “You’re
free to go out on strike. That’s your right. And I should be free to fire you for going
on strike, or I should be free to hire replacement workers.” It’s the restrictions imposed
by government on those actions that libertarians oppose. Analysis of the unions is very, very
simple. They are unambiguously bad for economic efficiency. Artificially, the government protections
help unions raise the price of a key input into all sorts of activities, raise the price
of labor, and make it more expensive to produce various goods, services, and so on. They are
justified by the union members, by the unions, because they raise wages. But they raise wages
for those people who are still in unions, not for everyone. They lead to lower wages
for the people who don’t end up being in the unions. They lead to lower wages for people
who don’t get the jobs. So their effect on the distribution of income is at best ambiguous,
is at best this weird mix of helping some people in hurting others. And they’re simultaneously
bad for the efficiency of the economy. In the U.S. these days, private unions don’t
have a huge amount of power except in a few industries. In other countries, private-sector
unions are still quite important and play a big role in distorting the allocation of
labor. In the U.S. and many countries, public-sector unions are an even bigger issue because they
have organized very effectively and do play an important role in raising the cost of providing
government services. What everyone thinks about any particular part of government, it
should be produced at the least cost. The public-sector unions raise the cost and therefore
are also problematic. Turning to environmental regulation, that’s
an interesting area because libertarians are often portrayed as being anti-environment
or at least anti-regulation. Nothing could be further from the truth. Properly interpreted,
there’s no conflict at all between libertarianism and protecting the environment. It comes down
to the definition of property rights. If the property rights to land, to water, to air,
and so on and so forth are clearly defined, then we have a market. We don’t have any
externalities. We don’t have any negative spillovers because everything is owned by
someone who has the right to sue if people damage it. If some company dumps toxic waste
on your land and there’s clear ownership as to owns it, that you own that land, then
you can sue, and that will be disciplined by the mechanisms we discussed quite readily.
It’s only when we have property rights that are not well-defined that there will be significant
externalities and there will be problems of reducing pollution and other things like that.
So libertarians absolutely endorse proper definition and assignment of property rights
to solve environmental issues. Classic example is fences. In the West, when
there were no fences and cattle ranches could graze wherever, they got in each other’s
land. There was excessive grazing that made the grazing land less effective. The same
thing happened hundreds of years earlier in England. England solved the problem by defining
property rights and setting up fences. Then each person had a certain amount of land,
grazed their cattle on that land. And that meant that there was no spillover. There was
no excessive use of those resources. Now it is in fact hard to assign property
rights in some cases. The air that’s right in front of my face, it will be pretty hard
to say, “I own that air and you don’t, I get to breathe it and you don’t,” and
so on. So some types of regulation that don’t just assign property rights but say you can’t
put certain types of substances into the air or you can’t put certain things into the
water may be well justified as a reasonable response to the difficulty of formally assigning
property rights. So in the U.S., the Clean Air and Water Acts of 1970 are plausibly an
okay compromise that said we should certainly look at them carefully to see if they’re
generating benefits in excess of cost. The benefits could be that the air is cleaner
and that’s good for people’s health. The water is cleaner, so people can fish, swim,
drink the water, and so on. But it could be that the regulations are imposing huge cost
and discouraging activity so much that it’s not enough benefit to justify those costs.
And the literature finds varying results. Some sorts of regulation that attempt to address
the property rights issue seem excessive. Others seem like they might be plausibly motivated,
given reasonable assessments of the cost and benefits.
Now all that said, there is of course tons of regulation that libertarians argue is misguided
in the environmental area. Endangered Species Act imposes all sorts of restrictions on private
property with minimal demonstrated benefit in terms of protecting species, mandated recycling,
almost never passes any sort of thoughtful cost-benefit test, all sorts of energy policies
that are pushing for solar power, for wind power, and so on and so forth, rarely meet
standard economic analyses of cost-benefit calculations, even addressing the possibility
of global warming issues and so on and so forth. So while libertarianism is absolutely
for certain kinds of environmental policies, especially when they are limited to defining
property rights, they’re also quite leery of many because they just don’t pass standard,
straightforward economic analyses for having benefits in excess of cost.
Last general category I’ll discuss is professional licensing. Governments erect barriers to entry
in a range of professions: medicine, law, plumbing, electrician, hair dresser, many,
many, many more. Academia is actually one of the few, to the best of my knowledge, that
doesn’t have many government-created barriers to regulation. Harvard could hire someone
with zero years of education to be a professor if it so chooses. Government doesn’t get
involved in that anyway. But, that aside, many, many professions have these barriers.
The effect of these barriers is to lower the quantity of people who are able to provide
that service, such as becoming doctors, and apply higher prices because when you reduce
quantity, you raise price. And the claim in defense of this licensing is that we raise
the average quality of the services being provided. We keep unscrupulous doctors from
becoming doctors. And that protects consumers. The evidence doesn’t back up that set of
claims. It certainly confirms that licensing reduces the quantity of the service that’s
supplied, and it raises the price. That’s exactly as you would expect from standard
economics. But the evidence doesn’t support that we get higher average quality, or in
any way, shape, or form, enough improvement in quality to justify the fact that we have
made a particular service – such as lawyer service, accounting service, medical services
– more expensive and therefore introduced an inefficiency, unless we have gotten big
improvements in quality, and we don’t see the evidence for that. So these licensing
barriers are a lose-lose, and they are especially bad for people of lower incomes because raising
the price of course affects them much more than it affects people of moderate or higher
incomes. To summarize, market economies have tons of
regulation. Some of that is well-intentioned, clearly. Some of it is not even well-intentioned.
Some of it is an attempt to prevent competition for the services of the people already in
an industry or whatever. There’s certainly a good case for some government involvement
to establish and enforce rules of the road so that capitalism works smoothly. Libertarian
view is not for zero government; it’s for these limited types of intervention, definition
and enforcement of property rights, contract enforcement toward liability.
There are a few other plausible cases of regulation that libertarians would endorse that are along
the same lines, in particular, some kinds of environmental regulation. Overall, however,
libertarians argue if we have way too much regulation, we would get substantial benefits
from scaling back or eliminating most of it. Thank you very much.

1 Comment on "6. Capitalism | Libertarian Public Policy with Jeffrey Miron"

  1. I remember a toy as a child in the 70's that was supposed to automatically throw a football to you. Turned out, there were a handful of cases where kids were having fingers torn off when the toy launched the ball prematurely while the child was loading it. Tort reform is all well and good, but the children had already lost fingers, potentially impacting their ability to become productive members of society. What about drug companies? Should they no longer be forced to publish side effects? Palm Pilot? Really? They were in no way a "monopoly" of anything. Sweet. So I can call myself a doctor and open my own clinic. Sure, I'll eventually lose customers once people figure out I'm a scam, but I'll be able to retire by then.


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