Free Markets and Coercion

A popular critique of the “Free Market” is a simple presumption against it’s actual existence. If they don’t exist, then any debate on the matter is a pointless exercise. Occasionally, there will be an attempt to make the case for justifying such a presumption by attacking the supposed proposition that the free market implies no coercion. So, if we demonstrate that there is no such thing as “no coercion,” then we have logically falsified the “free market.”

In symbols:

FM –> ~c
which is equivalent to: c –> ~FM

So, if we show c(coercion), we show no free market.

This type of argument is typically represented by this recent blog post: Libertarianism: Coercion Seen Through a Fun House Mirror. The gist of the argument is to debunk the supposed libertarian premise: “Any libertarian will tell you that contracts are ‘coercion free.'”

Well, I deny that premise. If we define coercion as a form of a moral claim, then I would concede that all social interactions(and contractual arrangements) are “coercive.” For example, consider a contract between a Homeowner A and a carpenter B for a Home Improvement I in exchange for monetary sum M. In the contract, it’s specified Carpenter B must guarantee it’s work. This certainly can impose a possible moral claim on the time and labor of B, beyond it’s own calculation of such quantities involved, in the event of a claim of an unsatisfactory outcome by A. The uncertainty or risk of such an outcome is certainly not trivial. This is why, in part, you may often have bonded insurance of such workers.

But couldn’t this insurance premium then be considered a “tax,” one that is just a “market representation” of “coercion.” (1) The enforcement to make sure this “tax” is paid requires an enforcement body–a State agency against B. (2) Since “taxes” are being paid and there is enforcement agency to enforce payment of such taxes, why not have the State simply pay it through direct taxation, to relieve the burden on B. Or better yet, why not a tax-financed community worker project for home repairs? After all, we already have established a market principle for “taxation,” and the necessity of an enforcement agent for tax collection. So, why not?

Note: my little example is not the argument advanced by the above referenced author against the “no coercion” premise. That particular argument relied on demonstrating that arbitrary agents Ai, in whatever context, are never equally powerful to one another. So the market exchange is fundamental exploitative. So we show c(coercion) by showing exploitation.

My example is more subtle. It demonstrates that uncertainty or risk can lead to “coercion,” without having to make any assumptions regarding the relative bargaining power of agents.

The libertarian response to this will usually focus on qualifying the “first-order” definition of coercion as simply a form of a moral claim. The libertarian insists on a second-order distinction, namely that coercion is an involuntary moral claim. Taxes are a product of involuntary moral claims. If a contractual arrangement is voluntary, however, then the insurance premium is just a type of rent paid to a third party to offset the risk of the voluntary transaction not being mutually beneficial. Rent collectors do not need to be the State.

However, using “voluntary” and “involuntary” as the moral sprinkle dust to differentiate between taxes and rent, as economic transfers, reverts to a type of moral argument that has yet to achieve any moral consensus. And indeed, I would question, on the libertarian side, whether the libertarian principle is simply decorating “moral claims” with “voluntary.” I would argue that it’s a bit more than that.

Game Theory, a framework for analyzing strategic decisions under uncertainty, provides us with a means to examine agent bargaining. A mutually beneficial bargain between agents is a cooperative outcome that can arise from agents attempting to more or less minimize the moral claims they have to concede in pursuit of a benefit. Agents bargain because, in a general condition of the world–which is characterized by scarcity– cooperation creates “additional surplus.”

It’s important to emphasize a few points. Agents are not pure “first-order coercion” minimizers. If that were the case, then the optimal state would be the “state of nature,” that is the defection state, for everyone. However, as bargaining agents, humans will act to minimize their own concessions in pursuit of the surplus of the bargaining outcome. This makes them strategic agents. In terms of a bargaining problem, the libertarian principle is really the Lockean Proviso, which is a boundary constraint on the bargaining outcome: no one is worse off in the bargaining outcome relative to the defection state, or “no agreement.”

So, the libertarian principle, in terms of a bargaining problem, is a constraint on agent moral claims in the cooperative outcome. Coercion,as a second-order definition, is a moral claim on an agent in the cooperative outcome that makes it worse off than it would be sans the bargained outcome(i.e., the defection state). That is, coercion, as a second-order definition, is the use of force to enforce an agreement to a bad bargain. In this sense, the “libertarian society,” in terms of coercion, is not so much dependent on a demonstration that all social arrangements are purely voluntary, but rather on the ability to voluntarily exit bad bargains without punishment.

So, this alternative libertarian definition of coercion definitely creates a “Fun House Mirror” effect for the presumption of coercion. Namely: a “progressive” argument–from the author cited above–that builds from the premise that markets are simply constraint-bounded social constructs that are fundamentally violated by the unequal bargaining power of agents that concludes with a claim that the ultimate representation of unequal bargaining power, the State vs the individual, is the contractual foundation of the rule of law.

The flaw is a simple failure to understand basic bargaining theory, which is based on strategic decisions under uncertainty. If there is no uncertainty regarding the relative bargaining power of agents, then there is no bargain to be had, particularly if exploitation can be shown. That we continue to see bad bargains, under such strategic certainty, may have something to do with the claim that “a law is a contract in which one of the parties is a government entity,” which, of course, implies the rule of law derives from the ultimate instance of unequal bargaining power.

So we end up with a progressive argument that seems quite reasonable to progressives under a presumption of coercion, but ends being an embarrassing admission if the presumption itself is challenged.

The Free Market

The Free Market is not:

FM –> ~c

Nor is it, as I have explained previously, a premise about regulation. That is,

FM –> RM

where RM=Regulated Market(NOTE: although an “un-free market” is a sufficient condition for an unregulated market).

Instead, a “free market” can be succinctly defined as a market that serves no political or moral ends. The practical meaning of this is more or less a statement about competition in “economic rent,” or “rent-seeking” behavior. One type of economic rent seeking can be a boon to human welfare, and is representative of an entrepreneurial economy, while the other type is a bane to human welfare and is representative of protectionist political economy.

The definition of Economic rent differs a bit from the popular meaning of rent as an income stream for use of a resource. Instead Economic rent refers to income flows for use of a resource in excess of that resource’s opportunity costs.

So, as an illustration, in our example above, the contract between Homeowner A and a carpenter B, that required a flow of payments to a third party to insure risk against a guarantee default by B, is a form of rent. But how much of this rent would be economic rent, that is payments in excess of opportunity cost? We would surely want competition in any rent-seeking behavior here to the extent these rents exceeded opportunity cost. This would be an entrepreneurial opportunity.

What we would NOT want to have is protectionism in terms of who qualifies to be bonded or who insures the bondable carpenters. Nor would we want some tax code to encourage(give a tax exemption advantage to home improvement) home improvement as an artificial market for protected bondable craftsmen. The competition in this type of economic rent is the essence of Political Economy.

The free market then is not some abstract ideal rooted in some abstract moral claim. It is something that very much can be approximated and spotting it’s violations is very much a matter of practical endeavor.

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