May 1, 2016

Anarcho-Capitalism: A Libertarian Nightmare

The fight for economic freedom goes in many different directions. Some of its proponents concentrate on tax cuts, others on reforming government spending. Another target is government regulations, which according to some estimates cost the U.S. economy some $1.8-2 trillion per year.

It is tempting to say that all venues to advance economic freedom are worth the while. After all, less government is always better, is it not?
Given the size of government in the Western world today, it is easy to answer "yes" unconditionally. We would all be much better off if we privatized our Gargantuan K-12 education system; those forced to live with Medicaid-provided health care would be clearly better off under a privately funded system; welfare recipients who become institutionalized on the government dole would be given a chance to lead a much more dignified life if poverty relief programs such as SNAP-WIC-TANF were funded and managed by private charities.

That said, there comes a point where the added benefits of privatization, deregulation and tax cuts decline, fall to zero and then become negative. Ironically, the reason for this is found in the very heart of our free-market capitalist system.

One reason why the free market is such an outstanding institution for individuals to trade with each other is that it allows every individual to seek out the best possible deal for him without coercing others into compliance with his preferences. The rationality of each individual - to pursue gains of trade - works in harmony with the rationality of every other individual until everyone has earned the gains they could under:

  • the equilibrium price established on the market;
  • the preferences and incomes of all individuals; and
  • the costs of all entrepreneurs for bringing the products to the market.

So far everything is hunky-dory in the land of libertarianism. All markets function as intended, there is a maximum of freedom and every individual is doing better than he could under any other market system. 

There is just one caveat. The rationality of the individual under the theory of economic freedom is such that he will always prefer more to less. Under static conditions - over the short period of, say, one market day - this results in saturation. Put bluntly: the consumer finds that buying and eating one more donut will make him puke at some point. The entrepreneur, in turn, will pursue more profits until his capacity to bring products to the market at a profit has been maxed out.

In other words, everyone will be satisfied within the realms of the short-term market.

Under dynamic conditions, however, the rationalities of the individuals will have dramatically different effects. Individual entrepreneurs in pursuit of more profit will, over time, do whatever it takes for them to accumulate gains from trade. Initially, "whatever it takes" means working to the edge of the clock, going the extra mile to hire top talent and spending that extra dime on advertising. 

Over time, though, the meaning of "whatever it takes" expands to include market dominance. Every rational entrepreneur realizes that the larger a share of the market he controls, the higher a price he can charge for his products. Once he has exhausted the "fair" measures of competition - advertising, brand building, etc - he will be tempted to pursue "unfair" measures.

What are those measures?

A notorious example is that of a bus company in a country where the metropolitan-transit market was deregulated. Anyone was allowed to enter the market and use whatever measures necessary - except, of course, outright mafia methods - to make it. This particular bus company had built enough financial "muscle" to operate their bus transit network free of charge for a few months. By selling their services for free they drove all their competitors out of the market. 

Once they had monopolized the market they started charging monopoly prices. Because of their aggressive measures to monopolize the market, nobody wanted to challenge them.

There are other kinds of predatory behavior, such as an entrepreneur buying  up suppliers, selling at a big mark-up to his competitors thereby forcing them to raise their prices; or going for a hostile takeover of competitors, then shutting them down one by one. 

This predatory behavior is perfectly rational to the individual entrepreneur. Yet at the same time, it destroys the very same free market where the entrepreneur was able to thrive. Once the free market is monopolized by a predatory capitalist, it will neither be, nor become a free market again. 

It is not hard to see the conflict here between, on the one hand, the profit-maximizing entrepreneur and, on the other hand, the rest of us who might want to get into that market as either buyer or seller. This conflict is in fact inherent to the free-market capitalist system; the rational behavior of the individual has irrational, and undesirable consequences; yet if we choose an entirely different economic system we lose the rationality of the individual that gives us the best products at the lowest prices.

The fact of the matter is that the free market requires a set of rules to function properly. If we leave the free market to operate completely independently, without any rules whatsoever, then the most aggressive entrepreneur, the most predatory capitalist, will eventually gain control over the market. Once he has a monopoly he will, metaphorically, draw blood from his customers to maximize his profits and shed blood to defend his market position. 

But, the book-studied libertarian asks, what is wrong with a big capitalist monopolizing a market? After all, he "won", did he not?

No. The goal of the free market - and of economic freedom - is not to let one entrepreneur dominate an entire market, regardless of how he becomes the monopolist. The goal of economic freedom is to give everyone the opportunity to find their best skills to pursue happiness. That means preserving and protecting the free market against all threats:
  • A power-hungry government eager to tax and regulate all market participants; as well as
  • A capitalist who turns a free market into a monopoly.

What proponents of anarcho-capitalism often forget is that the purpose of a free market is divided between both sellers and buyers, both entrepreneurs and consumers. Just as entrepreneurs should be free to compete for profit, consumers should be free to compete for the highest gains possible from trading on the market. On a fully free market where no buyer and no seller has a dominant position, consumers get the most for the least: the best products for the least money. 

This is why countries where the economy is predominantly built of free markets are the richest nations in the world. 

A free market cannot be free of regulations, or else the predatory capitalist destroys it. A free market is guarded by regulations the purpose of which is to preserve that same free market. If this does not make sense, consider a constitution the only purpose of which is to protect and perpetuate individual freedom. 

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