– December 26, 2018
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Dear libertarians,” read a recent tweet from Niskanen Center President Jerry Taylor; “tell me why this sort of usury is in the public interest, or more directly, how it serves the interests of consumers. Is it not simple predation against those unsophisticated or unwise enough to resist the commercial trap?”

He attached a recent New York Times op-ed decrying the lending practices of rent-to-own furniture and appliance stores, which are dramatically overrepresented in low-income and minority neighborhoods.

This was but the latest shot fired by Taylor against his former libertarian allies since the Niskanen Center pivoted to an agenda that one can describe in almost oxymoronic terms: dogmatic moderation, unyielding centrism. The implication was clear. Libertarians were on the hook to explain why this method of transacting with customers was indeed in the public interest and did not require government intervention.

Many commenters answered the call and did just that, but by defending these lending practices without focusing on the bigger picture, they may have let Taylor escape to fight another day.

Credit Where Credit Is Due

Art Carden of Samford University asked, “Are the places actually providing the poor with credit — RTO, check cashing, etc. — more blameworthy than those of us who *aren’t* offering credit on better terms?” My AIER colleague Phil Magness pointed out Taylor’s conspicuous use of the term “usury,” with all of its religious and historical connotations. Corey DeAngelis of the Cato Institute focused on Taylor’s condescending description of the consumers in question as “unsophisticated or unwise.”

Many other commenters made equally great points. In sum, they represented decisive but limited victory. Some version of this debate plays out in the policy echo chamber dozens of times per day. Libertarians are confronted with some outcome in the free market that someone thinks is bad. They respond that the outcome in question really isn’t bad, or that it wouldn’t be an issue in a truly free market without existing regulations.

The problem with having that debate on an issue-by-issue basis is that bad things, even systemically bad things, happen in free markets. But that does not automatically, or even almost ever, imply that top-down government regulations are the best answer.

Moving Past Chapter 1

While many of the commenters on Taylor’s tweet come from heterodox schools of economic thought, this issue-by-issue battle takes a page right out of the book of mainstream neoclassical economics. Chapter 1 of the standard introductory econ textbook presents students with the model of perfect competition, which leads to an optimal outcome. The next several chapters are devoted to market failures: departures from the assumptions of perfect competition, with the implication that in these cases government must fix markets to be more like they were in chapter 1. This implication appears to have been behind Taylor’s assertion in his tweet.

But heterodox schools such as Austrian and complexity economics view markets very differently. Instead of being closer to or further from some perfect ideal, markets are supercomputers of epic proportions, leveraging the information and motivation of every individual to make sure the right resources get to the right places at the right time.

Markets are not perfect, but markets are essential.

The Bigger Case Against Regulation

Viewed through this lens, the sometimes sleazy practices of businesses identified by Taylor are no longer an indictment of libertarianism or free markets. Instead, two bigger-picture points emerge.

First, in our complex economy and society, one cannot do away with only the bad outcomes while leaving the good — not even close. Absent a benevolent dictator, curtailing the activities of rent-to-own firms involves legislation, task forces, enforcement, and the potential for the next round of elected officials to get their hands on the regulatory apparatus and do something completely different. It also allows the largest and most powerful firms to mold that apparatus to their benefit.

Many, especially on the left, cling to the idea that overcoming these problems is a matter of electing the right people or writing the right rules. But this regulatory hemorrhaging, to turn a phrase, is inevitable in the governmental system we have today.

Does all of this mean we’re stuck with lousy outcomes like predatory lending? Absolutely not. Hanging over this whole debate is something I call the nation-state fallacy. The line of thinking goes that if there is a problem somewhere in our society, it is the job of government to fix it. If government does not fix it, our duty as citizens is to elect other people who we hope will do better.

Developing more positive, community-based solutions to problems like predatory lending will take time, especially as government holds them at bay. But what if community members met with each other to discuss finances, with more established and successful residents mentoring the young, and the group discussing pitfalls unique to their neighborhood.

If rent-to-own businesses were offering credit where none was available, people could avail themselves of the service along with guidance from trusted community members. If Taylor’s exploitive view was closer to the truth, education and word of mouth could dampen their business, and the already existing and better-connected group might be able to bring other businesses in. Again, these are only sketches of ideas, but when multiplied thousands of times over, and most importantly allowed through experimentation to evolve, the result would be radical.

The Future of Governance

Those of us advocating free markets do not spend enough time talking about these solutions. For one thing, the nation-state fallacy is so ingrained in our opponents that it’s often not a conversation people are willing to have. But some revered economists and authors in libertarian circles have gone too far in arguing that many of the challenges that could be addressed by decentralized and voluntary institutions are actually good and efficient and just. The nation-state fallacy is indeed cunning, baffling, and powerful.

In my view, this small-scale and incremental radicalism is our best hope across many different issues. Notice how these ideas depart from traditional notions of left and right. Rather than Taylor’s centrism, which draws a sort of 38th parallel between free markets and government intervention, governance from the bottom up can yield results that libertarians, conservatives, and progressives would all see as positive.

Jerry Taylor has shown an admirable willingness to reevaluate his views throughout his career. My hope is that he and his think tank will move outside the bounds of left and right, stepping away from the inevitable collision course of centrism.

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Max Gulker

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Max Gulker is an economist and writer who joined AIER in 2015. His research focuses on two main areas: policy and technology. On the policy side, Gulker looks 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 is 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 @maxgAIER.
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