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Taxes, the Constitution and the Slippery Slope
[Note: This was written several weeks ago but not published so it's a little out of date.]
A modern-day “conservative” is basically a libertarian who doesn’t believe in slippery slopes. Indeed, there is a widespread denial of the phenomenon which defies logic. Nearly every time someone tries to point out that something the government wants to do may lead to undesirable consequences, they are met with an automatic dismissal–“oh what the slippery slope argument?” (rolls eyes)—as though practically every time someone has warned of a slippery slope, it hasn’t ended up being the case. (See “argument from intimidation.” )
The left has to whitewash the notion of a slippery slope because their entire movement is based on it. It is all about getting people to go along with things that most of them wouldn’t want through subtle manipulation over a long time-period. It’s right there in their name—“progressive.” For too long, conservatives have allowed the government to start down these slopes and then tried to steer the slide away from the collectivist disasters that they are designed to funnel us into. But they are always one (and quite often several) steps ahead of us because they designed the slope in the first place so that whenever we try to steer around Scylla, there is an undetected Charybdis waiting to swallow us up. Nowhere is this more apparent than in the healthcare debate. I will get into the economics of healthcare next time but first we have to talk taxes.
There is a real divide in political ideology in the country but it is not between Democrats and Republicans or liberals and conservatives. It is between people who think society should be socially engineered through force by a centralized authority and those who think it should not. It’s true that most of the people on the “should not” side are also on the conservative/Republican side. But how often do you hear a “conservative” pundit say they want “small government” and then in the next segment call for the government to do something to bring down gas prices, fight “speculators,” save children from their parents and engage in all sorts of other interventions designed to engineer society in a supposedly conservative way?
Taxes
In order to have a government you need taxes. In order to be free, you must have an absolute prohibition on the government (at least the Federal Government) using the tax code to socially engineer society. Once you let go of the premise that social engineering is the proper purpose of government, and that the proper role of the individual is to try to influence the government to engineer it in the way that individual desires, then you become a libertarian (welcome aboard). To most conservatives, this sounds great until they realize that giving up this notion means giving up your mortgage interest credit, your earned income credit, your continuing education credit, etc.
Of course, a libertarian tax code would also get rid of all the credits that you don’t use and offset this with lower rates (way lower rates if we also had a libertarian spending policy), so nearly everyone would be better off. But strangely no congressman ever proposes a bill eliminating all tax credits and lowering rates. Why is that? Perhaps it’s because politicians like power and their power derives largely from their ability to divert money to specific segments of the public. But I digress.
The Constitution
The founding fathers were libertarians. In light of this, doesn’t it seem like they would have put something in the constitution prohibiting the Federal Government from using the tax code to target certain individuals and behaviors in order to socially engineer society? Yes it does, and in fact they did just that.
“Representatives and direct taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers…”
-Article 1, Section 2, Clause 3
“No Capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration herein before directed to be taken.”
-Article 1, Section 9, Clause 4
So how is it that we just witnessed the Supreme Court uphold a bill which gives the Federal Government the power to force every individual to buy healthcare on the grounds that the penalty for not complying is actually a tax? The answer, of course, is that we allowed progressives to undermine this important provision of the constitution a hundred years ago when we passed the 16th amendment.
You might recall when President Obama expressed his regret that the constitution was only a charter of negative rights saying what the government can’t do to you and not a charter of positive rights saying what the government must do on your behalf. The response of conservative commentators was to shout “see, he wants to change the constitution from a charter of negative rights into a charter of positive rights!” But this was a misdirection, as I pointed out a while back.
What we should have said is “wait a minute, it’s actually not either of those things, it is a charter of enumerated powers. It says what the government may do on your behalf.” This is a very important distinction. All of the debate over the healthcare law was centered on the commerce clause. The question was posed: can the government force us to buy broccoli under the commerce clause? The court avoided answering this question, and so far nobody is asking the same question with regard to the power to tax. Can the government “tax” me if I don’t buy broccoli? Of course, the answer is yes. Whatever the government wants me to do, it can declare a tax against me if I fail to do it. There is no longer anything which falls outside of the enumerated powers of the Federal Government.
So what is the point of the constitution then? It stops the government from discriminating against me based on race, infringing on my freedom of speech, freedom of religion, right to bear arms, etc. The protections contained in the constitution have been reduced to only those protections which are specifically mentioned. In other words, it has been transformed into a charter of negative rights.
The slippery slope
Imagine the response if, in 1913, you had stood up and said “if we allow this amendment, there will be nothing stopping the government from taking over the healthcare industry, or any other industry, and telling us what we have to buy, and how much we have to pay for it, because this will ultimately transform the constitution from a charter of enumerated powers into a charter of negative rights.” But the reality is that this power to tax us however they see fit, does give them the power to do pretty-much anything they want to us. (Speaking of slippery slopes, in 1913, the top rate was 7% and this was supposed to be temporary. By 1918, it was 77% and in 1944, the top rate was 94% and the first bracket was 23%)
I’m not making a slippery slope argument in reference to the future. I am making it in reference to the past. We have been sliding for a century, the whole process is right there in the history books. There is no speculation involved, you just have to look around and notice that we are at the bottom of the hill.
It’s not enough to just blame Obama or Democrats or Chief Justice Roberts or the media for what is happening. This is happening because Americans have lost touch with the moral and philosophical foundations of liberty. If we hadn’t we would have stopped it in 1913 (along with a lot of other things that started in 1913). Progressives actually don’t want liberty and they are purposely trying to undermine it. Conservatives don’t want this, we have just been tricked into going along with it. But the reason we fell for it is because we stopped being libertarians.
This government is a Hydra with so many heads nobody can count them. There is always one head nuzzling up to you while six others are devouring your neighbor. Then, when one suddenly comes for us, our reaction is to try to cut off the head, but even if we succeed in cutting it off, two more spring forth (repeal and replace?). In the end, everyone gets eaten unless we actually slay the monster—unless we can look at the head nuzzling us, the head devouring us and the head claiming to be protecting us from the one that is devouring us and say “you all gotta go”–in short, unless we become libertarians again.
Morality and Government Part II
There are two ways to think about government. By far the most common is to think of government as a force over and above the citizens which has always just been there, which provides for them, which they are inherently bound and subject to, and which can be petitioned as one petitions God or a child petitions its parents for whatever they want by appealing to its morality. This is a bad way to treat government and I’m sure my libertarian friends will agree. The correct way of thinking about government, at least government among free people, is as a contracting problem. Most people have trouble thinking of it this way because when they hear the word “contracting” they think of contracting in a legal sense. This type of contracting requires a third-party enforcer (a government) to enforce the contract. In the absence of a third-party enforcer, there is still the possibility for contracts but those contracts must be self-enforcing. Consider some examples.
Contract 1: I come to you and ask for a loan. You give me $100 today and I will give you $110 one year from today. This contract is not self-enforcing because 1 year from now there is no incentive for me to pay you back. I already got what I wanted out of it, why should I fulfill my end of the agreement? If there is a third-party enforcer, it is in my interest to uphold the contract because if I don’t, then the enforcer will come and punish me. But without a third-party enforcer, this contract will not be possible even if it would be mutually beneficial.
Contract 2: I am a farmer and you are a swineherd. We agree that every autumn I will give you a portion of my crop and you will provide me with meat throughout the year. This contract may be self-enforcing because the benefits to both parties are continuous. This will be the case as long as the benefits to both of us from continuing the agreement are always greater than the benefits from breaking it.
The last post was intended to establish a framework for thinking about morality and ethics in the context of government. The purpose of this post is to analyze the morality of a specific government action, namely taxation. [Editor: it actually goes a little beyond that...] In order to do this we must assume a few things. Here’s the scenario we will consider: A group of people come together who want to form a libertarian government. They believe it is immoral to initiate violence against another person. So I aim to evaluate certain functions of government through this moral lens. I’m not trying to argue that this morality is the one true correct morality but this post is intended for people who generally share my libertarian views. Read more…
Morality and Government
This is a continuation of what I started in this post on morality and ethics. The position I am disputing is that government shouldn’t tax because taxation is theft and theft is immoral. Let me say up front, that a government which could accomplish its purpose without taxation would be ideal and I believe it’s possible that this could be achieved. If we could start a government from scratch with people who all believed as Thomas and I do, we might be able to fund the government with only voluntary payments (to be fair this is exactly the scenario he was dealing with in his original post). I won’t get into how that could be done but I’m not trying to prove that it’s impossible here. My issue is with the attitude that there is a universal morality which government must (or at least ought to) follow. And if we have any interest in fixing this thing before it gets so bad that we have to rebuild a society out of the ashes, we can’t have that approach. We are so far away from a national consensus that taxation is theft and should be outlawed altogether that if you adopt this position your only option is to wait for the collapse of society. The real important thing is that the government be prevented from using taxation to redistribute wealth and manage its distribution. This does not require a complete moratorium on taxation.
A government has no morals. It has no morals because it is not a creature. It is a tool created by people to perform some task. Tools do not have morals. A hammer can be used for building a house–a noble pursuit–or committing a murder–not so noble. If I am making a hammer, I cannot imbue the hammer with a moral objection to murder. There are however, some things I could do to make it more difficult to commit murder with my hammer. I could remove the forks on the back or perhaps put a layer of foam rubber around the whole head except for the face. If I really wanted to be sure, I could even cover most of the face leaving only a small hole in the foam rubber that would have to be lined up precisely with the nail on every strike in order to work. These things, while making it more difficult for someone to use my hammer for murder would also make it less useful for building houses. Read more…
Democracy
Since I was a child I have been taught that democracy equals freedom. But this is not the case. Well at least it’s not the good kind of freedom. To see what I mean let’s play the two codes game. Consider two moral codes which both value “freedom” and despise “oppression.” The difference is in what type of entity each code identifies as a candidate for freedom or oppression. A holder of the first code believes the relevant entity is the individual and the holder of the second believes it is the collective. You cannot simultaneously believe in individual freedom and collective freedom. Here’s why.
If you take a free individual, his decision-making process is simple. He looks at a situation, decides what he wants to do and then does it. If you take a collection of individuals, the process is much more complicated. The reason is that there is no way to aggregate preferences. At least there is no way to aggregate preferences when you think of a collective as a collection of individuals. If however, you consider the collective to be a monolithic being, then it becomes simple again. You just ask it what it wants and then do that. But how do you ask the collective to make a decision? You have a vote of course. And that’s democracy. And as long as you only care about collective freedom you feel just fine about this because the collective always gets what it “wants.” It’s free.
Of course if you care about individual freedom this just won’t do. The reason is obvious. This is tyranny of the majority. If at any time, your life and or property can be disposed of by a majority of the other people in society you are not free. This is problematic if you are not very popular. But even if you are popular, you are bound to the whims of the masses at every turn and I think it is self-evident that the majority does not always make the right decision. This, of course, is the view held by Bernays and the progressives which is why they devote so much energy to propaganda/public relations. But it is also why they are such ardent advocates of democracy. They believe the masses are idiots that they can convince to do whatever they want. Of course not everyone is an idiot, but if you have democracy it’s ok, you only have to get 51% of them, the rest have no choice.
So progressives and I have one thing in common, we both don’t trust the masses to make the right decisions for society. But we have different ways of dealing with it. They want to vest as much power in the masses as possible (democracy) because they think they can manipulate them. I don’t want to manipulate anyone, I just want to be free from the consequences of their potential idiocy. To anyone who shares this desire, democracy is a terrible governing concept.
If you believe in collective freedom, then democracy equals freedom and all you would need to form the perfect union would be this:
“The government can do whatever it wants as long as it’s supported by a majority vote.”
If on the other hand you believe that government should be established for the purpose of protecting individual liberty then it is a much more delicate process. It requires things like enumerated powers and a bill of rights. These things exist to protect the individual from the masses. These are the things which have been eroded by progressivism. The perfect example is the case of income taxes I spoke about recently. This allows the government to target certain people, and dispose of their property for the benefit of some other people. Also we have the popular election of senators, socialized healthcare, etc. And their justification for all these things is that it’s the will of “the people.” As long as it’s what “the people” want, it’s ok.
But it’s not my will. I don’t want to be bound to a government-run healthcare monstrosity. I happen to know that it’s a bad idea (in this case the majority seems to be on my side but they won’t be when it comes time to actually fix the healthcare system). If we were left to our individual liberty, I could choose to participate in free market health insurance and the leftists could go voluntarily institute a collectivist healthcare collective. The only difference would be that they couldn’t take money from those of us who think it’s a stupid idea in order to pay for it. Then we could see which works best (even they know which one it would be that’s why they don’t do it this way) and make our own choices. But progressives’ moral code holds that it is just to force anything on anyone as long as a majority of other people support it. This makes it entirely incompatible with individual liberty, and that is why our founders did not establish a democracy.
I’m not very happy with this one but I have had writer’s block and I promised this one would be coming soon so I’m pushing it out, sorry.
A Model of the State (What Would a Dictator Do?)
Let us begin with a model of dictatorship. This follows from the basic story layed out in The Role of the State. We begin with a dictator who has established control over some group of subjects. The dictator incurs some cost in order to protect the property of his subjects. This is assumed to be an increasing function of the amount of wealth created and will be denoted G(Y) where Y is total output. So if the population is fixed and equal to N, then each individual (they are assumed to be identical) produces y=Y/N. Also, the dictator decides what percentage of output to seize (tax) from his subjects. Let this percentage be denoted by t. This means he will receive income equal to tY. The problem faced by the dictator will be to choose t in order to maximize his profit given by tY-G(Y).
In order to do this, the dictator will have to consider the maximization problem faced by his subjects. The issue, in a nut shell, is that the higher the tax rate t, the less incentive there is for people to produce because they get to keep a smaller percentage of their output. This can be seen easily by imagining that each member of the economy produces output according to the production function y=l where l is the quantity of labor an individual devotes to production. Also let us assume that each member faces a cost of labor c(l) which is increasing and convex (increasing at an increasing rate). The amount of output that a worker gets to keep will be (1-t)l-c(l). (For simplicity I am measuring the cost as the value of foregone leisure in terms of output, so in other words I am counting that as lost goods which means the proper way to interpret this is as the amount by which the workers wealth increases from their initial state where they have all leisure and no production goods. This is somewhat simpler, and in my opinion no less accurate, than dealing with a worker with a utility function over consumption and leisure) So the worker’s first order condition for the maximization of this expression will be
c’(l)=1-t
From this we can easily see that when t increases the marginal cost of labor will have to decrease which means he will produce less (since c”(l)>0). Going forward let us assume that c(l)=l^2. This will make the above equation
2l=1-t
which means l and y will be given by
y=l=(1/2)(1-t).
Plugging this into the dictator’s profit gives us
t(1/2)(1-t)N-G[(1/2)(1-t)N]
Now, to make is simpler, let’s let G(Y)=Y/5. This means that the first order condition for the dictators maximization problem will be (notice that the Ns cancel out)
1/2-2t*+1/10=0
This will give us
t*=.3 y=.35
The profit to workers will be .35(1-t)-.35^2=.1225.
The profit to the dictator will be .3(.35)N-.2(.35)N=.035N.
Now let’s imagine a government of some form which makes decisions in order to maximize the prosperity of its citizens rather than of the dictator. In this case, the government will need to raise just enough money to pay the expense of protecting the economy’s output. Mathematically, we can impose the constraint
tY=(1/5)Y which implies t=1/5
In other words, we can just set the tax rate equal to the marginal cost of protection (if G( ) were not linear this would work out a little different). In this case the problem for each individual worker will be to maximize
.8l-l^2
which gives the first order condition
.8-2l=0
so l* (and y*) will be .4 and the profit to workers will be .8(.4)-.4^2=.16.
There are two important things to notice here. First is that this benevolent government makes citizens richer by transferring the profit formerly accrued by the dictator to them. Second, this is more efficient. This can be seen simply by noting that output increases when the dictator is removed (in this case from .3 to .4). This also makes the citizens better off. This happens because the dictator, in his attempt to capture as much wealth from the society as possible, damages the incentive to produce. He will not destroy it entirely because this would also destroy his source of wealth, but he will do so to an extent which is inefficient. It is in an attempt to acquire both of these benefits for the people, that men endeavor to establish free rule of law societies. The rule of law allows men to get the benefits of secure property rights without surrendering to a dictator the ability to loot their property to whatever extent he desires.
Now with this in mind consider the Laffer curve. This is a theoretical curve showing the total amount of tax collected as a function of the tax rate. For low levels of the tax rate it is increasing and for high levels it is decreasing. This was the argument used in the Reagan administration to justify lowering the tax rate. The position of that paragon of small government conservatism was that the tax rate was so high that it was on the downward sloping section of the Laffer curve so we could actually get more revenue by lowering the tax rate. And this is the same argument going on now. In a brilliant sleight of hand, Democrats are now claiming that we need to raise taxes in order to reduce government deficits and Republicans are saying that we need to lower taxes to “stimulate the economy” in order to lower deficits. The entire debate amounts to an argument of where the maximum point of the Laffer curve is. In other words, what tax rate maximizes government revenue? Or in still other words, what would be the appropriate tax rate for an absolute dictator to impose on the economy?
You see the argument made by the Reagan administration was not that the government had no right to confiscate your property to whatever extent it desires. The argument was that the government could actually confiscate more of your property if it lowered the rate of confiscation. This argument would have been no less compelling had it been made to Castro. And this is the closest thing we’ve had to a small government republican administration in… I don’t know let’s say fifty years (Ike wasn’t that bad I guess…).
So how did we get here? We kept convincing ourselves that we could get more stuff from the government without paying for it. Now we have such a massive government (and government debt) that the maximum amount they can possibly confiscate is barely enough to pay the expenses of that government (and actually it’s probably far short of that amount). This lack of foresight on our part has not only allowed the argument to become “what would a dictator do?” but it has allowed them to have the argument in the name of “fiscal responsibility.”
The Temptation of the State
The primary role of the state is to define and protect property rights. This role requires it to wield coercive power against individuals. Historically, the most common manifestation of the state is one where an individual or a small group of individuals has control over the state and therefore near complete control over the other members of society. The emergence of what can be loosely called “democracy” or government by the people, is an attempt by free people to get the benefits of governance without subjecting themselves to serfdom. This is done by entrusting control of the government to the people it is charged with governing. But this creates some problems.
If “the people” was a single unified body that made decisions in its own interest then this would work out fine. Unfortunately “the people” is really just a collection of individual people with different interests. Each of these individual people will see the state, which is partly under their control, as a potentially very useful tool for achieving their goals. And this is true, because the state has a special power that individuals lack, namely the power to coerce others with the threat of force.
To understand the temptation that necessarily comes with this type of power, consider a man who has devoted his life to feeding the poor. This, of course, is a noble pursuit which would no doubt be commended by almost any free man. But any free man would not be willing to devote his life to it. It may, in fact, be the case that most free men wouldn’t devote much energy at all to it. To the man who does care, this will seem barbarous and mean. He will see others enjoying plenty and not showing what he considers to be the proper concern for those with less. He would like to get some of what they have and give it to the poor. This would make him happy.
In a free society, this man has a clear path to achieving his goal of getting some food from a rich man and giving it to a poor man. He can work to produce something of vale and trade it to the rich man for the food that he wants to give to the poor. On the other hand, if he has access to a coercive enforcer, he may be able to just use that power to make the rich man give it to him. This process is attractive to him for two reasons. First, it cuts out the nuisance of having to produce something valuable to trade. Second, he is able to accomplish far more this way. Instead of being able to donate the produce of only one man (himself) he is able to donate the produce of many of his fellow men to his cause.
What is more, he will likely feel no moral reservation about pursuing such a strategy. On the contrary he will probably feel the exact opposite and he may even develop a sense of righteous indignation toward those who would be so selfish as to resist his attempts to confiscate their property and direct it to what he considers a very worthy cause. And this moral reproach will be used as a weapon to accomplish his goal. He will brand those who don’t support using the government to direct peoples’ private property toward ends which they do not condone as enemies of the poor when in fact they are simply indifferent to the poor. The public at large (who controls the state) will see the issue as one of who should get this wealth, the rich or the poor? And that is what the issue is. But this view betrays the fact that the public considers the wealth of every member to be public property which can be disposed of as “the public” sees fit.
Likely “the public” will prefer the poor to the rich on some sort of moral grounds. This will especially be the case when the burden of a policy falls on a minority of them. This might not be very troubling except for the fact that everyone has a cause that they care more about than others. They will all want to use the state to coerce others to support their cause. The direction of resources will become a public political decision rather than a decision made individually by the owners of the resources. Indeed, in this case the public is in fact the owner of all resources because they have the ability to seize any of them at any time and direct them to any cause they see fit. This fact is illustrated by the current debate in this country over whether we should increase or decrease tax rates in order to increase government revenue. Notice that this is exactly how a tyrant decides on the tax rate. The thief-turned-governor in our initial example allows the foragers and hunters to keep some of their produce because it provides an incentive for them to produce more for him to steal. In a free society the question shouldn’t be what will maximize tax revenues, it should be what is the minimum tax possible to achieve the necessary functions of government?
The big problem with this situation is not that the poor get fed. It is that when the objects of wealth become disassociated with the creation of wealth, wealth will not be created. This can be illustrated with another parable.
Imagine a society made up of three individuals. The first wants to feed the poor and provide universal healthcare. The second wants to feed the poor and build roads. The third wants to provide healthcare and build roads. They each have $150 and spend $75 on each of their causes. If they are left alone they end up spending $150 on feeding the poor, $150 on providing healthcare, and $150 on building roads.
If they can vote to make the government do things, the first person may propose that the government take $50 from each person and spend it on feeding the poor. This will pass because two out of three people value feeding the poor. And in this way those two get the same amount of benefit at a lower cost to themselves ($50) because they make the third person subsidize their efforts. If only this happened, the society would end up with more feeding of the poor and less healthcare and roads. However, the second person will probably notice that they could propose a measure to have the government take $50 from everyone and use it to build roads. This will also pass because two out of three favor it. And the third person may propose that the government take $50 from everyone and use it to provide healthcare. After all of this they end up with the same amount spent on each project as they had to begin with ($150). It is worth mentioning that this is not necessarily always the case. The example is constructed this way to illustrate that it is not the reallocation of resources that is the main problem here. The main problem is that now, if any one of these people earns another dollar, only 2/3 of that dollar will go to causes they care about. This means they will have less of an incentive to produce. If all three produce less, then every cause receives fewer resources. The more people and causes you add, the more an individual’s wealth will be diverted away from projects that they care about and the less will be their incentive to create wealth.
In addition to this, it is likely that a lot of otherwise productive resources will be used up simply trying to manipulate the actions of government. Every politician, lobbyist, campaign manager or volunteer, pundit, blogger, and bureaucrat could be employed in the production of some other good. The cost of all of this together with the waste and corruption which is well known to be common in any government is most likely small however in comparison with the negative effect on incentives described above.
There is an important distinction to make here regarding liberty. It is between the conception of a “free people” in which people is thought of as a single organism and that in which people is considered a collection of individual free people. The idea that a people is free if its collective actions are chosen by the majority is fundamentally different from the idea that a people is free if they are individually allowed to live and act in a way of their own choosing so long as it does not infringe on the liberties of some other individual. The fact that a man has some say in the actions of the state which wields complete control over his life does not make him a free man. The difference between this and a dictatorship is not the degree of freedom, it is only the way in which the oppressing body makes decisions. People are only free when there is no oppressive body making these decisions at all.
Aside: On the Morality of Government
One man sees that there are poor people in his community and thinks to himself “I should do something to help.” So he goes out and gets a part-time job to earn money to buy food for the poor. Another man sees that there are poor people in his community and thinks to himself “somebody should do something to help.” So he goes to the government and demands that it use its coercive power to force other people to give food to the poor. Which man deserves more admiration?
The Nature of the State
If the state is going to be of any use, it must have the ability to protect property rights and enforce contracts. This means that it must be powerful enough to impose penalties on individuals or small groups of individuals. If an individual doesn’t fear the state, his actions will not be restrained by the law. The role of the state therefore requires that it wield significant physical power. As Mao put it “all political power comes from the barrel of a gun.” To put it another way, the whole purpose of the state is to make people do things that they would otherwise not do. No enforcer is required to make someone do what they believe is in their individual self-interest. The state is only necessary to make them do something that is not in their own interest.
In many cases this is not a bad thing. It may be in my interest to go to my neighbor’s house and take his things but I am willing to give up that right in exchange for all my neighbors giving up the right to do the same to me. This right can only be effectively taken away by the threat of physical force in retaliation if I (or my neighbors) commit such an act. This means that in order to have an effective government, each citizen must be individually put in a position of such inferiority that the state is physically capable of disposing of their very life against their will if it deems this necessary. It is because of this fact that liberty is so precarious and must be guarded so carefully.
Most governments in the history of the world (with some notable exceptions) have been essentially totalitarian. That is, they have been characterized by a ruler or ruling class that has more or less absolute power over the governed. It is worth noting that this is the situation in which we left our primitive society of hunters and foragers. The ruler allows the subjects only as much freedom as he wishes. This may be the amount which is most profitable for him or he may be a “benevolent dictator” who genuinely cares about his people and allows them much more than that. Either way, though, they are subjects, willing or not, of some higher power. We may consider this a sort of natural state of society in the sense that there are many forces pulling society toward this state.
The great contribution of the political philosophers of the enlightenment was to recognize the proper role for government, realize that it was necessary for any degree of prosperity and try to find a way to manifest this power in a form that could achieve its purpose and also be controlled collectively by the governed. This is the key to maintaining a free society and it allows the prosperity which is enabled by well defined and protected property rights to be captured by the public rather than the ruler.
Now, when we want food we go to the supermarket not the vine or the bush. Nonetheless our food still comes from the vine and the bush. We have just created a distribution system which allows us to acquire it more efficiently. Without the vine, there is no food. Likewise, in America (and most western countries), when we want to manipulate political power we go to the ballot box but we must not forget that this power still grows from the barrel of a gun. If there were no men with guns willing to enforce the wishes expressed in the ballot box, our votes would be meaningless. The mechanism that translates peaceful expression into political power is the object of political philosophy.
The American founders clearly recognized this as can be seen by examining the language of the second amendment to the constitution.
“A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.”
Notice that it doesn’t say “Hunting and sport shooting, being entertaining hobbies, the right of the people to bear Arms shall not be infringed.” Bearing arms was not just a thing people wanted to be able to do, it was “necessary to the security of a free state.” This is because once you have created an apparatus for wielding coercive power against individuals, there is a natural tendency for it to morph into a totalitarian government. The protection against this is the threat that the people collectively will rise up against it and wield some physical power sufficient to prevent it. A power that grows from the barrel of a gun can ultimately only be controlled by an even greater power of the same nature. Knowing this, free people should be wary of any attempt by such an authority to reduce their collective military power. This is the reason for the second amendment.
In fact every amendment in the bill of rights is designed to protect specific freedoms that are essential to the preservation of freedom. The more trivial rights are all covered by the ninth and tenth amendments. The first eight all deal with free speech, the right to bear arms, and protection from being disposed of or threatened by government troops or officials without just cause and due process. All of these rights are especially important to liberty because without any one of them, the ability to protect all other rights is in jeopardy.
In this way a system was created in which every individual is subject to the power of the government but the government is subject to the power of the people collectively. Unfortunately over time this system has suffered much abuse and neglect and it is now time to reexamine these issues.
The Role of the State
A while ago (before this blog existed) I wrote down the basic outline of my theory of the state and then forgot about it. I want to post a simple model explaining why we should be frightened by the Laffer curve but first I am dusting this off to build some context. I will post it in several (I think three) installments followed by the model.
The Role of the State
Government serves an incredibly important purpose economically. It is important to realize that government is a concept that has developed naturally out of a state of nature in which people stand to gain from its creation. To see this, consider the fictional situation of some primitive men with no organized government. One man is a very good hunter and another is a good forager. Since both men would prefer to consume some meat and some vegetables, there are potential gains possible if the hunter does all the hunting and the forager does all the foraging and then they trade.
The problem is that the process of trading is likely to be very tricky. Let us imagine that the hunter is also a better fighter than the forager. If the forager approaches the hunter and offers a trade, it is not necessarily in the hunter’s interest to take the trade because he has a third option which is to simply take the produce of the forager and give him nothing. There is nothing compelling the hunter to offer a mutually beneficial trade to the forager. To take it a step farther, there is nothing preventing the hunter from going out of his way to track down the forager and take his stuff.
This is likely to have several effects on the behavior of the forager. First, the inability to trade will cause him to spend some time hunting, a task at which he is comparatively inefficient. Second, he will refrain from saving a significant amount of assets because they will be at constant risk of theft. Finally, he will probably invest some effort into defending whatever assets he does accumulate. This may take the form of hiding them, or getting better at fighting, or living in a place which is easily defended but is inconvenient for other reasons.
These costs may seem small by themselves, but consider that the economic development of society is dependent to a very great extent on specialization. This situation allows for almost no specialization. There is one type of specialization that is lucrative here though. There is one skill that is capable of providing all manner of goods equally well. That is the skill of combat and theft. If the hunter decides to specialize in theft, he can steal from other hunters as well as foragers. So in this state of anarchy, there is likely to be a very great deal of combat and theft and a very small amount of production (and almost no savings).
Now at some point, a particularly sharp thief is likely to realize that there is a way to do his job which is easier and more lucrative. Instead of beating up (or killing) the hunters and foragers and taking everything they have, which imposes some cost on the thief and ensures that they will never have much, the thief can just use the threat of beating them up and take only part of what they have. The victim may be enticed to comply, since they are likely to lose a fight and come out even worse if they don’t. This will save the thief the cost of the fight, and more importantly it will allow some incentive for the victim to accumulate wealth since he will be able to keep a portion of it rather than lose it all to the thief. In this way, the thief may eventually be able to get half of 4 rather than all of 1.
In a sense, this behavior by a thief is similar to that of the first farmer who comes upon a wild plant, and instead of devouring the whole thing, realizes that he may devour some now and plant some in anticipation of its later produce. Just as the farmer, following this revelation, will have to devote some energy tending to his crops, the thief will find it in his interest to protect his hunters and foragers from pests which may threaten his harvest. After all, the desired incentive to produce would be ruined if, after the first thief takes only half, another one comes and takes the other half. So some measure of protection will be required. But this is exactly the field in which the thief is already specialized. So his efforts will be diverted away from fighting with hunters and foragers and toward fighting with other thieves. In return for this service, the hunters and foragers under his protection will willingly (that is, without a fight) surrender to him some portion of their produce.
At this point we have a government. Of course the exact course of events that lead to this situation may vary, but this illustrates how people acting in their own interest may move from a situation of anarchy to one with governance. And it is important to point out that both the governor (who started out as a thief) and the subjects (who started out as victims) end up better off under this arrangement than they were under anarchy. More importantly though, is the fact that this situation now allows for economic progress. That is because people now have an incentive to invest and produce more because they will get to keep some of the benefits. Furthermore, they will be able to trade. This is because the governor is in a position to enforce contracts. So if a forager wants to trade with a hunter he needn’t fear the hunter seizing his goods because there is a third party enforcer who has an interest in preventing this. This ability to trade allows for specialization which leads to innovation which means progress and greater wealth for all.
So now we can take a step back and ask what is the essential role of government that is necessary in order to have a stable and productive society? The answer is the establishment and enforcement of property rights. To analyze this we need to define the term property rights. For this I turn to Barzel who distinguishes between two types of property rights. The first, which he attributes to Alchian and Cheung, and refers to as “economic property rights” can be defined simply as the ability to enjoy a piece of property. The second, he calls “legal property rights” which he describes as what the state assigns to a person.
The distinction is important. To see the difference, note that economic property rights exist even in the absence of the state. The forager living in a situation of anarchy retains some ability to enjoy the produce of his labor. This ability is limited however by his ability to defend that property from thieves. The purpose of legal property rights is to extend economic property rights at a lower cost. In other words, the state, once established, will delineate some legal property rights by declaring that the forager has a legal right to use the produce of his labor as he wishes and nobody else has the legal right to take it or otherwise interfere with his enjoyment of it. The state then must enforce this legal right with a threat of punishment in order for it to have any effect on economic property rights. If the state just said that, but did nothing to someone who ignored it, then it would not stop a thief from taking it anyway and the forager’s economic property rights, again, would exist only to the extent that he was able to defend his property himself. If however, the state threatens to punish a thief, and because of this the thief is unwilling to steal from the forager even if the forager does nothing to defend his property, then his economic property rights are secured without any particular individual effort to secure them himself. The effect of these legal property rights is that the forager’s economic property rights will be much more extensive and he will be able to devote the effort that would otherwise have been used in securing his property rights to more productive endeavors.
