Errors of libertarianism

By Mike Tudoreanu

There is a joke that we economists always like to tell about our field: A physicist, an engineer and an economist are shipwrecked on a desert island, and the only thing they have to eat is canned food saved from their ship. But they have no way of opening the cans. The physicist proposes that they apply a certain force to a certain point on every can to open it. The engineer designs a complicated device to open cans using rocks and twigs. The economist said, “Well, assuming we had a can opener…”


It’s a joke about how not to do economics. Bad economists engage in circular reasoning; they assume what they want to prove. If you simply assume that you always have a can opener, you will believe that opening cans is never a problem. Likewise, if you assume that markets are always perfect, you will believe that government intervention is never necessary. It’s a cheap trick, but it makes for a simple and appealing story, so it can be persuasive. Libertarians like Ron Paul and his supporters use this trick on a daily basis, and it’s important to call them out on it before they do serious damage.

The libertarian economic ideas currently in fashion, thanks to Paul, which are collectively known as the “Austrian School” because they were first invented by academics from Austria, are based on the subjective theory of value. This theory says that voluntary market exchanges benefit both parties – both the buyer and the seller – by increasing their personal happiness, or their “subjective value”.

At first, it may sound reasonable, because we can all think of situations when one person sold something to another and they both walked away satisfied. This does indeed happen many times. But then, without making it obvious, libertarians jump from “it happens sometimes” to “it happens every time.” The Austrian School assumes that every single market exchange is beneficial and makes people happier by increasing subjective value. In other words, according to the Austrian School of economics, every time something is freely bought or sold, that is a good thing. Every time. No exceptions.

If you are inclined to agree with this, take a moment to imagine all the many things that could be bought and sold, and ask yourself if such buying or selling really is a good thing every time. To help your imagination, here are some examples of free market transactions: selling hard drugs; prostitution; selling guns to warlords; selling human organs; buying forests for the purpose of clear-cutting them; selling food that may cause cancer; paying for advertisements that contain outrageous lies; paying for entire news stations to broadcast lies; selling your goods to white people only; buying up public schools to turn them into for-profit ventures; selling health care only to those who can afford it; selling insurance with the intent to deny claims; engaging in any kind of banking or financial transaction on Wall Street, including insider trading. The list goes on. If one agrees with the Austrian School that all voluntary exchange is good, then one agrees that all of the above are good. In the world of libertarian economics there is only one rule: As long as both the buyer and the seller agree to the exchange, then it improves happiness. End of story.

And this is not a conclusion borne out of any kind of experience or observation. The Austrian School actually rejects the idea of using experience to guide economics. Instead, they start with some assumptions which they declare to be true, such as “market exchange is always beneficial,” and then draw conclusions. Real-life experience doesn’t matter because, in their view, the real world is too muddled by random chance. Anything might succeed by accident or fail by accident. Did free markets lead to bad outcomes? That was an accident. Did government intervention lead to good outcomes? That was an accident too. Thus, any kind of historical experience that disproves libertarian economics can simply be dismissed as a coincidence – such as the great success of the American economy when government intervention was at an all-time high from about 1945 to 1975.

In this way, Austrian School libertarians build their own imaginary world in which they are always right by definition and nothing can ever prove them wrong. But, sadly, the list of their errors does not stop there. Libertarian theory also contradicts itself on many occasions.

Take the role of government, for example. Libertarians argue that government spending and taxes are bad because they get in the way of the market increasing subjective value. But why can’t taxes and spending increase subjective value? Suppose we increased taxes on the rich and gave the extra money to the poor. This would reduce the subjective value enjoyed by the rich, but it would increase the subjective value enjoyed by the poor. And the benefits to the poor will be greater than the losses to the rich. If Donald Trump lost $50,000, for instance, he would barely even notice it. His subjective happiness might go down, but not by much, because he has so much money that 50,000 plus or minus doesn’t make any difference. For a college student struggling to pay tuition, on the other hand, $50,000 would make a world of difference. The student’s subjective value and happiness would increase massively.

So the basic assumption of libertarian economic theory, or subjective value, leads to the conclusion that redistribution of wealth from the rich to the poor is good, and thus contradicts libertarian views on the free market. But don’t expect them to notice the irony.

Some of the other absurdities of libertarian thinking are more offensive than ironic. When they claim that the free market satisfies people’s wants and needs, they forget how a market economy actually works. In order to buy things, you must have money. If you need something but can’t afford to pay for it, your need doesn’t count in the market at all. In reality, markets don’t satisfy needs or wants, they satisfy the demands of paying customers. If you’re not a paying customer, that’s too bad – your wishes don’t matter.

Markets satisfy peoples’ desires depending on how much money various people are willing to pay to have their desires satisfied. And since the rich have more money than the poor, their desires come first. That is why the free market gives us a world in which some people have yachts, mansions and private jets while others get kicked out of their homes or can’t afford desperately needed health care. The rich guy had the money to pay for his mansion but you didn’t have the money to pay your mortgage, so his desires came first.

To support Paul or his libertarian ideas, one must put blind faith in the absolute perfection of the free market and resist the temptation to look at the historical evidence or even just to consider the lessons of one’s own life experience. As such, it is no wonder why most of Paul’s support comes exactly from those people who have the least experience of struggling to survive in a market economy.

Mike Tudoreanu is a Collegian columnist. He can be reached at [email protected]