If people know anything about libertarians and classical liberals—and increasingly they do, thanks to the efforts of Ron Paul and others—they know that we place great value on individual freedom. They may know that we see little place for the state either in the bedrooms or in the boardrooms of the nation, and that we favour individual liberty above competing values like explicit egalitarianism or enforced solidarity.
What is perhaps less well known, and what is worth emphasizing as foreign policy hawks rattle their sabres over Iran of late, is the way in which liberty promotes peace. Although Ron Paul is certainly both the peace candidate as well as the freedom candidate in the ongoing race to become the Republican nominee for president, the exact nature of the connection between individual freedom and peace is not widely appreciated. Sure, Paul wants to bring home the troops, but does that really have anything to do with his support for free markets? As it turns out, peace has quite a lot to do with free markets, and a good part of Filip Palda’s new book,Pareto’s Republic and the New Science of Peace, is devoted to explaining and exploring that connection.
Fighting over Resources
Bastiat is famously quoted as having said that “if goods don’t cross borders, armies will,” and there is empirical support for this plausible claim. Nations that trade have a disincentive to fight each other. But peace is not merely the state of affairs that exists between nations that are not at war; it is also the state of affairs that exists between individuals who are not at war, and this is where Palda begins: “This book is about the peace that people arrange between themselves, face to face when they confront each other to dispute the control of some resource.” Most conflict that endures, Palda writes, is mainly about who will control some resource or another.
For peace to reign, people do not need to love their neighbours. What they do need is to feel that there is some kind of balance between what they put into society and what they get out. Some believe that this balance can best be achieved by centralized control, in which the use of resources is dictated by government exercising broad coercive power. But central planning famously suffers from an intractable calculation problem: who is contributing what, and who wants how much of what, and how much do they want it? Central planning also concentrates power in the hands of a few and creates incentives for them to steal. Furthermore, democracy, which Palda calls “the only feasible check on the venality of rulers,” is not enough of a check when those rulers hold the purse strings. “By putting all of society’s resources under the control of government, democracy becomes a contest between interest groups to divide the riches of the state, a situation that leads ultimately to civil war.” Short of this extreme, the contest between interest groups nonetheless causes a great deal of strife.
Fortunately, there is an alternative: “Instead of having someone above us keep accounts on our behalf,” Palda writes, “we might think of balancing these ledgers by ourselves.” Private ownership over one’s own labour and over physical resources “empowers the individual to make calculations about the worth of his or her property and how it should be used.” While individuals may err, they can generally be trusted to have more insight into their own desires than a distant central planner dealing in blunt aggregates. Privately owned property also brings into play the powerful force of competition, which requires individuals to reveal what they are actually willing to exchange for one another’s resources. This encourages voluntary exchanges to mutual benefit, and when a society maximizes these gains from trade, it achieves what is known in economics as Pareto efficiency, the inspiration for Palda’s book title.
The fact that decentralized ownership of resources leads to more peaceful and prosperous societies than centralized ownership is supported, as Palda points out, by comparisons of nations that are similar in every other regard, like North and South Korea, Haiti and the Dominican Republic, or East and West Germany before reunification. In each case, the country with more decentralized ownership is (or was) clearly more peaceful and prosperous.
But are there limits to the power of decentralization? One indication that there are such limits comes from the way corporations operate. Drawing on the work of Nobel Prize winning economist Ronald Coase’s famous 1937 article “The Nature of the Firm,” Palda writes, “Corporations do not rely on decentralized bargaining over property rights among their employees to get things done, but rather on vertical lines of command and cooperation.” It would simply be too time-consuming, and hence too expensive, to have to negotiate every single transaction individually, and so some centralization of property rights is advantageous.
Importantly, the centralization that happens in a firm is voluntary. Employees agree to hand over their labour to someone else’s control for prescribed periods of time and for a certain set of purposes. If employees feel their employers or managers are overstepping their bounds, or if they simply wish to pursue greener pastures, they are free to terminate their agreements and retake control over their labour, subject only to whatever restrictions they agreed upon when negotiating their employment.
Does this mean that all decision-making can be decentralized, or at least that any advantageous centralization can be voluntary? In other words, is there any need in Pareto’s Republic for a government that exercises coercive power for purposes other than the protection of life, liberty, and property? Palda thinks there is such a need: “In the case of society, just as in the case of firms, sometimes property rights are too costly to pay for and a hierarchical solution to conflicts is required.” Government intervention is justified, he elaborates, in order “to resolve disputes where property rights cannot be established and exchanged in a private market.” These “market failures,” as they are commonly called, come in two flavours: public goods and tragedies of the commons.
Who Will Light the Streets?
As an example of a public good, Palda discusses the example of street lamps, which provide a service to passersby. But it is not easy to imagine how to charge these passersby for this service in a non-cumbersome manner (in the jargon, the service is non-excludable), which is why government has to step in and provide the service, paying for it with the proceeds from coerced taxation.
It is interesting that Palda chooses an example so similar to the classic example of a public good, namely the lighthouse, but does not mention Ronald Coase’s other famous article, “The Lighthouse in Economics.” In this article, Coase argues that contrary to popular belief, private lighthouses did in fact exist in England at one point, surviving by charging fees at nearby ports. Though controversial, Coase’s observations at least suggest that we need to be careful about assigning something the status of a public good, and Palda, a professor of economics and a Senior Fellow with the Fraser Institute, is surely aware of this take on the issue. Indeed, libertarians often argue that roads themselves need not be treated as public goods, which obviates the need to treat their lighting as a public good either.
To his credit, with regard to market failures, Palda does acknowledge that technological advances can provide ways of turning public goods into private goods and of resolving tragedies of the commons (like overfishing) by finding new ways of establishing clear, secure, manageable property rights. “When such an advance occurs,” he writes, “government should abandon its stewardship of the resource in question.” The rub, of course, is that generally speaking, politicians and government bureaucrats are loathe to relinquish any of their accumulated powers. Also, their “stewardship” may itself delay the discovery of the very technologies that would allow for the development of stable private property rights.
Also worth considering is the fact that governments may make market failures worse rather than better, as the Canadian government did with its mismanagement of the Atlantic cod fisheries. Furthermore, as Palda writes, “most of government spending by the end of the 20th century was devoted to redistributing money rather than spending that money on building bridges and funding other forms of infrastructure.” Getting to Pareto’s Republic, it seems, is no easy task.
About his book, Palda writes, “No prerequisites are needed to understand it except a curiosity about a principle that might one day become humanity’s salvation.” I can attest that readers need not possess a degree in economics to find much that is worthwhile in Pareto’s Republic, even if I think the author is not skeptical enough about how helpful government can be in bringing about a peaceful society. But this book was not written with a reader like me in mind. It was not written to convince a libertarian to be a little bit more mainstream; it was written to convince the mainstream to become considerably more libertarian. As such, I can recommend it with few reservations and confidently assert that readers will find much valuable food for thought, and will enjoy thinking about it, if they read Pareto’s Republic. And yes, humanity’s salvation really does hang in the balance. Peace out.
I found Pareto's Republic a very useful, novel, insightful and interesting book. It is compact, well organized and written for a large audience - both for persons unfamiliar with sophisticated economic ideas and for experts in politics and economics, specifically in public choice and public finance.
Pareto's Republic pays tribute to the principle of Pareto-efficiency, which essentially says disagreements over the use of a property (physical or intellectual) can be resolved in ways that no one is made worse off and at least one person is made better off. Once people have exhausted all Pareto improvements possible, they have attained a state of Pareto Efficiency, and perhaps a state of Pareto Optimality.
The book offers some historical background to several fundamental ideas and prescriptions in economics (applied on a daily basis) that are rooted in the application of the Pareto Principle (PP). The book recognizes that conflicts often occur over how resources are or could be used and argues that the PP offers guidance on how to mitigate and sometimes completely resolve conflicts.
Many advanced economics theories and ideas are built on the foundations of the PP, which we take for granted or are unaware of. The argument advanced by Palda is focused on the importance of clear and enforceable property rights. Parties with the property rights are then able to use, modify, and transfer their property for optimal (most productive) use. The book does not pretend to suggest or address issues of fairness, which is altogether another subject matter, and Palda is sincere in not over-extending the PP or over-reaching.
The book clearly states it is impossible to allocate all resources using property rights because sometimes these rights cannot be created or determined. When property rights are absent, private transactions in markets fail to correctly balance social accounts. In such cases, government may step in to correct the imbalances, as it may in the case of public goods, externalities (mitigating negative ones and enhancing positive ones) and common property resources. The book then emphasizes that as technology and the environment evolve, government should reconsider and re-evaluate if it would be socially efficient to withdraw from the economic activity and allow the transactions to be conducted, privately, in open decentralized markets.
Palda applies PP to government spending, taxation and politics and a variety of other public choice and public policy issues. Indeed, the book is compact, lucid and well argued, which most people with economic and intellectual curiosity should and probably would find refreshing, novel, and interesting.