Economics and Public Policies 28:55
Dr. Miron briefly discusses criminal justice, intellectual property, scientific research, risk management, campaign finance, abortion, and behavioral economics.
Miron: Welcome back. We’ve now covered a number of the most important policy areas that feature in market economies and more broadly. We obviously can’t cover every single possible government policy. But there is a small set, a popery of other policies I’d like to discuss because they address some important issues and fill in some gaps in the discussion that we’ve had so far. In particular, I want to talk about the libertarian view on crime, contracts, and property rights, talk about the libertarian view on intellectual property protection such as patents, government funding for research, abortion policy, campaign finance regulation, policies that attempt to mitigate risk. And finally, it’s not exactly a policy, but it’s a perspective that relates to policy: behavioral economics.
Starting with crime, property rights contracts, this is an area where in addition to national defense, libertarians certainly support some government involvement. They would support having a government outlaw and punish particular crimes, enforce not necessarily all but many contracts arranged between private parties, and more broadly, to define and enforce property rights in the economy. Indeed, you can think of a label that covers essentially everything libertarians support as being an example of defining and enforcing property rights. A contract creates particular claims about property between the parties to the contract. National defense is at some level protecting our property relative to possible taking of that property by people from other countries. So we want to think about what the government role might be and should be in this area and think about its limits.
Libertarians have no general objection to – indeed support quite clearly – laws against murder, rape, robbery, arson, theft, acts of theft and violence. All these actions violate property rights. And simple efficiency arguments, simple economic incentive arguments will tell us that unless people feel that their property rights are protected, that their lands, their houses, the factories they build and so on and so forth are theirs, that they own them, that someone will help protect them against theft by other parties, we won’t see people invest in houses, we won’t see people develop their land, we won’t see people create manufacturing entities and so on and so forth. So we need to define and protect property rights in order for economic growth to occur. Of course, there are some private mechanisms which can help to protect property. And maybe we don’t need quite as many government efforts along those lines as we have. But broadly speaking, this is certainly an area that libertarians endorse as one of the few areas for government involvement.
That said, current criminal justice systems in most economies are way too big in the libertarian view, and it’s useful to talk about those excesses. One plausible excess is what we would call deterrence activities. In addition to investigating crimes after they’ve occurred, trying to find the perpetrator, bringing that perpetrator to justice, prosecuting, incarcerating, and so on, police departments engage in a lot of activities that are just meant to keep crimes from happening in the first place by having police officers patrol the streets and things like that. The evidence doesn’t seem to suggest that it has much effect, and of course it costs resources. So there’s a plausible case that a lot of that is just wasteful. It’s not necessarily evil. It may not be doing anything too horrible directly, although if police are engaged in stop and frisk and that creates animosity within the community, it could indeed be counterproductive. But mainly, it just seems to be wasteful. So there’s probably scope for significant reductions in the size of police forces by cutting back on that particular type of criminal justice activity, the ex-ante deterrence as opposed to the ex post prosecution and punishment.
A broad category of things under criminal justice that libertarians certainly oppose is the definition and enforcement of laws against vice such as prostitution, drugs, gambling, owning and carrying weapons, and so on and so forth. There’s quite substantial effort across the country, across both federal and state efforts, to deter vice, to punish vice. And libertarians are opposed to all those efforts. That would be substantial savings in criminal justice expenditure in addition to a bunch of other beneficial effects that we discussed earlier.
Another useful category to think about is anti-money laundering laws. Under those laws, banks and other financial intermediaries have to keep detailed records of a whole set of transactions, especially transactions involving cash, but more broadly as well – with the idea that this is useful for helping the authorities stamp out activities that generate money and they are depositing their revenues etc. in banks. They’re enlisting banks in the attempt to try to catch such criminals. The first problem with that approach is that of course most of the anti-money laundering activity goes against activities that libertarians don’t think should be illegal in the first place. So if the issue is drug traffickers depositing their cash in banks, if we legalize drugs, we certainly don’t need any anti-money laundering statutes to deal with the cash that’s put in the banks by drug traffickers. We would just have legal drug sellers, not drug traffickers.
But more generally, these laws are incredibly burdensome and cumbersome for business. There’s very little evidence that they’re effective in terms of deterring those activities that we might want to deter, even if there are a few. So those should probably be scaled back, probably just eliminated. And let the police and other authorities prosecute those things that they can do on their own without having to enlist, without having to in effect deputize the entire banking system. That’s incredibly costly and doesn’t seem to be effective.
There’s also a lot of white-collar crime that most libertarians would at least raise serious questions about. These are things like fraud, embezzlement, stock manipulation, insider trading, etc. etc. Take a simple example. Think about actions taken by the management of a particular corporation that may have robbed shareholders in order to benefit management. There’s some fraud in which management pays themselves excessive amounts, or they spend ridiculously on lavish perks that are not productive, and so on and so forth. One view is that the government needs to go in and prosecute those executives who have undertaken such acts and to prosecute them criminally, possibly put them in jail.
Another view is that if the shareholders don’t like those executives, the shareholders can vote them out. If the shareholders are worried that executives might be doing things behind the scenes, they should set up a structure that makes it harder for that to happen. They should have review processes and so on and so forth.
Related to that, short sellers in financial markets will tend to punish, i.e. bid down the price, of stocks of corporations that are doing bad things or where the executives are not giving sufficient information for the shareholders to figure out what’s actually going on inside the company. So I think the libertarian view is very sympathetic to the notion that these private mechanisms of the marketplace disciplining mismanagement, embezzlement, fraud in many of these settings would be more effective than having the government do it. When the government does it, first of all, it’s easily politicized. The government goes after targets that are politically unpopular at the moment, not just the most egregious violations. And the government can’t be everywhere. It can’t possibly discipline all the potential mismanagement, fraud etc. that might occur. But the market is everywhere. There are people buying and selling all these stocks all the time. The short sellers are always looking for cases where something doesn’t look right and they can make money by being correct in identifying, accounting gimmickry and so on. So reduced, maybe very little government involvement in white-collar crime is another way in which the criminal justice system can be scaled back and still be quite consistent with libertarian principles.
Turning to another aspect of property, intellectual property protection, governments provide property rights for patented goods, copyright issues, trademarks, and so on, i.e. they lay down rules under which people can use property that has sought this kind of intellectual property protection. There’s a standard argument for that type of intervention, and it seems fairly sympathetic and easy for libertarians to relate to. First of all, libertarians like the idea of government defining property rights. They’re perfectly okay with that general concept. In addition, the economics of that type of property is that much of it is very basic and much of it is very easy to copy. So if there’s not government protection of your property right to a patented good, people will reverse-engineer it, and they will sell it and compete with you – which will make it hard for you to make money by inventing new goods and selling them in the marketplace. It takes a lot of huge cost to do research and development, to create these goods that you might patent. And then once you’ve done it, if there’s no patent protection, somebody else reverse-engineers the new medicine or whatever and starts competing with you. So you can’t actually make a profit. So to spur innovation, to encourage artistic creativity in music and so on, we might need intellectual property protection.
So libertarians at one level are very sympathetic to that perspective. But in practice, this case doesn’t seem to be nearly so clear. The evidence is quite mushy as to whether intellectual property protection actually spurs innovation. There are good examples of industries, countries, times when there was no intellectual property protection or much less. And those areas had similar amounts of innovation or creativity of various kinds, as places which did have the intellectual property protection. So for some reason, the empirical evidence doesn’t support the standard economics view. And government systems have their own cost. Patent cases are probably the best known. Patent trolls are people or organizations that go out and patent everything they can think of related to some area where there might be innovation at some point in the future. And then they try to hold up someone who realizes they need one of those particular patents and then has to pay a large amount of money to the patent troll. That generates a lot of extra cost, a lot of delay, possibly interference with a lot of useful innovation. So the patent system is certainly not perfect. The evidence doesn’t support spurring innovation. Maybe it needs some additional rethinking.
Government funding for research occurs broadly in the U.S. and elsewhere. In the U.S., we have the National Science Foundation, the National Institute of Health, the National Endowment for the Arts, National Endowment for the Humanities, state universities, lots of government funding for science and other related activities. The standard argument is very similar to the argument for government patent protection. Basic research might not be very profitable. It might be no one will focus on the things that are at the foundation of science but that are necessary for more applied aspects of science to occur because you can’t get government funding for discovering the rules of calculus. Those have already been discovered. But similar things would be so easily available, the ideas would be so easily transmitted to everyone that you can’t make a profit by coming up with these great, basic ideas. You can only make a profit when you can put the idea into a product, a pill, a toaster oven, the Internet, an app, whatever, that you can sell. Therefore, we need to have government fund the basic research. That’s not a stupid idea. That model is logical on its own. But again, it’s not so clear in practice that it’s doing more harm than good. First, a lot of what the government is funding under its budgets that are supposed to be for basic research, under the story, is clearly not going for basic research. It’s going for very applied research. That kind of research translates into marketable products. There’s plenty of private incentive for people to undertake that type of research. So that government money is simply wasteful. It’s just helping companies that would have to do the applied research on their own.
Some funding that is basic research would clearly happen on its own. When Benjamin Franklin discovered electricity, he wasn’t doing it because he thought he was going to be able to use it to help run the Internet hundreds of years later; he was doing it because it was cool. And clearly, there are lots of examples of that. That would occur anyway. There are lots of private efforts to fund basic research. Universities are one example. They fund all sorts of things that may or may not ever be marketable because they think they’re interesting, because they think they’re important, because they think they’re cool. So it’s clearly wrong to think we would have no funding for basic research without government funding. Some things the government funds may be interesting. They may be cool. But they’re not necessarily going to be useful in a long, long time, if ever. So that’s also a cost of having the government be involved.
As an example, consider the superconducting supercollider that the U.S. government was going to build in Texas. It was going to be huge. It was going to cost tens of billions of dollars. It may have contributed something fascinating to the understanding of physics, but its ability to help us make better laundry detergents or anything practical was pretty hard to see, so that also might not have been particularly productive.
Of course, last but not least, government funding of science can get politicized. It can tend to get tilted. From my own area of research, I see that the government funding that goes to support research on drugs has a very, very strong prohibitionist slant. That’s not what the government should be doing; tilting the deck towards some ideas rather than others. That is extremely dangerous. So in principle, there might be a case for some government funding of basic research. In practice, the case doesn’t seem to be particularly convincing.
Governments get involved in trying to eliminate risk in all sorts of ways. People don’t like risk. They don’t like uncertainty. They don’t like volatility. So it’s understandable that they take private actions to reduce their exposure to risk when buying life insurance. But the key question is whether government should try to reduce risk. Very simple story here, when the governments try to reduce risk via various kinds of government-provided insurance, it creates moral hazards. It creates incentive for people to take more risk because they know they’re insured, and that’s potentially disastrous. Things like the Pension Benefit Guaranty Corporation, the Federal Deposit Insurance Corporation, some of the platforms in Dodd–Frank are all ticking time bombs. They’re telling people, “Don’t worry. There’s no risk. We, the government, are paying for it.” But that means there’s more risk being taken. And eventually, chickens will come home to roost.
Campaign finance is an important issue because it gets tons of attention and potentially seems to play a huge role in politics. Campaign finance imposes rules, regulation on who can give to political campaigns under what circumstances and what amounts, and so on. Why an argument against all this regulation? It might be that money just doesn’t influence politics, that it’s the ideas that influence politics. The evidence is somewhat mixed. It certainly does not say that campaign contributions and other sources of money are determinative. It’s clear that to a large extent, the money follows the expected winner rather than money causing the actual winner. But there are some cases where money clearly seems to play some role. Certainly, candidates need some minimum amount of money to get enough name recognition, to get media events, and so on. So I don’t want to make that particular argument.
The key thing is the assumption that the influence of money in politics is necessarily bad. Libertarians can of course think of lots of cases where there are lobbying groups, there are special interests that are trying to promote particular government interventions that we don’t like, and we think the influence of money, if it’s successful, would be bad. But there are billions of cases in the other direction where money is attempting to stop things that libertarians and lots of people would agree would be bad. So it’s good that money is influencing politics in those instances.
Simple case, if regulators want to impose something new, the industries affected are going to push back. They’re going to lobby. They’re going to spend their money against those particular regulations. It is good that some skepticism, it is good that some cost-benefit analysis is brought to bear, and regulations aren’t just decided by regulators from on high; that money is able to attempt to get us to a better balance of arguing through all the pros and cons.
In addition to all that, I don’t think we really need to argue about whether money influences politics or whether that influences good because the fact is money will out, no matter what the regulation does. There are so many different ways that people with a lot of money can spend it in order to foster the campaigns, the ideas, or the candidates that they want, unless you are willing to utterly shred the First Amendment, if you’re utterly willing to pay no attention to government getting directly involved in determining the political outcomes ex ante, you simply can’t stop the money. So imagine that private individuals spend their own money to produce pamphlets, to put ads on TV, to put ads on the internet to say “I’m in favor of this candidate, of this policy, of this platform.” Having the government stop that is unquestionably thought-control that most reasonable people would not consider acceptable. Unless you do that, you can’t possibly stop the money from getting out. So it’s way too strong to assume that money’s influence in politics is all bad. There are clearly ways in which money’s influence can be positive.
Regardless of whether you think money has a big influence and regardless of whether you think that influence is good or bad, we don’t really need to resolve that because money will have an influence in politics no matter what we do. Individuals with money will use that to take out ads on TV and the Internet and billboards, sponsor pamphlets, books, so on and so forth. And unless you’re willing to write laws which ban those activities, i.e. unless you’re willing to run roughshod over the First Amendment, you simply can’t prevent the money from trying to have an influence, whether or not it has a big influence. So all the regulation is simply useless, costly, and it rewards the unethical. It harms people who try to obey the rules and helps people who are willing to disregard the rules. So the right thing on campaign finance regulation is simply to repeal absolutely all of it.
Another issue that’s useful to discuss is abortion. This is important because it’s one issue on which libertarians disagree and disagree quite strongly. At one end, you have people who think roughly-speaking, a fetus is a life, abortion ends that life, so it’s murder, or certainly violence. And governments – and libertarians routinely agree – should outlaw violence. So government has a legitimate role in banning or at least severely limiting abortion.
Alternative view, which other libertarians subscribe to, is to think that we never want the government to invade anyone’s personal space, that the government’s ability to intervene ends where a person’s nose begins. Therefore, as long as we’re talking about doing something inside someone’s body, that is not a legitimate role for government.
Arguing those things on ex-ante principles could take a long time. It’s unlikely to lead to easy agreement. There are clearly strongly held and widely differing views on those positions, both amongst libertarians and obviously much more generally. So I simply point that out. This is an area where libertarians have agreed to disagree. Libertarians do tend to be sympathetic to one aspect of abortion policy, which is it should be left to states and not the federal government. Very few libertarians would support any federal policy that banned abortion or severely restricted abortion. Likewise, libertarians would not support policies that force states to take particular abortion policies. Generally, maybe a few exceptions, libertarians would say, “Let each state define what’s legal abortion or not as part of its laws defining murder.” So abortion would simply not be a federal policy one way or the other.
Last thing to discuss in this popery sort of useful items to fill in the gaps in the view of libertarianism is behavioral economics. This is an area of economics that has its roots in psychology and psychology in economics. It goes back at some level many decades, but has had a huge boom in the last couple of decades. It basically says the following: Standard economics use individuals as rational. They have these situations they face, these problems they’re trying to solve about how much to save, which products to buy, which occupations to go into, and all that sort of thing. And they know the relevant information. They think ahead. They make decisions which are consistent over time, and so on and so forth. They’re very good decision-makers.
There’s lots of evidence that challenges that view and says in many settings, people seem to be making, at a minimum, unusual decisions, and in other cases, seeming very irrational and clearly sub-optimal decisions, failing to take advantage of dominated choices. In these experiments that are done to provide this information, typically with college students, some of the participants, and in some cases, many of the participants, choose one option over another – even though everything about the second option is better. They should choose this one option, and yet some of them choose the other. That certainly is not easily consistent with rationality.
A simple illustration of behavioral economics is something called the ultimatum game. One person gets to offer some portion of a dollar to another person. And the rules say that the person doing the offering can offer as little as one penny. Then the person who receives the offer has the option to say, “I accept,” or “I don’t accept.” That’s the only thing that the receiver can say, accept or don’t accept. If the receiver accepts, the two people share the dollar in the offered proportion. So if the offerer had offered one penny to the receiver, receiver gets a penny, the offerer gets 99 cents. If the receiver says, “I reject,” they both get nothing.
What does rational standard neoclassical economics say that the offering people should do? They should always offer exactly a penny because then they get the most money at the end of the game. And they should do that with confidence that the receiving person will always accept the penny because a penny is more than zero. And the best thing the receiving person can say is I accept the penny, rather than saying I reject your offer, and walk away with actually not even that one penny.
In fact, this experiment has been run hundreds and hundreds of times across lots of campuses, countries, with different stakes, all sorts of things. Routinely, almost all the offerers offer the receiver way more than a penny. Sometimes they offer them 50 percent. Sometimes they offer them more than 50 percent. They offer to give away more than half. They almost always offer to give the other person 20, 30, 40 percent of the dollar. And the receivers frequently reject offers. They consistently reject offers that are really, really un-generous. And they often reject even relatively generous offers. Their likelihood of accepting offers of course goes up with the amount that they’ve been offered.
Neoclassical, strictly rational economics doesn’t explain this easily. And there are billions of other experiments that raise similar types of issues. What should we think about behavioral economics? As descriptive economics has telling us here’s some evidence on how people actually behave, at least in these experimental settings. Here are all these other pieces of evidence that seem consistent from actual markets of people doing things suggested by the experiments as a description of what people do, as what economists call positive economics, behavioral economics is great. Just like all other science, sometimes it’s better done; sometimes it’s worse done. But there’s no reason libertarians should have any issue with it whatsoever. If that’s what the facts say, that’s what the facts say.
Where libertarians can absolutely push back is when some behaviorists, but certainly not all, make a giant leap from saying, “Because some people are not fully rational, that justifies more government intervention.” And that is at a minimum a whole another argument that has to be made, and in many cases, in my view, will not be least bit compelling and indeed will go the other direction.
Here’s an example: If you think that people are super rational and you outlaw drugs, how much did you harm the super rational people? Well, you harmed them some. You caused the prices to go up. You made it harder for them to find a place to purchase drugs. You made it harder for them to figure out if they’re getting a dosage that’s low or high. You make it harder for them to know if there’s been adulterants and things like that. So you’ve made rational people worse off but not that much because they will realize they’re going to have to buy from criminals. And maybe they’re going to switch to alcohol from marijuana because of that. They’ll realize that they’re paying these higher prices, and that maybe is something they want to avoid. They’ll realize that they’re not going to know what purity they’re purchasing if they’re buying these things in the black market. It is precisely the people who are behavioral, who are myopic, who are irrational, who are not well-informed. That’s precisely the people that the paternalists want to help and are using these behavioral arguments to justify who are going to be harmed by prohibition because they’re the ones who are naively going to keep buying from criminals and dangerous areas, are going to keep buying the drugs not knowing what purity they are, are going to be most disadvantaged by the excessive prices, who are going to undercount the probability that they get arrested and go to jail – which is really, really bad for your health and your productivity and all those sorts of things.
So as a way of thinking about the world, modeling the world, behavioral economics may well be right, may well be more accurate than neoclassical economics in many settings. Almost everybody does something behaviorally some of the time. Maybe a lot of people do it a lot of the time. But as a simple way to say, as a leap to therefore we need more intervention, that is not in the least bit convincing in at least many, many, many settings. So libertarians are quite right to force people who want to justify policies to justify them, to argue for them, not just call on the fact that some people are behavioral. That by itself doesn’t tell you anything.
To summarize today’s discussion, governments intervene everywhere. That’s certainly a sub-theme of this course. If you don’t stop and think about it, you forget exactly how much government intervention there is. So I wanted to talk about some additional policies to help emphasize that. The consequentialist approach provides a good starting point for discussing all these issues. So even though we haven’t covered everything, I hope that this framework is useful for thinking about a whole set of things we haven’t discussed. I certainly don’t want to assert there’s a theorem that every intervention is bad, that every intervention is equally bad. But the vast number of examples we’ve examined certainly suggest a pattern. It certainly suggests some common themes, some common sorts of negatives from these interventions. Therefore, the overall claim is that the treatment of government intervention is worse than whatever disease might be there because markets themselves, private arrangements themselves are not necessarily perfect. They’re not, but the government usually makes it worse. Thank you.