Defining Ideas

My Rand Paul Problem

Monday, February 3, 2014

The name of my Defining Ideas column is “The Libertarian.” The title of my recent book on constitutional law is “The Classical Liberal Constitution.” Clearly, I consider myself a proponent of limited government. So does Senator Rand Paul of Kentucky, who has moved the term “libertarian” to the fore of our national political debates. In a recent New York Times analysis, “Rand Paul’s Mixed Inheritance,” Sam Tanenhaus and Jim Rutenberg treat him as today’s exemplar of libertarian thought. But Paul’s ideology is a far cry from classical liberalism, which is conceptually and politically superior to hard-line libertarianism.

Libertarians and Holdouts

Libertarians fall into two distinct groups: strict libertarians like Rand Paul and classical liberals such as myself. “Classical liberal” is not a term that rolls off of the tongue. Consequently, “libertarian” is the choice term in popular discourse when discussing policies that favor limited government. Libertarians of all stripes oppose President Obama’s endless attacks on market institutions and the rich. The umbrella term comfortably embraces both strands of libertarian theory vis-à-vis a common intellectual foe.

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Illustration by Barbara Kelley

The renewed attention to Paul exposes the critical tension between hard-line libertarians and classical liberals. The latter are comfortable with a larger government than hard-core libertarians because they take into account three issues that libertarians like Paul tend to downplay: (1) coordination problems; (2) uncertainty; (3) and matters of institutional design. None of this is at all evident from Tanenhaus and Rutenberg’s unfair caricature of the “mixed inheritance” among the “libertarian faithful,” which to them includes, “antitax activists and war protestors, John Birch Society members, and a smatter of truthers who suspect the government’s hand in the 2001 terrorist attacks.”

This unfortunate list mixes libertarians of all stripes into a convention of unthinking kooks. A more accurate rendition of the various strands of libertarian thought would hearken back to such great thinkers as Hobbes, Locke, Montesquieu, Hume, Smith, and Madison. Their incisive contributions concerned the relationship between individual liberty and the social order.

It is important to understand the differences in views between the strong libertarian and classical liberal position. Serious hard-line libertarian thinkers include Murray Rothbard and Karl Hess. Rothbard believes nonaggression is the sole requirement of a just social order. For Hess, “libertarianism is the view that each man is the absolute owner of his life, to use and dispose of as he sees fit.” There are large kernels of truth in both propositions. It is quite impossible to see how any social order could be maintained if there were no limitations against the use, or threatened use, of force to enslave or butcher other people, which Hess’s proposition of absolute self-ownership strongly counteracts.

Yet the overarching question is how does a group of people move from the Hobbesian “war of all against all” toward a peaceful society? Hess claims that stable institutions are created by “voluntary association and cooperation.” Again, strong libertarians are on solid ground in defending (most) private contracts against government interference, which is why Lochner v. New York (1905), reviled as it is by most constitutional thinkers, was right in striking down New York’s sixty hours per week maximum labor statute. Yet the hard-line libertarian position badly misfires in assuming that any set of voluntary contracts can solve the far larger problem of social order, which, as Rothbard notes, in practice requires each and every citizen to relinquish the use force against all others. Voluntary cooperation cannot secure unanimous consent, because the one violent holdout could upset the peace and tranquility of all others.

The sad experience of history is that high transaction costs and nonstop opportunism wreck the widespread voluntary effort to create a grand social alliance to limit the use of force. Society needs a coercive mechanism strong enough to keep defectors in line, but fair enough to command the allegiance of individuals, who must share the costs of creating that larger and mutually beneficial social order. The social contract that Locke said brought individuals out of the state of nature was one such device. The want of individual consent was displaced by a consciously designed substantive program to protect both liberty and property in ways that left all members of society better off than they were in the state of nature. Only constrained coercion can overcome the holdout problems needed to implement any principle of nonaggression.

The Antitax Divide

Precisely for this reason, the vigorous “antitax” strand of hard-line libertarian thought has never commended itself to classical liberals like myself, who recognize the need for taxation to support the institutions of social order. Usually that view cashes out into a defense of a unified flat tax on either income or, preferably, consumption. That view is in evident tension with antitax activists like Grover Norquist, whose focus is current tax struggles and not general political theory. Norquist wants to shrink government “to the size where we can drown it in a bath-tub.” The classical liberal avoids such over-the-top rhetoric. Instead, he seeks to maximize the net social gain from the tax system, so that each taxpayer receives a bundle of government services whose value exceeds the cost of the tax.

Here institutions matter. The flat tax is preferred because it reduces private incentives to game the tax system and, likewise, the ability of government officials to unfairly target their opponents. The optimal theory of taxation minimizes the distortions created by the need to fund the government activities that maintain public order and supply infrastructure. The classical liberal thus agrees with the hard-line libertarian that progressive taxation, with its endless loopholes, is unsustainable in the long run. At the same time, the classical liberal finds it incomprehensible that anyone would want to condemn all taxes as government theft from a hapless citizenry. The hard-line libertarian’s blanket condemnation of taxes as theft means that he can add nothing to the discussion of which tax should be preferred and why. The classical liberal has a lot to say on that subject against both the hard-line libertarian and the modern progressive.

Beyond Taxes

Hard-line libertarians and classical liberals face a deep methodological schism. The hard-core libertarian dismisses holdout problems as unimportant and thus concentrates his fire exclusively against the evil of aggression. The classical liberal points to major holdout problems that remain even after aggression is curbed, and calls for a balanced social response—in the form of compensation—to individuals subjected to the use of force.

Eminent Domain

Hard-line libertarians are generally opposed to the use of eminent domain to acquire particular parcels of land that might stand in the path of a pipeline or highway. The classical liberal’s views are embodied in the Fifth Amendment to the Constitution—“nor shall private property be taken for public use without just compensation.” The classical liberal recognizes that severe holdout problems on key public projects warrant condemnation so long as just compensation is paid to owners. Designing a system of just compensation is immensely complex. But by ignoring it altogether, hard-core libertarians do much more harm than good.

Monopolization, Antitrust, and Rate Regulation

The hard-line libertarian thinks that there are no difficulties with the behavior of parties who exploit a monopoly position in industries like transportation and communications. The classical liberal realizes that the refusal to deal, which works so well in competitive markets, yields dangerous results in these cases. Thus, for over 200 years, the classical liberal has advocated the implementation of rate regulation for common carriers that walks the fine line between under-regulation (which results in monopoly profits) and overregulation (which results in the confiscation of invested capital). It is very difficult to design these systems and to ask whether, and if so how, they should be applied in individual cases. But the problem cannot just be solved by a wave of the hard-line libertarian hand.

The same considerations point to the creation of an antitrust law, where we must ask whether it is appropriate to prohibit or punish relationships between competitive sellers who in good cartel fashion raise prices and reduce output. To the hard-line libertarian, the nonaggression principle does not limit these activities. He is thus blind to the major resource losses that could attend these pricing schemes. Classical liberals follow Adam Smith in imposing antitrust enforcements on these cases. Again, hard-line libertarians are on the sidelines in the debate over how to organize bodies of law that they think ought never to exist.

Intellectual property

Hard-line libertarians are often harsh opponents of copyrights (which limit freedom of speech) and patents (which limit one’s use of one’s own resources). Classical liberals recognize that a world without intellectual property protection could lead to low levels of social innovation. They work to devise a suitable legal framework for IP protection consistent with the constitutional provision that allows for the creation of copyrights and patents for limited times. Ask how many companies would invest over a billion dollars to formulate and test a new drug if others could enter into competition with them by offering a product developed by others for a fraction of the original price. As before, no hard-line libertarian can help design a system of property rights that he doesn’t think should exist.

The Uncertainty Constraint

Another key difference between these two strands of libertarian thought lies in their treatment of uncertainty. Hard-core libertarian thought stresses compensation ex post for violations of the nonaggression principle and for breach of contract. But it has no program for stopping potentially harmful conduct by private injunctions or public regulation. Yet, just this issue is critical to the institutional design of the common law of nuisance and a more extensive system of environmental regulation to control water and air pollution. Today, much government action abuses the state’s licensing and permitting powers. But it is not possible to shut down the system of regulation in order to stem these abuses. Instead, the classical liberal rightly tries to minimize the sum of the two types of errors, and thus often opposes when government moves too soon, too hard, or too far. The hard-core libertarian simply turns a blind eye to the problem.

The Rand Paul Dilemma

As Tanenhaus and Rutenberg note, Rand Paul knows that he must move to the center to become a credible political candidate. If he embraces a classical liberal framework, he can meet the objections of his critics without abandoning the best elements of his own libertarian position. 

Editor's note: The author has written an addendum to his above essay. The addendum was first published on the blog Ricochet on February 10, 2014. 

In my recent Hoover column, entitled "My Rand Paul Problem," I drew distinctions between hard-line libertarians and classical liberals over a broad range of issues dealing with taxation, eminent domain, copyright, and the like. Just today, I received a gracious handwritten note from Senator Paul noting that, in his view, his positions should not be associated with the hard-line stances of writers like Murray Rothbard and Karl Hess, whose work I focused on in the piece.   

As several Ricochet members pointed out, Senator Paul has said:

What I've promoted is a flat tax, 17 percent for individuals as well as corporations with about a $50,000 deduction for families, similar to what Steve Forbes promotes. 

That is certainly a far cry from a no-tax position, and very close to the uniform tax structure  that I propose (it should be noted that I have no preconceived notion of what the appropriate tax rate in such a system should be). It is also a vastly superior alternative to the current tax system, which engenders endless battles over the appropriate forms of taxation, the appropriate rates, and the appropriate exemptions. My apologies to Senator Paul for misstating his position.

As to the other issues I discussed, I make no further comment here. Senator Paul is certainly well able to fend for himself. I continue to think that grasping the basic distinctions between hard-line libertarians and classical liberals is essential to understanding our current political debates, and I hope readers study the piece on the merits of the message it attempts to convey.