1. A Libertarian Perspective on Economic and Social Policy Lecture 1 Introduction ©2007 Jeffrey A. Miron

2. Introduction This is EC1017, A Libertarian Perspective on Economic and Social Policy. Jeffrey A. Miron, Professor. –Visiting Professor of Economics at Harvard. –Not “visiting from” anywhere. –Was a tenured professor at BU. –After visiting for one year a few years ago, I, resigned from BU to accept a 5-year visiting position at Harvard (this is year 2 of 5).

3. Introduction, continued Purpose of today’s lecture is to provide an introduction to Libertarianism generally and to the specific issues we will address in this course. Roughly an hour on this introduction, and then discuss the syllabus, prerequisites, and other nuts and bolts issues.

4. Libertarianism What is Libertarianism? Why Should There be a Course About It? What Does Libertarianism Have to do with Economics?

5. Answer These Questions in Several Steps Define Libertarianism Consider examples of policies that libertarians oppose. Compare libertarianism to other “isms” with which you are probably familiar; goal is to make clear that libertarianism is fundamentally different.

6. What is Libertarianism? A Definition Libertarianism is, roughly, the view that the best government policy is usually laissez-faire. The word “best” is important: –Need to be clear about the objective function, since there are many possible views on what is “best.” The word “usually” is important; libertarians do endorse a few deviations from laissez-faire; –But only a few relative to current practice. The word “policy” is also important. –Libertarianism is a perspective on the appropriate size and scope of government; it is not a perspective on life, religion, happiness, good and evil, philosophy, or anything else. –And laissez-faire is a policy: the policy of non-intervention.

7. Examples of Programs and Policies that Libertarians Oppose Public Schools Gun Control Laws Social Security U.S. participation in the United Nations Government-Mandated Affirmative Action Government protection for unions Prohibitions on Insider Trading High-Stakes Testing U.S Invasion of Iraq Death Penalty Government Restrictions on Abortion Drug Prohibition Government Restrictions on Immigration Anti-Trust Policy Campaign Finance Regulation Medicare And a whole lot more

8. Cabinet Departments Under Libertarianism Eliminate: Agriculture Commerce Education Energy Health & Human Services Homeland Security Housing Interior Labor Transportation Veterans Affairs Keep: Defense Justice State Treasury

9. Government Agencies that Libertarians Would Eliminate SEC FTC FEC CPSC FCC EPA CIA NASA NIH NSF NLRB FEMA ICC NRC

10. Libertarianism is Different It is not just fiscally conservative liberalism; It is not just socially liberal conservatism; It is not just advocating moderate reductions or modest tweaks in the size of government; It is a radically different perspective.

11. Why Study Libertarianism? A Comparison to Other “Isms” Anarchism Liberalism and Conservatism Philosophical Libertarianism Externality Libertarianism Consequentialist Libertarianism Cost-Benefit Analysis

12. Libertarianism versus Anarchism Anarchism is the view there should be zero government. Libertarians argue for small government, not zero government Relative to current views about the appropriate size and functions of government, liberalism and anarchism look similar. But the distinction is real and important. Two main areas in which libertarians support government involvement: –National defense –Definition / enforcement of property rights, contracts

13. Liberalism What is the definition? What is the principle? –It’s hard to give a clean definition or explain the principle behind modern liberalism. Liberals are suspicious of government intervention in some spheres, but highly receptive in others. –Traditionally, liberals support economic interventions but not social interventions. –For example, liberals support legal abortion but endorse minimum wages and rent control.

14. Conservatism What is the definition? What is the principle? –It’s hard to give a clean definition or explain the principle behind conservatism. Conservatives are suspicious of government intervention in some spheres, but highly receptive in others. –Traditionally, conservatives support social interventions but not economic interventions. –For example, conservatives support school prayer and restrictions on abortion but oppose limits on free trade.

15. Liberalism and Conservatism In fact, current versions of liberalism and conservatism are not all that different. In most areas, both support substantial intervention, differing somewhat on the amount or manner of intervention, not on whether there should be intervention at all: –Social Security –Drug prohibition –Fighting Terrorism Thus, again, libertarianism is truly different.

16. Libertarianism versus Liberalism and Conservatism There are areas in which liberal and libertarian perspectives agree, but also many where they diverge. –Roughly, agree on social policy but differ on economic policy. There are areas in which conservative and libertarian perspectives agree, but also many where they diverge. –Roughly, agree on economic policy but differ on social policy. Libertarianism is “laissez-faire” across the board. –More broadly, this course will argue that libertarianism is consistently based on application of one, reasonable principle, in contrast to either liberal or conservative views. And even when libertarianism “agrees” with liberalism or conservatism, the reasoning is often quite different.

17. Libertarianism versus Liberalism and Conservatism, continued The fact that libertarianism differs from both liberalism and conservatism is not, by itself, sufficient reason to study it: –There’s lots of nutty stuff out there that is “different.” But this course will suggest that libertarianism resonates, at least in its milder forms, with many people: –A substantial portion of the population is unhappy with both liberal and conservative views. –The libertarian perspective seems to be what at least some of these people are looking for.

18. Libertarianism versus Liberalism and Conservatism, continued The fact that libertarianism is different and seems to resonate with a non-trivial fraction of the population is a key motivation to consider it. But this does not explain why libertarianism is an economics subject, and indeed much discussion of libertarianism seems to imply that libertarianism is about philosophy, not economics. To understand why it really is about economics, we need to discuss philosophical versus externality versus consequentialist libertarianism.

19. Philosophical Libertarianism One way that many people justify libertarian policy positions is by asserting that –Individual rights and freedoms are the most important values in society; –Therefore, most government policies are bad because they impose limitations on individual rights and freedoms. The policy conclusions to which these arguments lead are similar to the conclusions I will argue for in this course.

20. Philosophical Libertarianism, continued But nothing in philosophical libertarianism explains why individual rights and freedoms are the only things that should matter. Some people believe other principles are the “correct” principle on which to base policy choices. –For example, some people think an “equitable” distribution of income should be a key goal of policy. Thus, philosophical libertarianism is not a scientific view; it’s an assumption or belief or assertion. This course is not emphatically not about philosophical libertarianism.

21. Externality Libertarianism A different version of libertarianism says intervention is justified only when the actions of one person have a negative impact on the welfare of others. –In economics language, only to correct externalities. This approach sounds appealing (at least to economists), but it is not that useful in practice.

22. The Problems with Externality Libertarianism First, the externality approach justifies almost anything: Some people claim they suffer a negative externality from being around particular races or religions. –Does this justify apartheid or state religion? Of course not. Some people claim there is a positive externality from baseball because it’s American? –Does this justify funding stadiums? Of course not. Some people they experience a negative externality from being around people who are sloppy dressers. –Does this justify a tax on T-shirts? Of course not. One can attempt to avoid this problem by considering only “substantial” or “tangible” externalities. But this becomes messy, vague, and subjective quickly.

23. The Problems with Externality Libertarianism, continued A different problem with the externality approach is that in many instances a genuine externality exists, but laissez-faire might nevertheless be the best policy given that attempts to correct externalities have their own limitations. –For example, snowblowers make noise; but banning them or regulating them would be worse. So, externality libertarianism is a lot closer to economics than philosophical libertarianism, but it is not quite the right approach.

24. Consequentialist Libertarianism CL says society should choose policies in the following way: –Determine in each arena whether there is really a problem for government intervention to address. –Identify the set of policies that might ameliorate the problem in question. –For each of these, examine all the possible consequences, both good and bad, tangible and intangible. –Intervene if, but only if, the entire range of consequences from intervention is better than what occurs under laissez-faire.

25. Consequentialist Libertarianism, continued Stated this way, it is hard to oppose CL. Indeed, many people accept this approach but believe it justifies a large range of government intervention. So, why does the CL view have strong prescriptions? Because of two empirical claims: –Many of the problems that allegedly justify intervention are not so large in the first place. –Most interventions have a lot of negative consequences that the proponents fail to consider, and these often swamp any possible benefits.

26. Consequentialist Libertarianism, continued Whether these two empirical claims are right is something I will try to convince you during the course. Assuming those claims are right, however, it follows that laissez-faire is the best policy in most arenas. –This view recognizes that markets are not perfect, that some people are myopic, some capitalists are greedy, etc. But, it also recognizes that policies are imperfect, so the right question is always, –Which evil is worse? And the claim here is that, usually, government intervention is worse than laissez-faire. It’s of course for you to decide whether you agree.

27. Libertarianism and Cost-Benefit Analysis Previous description makes clear that consequentialist libertarianism is just cost- benefit analysis, broadly construed. So, it’s just good economics, with a comprehensive view of costs. The course will try to identify the broad range of costs from policy. It’s useful to get a preview.

28. A Broader View of the Costs of Policies Prohibitions breed disrespect for the law Paternalism discourages individual responsibility Providing entitlements fosters a demand for further entitlements Complicated Rules and Rent-Creation Encourages Rent-Seeking Policies generate arbitrary distributions of income Programs Expand Beyond Point of Value; Hard to Eliminate Slopes are Slippery One size fits all approach is polarizing. Regulation inhibits innovation to gain monopoly profits Intervention gets government involved in unsolvable problems Many of these are hard to measure and hard to put in a model. But that does not mean they are unimportant. At a minimum, policy analysis should recognize the potential for such costs.

29. Then Why Aren’t All Economists Libertarians? Five Answers Many are. Certainly more so than for any other group. Different Values: distribution versus efficient allocations. Different Assessment of the Facts. Economic methodology encourages a narrow vision of the costs of policies. Incentive for academics to publish in journals encourages an “interventionist” view of policy.

30. Is Consequentialist Libertarianism Useful? I have argued that philosophical libertarianism in unpersuasive because it rests on assertions not science. I have argued that the externality approach is not useful because externalities can justify any intervention. Are there similar limitations to consequentialism? –Yes. Even if one accepts the approach, one can frequently hypothesize costs or benefits that justify any intervention. Then why is CL/CB any good? –Because it forces analysis of public policy to be specific about the objectives and consequences of policy.

31. Is Consequentialist Libertarianism Useful, continued One reason for differing conclusions about policy is differing views about what constitutes a cost. –Example: Is income inequality a “bad” thing? A different reason is differing assessments of the effects of various policies –Example: Does drug prohibition reduce drug use? Either of these possibilities reduces the usefulness of CL. And both of these factors explain some of the differences in views about policy.

32. Is Consequentialist Libertarianism Useful, continued A third possibility, however, is that many people have simply not considered the broad range of consequences of policy, such as those outlined above. Thus, consideration of the entire range of consequences might produce more agreement about policy, even if some differences about values or effects remain. In my experience, this is indeed the case: –Differences about values and effects do exist. But at least as important a reason for disagreement is failure to consider the entire picture. If this is right, then the CL approach is useful because it gets people to adopt a consistent and complete approach to evaluating policy.

33. Is Consequentialist Libertarianism Useful, continued Thus, the challenge for me is to convince you that in at least a reasonable number of instances, careful and thorough analysis of all the effects of various interventions leads to the conclusion that intervention does more harm than good, even granting the scope for differing view about costs and consequences of policies. You get to judge whether I am successful.

34. Goals of the Course Provide an understanding of what libertarians believe. Convince you that libertarian views on policy are consistent, while liberal, conservative, and other views are not. Convince you that designing sensible policies is harder than implied by standard economics textbooks; many important issues are left out. Make you more critical of policy proposals from either side.

35. Random Further Thoughts This is course is about economics, not philosophy, government, or political science. The course focuses on major issues, not just “traditional” libertarian themes (sex, drugs, rock and roll). –Point is that the CL approach works widely. You don’t need to be a libertarian to enjoy this course: –Indeed, it will be more fun if we have many views represented. –And the Libertarians might get even madder at me than the non-libertarians

36. Nuts and Bolts Background on Prof Prerequisites and Requirements Discussion of Topics and Reading List Questions

37. Background on the Professor http://post.economics.harvard.edu/faculty/ miron/miron.html BA in Economics, Swarthmore College PhD in Economics, M.I.T. Research Interests: –Economics of Libertarianism, Drug Prohibition, Crime, Environment, Terrorism, and Other Policy Issues

38. Course Prerequisites and Requirements Prerequisites –Social Analysis 10 or equivalent Requirements –Mid-Term Exam (40%) –Final Exam (60%) –or –Mid-Term Exam (30%), Final Exam (45%), and a Research Paper (25%)

39. Format of Exams Short Questions That Require Analysis of Policy Issues Some will basically re-hash lectures Others will address “new” issues No obligation to arrive at Libertarian conclusions. But a strong obligation to use specific, economically coherent arguments.

40. Research Paper Economic Analysis of a Policy Issue As with exams, no obligation to draw libertarian conclusions, but a strong obligation to use economics. Theoretical arguments are fine; but work that combines theory and empirical work is better yet. Roughly, a paper should have the same structure as one of my lectures. I am willing to discuss alternative approaches.

41. Reading List and Topics Covered Broad range of topics. Readings are very useful on some topics, not so useful on others. Two Blogs you should read: mine and Mankiw’s Lecture notes will be available on the web by the start of each class. No video-taping.

42. Questions?