January 6, 2020 Reading Time: 6 minutes

Economist Tyler Cowen has released a provocative essay with, I hope, the opposite of its intended impact. State Capacity Libertarianism, which he deems the only “smart” path for libertarians and classical liberals, is as conventional in its thinking as it is strangely named. 

At first blush his eleven-point description sounds like something that would have been called center-right before the conservative movement fissioned into neocons, the Christian right, and nationalists and broke libertarians’ hearts one too many times.

I like reading Cowen–he’s one of those writers who makes you think why you disagree and puts into stark relief what’s actually important. That moment comes in Cowen’s item number five:

“Many of the failures of today’s America are failures of excess regulation, but many others are failures of state capacity.  Our governments cannot address climate change, much improve (sic) K-12 education, fix traffic congestion, or improve the quality of their discretionary spending.  Much of our physical infrastructure is stagnant or declining in quality.” 

In justifying State Capacity Libertarianism, Cowen has committed what I’ve equally awkwardly called “the nation-state fallacy.” Under this belief, taken for granted by even many libertarians, society-level issues are either for the government to address, or not to be addressed at all. Think about how many debates revolve around whether government, not society, should tackle a problem. Only when written on a page is its peculiarity revealed. 

I’m in no position to make sweeping proclamations about what libertarians should or shouldn’t do, but I can speak to Cowen’s likely-correct assertion that libertarianism isn’t “commanding new adherents.” I’m an exception.

Eleven years ago I was a newly-minted PhD from a highly-mathematical program typical of the mainstream where strange names like “Hayek” and “Buchanan” were never uttered. I was a lifelong Democratic voter, part of what I would have called the center-left. I’ve told the story of how I became a “new adherent” in bits and pieces, but the whole thing is quite simple and I believe very possible to replicate without alienating anyone already under the tent. At the heart of it is the need to put that peculiar assumption about government to bed. 

Why Government Doesn’t Work

I was competent enough at the highly mathematical and statistical work falling under the umbrella of mainstream neoclassical economics to finish a degree, but not good enough at it for an academic career. I left academia for the private sector, and in January 2009 began consulting mostly on financial litigation. I picked quite a moment and had a close-up seat to the cyclone ripping through Wall Street that triggered the Great Recession.

Like most moderate Democrats I thought the future of capitalism lay in smart adults taking the reins of government, tightening up regulation, and renewing prosperity. I admired once-conservative thinkers like Richard Posner who wrote about how and why they had been wrong. But I noticed that the new administration I had eagerly voted for didn’t seem to be making headway, and that the politics looked quite the same as the last poisonous eight years with the two parties switched. Maybe, I thought, it wasn’t possible to be a “good President.”

Around this time I began exploring corners of economics not touched in my graduate education, just out of curiosity. I don’t remember how I happened upon F.A. Hayek’s paper “The Use of Knowledge in Society,” but it’s as close to an intellectual lightning strike as I’ve ever experienced. His intuitive notion of markets as information-processing networks capable of accounting for vastly more knowledge than could ever be handed to a central planner gave me the first satisfying explanation of why top-down progressive policies just didn’t seem to work.

I was also doing some reading on complexity economics, first introduced to me by Eric Beinhocker’s “The Origin of Wealth.” I’ve never gotten deep into the technical details of the field but on an intuitive level it perfectly reinforced Hayek’s ideas of dispersed knowledge. It also emphasized the economy as something not in equilibrium but rather evolving. Forget the idealized static equilibrium of “perfect competition,” but also forget the idea that government can make it that way without distorting markets’ capacity to process information and evolve. Markets aren’t perfect, they’re essential.

I was privy to at least a bit of the confidential inner workings of big banks and was doing a lot of thinking about how large firms could do “bad” things without any individual having done anything particularly bad. This flew in the face of the Occupy Wall Street movement that was gaining steam. It was easy to see the analogy when I was exposed to a bit of public choice theory that similarly looks at government as a large organization filled with individuals with their own knowledge and incentives.

Labeling entire groups of people as nefarious or incompetent has never been my intellectual cup of tea. Now I had a reason why government seemed to make the same mistakes over and over again, and why more top-down regulation, for example, was likely to only increase the points of contact between corporations and government from which crony capitalism arose.

To review, I had learned that government couldn’t solve society’s problems from the top-down as I’d assumed, and that systematically it would never be able to get out of its own way. I moved to Soho, started working with tech companies instead of banks, and became politically disinterested for years.

Why Governance Can Work

I was certainly a government pessimist, if not a full-blown libertarian, by the time I’d had my fill of consulting and city life and found some kindred spirits in idyllic western Massachusetts at the American Institute for Economic Research. The only piece missing was the optimism.

I don’t remember whether the answer was a direct quote from AIER President Edward Stringham’s book Private Governance, something he said to me, or some accidental fusion of many conversations. “Governance without government.” 

We can make rules, coordinate our behavior, enforce contracts, help the poor, and yes, even build roads without the help of a hulking nation-state backed by coercive power and taxation.

It sounds obvious, but I believe most people spend no time at all considering this idea. And when you do, worlds of possibilities open. Governance institutions can emerge voluntarily and spontaneously, compete, evolve, and solve problems. This thinking is well-developed, from Elinor Ostrom’s polycentricity to Richard Cornuelle’s independent sector.

And that’s where Cowen’s State Capacity Libertarianism completely drops the ball. I don’t think climate change, education, and infrastructure aren’t important. They’re so important, in fact, that we can’t leave them up to a lumbering organization plagued by political incentives and lacking the information to implement anything all that helpful. Stringham shows that private governance develops all around us. I think we have to make its study a more prominent research agenda in economics.

Hearts and Minds

I often talk about these private decentralized solutions in my writing. My friends on the left often press me for examples, and I’ll be the first to admit I often come up short. That’s actually the point–no one person can know the solutions to problems that emerge from our complex web of everyday decisions–they must evolve, and they cannot do so under a model where national governments are assumed to be our only chance. 

Cowen and others believe that climate change is an issue particularly damning to the libertarian worldview. But imagine if all the energy, money, and policymaking that went into Europe’s Green Deal instead spurred creativity, innovation, and environmental work by today’s advocates that nobody could vote against. We’d certainly be better off than we are now, and the success of Europe’s giant top-down effort is far from guaranteed. 

A libertarianism based on private governance rather than state capacity can truly flip the narrative, but it must cross a wide chasm. Private solutions to issues from poverty to infrastructure must evolve, and they can’t fully do so in parallel to big government. Either we have to convince enough people to get enough government out of the way to let them evolve, or we have to find places they can evolve enough next to government to convince people we can do better.

This is a big-tent libertarianism, and these may not be the first priorities on a lot of the lists of many. But I don’t see how anyone’s priorities are undermined. In his own critique of Cowen, Reason’s Nick Gillespie describes pretty much why I’m on board when he calls libertarianism “an outlook that privileges things such as autonomy, open-mindedness, pluralism, tolerance, innovation, and voluntary cooperation over forced participation in as many parts of life as possible.”

I’d likely vote for a state capacity libertarian candidate, but in the medium to long run we can do much better. Gillespie’s statement boils down to a comfort and optimism in the constant change society undergoes when people are allowed to mostly do as they please. I don’t think I’m the only one who’ll respond to that message.

Max Gulker

Max Gulker

Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.

Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.

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