Monday, October 31, 2005

Trade-off between Freedom and Security

Michael F. Cannon has an article published in CATO Institute, 31 October, (, which was originally published in National on October 14, 2005, entitled “Choice and Security”

In it he poses a most interesting question:

“Which would you rather have, freedom or security?

The Left has argued that since September 11, 2001, President Bush has curtailed civil liberties in an attempt to keep America safe from terrorism. Few people on the Left believe this bargain will pay off, and the skepticism runs deeper the farther left one moves across the political spectrum. The same cannot be said when it comes to economic freedom. Here, acceptance of a trade-off between freedom and security increases as we look leftward. In The New Republic, Jonathan Cohn recently asserted the existence of that trade-off — and argued for making the trade — on issues from Social Security to education to healthcare.

Cohn criticizes conservatives for selling greater choice in these areas without acknowledging that it would result in less economic security. His argument goes like this: The limits on choice that conservatives would sweep away also make people more secure. Social Security provides Americans a guaranteed pension; having the choice of putting one's Social Security taxes in a personal account would weaken that guarantee. Public schools are devoted to educating all comers; vouchers take money away from those schools and that mission. Each state has its own set of health-insurance regulations, many of which attempt to make coverage more affordable; allowing consumers to choose what slate of regulations they want would make those well-intentioned rules less effective.

Though not a conservative, I will break bread with conservatives when their aim is to tear down barriers to choice. Social Security privatization, school vouchers, and deregulating healthcare would expand the menu of choices available to ordinary people. There is an alternative explanation of the relationship between choice and security: Rather than crowd out economic security, choice actually increases it, whether it's saving for retirement, educating one's children, or protecting one's health.

Who Wants to Buy from a Government Monopoly?

My argument goes like this. From whom would you rather buy bread: a government monopoly, a private monopoly, or one of a number of competing grocery stores? It's really not much of a contest. The government and private monopolies would have consumers right where they want them. They don't have to take much care to meet specific needs, and they are likely to overcharge, which leaves consumers with less money (i.e., they are less economically secure). Competing grocery stores, on the other hand, will fall over themselves to provide fresh whole grains at a price that most increases a consumer's economic security.

Adam Smith said it well: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." But once consumers are dispossessed of their freedom to choose, businesses worry far less about consumers' economic security.

That is the basic argument. But it is over time that choice really begins to look good. In the process of falling over themselves, those producers strike upon tiny improvements in quality, delivery, etc., all of which translates into even greater security. Such innovations have caused prices to fall for everything from food to computers to telecommunications. Over time, choice makes products of ever-increasing quality available to an ever-increasing number of people at an ever-decreasing cost.”

Michael F. Cannon makes a compelling argument. Competition disciplines producers into trying harder to earn the consumers’ spending and disciplines those inclined to create monopolies into avoiding anti-consumer practices that raise prices and thereby profits at the expense of consumers and their real incomes.

The impartial competitor in Smithian markets is analogous to the impartial spectator in moral sentiments. Unfortunately, many who quote Smith on the ‘butcher, the brewer and the baker’ confine themselves to only part of the transaction. In fact, almost the entire economics profession has ignored the while exchange process at the heart of every economic transaction ever carried out.

Most economists believe that prices are formed, goods are exchanged, wants are satisfied, as if in an instant auction system – sellers cry out a price and buyers respond with their cash. Smith spent a little longer on the formation of bargains and so should modern economists. Instead, they fell into what I called the ‘fundamental error’ in “Adam Smith’s Lost Legacy” (2005). They saw only one side of the transaction – the “butcher, the brewer and the baker” acting in their self-interest – and forget the effort required for two parties, each acting in their self-interest, to mediate their different interests (sell dear, buy cheaper).

Each party to a market transaction has to address the interests of the other; buyers raise their offers; sellers lower their demands, until a common price is struck, for there can only be one price in a market transaction. When buyers contemplate competitive prices from several butchers, brewers and bakers and choose the price closest to their offers, the negotiation is silent, but the outcome is the same as if they had stood and tried to bargain with the sellers verbally (as some do; and in marekets for major transactions almost all do).

The same is true for the sellers contemplating potential consumers in a competitive market; they survey the different buyer’s offers and select the one closest to their demands (silently) or from verbal attempts to bargain. Each addresses the other’s interests to persuade them to transact close to the range of prices they have selected for that purchase or sale. In fact, Smith goes on to describe this very process in the same chapter from which the ‘benevolence’ of the ‘butcher, brewer and baker’ is dismissed.

Likewise, the impartial spectator operates in what J. R. Otteson calls the ‘moral market place’, except ‘prices’ as understood by economists for economic goods (excess demand at zero prices) are not the instrument of the transaction (a point, respectfully, I think is not fully appreciated by Jerry Evensky in his brilliant recent book, Adam Smith’s Moral Philosophy, Cambridge 2005). In the moral market place, 'exchanges' are the reciprocal favours (good turns, obligations, expectations, etc.,), universally common in all societies and throughout history and pre-history, and their practice has a decisive role in social relationships.

Smith alludes to this in "Moral Sentiments" (TMS II.iii.2: pages 85-6): “by a mercenary exchange of good offices according to an agreed valuation.” Reciprocity was the basis of the first transactions between humans (and I believe among the pre-human hominids, the ‘Brutes’) which evolved, socially, over millennia into transactions recognisably economic in the form of exchange through trade between strangers.

With these caveats, Michael F. Cannon’s article is a welcome contribution to the restoration of Smithian political economy and moral philosophy.


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