Julian Simon and the Welfare State: Are Libertarians Social Malthusians?

The Libertarian/right are a fickle bunch, on the one hand they tell us that we need not worry about unlimited growth, that the Malthusian theories are incorrect and that we should all read Julian Simon to see why.  However, when it comes to social resources, they become distinctly Malthusian, things like universal healthcare they say, will lead to incredible scarcity, complete with terrifying tales of people dying while waiting in line, absurdly unequal doctor to patient ratios, a worse life for all of us.

But yet, when the countries that have implanted such systems are looked at, it becomes apparent that their tales of doom are not as accurate as they claim.  Perhaps my Libertarian friends need to re-read Julian Simon to see why.

When I first read Simon, I was admittedly quite skeptical, as are most people who do.  For those of you who are unfamiliar with his work, Julian Simon was a Chicago School economist best known for his book “The Ultimate Resource”.  Simon’s fascinating vision is bold, he believes that the Malthusian theories of ever-depleting resources and ever worsening material reality for humanity are wrong.  We will not run out of resources, even as the population increases he says, in fact the long term outlook for commodities should be bearish, that is, the price of things like oil and metals, finite resources, will be lower in the future than it is now.

Crazy, right?  That’s what I thought too, but as I explored his theory more, I realized that Simon may have a point.  The theory goes that as demand increases for a commodity, so will the price, however, rather than fizzle into oblivion, it will reach a point where the cost becomes so high that markets will seek innovations which lead to greater efficiency, or substitutes for the good.  As a result these innovations will decrease the scarcity of the good, and in fact the price will go down eventually.  Essentially the price outlook for all commodities should be one of a giant bell curve, the price rises, reaches a peak, and then innovation and substitution will kick in and the price decreases.  For example, over 100 years ago whales were the primary source of heating oil, they were famously hunted to the point that they were on the verge of extinction, anyone living 150 years ago could reasonably assume that whales would be gone from the earth eventually.  However, there came a point that the price of heating oil was high enough that demand increased for substitution, and eventually a man named Edwin Drake figured out a way to drill for a new kind of heating oil, called “rock oil”.  This proved to be a success, and soon kerosene replaced whale oil as the main source.  Furthermore, the drilling techniques were perfected and kerosene proved to be even cheaper than whale oil.  Soon the hunting of whales for oil ceased to be a viable industry, and today we have more whales than we did 100 years ago. 

Another example is in wood, for centuries wood was the dominant fuel source.  It was used for both household heating and cooking as well as industry like iron smelting.  Nearly all of the forests in North America were chopped down at some point in time, very few virgin forests remain in the northeast.  The amount of wood decreased, erosion caused damage, and it was becoming harder and harder to find cheap wood for fuel.  But in places like the hills of Pennsylvania and West Virginia a new fuel was being discovered: coal.  At first the mining of coal was ineffective as it was cheaper to find wood, but as forests became increasingly scarce, the opportunity cost changed.  Soon mining of coal became more widespread, innovations made it cheaper than wood, and processes such as coking proved it to be superior for industry, this helped to spur the steel industry.  Today we again find more forests than we did 150 years ago. 

The more you understand Simon’s theories the more convincing they become, at the center of it is a deep faith in the ingenuity of humanity.  If the human mind, which Simon called the “ultimate resource” was properly utilized, innovation and responses to increased demand can deal with threats of scarcity, and in fact our society will enjoy further and further abundance and prosperity. 

Libertarians often tout Simon when responding to criticisms of environmental strain and resource scarcity.  And to be fair, the criticisms have some validity, we should still seek to curb harmful activities and not go overboard.  But I agree with many of the Simon fans that a focus should be on innovation and proper use of human resource, rather than austerity.   However the economic liberals become staunch Malthusians when it comes to things like the welfare state or green technology.  In their mind something like universal healthcare will invariably lead to a Malthusian spiral in which we all die.  This kind of Jekyll and Hyde hypocrisy is common among the laissez faire crowd, on the one hand they will tell you that things like the bank bailouts aren’t needed because the market is strong enough to bounce back, yet at the same time they seem to attach an apocalyptic outlook for the slightest of things like Environmental regulations and Social Security.  Very strange indeed.

Libertarians need to stop being so Malthusian and listen to Julian Simon.  Something like Universal Healthcare, if done correctly would not lead to an epic collapse.  If everyone in the country could afford healthcare it would indeed spike demand, however, would it be the end of times?  Of course not, the increase in demand would cause a corresponding incentive for innovation, the obvious job opportunities would lead more people to med school, greater use of creative innovations like use of LPNs and better preventative and screening technologies would occur.  In other words, the healthcare market would expand so the supply meets the demand, and if human ingenuity is used correctly, we may even expect that these innovations would be cheaper than their predecessors, thus healthcare in the long run may actually become progressively cheaper.  This is classic Simonian analysis here.  And of course this is why universal healthcare has not caused doomsday scenarios in the countries that have it.  As long as we do not stomp on opportunity and the freedom for medical providers to innovate and expand, we shouldn’t expect it be bad in the long run at all. 

Once you reach this understanding the world opens up and becomes an exciting place.  Could we create an economy that combines the best of both capitalist and socialist features?  Could the demand boosting aspects of socialized programs be complimented by a capitalist supply side?  I cannot say for sure, but with each day I grow more and more convinced that if the “ultimate resource” of humanity is properly utilized, we should expect to see a better world.  The ingenuity of humanity should never be underestimated.

And a cheaper and universal healthcare system would be utilizing the ultimate resource, the decrease in medical fees would free up capital to be invested in other purposes to help people achieve their goals and dreams.  Things like social security for old age and disability decrease the burden on households to cover those immediate needs. Thus the children of a disabled or elderly person, instead of having higher time preference and having to work quick paying, low skilled jobs to cover immediate expenses for their family members, could be relieved of that burden by a welfare state and instead be able to make long term investments in themselves like education and training.  This would help them utilize their full potential.  Imagine how many potential Einsteins and DaVincis, Beethovens, Cricks and Curies have wasted their lives away working in a farm field or a factory because they were forced to meet immediate expenses to pay for their elderly parents or disabled spouse, or to simply cover basic costs like food and shelter.  Imagine if they had been able to instead afford the long term investments in themselves by becoming educated or pursuing their passions.  Imagine the benefit that would have brought humanity.  Imagine if we could have a world where human capital is not being wasted.  Imagine a world where the ultimate resource is used in the most efficient manner.

I am not a Malthusian, I believe that we can achieve a better world.  Free market capitalism only gets us halfway there, it still does not properly utilize human ingenuity, socialism is also only a halfway point, it does not utilize the innovating power of the market and the incentives of privatization.  We could see a better world.  I challenge all the free marketeers and socialists out there to open their minds, allow themselves to ask “what if?”  The safety net of the government compliments markets if done correctly.  We truly could have a better world.  Open your mind and stop being so Malthusian. 


3 responses to “Julian Simon and the Welfare State: Are Libertarians Social Malthusians?”

  1. noteconomist says :

    Socialism is supposed to be that halfway point between free-market capitalism and communism. So it’s actually free-markets that get it half right, communists that get it half-right, and socialists (in the democratic, liberal. market-friendly sense) straddle the two extremes.

    If we embrace markets for most consumer products, but control allocation through public regulation and ownership for key industries like…aircraft building (anyone who calls Boeing a purely free market private organization is on crack), healthcare provision, etc. — that’s a socialistic outcome. It’s acknowledging when free markets work, with competitive profit-seeking leading to efficient allocations … and when they don’t. And different industries require different degrees of regulation to ensure a socially optimal outcome.

    The fact is that free markets (or markets of any sort) can’t exist without government intervention and maintenance. And communistic societies can’t exist without markets and individual incentives rearing their ugly heads to provide some sensible resource allocation. If we’re going to craft public policy that’s yields the best social outcome controlling for our basic desires for freedom and basic human instincts, then it’s going to have to be through careful experimentation and understanding what works where and why, instead of clinging to failed ideologies.

    The neoliberals are looking an awful lot like the old Marxists who claimed that their true vision has merely not been implemented properly, and that’s why their ideas have failed in recent past. That’s why you get nonsense from right-wingers like Niall Ferguson claiming that now, of all times, we need deregulation to spur growth.

    • thehobbesian says :

      Yes that is true, and much of the point of this article was to show how Marx and Julian Simon weren’t too far apart in their idea of what human potential really is. And both of them in my opinion were not completely correct about the underlying mechanics of bringing it out. We know that what makes the argument for capitalism so powerful is that it really does create not only incentives for innovation, but it also helps to create channels whereby individuals can find a niche which allows them to contribute to society in ways which positively benefit all of us. This was something that the socialists didn’t fully recognize, but by this point in time its beyond argument that market economies utilize this niche finding mechanism more efficiently. However, at the same time, free market capitalism, does cause human capital to be underutilized in various ways, especially with things like poverty traps in which a great amount of the humans on earth simply don’t have the resources to find a niche which truly maximizes their potential. For example, a brilliant but impoverished person works manual labor their whole life because they were born in a ghetto in India and never had a chance to get an education. And given the sheer amount of impoverished people who have ever lived, that really does represent a huge opportunity cost for humanity! Even scarier is the costs of what happens when intelligent people like Joseph Kony or Adolph Hitler are raised in repressive environments, but rather than simply seeing their human capital wasted, they expressed it in a way which caused great harm. There is a very real argument that perverse incentives of such things may be worse than the human capital being wasted.

      In my opinion, free markets were the first step, they destroyed feudalism and the legal and cultural barriers which kept people from finding a niche and utilizing their human capital in a way which truly benefits humanity and makes our lives better. However, it still wastes much human capital. The reason why Simon’s arguments are so powerful is because free markets were vastly superior to feudalism in utilizing human capital and allowing for the free exchange of ideas. But, if you consider the fact that almost 2/3 of the world’s population lives in poverty today, perhaps through things like aid to the poor, and equality of opportunity, we could maximize this process of maximizing the utility of human capital to an extent which could be simply mind boggling in how much progress we would experience. Just think, if all the progress seen in the past 500 years was the result of freeing up just one tiny portion of humanity and giving them the opportunity to contribute, imagine how much progress we could see if we could extend this process to all of humanity!

      I think that Simon fell into the same old neoliberal trap of assuming that free markets were the best way to utilize this simply because of the ideological stubbornness you mention. Karl Marx fell into this trap as well but on the opposite side. The Neoliberals assume that the benefits of capitalism are because free market capitalism is simply the best way of doing things, rather than recognizing that the benefits of the free market come from the underlying mechanics of what is actually going on here, which is really its ability to enable connections between people to be made and human capital to be better utilized. And once we understand the mechanics of this, and that it is the mechanics driving this process rather than the entire system as a whole, we may be able to see ways in which we can have even more benefits, correct the bad parts about capitalism and maximize the positive developments seen in free markets. That’s really what I believe, and I tend to shy away from the capitalism/socialism dichotomy because I ultimately see the mechanics as the most important thing, rather than vast prescriptions. But I think that this is an important discussion which people should be having, and often times it is pure ideological stubbornness which impedes this conversation from progressing.

    • thehobbesian says :

      But yes I do generally agree with you that what I am arguing for is a “socialist outcome” as you describe it. Its just that socialist is such a loaded term in this day and age and means a lot of things, many of them not very good things, and as such I tend to shy away from using the term in that sense since many people will just get turned off as soon as they hear that word. And this post was designed to intrigue more market-oriented thinkers by taking a free market hero like Simon and then using his insights to justify something that would appear to go against the free market orthodoxy, yet at the same time prove that it does not violate Simon’s theory much at all. Its that kind of cognitive dissonance that gets people’s gears working, and hopefully it leads to people looking at things in a new and different way. Whereas saying “let’s do socialism” turns many people off right from the start, and even if my arguments are good, it still won’t be as effective as “tricking” people into breaking past prior held views by slowly leading them into an argument which forces them to consider a different view. Because like I said, its the mechanics that matter, not the system or the name we give it. And the word socialism tends to have more to do with an ideology and a system than mechanics.

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