– March 30, 2020

The often-prescient Tyler Cowen commented not long ago that libertarianism, if it is to grow as a political movement, should embrace arguments for expanding state capacity in some areas. He named this approach “State Capacity Libertarianism” (SCL). I’m not sure you have to go that far, accepting a version of libertarianism that also takes the state to be indispensable. But it seems to me the argument for SCL can simply accept the political reality that, in some domains, the state is a fact, and that libertarians must work within political realities.

Milton Friedman recognized this problem, back in 1991:

It is of course desirable to have a vision of the ideal, of Utopia. Far be it from me to denigrate that. But we can’t stop there. If we do, we become a cult or a religion, and not a living, vital force. These comments apply, I believe, to the largest socialist enterprise in the U.S. as well. That is, of course, national defense. Like everyone else in this room, I am appalled by the waste of the defense industry. I am sure that if you and I could only run it, we could do it for half the money, and do it a lot better. But although I have tried for many years to figure out a way in which we could run defense as a private enterprise… I have to admit that after some 30 years [I am unconvinced]. At any rate, simple slogans like “The market will take care of it” or “noninterventionism” do not resolve the hard problems. We may very well agree on the direction we want to go in, but just how we’re going to go there and how far we’re going to go, that’s a much more difficult problem. (Friedman, 1991; p. 20; emphasis added).

Even if you believe, on some level, that the state screws up everything it touches, you have to grant that there are degrees of efficiency and inefficiency, and more and less screwed up government policies. I see the proper domain of the state as sharply circumscribed; in most areas individual liberty and autonomy, disciplined by personal responsibility, is the ideal organizing principle. But I have identified myself as a directionalist, willing to accept incremental improvements that leave the state apparatus intact, or in some cases even larger.

Suppose, for example, you think that markets and brand names could handle the problem of guaranteeing safety and efficacy of drugs, without government interference or regulation. It does not follow that closer approximations to that goal improve the present system. Specifically, if voters insist on keeping the FDA, then cutting its budget so that applications for new drugs or medical equipment are delayed for years does not make the system better or freer; it makes it worse. Given that we have a state, it must have the capacity to carry out the functions our political system has assigned to it. That may mean we have to increase the funding of the FDA.

The Argument For State Capacity Libertarianism

According to Cowen, SCL embraces several propositions. I am simplifying, and paraphrasing, but I don’t think I am misrepresenting Cowen’s view. And—in my version at least—the propositions are lexically ordered. That is, the list represents tenets of decreasing importance.

First, markets and capitalism are powerful, and in fact indispensable, tools for organizing mutually beneficial human activity at scale. Give them their due. A key part of the justification for the existence of the state is the duty to manage property rights and institutions that reduce the transaction costs of impersonal exchange at scale, and at distance.

Second, partly in keeping with the need to nurture predictable markets but also as a per se obligation, the state needs to have sufficient capacity to protect individual rights to intellectual property, to foster the conversion of illiquid assets into liquid and mobile forms of capital, and to guarantee, by force if necessary, the territorial integrity of the geopolitical jurisdiction called the nation. The ability to negotiate exchange without foreign threat or holdup, and the ability to conduct competitive elections without foreign influence, requires considerable capacity in several dimensions. In all cases the principle to be protected is permissionless innovation rather than regulation or control.

Third, low levels of state capacity can be tyrannical; high levels of state capacity can be consistent with liberty. This seems paradoxical, but the key variable is the scope of government, not its size. A relatively small government that arbitrarily sets prices, nationalizes private property, and controls the media is the archetype of the authoritarian regime, as is the case in Turkmenistan or Chad. A large government that accepts constitutional and customary limits on its domain of action can be an archetype of personal freedom, as is the case in Denmark and Sweden.

Fourth, the standard for what “we” want government to do has two parts: (a) a healthy, informed skepticism about expansions of the scope of government’s ambit, and (b) a commitment to funding government action within its appropriate domain in ways that are responsible and not focused on other social goals. Part (a) means that most domains of activity have minimal government activity other than enforcement of property rights. But in areas of education, national defense, public health, and the environment state action is empowered and amply funded. Part (b) means that the tax policies used to provide the funding for the activities in Part (a) are not focused on redistribution or promotion of business investment. 

Instead, funding policies seek to raise the revenues required for adequate state capacity by generating as few distortions or side effects as possible. The result may be a government that is big (in terms of funding and employees) but narrow (sharply limited in scope, with constitutional “no trespassing” signs on most aspects of citizens’ lives).

Fifth, even a cursory examination of the trends of the past 20 years in Asia and northern Europe show that vibrant and dynamic market systems can be compatible with states with high capacity. That is not to say that China’s growth wouldn’t have been even larger with less interference, or that the prosperity of the Nordic countries and Germany wouldn’t have been even greater with lower tax rates. But libertarians who have equated capitalism with the absence of a state have alienated many sensible potential allies. We can have both a muscular public sector and a puissant private sector, at the same time. 

On the other hand, the main problem with countries in Africa and Latin America is likely not primarily the “absence of markets,” as many libertarians have argued. Instead, failed nations have failed first to be able to generate sufficient state capacity to enable property rights and nurture markets in the first place. It’s worth quoting Cowen here:

The fundamental growth experience of recent decades has been the rise of capitalism, markets, and high living standards in East Asia, and State Capacity Libertarianism has no problem or embarrassment in endorsing those developments. It remains the case that such progress (or better) could have been made with more markets and less government. Still, state capacity had to grow in those countries and indeed it did. Public health improvements are another major success story of our time, and those have relied heavily on state capacity — let’s just admit it.

This is an important point, because it highlights the “haven of last resort” role of the state. It is common to think of the central bank as the “lender of last resort,” but the same notion is the foundation of security in much of our social lives. It is a requirement of emergency response that some institutions in society cultivate excess capacity. When you think of how firefighters spend their time, you think of lifting weights, cleaning the fire trucks, and making pancakes on a quiet Sunday morning. If all the resources of first response units are occupied, then there are not enough first responders. Markets do not naturally cultivate excess capacity, especially in stable and predictable conditions. But that means that if the state is doing its job, conditions will be stable and predictable and an event such as the COVID-19 outbreak cannot be answered, at least not immediately, by market forces. When it comes to emergency response, “state capacity” means “excess capacity.”

Cowen makes an interesting point about this: many on the left pay lip service to emergency response, but given the chance Democrats gut those programs to fund utopian schemes in social engineering, redistribution, and subsidy payouts to traditional political clients. And the naïve “government is the problem, starve the beast!” wing of the political right seeks to cut back government capacity on every margin, not discriminating between essential functions and recreational progressive excess. Thus, SCLs are the only effective advocates for maintaining state capacity for public health and emergency response.

I write this while “social distancing” at home, and having read far too many naïvely uninformed tweets about how “libertarians have no way of explaining why the government is failing to protect public health.” The left blames us for cutting too much (as if the current government is in some way libertarian, which is nonsense.) And the right blames us for emphasizing markets over society and religion. 

My response is that State Capacity Libertarians have a powerful counterargument, and we can take an important position in the public debate. The state needs the capacity to carry out public health functions, but those powers must be effectively limited to that domain, not available to be hijacked for socialist boondoggles.

To my friends on the left: If you had been responsible enough to keep government in its proper, limited role we would have plenty of resources and capacity to carry out the functions we now find lacking. Your flagrant and shameless bait-and-switch tactics, affecting concern for the poor but then diverting resources to pet causes, is the heart of the problem. We need a state that is good at a few things, not your state which tries to do everything and fails at all of it.

To my friends on the right: The “starve the beast” tactic has forced cuts more or less across the board, rather than making hard choices and advancing principled arguments about cutting entire programs and eliminating the illegitimate functions that government should have never been involved in in the first place. Limited government does not mean crippled government; it means a gimlet-eyed focus on the relatively few domains where government action is useful, and then ruthlessly pruning all the other branches.

Michael Munger

Michael Munger

Michael Munger is a Professor of Political Science, Economics, and Public Policy at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washingon University in St. Louis, and Washington University. Munger’s research interests include regulation, political institutions, and political economy.

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