I read quite a bit of what libertarians say, as you might be aware if you read this blog. I'll ignore their perpetual use of reductio ad absurdium to death, although I love this response by Matthew Yglesias to one specific (boring) form of that. They usually misunderstand the point, in my experience, despite the fact they believe they are better than everyone else as representing their opponents' views.
My main problem is that the set of events that libertarians yearn for, a completely private set of markets without any government intervention (other than to keep the rules of the game), would (a) not provide every man with the liberty they believe it would, and (b) would not be a stable situation (or equilibrium, as economists like to say).
On point (a) I've written quite a bit on here. There are just too many situations where imperfect information and/or externalities mean that the price mechanism just doesn't do the job it should if the market was perfectly competitive (or some close approximation to that). The fact that one libertarian I've debated with claimed ignorance of perfect competition neatly epitomises that they don't really care about the details of markets that may lead to them working horribly, and denying a lot of people the liberty to make their own choices and better themselves.
On point (b), I've been coming to this conclusion for a little while now I think. If you do the thought experiments about why a fully free market might be problematic, one aspect is scammers, or those that do a bad job, or even a dangerous job. If the market isn't health where that could lead to your death, the idea is that reputation will matter, and if someone wishes to be in the business long enough, they will avoid providing bad service because it's not in their interest.
But say all market participants are good and honest after a long process of the bad eggs being weeded out. Then all customers know that all firms provide a good, honest service. I don't believe this can be stable, because it's then in the interests of some unscrupulous person or group of people to exploit the believe that all providers are good and honest, and provide a shoddy performance. Particularly, say, in financial markets - someone like Bernie Madoff turns up. They provide a seemingly wonderful service for a while, and people are attracted to their service, not realising its a scam. Then just before they are found out, they flee the country (Panama, say), and run with the money.
Then the equilibrium is gone; people no longer believe that all providers are good and honest. The atmosphere may not be ripe for more scammers, but the point is that reputation alone will not ensure a good, stable equilibrium in fully free markets. Can regulation though, of course, is the response - and the right one too.
My sense is the libertarian accepts all of what I've said so far but says "so what?", because the market situation with regulation is likely just as bad as the one without - certainly Madoff made it abundantly clear that whatever the rules of the game, there will always be that incentive to get around them to play scams. Now this I don't doubt, but the point is this: Stripping us back down to fully free markets won't solve any of the kinds of problems we have now, despite what libertarians might assert.
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