The Online Library of Liberty

A project of Liberty Fund, Inc.

• Introduction
• Part One: the Needless State (chapters 2, 3, 4 Are Not Available Online For Copyright Reasons)
• 1: Who Gave Us Order? On Exclusion, Enforcement, and Its Wherewithal *
• 5: Empirical Evidence *
• Part Two: Redistribution (chapter 7 Is Not Available Online For Copyright Reasons)
• 6: A Stocktaking of Perversities *
• 8: Disjunction, Conjunction *
• Part Three: Justice (chapters 10, 11 Are Not Available Online For Copyright Reasons)
• 9: Justice As Something Else *
• 12: Slicing the Cake Nobody Baked *
• Part Four: Socialism
• 13: Ownership, Agency, Socialism *
• 14: Market Socialism: “this Square Circle” *
• Part Five: Freedom
• 15: Right, Wrong, and Economics *
• 16: The Paretian Liberal, His Liberties and His Contracts *
• 17: The Bitter Medicine of Freedom *
• Works Cited

6

A Stocktaking of Perversities *

Anti-poverty programs prolong poverty. Minimum wage legislation reduces employment and does not noticeably raise the earnings of those who do find jobs despite it. Universal educational opportunity leads to the massive erosion of standards of literacy and numeracy. Aid to families with dependent children helps to break up families and promotes childbearing by unwed teenage girls. Social Security stimulates consumption at the expense of saving, eating into the capital stock that would be called upon to help honor pension promises. Paying people when ill encourages malingering, paying them when out of a job encourages them to wait for an “acceptable” job to turn up. Rent control induces maldistribution of the available housing, penalizes the homeless, and in due course reduces the housing stock altogether. Compulsory insurance provokes more frequent occurrence of the event people are made to insure against. A redistributive fiscal system churns income flows among social groups “horizontally” but does little to redirect them “vertically” to fulfill its ostensible goal, greater equality.

For the benefit of those for whom this kind of sad litany is still news, Richard E. Wagner’s To Promote the General Welfare: Market Processes vs. Political Transfers (San Francisco: Pacific Research Institute, 1989) proceeds to a workmanlike stocktaking of the perversities of the welfare state, showing in the process that these are mostly predictable effects of a single common cause, the unrestricted power of democratic decision making.

Most of us are individually straight if not downright square, yet collectively we are nothing if not perverse. The costly failures of welfarist redistribution and their corrosive effect on the fibers of society are not seriously in dispute. Nor are many left who still believe that if a policy proves to have too many unpleasant by-products, a better one can be found that will bring only pure bliss. Yet there is little sign of any contemporary society really trying to kick the welfare habit—at best, there are periodic good resolutions to cut down on the fixes. Why is this so?—and must it be the case?

Many answers are floating about in the public consciousness. Some are on the comic strip level: “Surely You Don’t Want Jones Back?,” “Market Socialism Is the Best of Both Worlds,” and “We Can’t Have a Darwinist Free-For All.” These are not amenable to critical scrutiny. Others are less simple but just as simplistic. However, three are, to my mind, worth discussing.

Welfare Relativism

The first is the answer sophisticated American liberals and European social democrats would give under pressure. They do not seriously contest that welfarism does, in roundabout ways, call forth a shabby catalogue of perverse effects (though they do not despair that reason backed by research can in due course deal with them). Other effects of the welfare state, however, they consider indubitably positive. They tell you that good and bad effects of different kinds and affecting different people are incommensurable and cannot be balanced against one another in some logico-mathematical operation. “The welfare state is a millstone around society’s neck” and “the welfare state is the best instrument of social justice we have” are not descriptive statements, but expressions of preference, and one is no more “valid” than the other. Welfare relativism does not argue about the “right” tradeoffs between justice and efficiency, liberty and equality, and so forth, that a rational society ought to have chosen, nor does it claim that individual wishes, once fed into the political sausage machine, somehow come out in the form of the “wrong” collective choice. It accepts that the policy society does choose, perverse effects and all, is what it wants—for the allegation that it “really” wanted a different one is meaningless.

The second answer, which I would label Hayekian liberal, is that it is right and proper to stretch out a social safety net to catch those who fall, as long as this is not done in the name of social justice and with an egalitarian intent. Hayek agrees that “the amount of relief now given in a comparatively wealthy society should be more than is absolutely necessary to keep alive and in health,”1 and he accepts that the availability of such relief will induce people to let themselves go and rely on it, as well as that the state should compel all to insure against life’s hazards and should develop some institutional framework of administering welfare. “Up to this point the justification for the whole apparatus of ‘social security’ can probably be accepted by the most consistent defenders of liberty.”2 What Hayek finds unacceptable is that the apparatus should have redistribution as its avowed aim,3 though it is not obvious why it matters so much whether welfare policies are meant to be, or just are, redistributive. It seems, however, that it is redistributive intent that vitiates welfarism and should lead to its rejection if collective choice were not perverse.

Wagner parts company with Hayekian and indeed all classical liberalism when he admits arguments for the legitimacy of intentional redistribution: for example, when individual charitable giving is conditional on enough others giving, too, so that charity functions as a public good the state can Pareto-optimally provide; when people are “risk-averse” and actually like progressive taxation as a form of insurance that even those who never collect from the policy are willing to buy; or when redistribution is the price all agree to pay to secure acceptance of the existing order by those who do least well under it. Here, Wagner stands squarely in the contractarian tradition, as befits a disciple of James Buchanan and a co-editor of Constitutional Economics. The notion that redistribution is good (Pareto-superior) for both gainers and losers because it is a necessary cost of producing civil society, however, has two versions. Buchanan’s shows how redistribution may be a condition of preventing our relapse from social cooperation to pre-contract lawlessness. Rawls’s affirms that redistribution in conformity with his “difference principle” leads to willing social cooperation as distinct from social cooperation tout court. The former version is as it may be, but to believe in the latter is to believe anything. Wagner wisely keeps a safe distance from Rawls’s contractarianism.4

The Charms of Churning

The third kind of answer as to why we collectively opt for the welfare state, even if individually we disapprove of its works, emerges from public choice theory, a body of doctrine that has become part of orthodoxy in political economy. Wagner’s book is a lucid illustration of many of its themes, largely free from the suffocating jargon of so much current writing in the social sciences. His focus is “constitutional” in that it bears upon causal relations between decision rules and the decisions they help to produce. So does a large part of the literature, from the study of elections and public utility regulation to game theory. However, according to his preface, this focus makes his book “unique,” a case of academic hard sell that devalues an otherwise sober piece of work.

Summarily, public choice theory shows how a given set of social decision rules, such as “majoritarian democracy,” has as its corollary a system of incentives, such as the potential payoffs that can be won by particular voting coalitions, to which the participants in the political process respond in predictable ways. With the insights of public choice theory, it is easy to grasp how, for instance, even minority groups can obtain overt or covert transfers that, by accepted modes of reckoning, confer smaller benefits on them than the cost they impose on the community. Publicly provided goods mostly enjoyed by a particular segment of society but paid for out of general taxation are, of course, analogous to transfers in their redistributive effects. Potentially, majority rule allows everybody to profit under some heading as a member of some minority, while paying for every other minority benefit as a member of the majority; it is theoretically possible for literally each and every voter to be worse off thanks to the welfare state that each nevertheless keeps voting for. What is more appalling still, each is perfectly rational to do so.

One characteristic of public choice theory is that it gets its results by having everybody, including the politicians, play the game by the rules to his best advantage, reacting to incentives, uncontaminated by ideology and metaphysical beliefs. Classical liberals, in diagnosing the perverse ailments of the body politic, used to blame the gullibility of the electorate, the fatal conceit of social engineers, and the dishonesty of demagogues. An approach that does not need recourse to such human weaknesses is presumably better theory, though one suspects it may inspire worse historiography. This, however, is just my self-indulgent speculation, the pursuit of which would loosen our grip on the subject in hand. Back, therefore, to rules, actions, and payoffs.

The Sanctity or Profanity of Rules

What is strange in Wagner’s work, and not only in his, is the juxtaposition on the same plane of the “welfare state” and the “contractarian state” as two interchangeable possibilities that could be chosen, rather like celibacy or marriage, rail or road, sea or dry land, town or country. From this treatment comes the cohabitation, under the same intellectual structure, of the positive study of public choice and the normative precepts of “constitutionalism.” The ability to have them as bedfellows is due, as far as I can judge, to a crucial maneuver around the genesis of rules and their immutability.

In public choice, winning groups get the best available payoffs and impose worse ones on the losers. However, for some reason or other, this ceases to be true where the payoffs are indirect and take the form of alternative constitutional rules, which are but gates giving access to direct payoffs. Redistributive direct payoffs depend on collective decisions, and constitutions are systems of rules for making them. One can identify these rules as, in effect, indirect payoffs. Some rules hinder redistributive decisions, others help them. Hence some constitutions are a manifest source of better direct payoffs for the prospective beneficiaries of public largess than others. The contractarian-cum-public-choice school appears to hold that these persons and their respective groupings respond to incentives and maximize payoffs when shaping legislation and imposing policies, but not when shaping the constitution that is a determinant, both of what policies may be imposed and who is entitled to impose them.

In actual life, for ad hoc reasons there happen to be defective constitutions which are not neutral, but loaded in the sense of facilitating collective choices that are contrary to the Lockean ideal or to some notion of natural right. By the contractarian logic, however, these are avoidable aberrations, for there is, in a society with the usual divergent interests, a place to be filled by a constitution that could have been unanimously agreed upon in an original contract, if the occasion to propose one had arisen. Its terms are at worst indifferent, at best benign, in that they hold no bias and threaten no adverse consequences for any person, group, or class, and promise benefits at least to some. Such a contract is concluded, as it were, in a state of innocence, before original sin, that is to say before there can be generalized collective choice, including contested choice where the winners can carry the day over the opposition of the losers. For, as contractarians might explain, winning coalitions can impose their will on the losers once there are rules for telling who has won, but not before. Consequently, in the choice of rules there can be no imposition, but only quasi-unanimous consent, and this is the fundamental reason why the choice of the rules is invested with an aura of sanctity, as opposed to the profanity of contested choices within those rules.

An obvious down-to-earth objection to this is that momentous choices can and since time immemorial have been imposed by some people on others without benefit of agreed, formal rules. Let it be the case, however, that there is a benign constitution to begin with and the greedy gremlins who swarm around public choices had no hand in its making. Since, however, they know no taboos and are led by interest, what is to stop them from profanely starting to reshape the constitution the moment it provides them with the rule system for engineering agreement to non-unanimous choices?

Article 5 of the U.S. Constitution, providing for the manner in which “rules for choosing” may be altered, erects obstacles to constitutional change which make it more difficult to amend the rules than to apply them in ordinary legislation. But such difficulties exert their “constitutional drag” essentially through augmenting the size of the winning coalition required for carrying the rule change; a broader coalition must be in favor than is needed for passing ordinary laws. Public choice theory, if it were not imbued with the contractarian dream of redeeming the republic through prescription, would in good logic have to predict that an impartial constitution will first be changed to suit the broad winning coalition, and then be changed again to let progressively narrower coalitions despoil ever larger minorities, until the rule system finds its final resting place—the “End of History” of media gurus—in unlimited bare-majority democracy. At this “End of History,” no minority right or privilege can subsist without (at least tacit) majority consent and no potential winning coalition that could carry the day under the existing rules can hope to augment its redistributive spoils by getting agreement to change the rules any further.

Generalized Public Choice

In reality, things work more insidiously than this. Constitutional change need not pass through the straight and narrow gate of some Article 5. The transformation of the U.S. Constitution from a rule system classical liberals used to admire, into one where modern American liberalism has all the elbow room it may desire for its redistributive exercises (even though the Rehnquist Court cramps its style in other respects), took place in more diffuse and unobtrusive ways.

Statute law, even when it ranks as constitutional law, is never simply “applied”; we would need no judges nor advocates, but only bailiffs and jailers if it were. In marginal cases, the courts have to make or remake law before applying it, but in all cases they must interpret it to some degree,5 and it is flying in the face of experience to suppose that judicial interpretation—be it informed by the best in legal scholarship and honesty—can for long dissociate itself from the political climate, the pressure of society’s demands, and, most potent of all, the trend of articulate opinion.

This is how the very Fifth and Fourteenth Amendments, once seen as the cornerstones of private property rights and the freedom of contract, have since been discovered to be no obstacle at all to the elaborate regulation of business, the broad advance of eminent domain, extensive legislative intervention in the distribution of incomes, “positive” discrimination, the shift of power from state to federal authorities, and so forth. Without significant recourse to any “rule for changing rules” that the original Constitutional contract may have provided for, enough of the essentials have changed de facto to transform American politics from “constitutional” to “majoritarian” democracy. A generalized public choice theory that did not confine its scope to the special case of “choices within given rules,” but exposed all political alternatives, including the rules for choosing among them, to the maximizing hypothesis that has proved fruitful in the study of the pork barrel, the growth and tenacity of bureaucracies, the deficit, and the essential perversities of the “promotion of the general welfare,” could have predicted this outcome, too.

Putting it at its simplest, majorities choose legislation that maximizes their gains from politics, and they learn to choose a constitution that maximizes the scope for such legislation. The second part of this double proposition follows from the same premises as the first, though the relevant maximizing processes may not be equally rapid and straightforward. Public choice theory, once it relegates the happy vision of a “rights-based,” rights-conserving, and liberty-securing constitution to its proper place alongside all of the other good things we cannot have, is well enough set up to digest both.

[* ]Reprinted with permission from Critical Review (fall 1990): 537–44. © 1990 Center for Independent Thought.

[1. ]F. A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960), 285.

[2. ]Ibid., 286.

[3. ]Ibid., 289.

[4.]In particular, Wagner (34–35) is rightly unimpressed by the maximin strategy that Rawls, in order to get his result, needs to pass off as the dominant one in the pre-contract position—i.e., unanimous agreement by the parties that the “difference principle” shall govern distribution among them.

[5. ]Any law (no matter how fussy or “special” in the pejorative sense) is more general than any case to which it might apply. The judicial decision that a class of cases in fact includes a given case, involves the cognitive operation of identifying each in terms of the other. “Substantive due process,” itself an interpretation of the Fifth and Fourteenth Amendments, rules out as unconstitutional a class of legislative acts that would “deprive any person of life, liberty or property without due process of law.” Whether the fixing of minimum hours of work in bakeries or minimum wages for women fall within this class or outside it is patently a matter of interpretation, and the interpretation has undergone enormous change in the present century. However, the change was fully to be expected on “public choice” grounds.