In defence of laissez-faire.

by Gurmukh Singh.

So; let’s start this with an age-old tale. A village chief telling a bedtime story to his grandson says that ‘there is a fight going inside me’. The fight is between two wolves; one is good and the other is evil. The good wolf is kind, benevolent, empathetic, generous and compassionate. The evil wolf is arrogant, envious, sorrowful and egotistic. The chief then tells his grandson that ‘the same fight is going on inside you, and inside every other person, too.’ The grandson thinks about it for a few moments and asks ‘Which wolf will win?’ The chief replies ‘The one you feed.’ What is the point that the chief is trying to make? It is that: all people are fundamentally capable of both good and bad.

If the story did not convince you, let us then turn to a more scientific approach of hypothesis testing. Hypothesis one says all people are fundamentally good. Hypothesis two says all people are fundamentally bad. We can test these hypotheses against the alternate that we are both good and bad. From what we observe in the real world, hypothesis one is contradicted by the plethora of available historical evidence. The central idea of the Marxist theory is that people are fundamentally good and are corrupted by the evils of this world. One only needs to look at the European history of early twentieth century to see how many lives were lost to that idea. Hypothesis two is contradicted by the observable fact that there is no chaos on the streets of Adelaide. This leaves us with the remaining alternative that an individual is capable of people being both good and bad. If we are to graph it, I believe it will look like a normal distribution around neutral. In normal lingo, this would mean that most people are roughly equally good and bad with a small sample of us being extremely good and another small sample being extremely bad.

Now, let us consider this story’s implications to the dynamics of government and politics. Some of the government’s duties are to set and enforce laws, collect and spend taxes (a lot of those) and control the country’s defence. These duties are undertaken by politicians who are elected by the people. To put it precisely; government is a potent tool wielded by the politicians. Politicians through government can be a force of immense good or bad for the society. Therefore, politics attract people from the tails, not the peak, of our graph. Individuals who are either very virtuous or very megalomaniac are attracted to climb the peak of this mountain we call politics.

It is the case that some considerable amount of power is concentrated at the top in a hierarchical society, like ours. It is also the case that to reach at the top of any profession, one needs to be extremely capable and dedicated. If these two statements are true for the private sector, there is no reason to doubt their applicability in the public sector. It then follows that as we move towards the top of the pyramid, the struggle between capable & virtuous politicians who are also extremely honorable, truthful and ideologically consistent and; capable & megalomaniac politicians with extreme qualities associated with the other tail of the distribution, also reaches its climax.

Let us pause here for a one moment to note an observation from George Akerlof’s Nobel prize winning paper ‘The Market for Lemons’. In essence, it says that people are not fully rational but, they are ‘approximately’ rational. For example, no family sits at the dinner table to discuss that ‘the government has jumped its estimated spending this fiscal year by 2 billion dollars. To recoup this, the treasury will most likely propose a tax raise at some point in the future. Therefore, as a household, we need to cut $13.20 per month out of our consumption spending.’ This behaviour cannot be attributed to the general society. However, people ‘will’ act when the effect of imposed taxes shows up on their payslip. From this observation, it can be concluded that people do not, rationally and informatively analyse the effect of policies offered to them by politicians.

Moving back to the struggle of politics, let’s imagine a scenario where a good politician takes a policy position that is consistent with the politician’s ideology. Also, let’s just say that upon examination, said policy can be concluded as good for the society. Now what would the other politician with no ideological grounds do? It is not hard to see what the answer is: make promises that appeal to the general public but have no grounds in reality or undercut the opponent to the point where opposition’s policy is no longer feasible in reality. A good person will not make promises that cannot be kept but a crook would not a second’s sleep over any empty promises. As a consequence, the top of the pyramid is filled with people who belong to the unfortunate tail of our distribution.

This begs the question: how can we reduce the influence of these megalomaniacs in our society? The problem has two solutions: either break the pyramid (often advocated by the preachers of the Critical Theory) or reduce its size. Problem with the first solution is that: what would replace the existing hierarchies? This solution has been tried by the followers of Marxist doctrine in the twentieth century with no less than catastrophic results (refer to the rise and reign of Stalin in Soviet Union). We are therefore left with the second option. In other words, a system of laissez-faire.

But stop! Laissez-faire caused the 2008 Financial Crisis and who will protect ordinary people from those evil corporatists!!

It has been a remarkable achievement of western governments that they have been able to dodge all of the responsibility of the 2008 disaster. Let us firstly examine these claims in theory. Firstly, governments grant licenses to operate a bank after certain conditions are met. These conditions are so stringent to begin with that they create a natural monopoly-turn-cartel dynamic in the banking sector. This is NO laissez-faire. Furthermore, when these banks choose to engage in risky behaviour, customers are effectively left with no choice to switch to a bank that is less leveraged than others. Whilst other businesses are constantly gauging customer expectations so that they can stay in business, this is not the case with the banking sector. Additionally, when the government guarantees bank deposits, which again, contradicts the principles of laissez-faire; it creates a moral hazard problem. In layman’s terms, it is effectively telling banks that it will guarantee the principal amount of the bank’s ‘gambling’ money. Consider two very simple markets: one described above and, the other with a large number to banks, serving different consumer profiles ranging from banks which almost exclusively invest in bonds (low risk) to highly leveraged (high risk) banks. There is no federal guarantee and an individual can choose the level of risk they want to engage in. Scenario two looks like a freer society than the other.

In the real world: Consider the actions of the U.S. government during the 2008 crisis. It rolled out a line of credit for the baking sector whilst many individuals lost their homes. Alternatively, it could have nationalized the payroll of employees who lost their jobs and let the inefficient institutions be put into voluntary administration and sold to better managers. However, people who were protected were different from people who were affected. One may be tempted to argue that it passed Dodd-Frank however, by the same logic, those same politicians wielded with the tool of government are stripping it down since 2015.

Furthermore, government institutions are often accused of being inefficient. For example, reportedly, up to 50% of the U.N. aid does not reach the people for which it is intended. The allegation of inefficiency has grounds in reality but, even more profoundly, as shown above, it protects the inefficiencies of the private sector even when they are exposed. In this sense, government is the abettor of inequality in this world. Therefore, the notion that it somehow protects the weak from the tyranny of some evil corporatists is naive one.

To conclude, I believe that all of the above arguments present a very strong case for limiting government and its powers. Additionally, I showed in brief detail that laissez-faire is a necessary condition for a freer and more equal society. It is a tool for the economically and politically weak class that shields them against the tyranny of the hierarchy. Milton Freedman famously said that the government is a place where “A and B decide what C shall do for D.” Only by stripping A and B of their tool of tyranny, can we make sure that both C and D do better.