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Why isn't libertarianism more popular?

8/11/2013

IGNACIO CLANCY

                                              “But this long run is a misleading guide to current affairs. In the long run we are all dead”
                                                                                        (John Maynard Keynes, A Tract on Monetary Reform, Chapter 3)

Why is the philosophy of liberalism not accepted in the Latin American countries, or indeed in general? Much Marxist analysis of this question suggests that libertarian ideas have nothing to offer to people under poverty conditions, and that paternalist systems are the only solution to generate relief for this sector of the population. Therefore, these writers suggest, the ideas of a welfare state naturally tend to be the most popular ones.

However there is an alternative explanation for the rejection of liberalism – defined here as a political paradigm that prioritises free markets, low taxes, small government and peaceful international relations – which utilises the psychological concepts of immediate and delayed gratification. It has been said that men instinctively tend to satisfy their immediate needs, in this way shifting emphasis away from delay of gratification. The latter requires the capacity to control one’s will and thus sacrifice to satisfy the needs of the long-term rather than the short term (Goldman, 2000).

Economics has developed a theory of time preference and opportunity cost (Menger, 1871), but economics fails to explain why these time preferences can be lower or higher in the short or long run. On the other hand, the theory of immediate and delayed gratification can easily provide an explanation for why an individual who has been exposed to a long period of consecutive crises delaying his basic needs, would like to immediately satisfy them. It is not expected that this individual could restrain his will in order to satisfy long term needs.

It is in those moments when man is overwhelmed by impulse that man becomes vulnerable to the implantation of ideas. Thus, when men face a situation that seemingly requires a quick solution, human will becomes weak and tends to succumb to a great deal of harmful, but immediately visible, ideas. On the contrary, men tend to reject in such situations any idea that postpones gratification, even though, in the long run, the final outcome would be better.

LIBERALISM AND LATIN AMERICA

Recent history of central and South American countries is based on successive crises. It is understandable, then, that most people in these countries opt for immediate solutions. Liberalism does not offer quick exits to deep crises; as many practitioners of Austrian economics have pointed out with reference to the Global Financial Crisis of 2007/2008, there is a period of painful adjustment when malinvestments must be liquidated, and when unprofitable firms must go bust. Similarly, the results of turning toward an open economy would take too long to materialize; since the necessary changes are structural in nature.

The second reason, related to the timing of change, is the magnitude of the changes that will need to be undertaken. In order to move toward a market economy, government spending should be controlled and reduced, subsidies and protection should be removed once and for all. These changes would allow markets to take back control of the economy and thus reorganize in order to turn each Latin American nation towards more efficiency. But of course, this transition would leave many people momentarily unemployed until markets are restructured and labour demand arises in the new and natural industries where each country has its own comparative advantage. Now we face a clear problem: there is not a single politician that would want to carry out such reforms knowing that the fruits would hardly be seen in their presidential term and in
those years their popularity would traverse very low levels.

History also shows us that Latin American people have generally chosen the faster solutions to economic issues. Thus in 1990 Peru was about to turn its economy to a market one, but the Vargas Llosa austerity plan frightened most poor people and Peru continued with Fujimoris authoritarian and paternalist government (Gouge, 2007). Another example is Argentina, which could have solved most of its economic problems by cutting the government deficit caused by excessive spending, but instead chose to devalue its currency in order to continue its spending (Lazzari, 2003). The most remarkable example is Venezuela; in 1998 Irene Zaes could have been elected president and turned the country toward liberalism, but Venezuelans were not ready to face these changes and chose Chavez instead. Summarizing, libertarian ideas in Latin American could never defeat paternalism when faced with crisis conditions.

PATERNALISTIC SYSTEMS

Paternalistic systems manipulate the immediate needs of the population to achieve high levels of loyalty among the people. Politicians know they have to find immediate solutions to win elections, since short-term measures may have their peak of ‘success’ during the same term of its implementation; the long-term negative consequences can be dealt with later. Such is the case of Carlos Menem in Argentina during the 1990’s, when his short term decision to fix the nominal exchange rate later contributed to a financial crisis in 2001. Paternalist decisions fail in the long-run and finally another candidate comes offering immediate gratification to people, wins the election and thus the cycle continues again.

So liberalism faces a great challenge in this region of world, as in other regions of the world, and it is an unfair challenge because paternalist policies do not respect individual rights as liberalism does. Paternalism permits satisfaction of urgent needs through redistribution of property, but liberalism does not. Liberalism in contrast, offers a gradual and sustained wealth creation, going through a period of restructuring that will require adjustment and sacrifices. In other words, it offers long term or deferred gratification which, for the moment, people are not willing to accept.

A question for future research in this area would address whether the problem lies in the minds of a people that seek to satisfy their immediate gratification, or whether liberty ideas should find a way to provide solutions to immediate needs in order to achieve high levels of acceptance in this region of the world.

References:
·
Goldman, D (2000). Inteligencia Emocional, Vergara, Mexico.

Gouge, T (2003). Exodus from Capitalism:The End of Inflation and Debt.

Jones, B (2007). Hugo! The Hugo Chávez Story from Mud Hut to Perpetual Revolution. Hanover, New Hampshire
·
Lazzari, G (2003).Apuntes sobre la caída de la economía Argentina. ESEADE, Buenos Aires.
·
Menger, C (2012).Principios de economía Unión Editorial, Madrid.

3 Comments

Interview with Robert Higgs

4/12/2013

27 Comments

Robert Higgs is a Senior Fellow with the Independent Institute, and is well known for his work on economic history (among other things). Having earned his PhD in Economics from Johns Hopkins University, he has also been a visiting scholar at Oxford University and Stanford University, and has held teaching positions at the University of Washington, Lafayette College and Seattle University.

You built your career in academia and then shifted to the Independent Institute, a research organisation funded by sympathetic donors. What are the main differences between academia and working at a think-tank?

In academia, my prime concern was teaching and training students. In my affiliation with the Independent Institute, my major responsibility was editing the institute’s quarterly scholarly journal The Independent Review.

In my research and writing I was completely independent in both situations. In academia no one ever prescribed what type of research I would do, how I would do it, or what conclusions I would reach. In my work for the Independent Institute, which now continues on a reduced basis, I have enjoyed the same intellectual independence.

Whether nonacademic work is more or less intellectually constrained depends on the organization one works for and the type of work one does. I have been fortunate in both regards.

You wrote a memorial piece for Murray Rothbard which was published by the Mises Institute. However not everyone is a fan of Rothbard; George Selgin - who has had disagreements with Rothbard on monetary issues - thinks he is a nut on fractional reserve banking, and David Friedman has blogged critically about Rothbard (see here and here), calling him intellectually dishonest. I was wondering your thoughts on these debates between wings of the movement.

Murray Rothbard was a personal friend of mine and also someone whose intellect and accomplishments I have always held in high regard. George Selgin is an old friend of mine, and I have known David Friedman for a long time. I try to avoid infighting among libertarians, some of which springs from personal enmities and eccentricities.

It is entirely to be expected, however, that economists in general and libertarian economists in particular should differ somewhat in their views. We do not belong to a cult. Lock-step conformity is neither required nor admired by people who have intellectual integrity. If all libertarian economists held the same views, that situation would signify that our discipline had stultified. Lively controversy is all for the good. It would be best, of course, if people kept their differences on an intellectual plane and did not descend to personal invective or insinuations, but libertarian economists are subject to the usual assortment of human foibles.

Why is Rothbard not taken more seriously by economists?

Rothbard upheld the Misesian approach to economics, which maintains that economic theory is an a priori body of logically connected propositions resting at bottom on the Action Axiom—that “human action,” by definition, consists of the purposive attempt to attain chosen goals by the use of chosen means. (Rothbard did differ with Mises in his understanding of the epistemological status of the Action Axiom, but he did not consider this difference especially important.) In this approach, economic theory is apodictically certain: its propositions are necessarily true as long as they are correctly deduced from the Action Axiom and other incontestable propositions.

Mainstream economists reject this approach to economics (which, by the way, was espoused by many economists in the nineteenth and early twentieth centuries). Modern economics rests on positivistic epistemological foundations of the same sort that (mainstream economists suppose) undergird the work of researchers in the natural sciences. Mainstream economists build models, derive testable hypotheses from these models, and use statistical methods to test the hypotheses. If the observed data are inconsistent with a hypothesis, the economist (in principle) either abandons the hypothesis or returns to the theoretical drawing board to reformulate the model in a way that can account for the variations in the observed data.

Misesians such as Rothbard view the mainstream approach as unsuited to the study of human action, which is always situated in a “complex” and changing context so that no theoretical ceteris paribus proviso is ever satisfied; nor can the researcher artificially impose this proviso statistically in an empirical test. Mainstream economics treats the human actor as no different from an atom or a molecule, expecting that the actor will always behave (at least as a central tendency) in accordance with some fixed “law,” whereas Misesian economics sees the human actor as having the capacity to change his goals, select new means of achieving them, and alter his relative valuations at any moment—hence, in Mises’s expression, there are no constants in economics.

Mainstream economists regard themselves as scientists and regard Misesians such as Rothbard as kooks, so naturally they pay no attention to his work. They view him and others like him as cultists or ideologues. I need hardly add that I consider them wholly mistaken in this regard.

What do you know of Australia and would you ever consider visiting us here?

I know a bit about Australia from having had good Australian friends—above all, the great Max Hartwell—and from having had American friends who have visited or lived for a while in Australia. I very much doubt that I will ever be able to visit there myself, however. I am on the verge of retirement, and I will be emigrating (I hope before the end of 2014) to a remote location in Mexico. Once I’ve left the USA, I probably will not travel anywhere except locally in Mexico and perhaps in Central America (I have many friends in Guatemala.)

One of Australia's free-market think tanks published a policy monograph entitled 'Why Does Government Grow?' which points out that non-combatants during World War II experienced comparable expansions in the size and scope of government (p. 15 of the monograph). Does this line of argument undermine the argument that crises - in this case, wars - are the culprit when it comes to government's growth?

As I wrote in the first chapter of my book Crisis and Leviathan, the modern growth of government has various sources. The researcher’s job is to identify which of them have operated at specific times and places and to determine how much weight to give each of them. Crises certainly have been a fertile source of the growth of government in the USA, many Western European countries, and elsewhere. The detailed historical research on this claim leaves little doubt of its truth.

World War II, however, drew in almost all of the world’s major countries. Of those not drawn in, some experienced the same effects, springing from the same causes. For example, Sweden, which was not a belligerent in either world war, nevertheless prepared for war in both instances, in case it should have to defend itself against attack. The actions the Swedish government took in order to prepare for war closely resembled the actions other countries’ governments took in order to prepare for war and then to engage in it. One should not be misled by formalities such as whether a country declared war or by whether it sent soldiers to fight in it. The important changes prompted by war pertain to the new and expanded powers that governments exercise in connection with war or preparation for war.

Moreover, economic and political history is not physics. In one’s explanation of the growth of government, there is no reason to expect or to insist that a single model must fit every country in the world. Finding cases in which war was not a prime culprit does not, in itself, refute the finding that in other cases war was the prime culprit.

In my work on U.S. history since the late nineteenth century, crisis (along with certain ideological preconditions) is the critical event. War is the crisis that has the greatest effects because it is the one that creates the greatest public fear and therefore leads the public to demand or to acquiesce in the government’s exercise of new or expanded powers ostensibly to allay the perceived threat. However, other crises, such as the Great Depression and other economic turmoil, may also have the capacity to elicit similar expansions of government power and activity because they, too, cause great public fear and apprehension about the security of people’s livelihoods and property values.

More workaday reasons for the growth of government also exist, including those emphasized by mainstream economists under the unfortunate rubric of “market failure.” In my work, however, I have yet to find a historical case in which these sources merit heavy explanatory weight.

One also needs to recognize that what happens in one country, whether it has fought in recent wars or not, affects other countries, including those that may have avoided the fighting. Ideological changes spill across the globe, affecting redistributional politics, government policies, and many other developments. Commercial and financial relations severed or altered during a major war also bear on countries everywhere. International migrations are affected, both in their volumes and in their sources and destinations. A country can scarcely remain unaffected if a major war is occurring somewhere on earth, and some of these effects promote the growth of government.

What would you say to aspiring scholars - is it possible to carry out an Austrian research program in the social sciences and succeed in gaining employment at a major research university? Is good work published in the leading journals and recognized by faculty irrespective of the particular argument put forward by the author?

It is extremely difficult for Austrians to get a job in a top tier university or to place their articles in leading professional journals—not impossible, but extremely difficult. Austrians can succeed in getting jobs at second or third tier schools and in placing their articles in second or third tier journals, but, again, given the overwhelming dominance of the neoclassical paradigm in mainstream economics, even this degree of professional success is quite difficult.

You are now entering retirement. Are you pessimistic or optimistic about the prospects for people understanding just how much unnecessary death and destruction governments cause?

I do not expect that many people will ever appreciate the full extent of the state’s destructiveness. The state has all the advantages, from public schooling to the statist news media to almost every major institution with real power and influence in society. Of course, it has vast funds at its disposal, too, looted from the productive members of the public. People are therefore exposed, from the cradle to the grave, to indoctrination and propaganda tilted in the state’s favor. Very few ever raise the pertinent questions about the state, much less answer them correctly.

States sometimes fail, of course, but when they do, new states quickly replace them, as most people want. Modern people, for the most part, are unwilling to assume the same degree of personal responsibility that their ancestors assumed. They have therefore sold their souls to the state, looking to it for personal and economic security and relying on its general beneficence. In this regard, they evince the triumph of wishful thinking over realistic understanding.

27 Comments

Don't destroy the dollar

3/9/2013

0 Comments

MICHAEL KUGEL

The perceived trade-off between export growth and currency strength is as widely held as was that of inflation and unemployment. The lackluster performance of Zimbabwean export industries in recent years should serve - as the stagflation of the 1970’s did - as one of many real world demonstrations that no such trade-off exists. Unfortunately, the Swiss National Bank has begun manipulating their currency in accordance with the policy prescriptions implied by this economic fallacy. It is important that Australians understand that ‘competitive devaluation’ is among the least economic behaviours imaginable.

The argument in favour of currency devaluation runs as follows. A strong currency drives manufacturers out of business due to a decline in both domestic and international demand resulting from the increased affordability of international markets relative to domestic markets. Therefore, the central bank should intervene to diminish the value of the currency. In the first place, this argument focuses only on immediate and short-run effects. And for that matter, it focuses on only some of the immediate and short-run effects. It ignores, for example, the fact that the cost of imported factors of production are immediately reduced. This invariably increases the international competitiveness of manufacturing firms.

It also ignores the mechanics of the price system and how it evolves over time. Exchange rates are among the most sensitive prices in the world. They fluctuate continually in response to changing market conditions and investors considerations of those conditions. Other prices in the market place respond to these changing conditions far less frequently and to a lesser degree. A stronger currency means cheaper input costs and this translates over time into lower prices throughout the market. A stronger currency means greater purchasing power for all users of that currency.

Ignoring these effects and misunderstanding the process by which the market reorients resources toward more urgently desired uses has caused many analysts to perceive a strong currency as a hindrance to economic behaviour. The reality is that through bankruptcy, the market makes the most of resources, which would otherwise have been squandered if the losses sustained by the business had been subsidized by government intervention. Salvaging resources in this way is essential to promoting the fulfillment of as wide a range of human needs as possible with the scarce resources available to us - the essence of the economic problem.

The fallacy becomes weaker still when the effects of currency devaluation are considered. By diminishing the value of the currency, the government can prop up the businesses which would otherwise have gone under. These are the effects which most analysts perceive. They do not understand that these are precisely the businesses which the market has determined should not be made guardians of scarce resources because of their inability to direct them toward the satisfaction of the most valued human needs. Propping these firms up only serves to reinforce their initial malinvestments.

Furthermore, artificial government support for these firms can only ever be temporary - which is good considering the harmful effects of enacting such support. But even from the point of view of proponents of currency devaluation, their own efforts are stifled by the dynamics of the market which they misunderstand. As the price structure shifts upward with the diminished value of the currency and the passage of time, firms face higher prices both domestically and internationally which reduce their competitiveness in foreign markets. This is now being seen in the US where exports have recently declined to their lowest level in over two and a half years despite the plunging value of the US dollar.

Many point toward China as the shining example of the success of currency manipulation. It is true that Chinese markets have engaged very much with international markets as a result of their manipulation. But the nature of this engagement has been thoroughly misunderstood. The goal of all economic action is a desirable allocation of resources. Manipulation of the Chinese renminbi has resulted in resources being directed away from Chinese citizens and toward the international markets with whom they engage. This leaves China with a whole lot of inflation and not a whole lot of anything else.

Those who call for ‘competitive devaluation’ misunderstand the market process. International competitiveness cannot be achieved by artificially debasing a currency. Such a process subsidizes uneconomical behaviour at the expense of economical behaviour. The winner of any such ‘competition’ will be rewarded with a currency that fails to operate, business conditions that cannot be described as economical by any measure and lower standards of living.

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Why isn't libertarianism more popular?

Interview with Robert Higgs

Don't destroy the dollar

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