Libertarian View

Lets Imagine I am a top rate taxpayer and I receive a £500 bonus, if I spend it all, how much goes into the real economy to buy goods and how much is taken by the government in taxes, duties, etc as its “Fair Share”:

So it would appear that a “fair share” for the state of my hard earned £500 bonus is 68.1% ?

But, that’s not the whole story, because the £159.34 of “goods” is paid to the companies that produce them and a good part of the cost of those goods is made up of tax.

Assume that the companies involved pay 50% for materials, 40% for Labour and make a 10% pre tax profit:

So the state’s “fair share” is up to (£22.41+£340.66)/£500 = 72.6%

But there is more:

The raw materials of £79.67 purchased by the companies represent the revenue of the companies for whom the raw materials are the outputs and are increased in cost because of tax. So assume 14.1% of that amount also goes in tax, another £11.15 for the state.

(£22.41+£340.66+11.15)/£500 = 74.8%

Allowing for the fact that this process continues further still down the supply chain  It does not seem unreasonable to assume that ultimately the state will take 75%+ of the bonus.

I get to keep just 25% of the value in free market goods and services and the state takes the rest. Yet, still the left demand higher taxes so I pay my “Fair Share”!

This is my final post in answering @simonr916 questions on the practicalities of a libertarian legal system which looks at the mechanics of a free market criminal law system.

To cover all the theoretical nuances is simply not possible in a single blog post. For anyone wanting to study this area in depth I highly recommend: “Anarchy and the Law” which is a fantastic collection of essays on the subject by a number of leading libertarian thinkers.

I am including links to the text and audio or video material to make it a bit easier to digest for those who don;t want to read it all.

A good place to start is Morris & Linda Tannehill:  Chapter 9: The Market for Liberty

Followed by Rothbard – Police, Law & Courts, Chapter 12: For a New Liberty

David Friedmann – Police Courts & laws on the market. Part 3 II – The Machinery of Freedom

There are also a number of societies throughout history that have operated forms of private law without a state. The most interesting ones are:

Iceland between the 10th and 13th Centuries

Irish Celtic Brehon Law from the bronze age right through to the early 17th century

Kapauku Papuans of West New Guinea

@simonr916 raised some questions about how could the law, police, courts, etc function in a libertarian society. I dealt with the issue of civil law in my previous post and now move on to criminal law.

Before tackling possible mechanisms of implementing a libertarian criminal justice system (Which I will do on the next post) I need to clarify how libertarians define crime and criminal justice.

What is a crime?

The only things that are considered crimes in a libertarian society are violations of the Non Aggression Principle. The invasion of private property (including the person) using force or the threat of force.

So, crimes include, murder, assault, rape, kidnapping, burglary, robbery, fraud, etc.

Many things that are considered crimes in the statist world are not criminal to the libertarian.

“Victimless Crimes” are not considered crimes in a libertarian society, so taking recreational drugs, driving without a seat belt, smoking in a business establishment if the owner gives permission, unforced prostitution, consumption of pornography, polygamy, etc are not crimes.

Exercising legitimate property rights is not a crime, so refusing to allow people onto your property, even if based on racism, sexism, homophobia or a hatred of people in blue boots, is not a crime. Owning an assault rifle is not a crime, growing drugs is not a crime. Exercising free speech that others find offensive is not a crime.

What is Criminal Justice

In the statist world the criminal commits crimes against the state. He is tried by the state, pays fines to the state and is, in some cases, imprisoned by the state. The principles guiding the state are punishment for the offence, deterrence of other offenders and rehabilitation of the offender back into society.

Libertarian justice in contrast is guided by the principle of restitution. The criminal has wronged the victims and has to make good that wrong, not to “society” but directly to the victim(s). The costs of administering justice, and creating deterrence are also borne by the criminal.

The difference is best explained with an example.

An man robs a pensioner of her life savings of £25,000.

In the statist system he is sentenced to 4 years in prison. After 2 years in prison, if he behaves, his “debt to society” has been discharged and he is free to go. If he has been successful at hiding his loot, he can enjoy his ill gotten gains. The pensioner has still lost her life savings and innocent members of society have had to pay to catch, prosecute and incarcerate him.

In the libertarian system he is “sentenced” to repay the victim the £25,000 plus compensation for her distress, the costs of catching and trying him and an amount to deter other criminals. The criminals assets are sold off and he is detained and put to work until the victim is restored and compensated and all the costs of the crime are paid for. The victim is fully compensated, no innocent members of society are forced to pay anything and all the costs of the crime are suffered by the criminal.

Now we are clear on what libertarians mean by a crime and criminal justice, we can move on to look at how a private system of criminal law enforcement would operate.

For a more in depth exposition try this

A couple of questions on this from @simonr916

In a minarchist state:

How would such a government come into being and who would
run and administer this organisation? How would decisions on spending money be made? Who would draft the laws, choose the judges, appoint the police officers and so on?

Alternatively In an Anarcho-Capitalist Society:

In such a country, each man would be left to defend his own property and rights. You’d live in constant fear of a larger, or better armed, group taking your property by force. If you choose to have no government, how does the honest man protect his property from those who wish to take it?

I am going to deal with this in a slightly different way because the first set of questions are also important in an Anarcho-Capitalistic society. The questions really boil down to how would a system of law operate in a libertarian society and how would laws be enforced.

There are two distinct types of law, civil law relating to the enforcement of agreements such as contracts and criminal law relating to violations of property rights (including the physical person). I will address civil law in this post and criminal law in the next.

Civil Law in a Libertarian Society

In a libertarian society people would be free to contract under any set of rules they agree on. To a large extent such a system of multiple legal systems already operates. It is quite common in commercial contracts between businesses operating in different countries (which have different legal systems) to include a contract clause that says the contract is to be construed in accordance with the laws of for example, England & Wales or Switzerland. The only difference in a libertarian society is that rather than being restricted to the laws passed by geographic states, they would be free to select the laws drafted by private businesses, such as The National Legal Services Company or the Association of Wine Merchants.

One of the benefits is that the laws could be very specific to the trade in question and being drafted by industry experts on both sides, would be likely to function far more effectively in line with the parties needs and expectations than a generic set of laws applying to the geographic area controlled by the state.

In the event of a dispute the conflict could be adjudicated on by any one of a number of private courts. Again this is already taking place. Many contracts already specify the use of  private arbitration companies, rather than courts. Usually because they are quicker and less expensive.

So to answer some of the questions raised, the laws are drafted by private companies, the courts are run as private companies and the judges/arbitrators are appointed by private companies. Market forces work to continually improve the quality of all parts. Since both sides have to agree to any law, or any court they must continually strive to be as balanced and as fair as possible.

In the state system if a particular judge has a prejudice against dairy farmers they have no choice but to suffer the prejudice. The judge has a state ordained monopoly on the administration of justice in his court. In a free market system, such a judge would simply not get any of the dairy farmers business. A totally partisan judge would go bankrupt!

Since the parties involved bear the costs they must continually strive to be efficient or a lower cost competitor may take their business. Courts that start at 10:00am and finish at 3:00pm would be replaced by courts that optimize their operations to reduce the costs to their clients.

How could the judgements of such private courts be enforced? In the current system if one party ignores the ruling of binding arbitration the state courts and the officers of the state will coerce them to comply. If there is no state, to threaten violence how will judgements be  enforced?

The answer is simple. Those who do not obey a ruling of a private arbitration court are simply blacklisted by the entire private arbitration system and publicly named and shamed.  Who would risk making a contract with another party who cannot have any dispute resolved by a third paty impartial judge and who is known not to honor rulings made by arbitration? It would simply be commercial suicide for anyone to flout such a ruling as they would be ostracizing themselves from the dispute resolution procedure required to trade. (In the event of fraud or other criminal activity additional options are open to the victim as for any crime, which are covered in the following post.)

Such a system is not just theoretically possible but historically mercantile law was developed and enforced by private merchant courts as was admirality law, before the state claimed sole jurisdiction. Perhaps a more recent example of a self regulating commercial community is Ebay. Anyone who cheats customers receives negative feedback which makes it, at best much more difficult, at worst impossible to continue to trade with other members of the community.

Most transactions covered by the civil law would be business to business transactions, but this branch of the law also covers the case of consumers buying from businesses.

What about the “poor”?

How can they pay for private arbitration, if a large corporation breaks the terms of its agreement with them to provide, for example a new satellite dish?

There are several options:

Insurance would be available in the free market to cover the costs. Annual legal insurance for £50,000 can be purchased today for £20 a year (5.5p a day) and the price would be much lower under a more cost efficient private arbitration system. This should be within the reach of all but the very poorest. Without a state funded legal system awareness of the importance of such insurance would be high.

Reputable sellers would include the offer of funded arbitration proceedings in the terms and conditions of their offering to demonstrate their confidence in the high quality of their products or services. The poor could restrict their purchases to only vendors offering this protection.

No win, no fee arrangements where a proportion of any damages are paid out to the person taking the case to arbitration would be very common in a libertarian legal system.

Charitable or pro-bono legal representation would also be available to many, as it is today.

For commercial/civil laws there is clearly no need for the state to be involved.

The next question from @simonr916

“Will a Libertarian world not become more and more unequal
as each generation further entrenches the privilege of the few?

Those people who have been successful will naturally wish to give their own children advantages and protections in life. They will pay for education, help their children develop networks of useful contacts, give them resources to use as capital and so on.

Those who were not successful will not be able to do things. Their own children – through chance of birth and no fault of their own – will have much less chance of success, even if they are hard working and clever. They will, of course, have no state education or welfare support.

Many of the most successful people in society have ‘pulled themselves up by the bootstraps’. Poverty is a great motivator. These people do this through hard work and ability, but they also require opportunity– whether that be a state education (which may allow them to shine and
achieve a bursary for higher education), or a public library for
research, or a small amount of capital to start their own business, or welfare support so that every moment isn’t dedicated to base survival”

It is certainly true that each of us has different opportunities, resources and abilities. The children of attractive parents are more likely to be born attractive, the children of intelligent parents are more likely to be born intelligent and the children of rich parents are more likely to have capital to start their way in life.

However, the relationships are complex. Regression to the mean dictates that the children of highly intelligent parents will not be quite as intelligent as their parents, children of highly attractive parents will not be quite as attractive. Over the generations the children tend to revert to the mean.

Many millionaires feel that to give large quantities of unearned wealth to their children would do them more harm than good and leave their fortune to charities instead.

Many who receive large amounts of unearned income lose it all in a remarkably short period of time. According to some sources 1/3 of lottery winners declare bankruptcy 

I can see two possible arguments in your comments:

1. Inequality would increase simply because inherited wealth accumulates
2. Inequality would increase because opportunities for those without any inherited wealth would disappear.

If the first argument were true, it would also be true, albeit at a slower rate, in any society that did not have a 100% inheritance tax.

We have had countless generations without such a tax and yet 80% of millionaires are the first generation of their family to become wealthy!

The reality is that inherited wealth is more likely to be dissipated by inept children than grown further for the grand children. The saying cloggs to cloggs in three generations or the Saudi version: “My father rode a camel. I drive a car. My son flies a jet airplane. His son will ride a camel” reflect the fact that 9 out of 10 wealthy families lose their wealth by the third generation.

The second possible argument makes the unjustified assumption that without state support there would be no opportunities for those born without wealth.

To equate no state education with no education, no public libraries with no libraries and no inherited capital to start a business with no capital to start a business is simply an error.

Private schools already offer scholarships to bright pupils who cannot afford the fees.
Free education at university level is available online at places like Khan Academy , Coursera and Itunes U . There are thousands of digital books available free for kindle users. It is highly likely that low cost education would be available using shared computers, kindles and online resources such as these once the state monopoly on education was removed. Parents and local communities would also club together to provide access to these resources and charities promoting education and industry sponsored schools would also likely be supported for the very poorest.

As a society we value the importance of education, it is in the interests of parents, children, employers, etc so the idea that it would not exist without the state is simply wrong. The free market and charity can do anything the state can do, usually better and more cheaply.

The idea that without inherited capital you cannot start a business is also simply wrong. The traditional way to acquire capital is to save. Work as much as possible, spend as little as possible and save the difference.

If you have a good enough idea you can bring in outside investors for a share of the business, or you can borrow money and pay interest on the loan.

I had no inherited capital but formed a business through personal savings an external investor and some money borrowed on a credit card.

It is therefore not inevitable that inequality would increase with every generation in a libertarian society. As long as opportunity is not crushed at the bottom end of the wealth scale it would not matter if it did. Wealth is not a fixed pie to be divided up, but an infinitely expandable pie with plenty for all who contribute.

As a libertarian the fact that others have been much more successful than me is not a cause for concern but a challenge to do better myself having had my eyes opened to what is possible.

A combination of two related question from @simonr916

a).Without regulation, what is to stop companies from acting
in amoral or immoral ways to the detriment of all

b).Without regulation and controls, how can we avoid being
deceived and make meaningful choices?

A libertarian world would permit snake-oil salesmen to tour from town to town, making fantastical claims to the poorly educated citizenry (no state education remember) but would also allow big companies to say what they liked.

So tobacco companies could still be telling us that smoking cures asthma, and we’d have no way of knowing how much fat, salt and sugar there is in a happy meal.

Perhaps the first thing to point out is that even with state regulation and controls we are not protected from deception. Homeopathy practitioners, Tarot card readers, psychic healers and all manner of nonsense peddlers continue to operate in our state regulated society. Exploiting the wise state educated citizenry on a daily basis.

Tobacco companies carried out their historic deceptions in a statist society not a libertarian one and  we have recently had the joys of horse meat in our “beef” despite the state funded Food Standards Agency regulating this industry.

You cannot prevent people from saying things that are untrue, unless you are an omniscient dictator.

What matters is how you deal with people who knowingly deceive.

Lets compare the statist and libertarian response to a hypothetical example of a company selling a pleasant tasting drink, Brand X. The company knows it causes cancer, but it is very addictive, causing customers to buy 20 to 40 cans a day and once they start they will be brand X drinkers for life. It is highly profitable product and all the executives are on six figure profit related bonus schemes.

In the regulated statist world
People start to get cancer.
People start to make connections and start to suspect that the problem is with Brand X. They call the authorities who have limited fixed budgets and decide that it is not cost effective to investigate this now, they have other priorities.
More people start to get cancer and more people call the authorities.
Eventually they decide the matter must be investigated and schedule some research.
The research is state funded, budgets are tight and it may take many years to be started. Finally the evidence is in and the case is overwhelming that Brand X is to blame.
Unfortunately the state is earning large amounts of tax income from the sales of Brand X and has a conflict of interest in banning the product.
The chairman of the company is also a big donor to the political party in power and entertains many politicians on his luxury yacht in the Bahamas each year.
A compromise is reached and they negotiate some laws that mean the packages of Brand X have to carry a warning and fine the company several hundred million pounds for deception.
The company pays the fine by missing a dividend to the shareholders.
The executives get to keep the six figure bonuses they made in each of the ten years before the problems were identified and action taken.
Other company executives see this and decide that the punishment for deception is nothing compared to the bonuses they can earn from the extra profit.

They launch brand Y the following week and Brand Z the week after. Incidences of unexplained cancer continue to rise.

In the libertarian world 
People start to get cancer.
People start to make connections and start to suspect that the problem is with Brand X. They call a private law firm.
Seeing the opportunity for a profit from a contingency fee arrangement, the private law firm hires a private research firm immediately to do some preliminary research.
The results look damaging so they pay to have a full study done immediately.
The evidence is overwhelming against brand X and the law firm takes action.
Since there are no limited liability corporations in a libertarian society the individual executives and investors are held personally accountable.
Libertarian justice operates on the principle of restitution for the victims. Those managers or investors the court is satisfied knew brand x caused cancer are guilty of murder. Libertarian punishment is set by the victims or their heirs and for murder the maximum punishment is the death penalty.
The injured parties signed an agreement with the law firm allowing many of the more junior guilty parties to buy themselves out of their punishment by selling all their possessions including their homes, with the money being paid in compensation to the victims and their families after covering the legal and research costs.

The managing director and senior executive team are executed at the request of the victims. The share price plummets costing individual investors most of their life savings.

Other executives see this and decide that deception is very risky.
Investors see increased risks in the food and drink industry and refuse to get involved with any company unless they hire an independent research firm to confirm the safety of all products before launch.
Junior managers and employees refuse to work for food companies that don’t allow staff association appointed researchers to check product safety before launch.

In the coming months Brand P, Brand Q and Brand R are retired and withdrawn from the market. Incidences of unexplained cancer fall steadily.

To be clear there is no system that will ensure nobody is ever deceived.
You cannot regulate and investigate everything so you need consumer or academic suspicions to uncover potential malpractice.
Private, profit motivated law firms and research companies are structurally more responsive then fixed budget bureaucracies.
There are no conflicts of interest between a victim and the criminal who has harmed them, these are possible between criminal and state.
State regulation and limited liability protection creates moral hazard for Executives, employees and investors. Libertarian restitutional justice and personal liability removes this.

Another question from @simonr916

Without the state, how will money work?

I’m not an economist so this is genuine musing here but the monetary system, as it currently works, relies upon states to under-write and guarantee currency, set interest rates and control supply. I have no idea how this whole system would work in a libertarian world.

This is a relatively simple one.

In the beginning of society trade took place by way of barter. If I wanted your pig and you wanted my goat, we would agree and simply swap. If we agreed that your pig was worth more than my goat, I might have to throw in a chicken or two to close the transaction.

The problem with such a system is that it is very inefficient.

If I want shoes and I have hens and you have shoes but want turnips then we can’t trade directly. I have to find a third party who will trade hens for turnips before I can get the shoes I want.

When people can’t trade for directly what they want, they will trade for items that have a larger potential trade audience. E.g. If you offer singing lessons, you would rather exchange them for corn, which many people will want, rather than quantum physics lessons, which have a much smaller market.

Over time certain trade goods gain the status of currency. Everyone will trade for them and everyone will accept them. In many societies the trade goods that gained the status of currency were precious metals like gold and silver. These had the benefit of being durable and divisible and relatively easy to store. Nobody was forced to accept them in exchange but almost everyone did.

Economies have functioned for thousands of years, using precious metals as money.

One of the modern problems with precious metals is that for large transactions they can be quite cumbersome and dangerous to move around. The solution was to store the precious metals in private bank vaults and instead transport around and deal with certificates of ownership.

The gold could stay secure in the vault and you could buy for example a house by simply transferring the ownership certificate to the gold in the bank vault.

Any private bank could hold gold deposits and issue their own certificates of ownership. Referred to as Bank Notes. Ownership entitlements could of course also be transferred by cards, cheques, etc.

This is how money would work in a libertarian system and how money worked for most of human history.

The state changed the free market system in three main ways:

1. Granting itself a monopoly on the issuing of bank notes in the USA in 1863  in the United Kingdom in 1844

2.By breaking the link between currency physical trade goods, i.e. gold. This happened as recently as 1971 when the United States totally abandoned the Gold Standard

3. Allowing Fractional reserve banking. This gives the bank a legal right to issue more notes than there is gold in the vaults.

A libertarian society would revert back to the system used in the free market from the dawn of the first trading nations up until the time of  these three catastrophic state interventions.

For further reading on money and banking try:

The Mystery of Banking – Murray Rothbard
The Theory of Money & Credit – Ludwig Von Mises

@Simon916 has raised a number of questions about libertarian views. There are 11 in total and all are sensible questions. I will not go through them in order, I will deal with the what I consider the weakest points first and work through to the strongest.

“If Libertarians hold that it is morally wrong for the state to take their money in taxes, why do they not take the principled stand against this moral wrong and refuse to pay tax in the full knowledge of the consequences? Why do they not refuse to use services paid for through immoral means?

I suspect that most libertarians are not living in such desperate
circumstances, or lack the necessary capacity for such absolute self
sacrifice, required to take the drastic action required to bring about
social change in the face of a moral wrong.”

There are two distinct point here.

1. Why don’t libertarians refuse to pay taxes
2. Why do libertarians use services funded by taxes

For libertarians the decision on the first point is simply a choice between two evils. Pay taxes that you think are unjust or have your liberty taken away and spend part of your life in prison!

If a burglar holds a knife to your throat and says open the safe or I will murder you. It is rational to open the safe. It does not imply any hypocrisy to subsequently assert that you are against burglary.

If everyone chose to die rather than open their safe, it would over time change society. Burglars would get no benefit and seek other ways to operate. This would be good for society, but a lot to ask of the first few thousand victims and their families.

The same argument can be raised against socialists. If they feel it is morally wrong for large inequalities in wealth to exist, why don’t they simply rob the rich and give to themselves and take the consequences?

Decisions made under threat of force do not shed any light on the morality of the person being threatened.

I don’t think this is a valid criticism of libertarians. It might be a criticism of humanity that we prefer self preservation to martyrdom, but that is a more general philosophical issue.

The second point is why do libertarians use services funded by taxation. The implication being that it is hypocritical to take the benefits of taxation, whilst opposing it.

A specific example of this point that comes up a lot on Twitter, not in this case from @Simon916, is the claim that Ayn Rand was a hypocrite for excepting welfare and state medical assistance in her final years. I will use Ayn Rand’s own words on the subject (made long before she became ill) to explain the point:

“The same moral principles and considerations apply to the issue of accepting social security, unemployment insurance or other payments of that kind. It is obvious, in such cases, that a man receives his own money which was taken from him by force, directly and specifically, without his consent, against his own choice. Those who advocated such laws are morally guilty, since they assumed the “right” to force employers and unwilling co-workers. But the victims, who opposed such laws, have a clear right to any refund of their own money—and they would not advance the cause of freedom if they left their money, unclaimed, for the benefit of the welfare-state administration.“

The Objectivist, June, 1966

So taking benefits from the state, at least up to the value of any tax you have paid, is simply restitution. The return of your rightful property, taken by the state without your consent.

What if you consume more in benefits than you have paid in taxes?

In many cases there is simply no alternative to using taxation funded services. E.g. If you want to have a crime investigated and a criminal punished the state has granted itself a monopoly on the provision of this service. If you want to use the road network to travel, the state owns virtually all the roads.

To quote Ayn Rand again:

“ The victims do not have to add self-inflicted martyrdom to the injury done to them by others; they do not have to let the looters profit doubly, by letting them distribute the money exclusively to the parasites who clamored for it.“

The equivalent argument to socialists would be that they should starve rather than eat food produced by profit making private corporations or live in the dark rather than use energy created by big oil & gas companies.

If you have no alternatives in the environment you find yourself in, it is not hypocrisy to make rational self serving choices within that framework, and still oppose the framework.