Home > Uncategorized > Why I get frustrated with libertarians

Why I get frustrated with libertarians

The latest example is from this post by guest blogger at modeled behavior, Sean Rust.   Part of the problem I have is that I agree, somewhat, with the idea here: we should have more immigration and those who most want to immigrate should be given priority.

Let me go through the problems with this a step at a time.   To start, Mr Rust asserts

the government would sell legal admission to work in the U.S., and control the supply of legal immigrants by either setting the price or the supply of visas itself.  This would better reflect economic theory, which tells us that absent any failures a market will efficiently allocate goods, services, and capital

The section here I’ve emphasized are actually not precisely correct.   I presume that Mr Rust is thinking in terms of the first and second welfare theorems.   The first problem here is that, strictly speaking, the welfare theorems require every market to satisfy the (rather strict) requirements of the welfare requirements or else any market may fail to be efficient.  Second, Mr Rust seems to be mixing up pareto efficiency with allocative efficiency.   Pareto efficiency does not mean that those with the highest willingness to pay will receive the good–that’s allocative efficiency–rather a market can be pareto efficient if the one who values a good the least owns all of it.   The two are often confused since a competitive markets will be both.   Finally, I would emphasize that the welfare theorems apply to economies not markets.

It is true that most economists argue that you should presume a market is efficient unless you can identify a specific market failure.   But, really, this is more of a “do no harm” attitude than any deep principle of the theory.

This sort of reasoning from libertarian types just frustrates me.   Libertarians think they understand economics and yet I rarely see reasoning from them (while they have their “libertarian” hats on, rather than their “economists” hats–and Mr Rust isn’t an economist so he isn’t likely to have that check on his intuition) any deeper than the welfare theorems and often not even that.   For example, there the second welfare theorem requires transfers from individuals, but libertarians are adamently opposed to ‘redistribution’, seemingly without realizing this.

I would say that there is no particular reason to think that any market is optimally allocating goods, rather a much more accurate view is that markets are likely to be the most efficient available mechanism for doing so.   The distinction is important for reasons that I will get into in a moment.

First, I would like to point out my second problem with Mr Rust’s post.  He says that

One objection to the market-based system is the financial barriers faced by low-wage immigrants.  However, assuming the U.S. will not freely open the boarders anytime soon; there is a necessity for some barrier of entry.  The financial barrier is optimal because it will allot visas to those who value them most.

The problem here is that it are two well known failures of auctions.   For non-economists out there, I should explain for a moment that we study auctions here as a way of understanding economic efficiency on a sale-by-sale basis.   Roughly speaking you can turn an auction into a single market by auctioning multiple goods at a time.

As I said, there are two failures here.   First, if the set of buyers have different abilities to pay, than a standard auction will be neither allocatively, nor pareto, efficient.   The reason isn’t too difficult: the “rich” shade their bids somewhat knowing that the “competition” is less intense than the number of bidders otherwise imply.   On top of that, though, the auction isn’t allocatively efficient if it is one of the relatively “poor” who has the highest willingness to pay.   Interestingly, the way to solve both these problems is to give the “poor’s” bid a bit of a handicap (treat their bid as higher than it truly is when comparing it to the rich’s bid).

It is simply not the case as Mr Rust claims that the market for these immigration visas will be allocatively efficient.

The other failure is that a standard auction of M goods to N buyers (with M<N) is known not to be efficient either.   There was a recent link from Mark Thoma on this issue, so I’ll just link to that.   I’m not sure I have much to add to that.

You could disagree that the auctions tell us anything useful about markets.  Fine.   Instead of defending that, I would just point out that the government, if it were to follow Mr Rust’s idea, would be running auctions for these visas.   My point still stands.

Regardless, the point is that the simplistic understanding of libertarians (not all of them, of course) for markets is something I find incredibly frustrating.

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