By Michael Munger - FEE
Our America Initiative Advisory Council Member of Monetary Policy & Economic Growth
We don't need nations, flags, and armies to make us prosperous
When I tell Duke freshmen my version of the argument for liberty, they often scoff, “If this is right, how come I’ve never heard it before?” I try to be conciliatory. I offer the kids time to go text their parents. They need to sue those elite private high schools for failing to educate them in even the basics of how societies work, and why so many societies fail to work.
Okay, so that’s not all that conciliatory. And my answer plays to mixed reviews, at best.
But it’s the truth. How can it be that some of the world’s most educated young people have never heard the concise version of the argument for voluntary private cooperation? I want to present here the version I have found most useful. And by “useful” I mean profoundly unsettling to people who hear it for the first time.
“Markets” are not the point
To start with, the argument for liberty is not an argument for “markets.” The market vs. State dichotomy was dreamed up by German sociologists in the nineteenth century. Don’t buy into that dichotomy; it’s a rhetorical straitjacket, and in any case it's not our best argument.
The question is how best to achieve the myriad benefits of voluntary private cooperation, or VPC. Markets are part of that, a useful way of achieving prosperity, but a variety of other emergent social arrangements—more properly viewed under the rubric “society”—are also crucial for prosperity.
The first argument I usually hear, especially from people hearing about VPC for the first time, is this: “If markets are so great, why is most of the world poor?” The problem is that poverty is not what needs to be explained. Poverty is what happens when groups of people fail to cooperate, or are prevented from finding ways to cooperate. Cooperation is in our genes; the ability to be social is a big part of what makes us human. It takes actions by powerful actors such as states, or cruel accidents such as deep historical or ethnic animosities, to prevent people from cooperating. Everywhere you look, if people are prosperous it’s because they are cooperating, working together. If people are desperately poor, it’s because they are denied some of the means of cooperating, the institutions for reducing the transaction costs of decentralized VPC.
So forget about explaining poverty. We need to work on understanding prosperity.
There are two reason that VPC is the core of human prosperity and flourishing.
1. Exchange and cooperation: If each of us has an apple and a banana, and I like apple pie and you like banana crème pie, each of us can improve our lot by cooperating. I give you a banana, you give me an apple, and the world is a better place. And the world is better even if there is no change in the total size of our pies. The total amount of apples and bananas is the same, but each of us is happier.
But there is no reason to fetishize exchange. (That’s the “markets vs. social/state” dichotomy; don’t give away the farm here.) Nobel Prize-winner James Buchanan’s central insight was that cooperative arrangements among groups of people are just “politics as exchange.” Nonmarket forms of exchange, in which we cooperate to achieve ends that we all agree are mutually beneficial, may be even more important than market exchanges. Banding together for collective protection and taking full advantage of emergent institutions such as a language, property rights, and a currency are all powerful tools of VPC.
If we cooperate, we can use existing resources much better by redirecting those resources toward uses people value more. So even if we are only thinking of cooperation in a static sense, with a fixed pie, we are all better off if we cooperate. Cooperation is just a kind of sharing, so long as every cooperative arrangement is voluntary. The only way you and I agree with a new arrangement is if each of us is better off.
2. Comparative advantage/division of labor: Still, we don’t need to be satisfied with making better use of a static pie. Working together and becoming more dependent on each other, we can also make the pie bigger. There is no reason to expect that each of us is well-suited to produce the things we happen to like. And even if we are, we can produce more of it by working together.
Remember, I like apples and you like bananas. But I live on tropical land in a warm climate that makes producing apples difficult. You live in a much cooler place, where growing your favored bananas would be prohibitively expensive. We can specialize in whatever we are relatively best at. I grow bananas, you grow apples, and we trade. Specialization allows us to increase the variety and complexity of mutually beneficial outcomes.
Interestingly, this would be true even one of the parties is actually better at producing both apples and bananas; David Ricardo’s “comparative advantage” concept shows that both parties are better off if they specialize, even if it appears that the less productive person can’t possibly compete. The reason is that the opportunity costs of action are different; that’s all that is necessary for there to be potential benefits from cooperation.
But there is no reason to fetishize comparative advantage. In fact, true instances of deterministic comparative advantage are rare. The real power from specialization comes from division of labor, or the enormous economies of scale that come from synergy. Synergy can result from improvements in dexterity, tool design, and capital investment in a production process composed of many small steps in a production line, or from innovations, using the entrepreneurial imagination to see around corners. Synergy is not created by the sort of deterministic accidents of weather, soil quality, or physical features of the earth that economists obsess about. Producing wool and port depend on location; human ingenuity can create synergy anywhere that division of labor can be promoted. All the important dynamic gains from exchange are created by human action, by VPC.
The street porter and the philosopher
Entrepreneurs are more likely to be visionaries than geographers or engineers. Argentina has a comparative advantage, probably an absolute advantage, in producing beef, because of its climate, soil conditions, and plentiful land in the pampas. But Argentina is poor. Singapore has next to nothing, and doesn’t produce much. But Singapore built both physical (port facilities, storage, housing) and economic (rule of law, property rights, a sophisticated financial system) institutions to promote cooperation. And Singapore is rich because those institutions help give rise to powerful synergies.
One could argue, of course, that Singapore has a comparative advantage in trade because of its location at the southern tip of the Malay Peninsula, connecting the Strait of Malacca with all of East Asia. But other nations not blessed with such location rents have used the same model. Portugal in the fifteenth century, Spain and Holland in the sixteenth, and England in the eighteenth century all built huge, prosperous societies by channeling the energies of citizens toward cooperation. None of these countries played well with others, perhaps, but internally they built synergies, so that for each their prosperity and importance in the world was multiplied far beyond what you would have expected just by looking at their populations, their climates, or their soil quality.
Humans build synergies by fostering VPC. Adam Smith’s example of the philosopher and the porter is sometimes quoted, but not well understood. The benefits to specialization need not be innate: The street porter might well have been a philosopher if he had had access to the tools that promote VPC. Education and social mobility mean that where one is born has little to do with where one ends up.
The plasticity of human abilities is at least matched by the malleability of social and economic institutions. Human societies need only be limited by what we can think of together. The development of specialization and the consequent increase in productive capacity is a socially constructed process, like Smith’s “philosopher”—the result of thousands of hours of study, practice, and learning. Smith’s porter didn’t fail to become a philosopher because of comparative advantage. The porter just failed (or was denied a chance, by social prejudice) to specialize.
To be useful, cooperation must be destructive
The flaw in division of labor is also its virtue. Division of labor and specialization create a setting where only a few people in society are remotely self-sufficient. Further, the size of the “market”—more accurately, the horizon of organized cooperative production—limits the gains from division of labor and specialization. If I hire dozens of people and automate my production of apple pie filling, I can produce more than you, your family, your village, or perhaps even your entire nation can consume. I have to look for new customers, expanding both the locus of dependency and the extent of improved welfare from increased opportunities to trade.
The same is true for the benefits of specialization. In a village of five people, the medical specialist might know first aid and have a kit composed of Band-Aids and compression bands for sprains. A city of five million will have surgeons who have invented new techniques for performing complex procedures on retinas, the brain, and exotic enhancements in appearance through plastic surgery. A village of 250 people may have a guy who can play the fiddle; a city of 250,000 has an orchestra. Division of labor, and specialization, is limited by the extent of the VPC.
The power of that statement, taken directly from Adam Smith, is the basis of the argument for VPC. People are assets, not liabilities. Larger populations, larger groups available to work together, and more extensive areas of peaceful cooperation allow greater specialization. Four people in a production line can make 10 times as much as two people; 10 people can make a thousand times more. Larger groups and increased cooperation create nearly limitless opportunities for specialization: not just making refrigerators, but making music, art, and other things that may be hard to define or predict.
VPC allows huge numbers of people who don't know each other to begin to trust each other, to depend on each other. Emile Durkheim, the famed German social theorist, recognized this explicitly, and correctly noted that the market part of division of labor is the least important aspect of why we depend on it. He said, in his masterwork Division of Labour in Society, "the economic services that [division of labor] can render are insignificant compared with the moral effect that it produces, and its true function is to create between two or more people a feeling of solidarity."
That "feeling of solidarity" is society—voluntary, uncoerced, natural human society. We don't need nations, and we don't need flags and armies to make us prosperous. All we need is voluntary private cooperation, and the feeling of solidarity and prosperous interdependence that comes from human creativity unleashed.