The Economics of Liberalism



On my last post about The Philosophy of Liberalism, I argued that Libertarians defend we should have freedom to choose our own path in life, that our uniqueness is our most important contribution to the world and that voluntary association should be the primary way in which people interact.

Economists are great supporters of liberalism, because more than anyone they believe the freedom to exchange are the building blocks of economic prosperity and well being. Over the years, economists such as Adam Smith, David Ricardo and John Stuart Mills proved that economically free countries are not only richer, they also have lower infant mortality rate, better HDI (Human Development Index), their citizens live longer and they are better educated.

The Market Process

Libertarians observed that people have the propensity to come together and trade things. I will give you what I have and you want if you give what you have that I want, and like that both parties will be happy. We also believe in expending trade, that involves not only two people but thousands of millions of people in a constant competition for price and quality that would increase the chances of finding what you were looking for, and the place where all these buyers and sellers meet is the market.

In our daily lives, we don’t stop to think how our food arrives at our supermarkets and restaurants, or how computers and smartphones come to be produced and delivered to our door steps. But these simple examples, involve the cooperation of countless individuals around the globe that come together in an environment facilitated by the market in three ways: Property Rights, Prices and Profit & Loss.

Property Rights is the exclusive power to determine how something in your possession is used. The most famous example in the capitalist world is land. When you buy a piece of land you are not only acquiring the physical space but the unconditional right to use it as you seem fit, building a house, farming or even harvesting. Property rights encourage people to produce things for themselves and for others and help grow the economy, mainly for two reasons: 1. If what you are producing is legally protected, nobody can take it away from you without your consent; 2. If you have to share everything you produce or own, you are less likely to fully put yourself into work and preserving it, since it’s not yours.

Prices is the second way of regulating the market. In a free market prices rise and fall according to the demand of a certain product or service, if higher the demand the prices also rise in order to accommodate the increase in demand. Let me give you an example: last month the United States under the Trump administration said it could close the boarder with Mexico, impacting not only in the free movement of people but also goods and services. Afraid of this change, buyers in the United States increased their demand for Mexican Avocado foreseeing a possible market shortage. As a result, the prices of Mexican Avocado increased 35% overnight, and people that were not willing to pay the new price simply did not buy it, forcing on a second moment, the prices to fall. This intrinsic control mechanism in the market system is what regulates and prevents unfair pricing and preferential treatment.

Lastly, Profits and Losses are the last way markets are regulated. People who have been intoxicated by the Communist and Marxist rhetoric often see profit as a dirty and unmoral word, but this couldn’t be further from the true. In a free market, money flows to where it is most valuable, meaning that products and services that have high demands often do well better than the ones with low demand. That is because consumers dictates the market and producers that successfully fulfill the customers needs and expectations are able to increase their value and consequently their profit. The Profit and Loss mechanism ensures we spend resources (money, time, raw materials…) to produce things the consumers really want. Also, profits boosts innovation since it is looking new opportunities to improve the product, the experience or to reduce costs, in a way that is creative, imaginative and revolutionary.

Skepticism of Power

As we have seen in the previous topic, in a free market capitalism the prices are regulated based on the demand and offer of products and services and business can make profits or bankrupt according to their ability to supply the consumers with their needs and wishes. However, in recent times, we have seem many examples of companies being benefited by the government, or banks being bailed out by politicians, and we came to think that capitalism don’t work. The fact is that this close relationship between companies, banks and industries with the government and politicians is not what capitalism is about.

Economists have a term to describe this effect, called Crony Capitalism, where businesses thrive not as a result of market risk, but rather as a return on money amassed through a nexus between a business class and the political class. In a recent case in the United States, the FDA (Food and Drugs Administration) banned the use of CFC (Chlorofluorocarbons) in drug claiming its use was harmful for the ozone layer. This new regulation affected mainly inhalers for asthmatic patients that used small amounts of CFC to spray the drug into the patient lungs. The change was a result of lobbying from Big Pharma to boost the sales of a CFC free inhaler, patent and developed in the 1990s. Now, that the CFC inhalers are out of the market, the new product costs as much as double the price of the original, an unnecessary extra 8 billion dollars to US consumers.

However, we cannot blame the big companies, such as Banks and Big Pharma for lobbying, the sad truth is that when business’s lobby is because the handouts are there for the taking. Politicians are not working in the best interest of the citizens, the electorate and even less for the consumers, which usually means an increase in tax revenues and that is why the political class is always making bad policies. Both economists and libertarians are skeptical about government intervention and regulation and advocate for more freedom and free market, because they see markets as selfless mechanisms that generates outcomes that we all generally like and don’t partially benefit the most powerful.

Civil Society

Civil Society is the environment that flourishes in the absence of government, as a community of citizens linked by common interests and collective activity. Libertarians believe civil society does a much better job defending the collective and the interest of its citizens than the government, because it’s less corrupt, smaller in size, more acquainted with local issues and inevitably more committed to solving these problems. Communities are better solving local problems than the government, and freedom and liberty is what empowers the individual to act and make change.

After hurricane Katrina in 2005 destroyed New Orleans and the surrounding areas, small religious groups and charitable organizations were the most effective providers of aid. When we delegate such powers to the government, what we can expect in return is inefficiency, corruption and political bias. In a free market, government taxes are minimal because the government has little duties and responsibilities, the citizens are free to exercise their civil responsibilities and charitable work, and since it’s a free market the same rules of price, profit and boost in innovation happens in the third sector.

Lastly, the 2009 Economics Nobel Prize winner Elinor Ostrom has found in many years of fieldwork that even when goods are truly non-excludable and commons problems emerge, people often finds local solutions to those problems without government intervention proving that local “private self-governance solutions” are more efficient. In other words, we should value more the Civil Society and rely less in government aid.