Ragnar Arnason

Markets Promote Maximum Possible Liberty

European students for Liberty

Reykjavik,October 3 2015

Want to show that

1. Liberty, properly defined, is promoted by the

market system

2. Under certain conditions the market system will attain maximum possible liberty

3. The state is liberty reducing in a fundamental sense

Approach

1. Formal analysis in the economic-logical tradition

2. Make use of fundamental economic results

IDefining liberty

Definitions of liberty

Oxford dictionary: “The state of being free within society from oppressive restrictions imposed by authority on one’s behavior or political views”

Merriam-Webster dictionary:“The power to do or choose what you want to"

Many and somewhat varied

Common core in most definitions

Liberty is the ability to do what one wants!

Will adopt this as my definition of liberty!

“Positive” and “negative” liberty(Primarily developed by Isaiah Berlin in the 1950-60s)

Negative liberty:Absence of barriers and hindrancesPositive liberty: Ability to act to control one‘s life &

fulfill one‘s fundamental purpose

Negative liberty Ability to do what one wants

Positive liberty: Unscientific (at best only the individual

will know => non-observable, unscientific). Opens the door for anything (s.a. justifying tyranny)

Extremely damaging concept for rational analysis and discourse

IIMeasuring Liberty

Why measure?• Standard in science (Difficult to talk about something

that is not in some way measurable)

• All but necessary for analytical progress

Note:• Not measurement in the common sense (cardinal measures)

• More like a set-theoretic type of measures• But need to be able to talk about more or less liberty in some fairly

well-defined sense

Nature of the measure

The measure must reflect the basic definition of liberty:

Clearly there can be more or less of this ability

“The ability to do what one wants”

Developing the measure

• Huge (possibly infinite) number of liberty dimensions (anything a person might want)

− Any kind of good & a wide range of personal freedoms etc.

• Refer to these as desirables (could be nondesirables)

• This defines the space of desirables• Any particular combination of desirables can be

represented as a vector in this space of desirables.

Desirable1

Desirable 2

The Space of Desirables(Two dimensions for illustration)

Can clearly extend to any number of desirables

Desirable 1

Desirable 2

A particular configuration of desirables

Generally a person’s opportunities can be represented by a set in the space of desirables

A person can choose any point in the opportunity set

Desirable1

Desirable 2Opportunity

set

Desirable1

Desirable 2

The size of the opportunity set may be seen as a measure of a person’s liberty!

Opportunity set

The larger the opportunity set the greater the freedom!

Measure of liberty: Illustrations

Smaller liberty

Larger liberty

Note: Economic progress increases many dimensions of liberty

Basic logic: Recap

1. Freedom is the ability to choose what one wants

2. This ability is circumscribed by the opportunity set

3. The greater the opportunity set the greater the freedom

The size of the opportunity set is a measure of the extent of liberty

Note, however, the complication

Which represents greater liberty?

III.Limits on liberty

• Liberty cannot be infinite

• Liberty is constrained by:1. Nature

2. Productive powers (capital, technology and knowledge)

3. Liberty of others

4. Man-made restrictions

• The first three are caused by real scarcity

• The fourth is man-made and may or may not reflect real scarcity and increase total liberty

Restricting liberty: An illustration

Restricting liberty: An illustration

IVMarkets and liberty

• It is now, straight-forward to show that markets promote maximum liberty.

• Just need to apply established results of economic theory

This is because the opportunity set is formally identical to economic opportunity sets

Base caseAll desirables are in markets

I. The total opportunity set (=liberty) maximized [Efficiency principle and Welfare Theorem 1]

II. The total opportunity set (=liberty) is maximized over time [WT-1 & and optimal growth theory]

This proves the basic proposition: “Markets promote maximum possible liberty” (….and more)

Note: Desirables subject to property rights they are in the market.

Equity (Interpersonal comparisons)

III. Allocation of desirables (dimensions of liberty) between individuals is “Pareto efficient” [WT-1]

IV. Any desired allocated of desirables (liberty) can be attained by a judicial initial allocation of desirables [WT-2] • This this must be once-and-for-all initial allocation.

– If not, a serious reduction in future opportunities

Case IISome desirables not in markets

The basic proposition “Markets promote maximum possible liberty”

still appears to be true.

I. Total opportunity set (=liberty) maximized w.r.t. the desirables

subject to markets

• But maybe at the expense of other desirables (dimensions of liberty)

• The total opportunity set (total liberty) may not be maximized

II. The total opportunity set (liberty) is only partially maximized over

time

VThe state and liberty

Big topic Here only a few observations

• The state can promote liberty (by helping markets)

• However, the state, as normally run, employs coercion which is exactly the opposite of liberty!

\ Even if the state is doing the right thing (promoting liberty) it tends to do so by subtracting from liberty even in the best conceivable case the net impact on liberty is doubtful

• What we need is a state that continually re-contracted for (people can opt out)

VIConclusions

Have demonstrated that:

1. It is possible to operationally define and measure liberty and systematically analyze its relationship with social organizations

2. Markets promote liberty in the sense that a) Liberty is maximized by markets (under the usual market

assumptions)

b) Liberty is almost surely increased by markets (when market coverage is limited)

Have argued that:

1. The state is fundamentally liberty-reducing• By relying on coercion (& majority rule etc.)

Þ Switching from a state-based system to a market-based system will generally increase liberty. • However liberty for some may be reduced

END