But when it comes to what the government should do, what role it should
play in the economy and infrastructure, I become confused. As you delve deeper
into libertarian beliefs (and on this subject they are joined by right-wing
Republican beliefs), you soon learn that they are rooted in a deep faith in capitalism
and the wisdom of the markets, in the benevolent guidance of the ‘invisible
hand’. But the idea that the state has no role to play in the economy is in
fact quite anti-capitalist because it ignores a fundamental underpinning of
capitalism, something so basic that it is really part of the definition of
capitalism: comparative advantage.
The concept of comparative advantage was first described by
the father of economics himself, Adam Smith. I’ll let Mr. Smith sum it up in
his own words: "If a foreign country can supply us with a
commodity cheaper than we ourselves can make it, better buy it of them with
some part of the produce of our own industry, employed in a way in which we
have some advantage." Of course, it doesn’t have to be a foreign
country: it can be any entity that has an advantage over you in how efficiently
or cheaply it produces a good or service. This isn’t just a principle or an abstract idea: it’s a mathematically provable
fact. If you take two goods (or services) and I produce one well and you
produce another well, protectionism or any other means of excluding you from production or market participation makes no sense as we are both materially better off if we trade. In
fact, it goes even further: even if I am better at both of these things than
you are, we are still both materially better off if I perform the task where my
skill most exceeds yours and you perform the other.
So what does all this have
to do with why libertarians, and right-wing Republicans who claim to be
capitalists, shouldn’t object to the many things modern governments do? It’s
because with quite a lot of the tasks required to survive and thrive in modern
life, governments enjoy a distinct comparative advantage over individuals and
even corporations and other organizations. Let’s take safety inspections as an
example. A strict libertarian says that safety of the food supply should be
left to producers, because it is in their best interest not to poison their
customers, who, if so poisoned, would punish them by not buying their products.* A single, centralized governmental food safety
organization enjoys a distinct comparative advantage over private industry
here, and certainly over individuals. The collective cost of all Americans
being responsible for their own food safety testing is ridiculously higher than
what a single agency would cost to perform this task for us all. Even when
compared to industry doing the testing (assuming we were foolish enough to
trust them to do so), government still enjoys the cost advantage through
economies of scale and centralization that help avoid redundant costs and
resources. So why not be good capitalists and pay them to do it through our
taxes?
The same principle applies
to a vast array of goods and services. Health insurance is another, much as
American Republicans and libertarians deny it. The verifiable fact is that programs like Medicare and Medicaid
have far less costly overhead and operating expenses than do private insurance
companies, who must pay for things like marketing and who of course must make a
profit. At the other end of the spectrum is something like manufacturing, a
task government is quite ill-suited to perform because, due to elasticity of
demand, competition is key to (and effective at) driving efficiency and
innovation, and a government take-over of such a task would by definition
eliminate such competition. And therein lies one of the keys to deciding what
government should and shouldn’t do: price elasticity of demand. That’s just a
fancy way of saying that people will demand something like healthcare service
at roughly the same level regardless of price (so it is quite inelastic). You
don’t say, ‘no thanks, I’ll just leave that arm broken or let that cancer grow
because the price is too high’ the way you would decide to walk or take the bus
if car prices went up too much. That’s why it does make sense for healthcare
insurance to be a government task while car manufacturing is best left to the private
sector: prices for cars are quite elastic since people have many options, thus
ensuring that there will be fierce competition among makers to innovate and
keep costs low through efficiency as otherwise they lose business either to
competitors or to alternative means of transportation. The list of examples
could go on and on: roads, emergency services, schools on the one side;
manufactured goods and value-added professional services on the other side.
So if our libertarian and
conservative friends want to be good little capitalists, let them prove their
understanding of capitalism by applying a reasoned, rational test - versus an emotional,
irrational and ideological one - when deciding what the government should and shouldn't do. If government enjoys a comparative advantage, and especially if
the good or service in question suffers from highly inelastic demand, then let
them do it and pay them a fair price (through reasonable taxation) to do so;
else, leave it to the private sector.
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*Let’s put aside for the moment the absurdity of allowing people to die in order to allow the market to adjust itself. Let’s also put aside the fact that poisoning with chemicals and impurities can take years if not decades, thus leaving companies with a profit motive to continue poisoning in the short to medium term with no fear of retribution from the marketplace during the lifetime of current management.
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