Libertarianism, inequality and cultural homogeneity

Andrew Norton doesn’t think much of this article by Christine Wallace in the Griffith Review, in which she argues that the Coalition under Howard has instigated libertarian policies by stealth. He calls it “a dozen or so pages of ignorance and silliness,” citing this paragraph from page 8 in particular:

The libertarian logic is that, since personal freedom and the existence of free markets are inextricably entwined, and since – as Bork puts it – “vigorous” economies are vulnerable to being “enfeebled” by particular cultural practices, then the champions of personal freedom have a licence to police cultural practices – in the interests of freedom and economic vigour. Thus libertarians can reason that difference (for example, multiculturalism, homosexuality) must be eliminated so that the economy can function better – reasoning that is absurd, to say the least.

A commenter on Andrew’s blog also highlighted this bit on the previous page:

The central difference between the Howard Government and the Hawke/Keating Governments is that the Labor governments saw a crucial role for the public sector … especially in relation to issues of economic inequality; about which libertarians are unconcerned.

First a confession: I’ve not read more than two or three pages of Christine’s article. Still, if the blogosphere isn’t a place for partially informed comment, I don’t know what is. In the interests of fairness, though, I will disagree (slightly) once with Andrew and once with Christine …

In the paragraph that drew Andrew’s ire, Christine argues that the libertarian pursuit of free markets justifies cultural homogeneity. Andrew’s implicit criticism certainly seems to make sense: why should free markets and cultural heterogeneity be mutually exclusive? But it is worth noting that Christine may – at least to some extent – have an unpleasant point. For a market to operate efficiently requires trust between its participants. A market can certainly operate without trust if institutions are sufficiently advanced and corruption-free, but the enforcement costs they impose are a classic form of market failure, along with moral hazard and adverse selection. Even with good institutions, market efficiency is optimised by increasing trust. However, as Andrew Leigh has observed for Australia [here and here] and Robert Putnam has found for the USA [here], ethno-linguistic diversity breeds mistrust. In so far as they proxy for culture, Chrstine’s point at least partially stands.

Now back to Christine. She reckons that libertarians are unconcerned about inequality. It’s obviously a generalisation, but even in general, it’s misleading. While I’m sure that libertarians are not concerned about inequality per se, I’m equally sure that they are concerned with unwarranted inequality. Classic theory of the firm suggests that in perfectly competitive markets, a person’s wage will equal the value of their marginal product. Presuming (safely enough) that different occupations have different marginal products (so an engineer will contribute more to a firm’s profits than a cleaner), if people at the top of the pile are being paid more than their marginal product and people at the bottom are being paid less than theirs, a libertarian would oppose the excess inequality that resulted.

10 Responses to “Libertarianism, inequality and cultural homogeneity”

  • John – There are two separate points here. While people do make the kind of arguments you report here about markets (though I am somewhat sceptical of what the trust surveys are identifying) Wallace was referring not to that but to a specific ideology, libertarianism. Libertarians support economic freedom (and so they support markets) but they also support maximum levels of personal freedom, including sexual and cultural freedoms. Anyone who does not is not a libertarian by definition.

  • Fair enough, but libertarianism also supports absolutely free (and thus, efficient) markets. On some level, the efforts of Putnam and Leigh are therefore throwing a spanner into libertarian philosophy itself.

    Either way, it’s probably (?) safe to guess that Christine didn’t know about their work before writing the article, so her assertion that libertarianism justifies enforced homogeneity does seem contrarian.

  • Though libertarians would support markets even where their efficiency benefits are not clear.

    In any case, I don’t think the argument attributed to “libertarians” works. Studying at the LSE, you will have noticed that London combines a high level of ethnic diversity and a very open gay community with a strong economy.

  • I’m not sure what you’re getting at. I agreed with you in my first comment.

    Don’t make the mistake of conflating “strong economy” with “perfectly free and efficient market”, mind.

  • John – I was trying to suggest that libertarians, at least of the rights-based variety need not be overly worried about ‘efficiency’.

    And yes, I should not confuse high-tax and heavily-regulated Britain with a ‘perfectly free and efficient market’. But people do have a lot of freedom to buy and sell most commodities.

  • I’ve got to agree – calling Howard a libertarian is more than a little ridiculous. Look at WorkChoices, where he had a clear choice between deregulation and a massive new set of regulations that tilted things in the employers favour. He went for the state-strengthening solution. It’s a make work bill for HR departments. In fact apart from privatising most of Telstra I’m hard put to think of a Howard government policy which doesn’t centralise power in Canberra. Howard has taken the middle class welfare of the Labor party and turned it to social conservative ends.

    Though many libertarians are fans of markets, I think most would happily paraphrase Franklin in saying those that would trade a little prosperity for a little liberty deserve neither.

  • Assaulted from all sides! 🙂 I’m clearly not explaining myself properly because I agree with both of you.

    I have no firm opinion of Christine’s piece because, quite frankly, I haven’t read it (and I don’t intend to). I also agree that Howard is no real libertarian, at least by any definition that I go by.

    Without defending it in the least, I was only pointing out that there is a trade-off between multicultural tolerance and perfectly efficient markets. To the extent that, *in Christine’s view of libertarianism*, the latter is more important than the former, she still has an unpalatable point.

    Clearly both Andrew and Adam take the opposite view: that true libertarianism must hold greater store by personal freedom (of culture) than efficient markets, though they’re both desirable.

  • Like Andrew I’m not sure if I buy the cultural homogeneity == efficient markets assertion. Even if we do take it on board (cultural expectations and enforcement of good contract behaviour, etc), and say markets are more efficient in those cases, isn’t the potential size of culturally heterogenous market larger? In international trade, if you’re willing to take bids and offers from more parties, you have a deeper and more liquid market, albeit one where you have a slightly higher chance of getting stiffed (maybe).

    John says: I just realised that I can edit anything on my own site, including other people’s comments. This of course makes sense if I want to remove slander or abuse, but it also lets me change what you said so that it looks like you’re agreeing with me. Now would be the time to insert maniacal laughter.

  • I imagine there’s a trade-off. First note that you’re thinking of adding culturally different people to a previously homogenous group, while Christine is (nominally) talking about (in/de)creasing the cultural variety in a static population size. You also appear to be implicitly thinking that market inefficiency serves principally to lower the “effective” market size. I’m not sure if I agree with that, but I’m happy to accept it for the sake of argument.


    Assumption 1): It’s okay to extrapolate the work of Leigh and Putnam to include cultural as well as linguistic variety.

    Assumption 2): Market efficiency co-moves with trust.

    Assumption 3): Market inefficiency serves only to decrease the market size.

    Taking (1) and (2) as given, a town of 10,000 people with cultural homogeneity will have more a efficient market than a town of 10,000 people with lots of different cultures. Adding (3), the culturally homogenous town will also have a larger effective market.

    However, we cannot make any definitive comparison of market efficiencies (or effective sizes) between a culturally homogenous town of 10,000 and a culturally heterogenous town of 12,000.

    This is where the value of Christine’s comment, even if we accept it, is revealed to be very low.

    To make any serious and relevant contribution to the debate, we would need figures on a) how population size combines with market efficiency to produce effective market size; b) how trust affects market efficiency; and c) how cultural diversity affects trust both within and across cultures.

  • BTW … I’m happy to accept the conclusion of this opinion at Club Troppo:

    While Wallace has identified a real tendency in the American and Australian free market movement, it is wrong to call it libertarianism.

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