Assessing State Capacity Libertarianism

Ryan Murphy and Colin O’Reilly suddenly have a 33 pp. (yes substantive) paper on my January 1 blog post on State Capacity Libertarianism (on speed, perhaps they have learned from a master).  Here is the abstract:

Cowen (2020) argues for a redirection of effort towards “State Capacity Libertarianism,” which keeps the core of policy proposals from libertarianism intact while emphasizing a select set of policies aimed at furthering economic growth. These policies center on the ability of the state to accomplish that which it sets out to accomplish, i.e. state capacity. This paper interprets Cowen’s proposal in terms of an interaction between economic freedom and state capacity. Using four measures of state capacity, it finds that state capacity and economic freedom are neither additive nor complementary. Rather, they are substitutes for one another. These results are uncomfortable for conventional libertarianism, for the advocates of state capacity, and for State Capacity Libertarianism itself. One measure of state capacity we use is a novel measure using data from the Varieties of Democracy dataset, which may be useful for researchers in other contexts.

I am very pleased (and flattered) they undertook this investigation.  In terms of response on the particulars, I would say that State Capacity Libertarianism is about living standard levels, not marginal growth rates holding per capita income constant (as they do), which tends to drain off the benefits of state capacity.  You can run into similar misspecification problems by regressing against growth rates for the particular American states, whereas again the levels ought to be central to the analysis.  I readily admit the levels are not easy to handle econometrically, mostly because (outside of some oil principalities) “all good things go together,” and the correct causal model is not well understood.

In any case, the debate will go on.


One problem with using living standards levels instead of rates is that levels are accumulated over a longer period than a human lifetime, some would argue over hundreds of years. The countries that have the highest levels of living standards today are by and large rich today because they had steady development since the 1800s, not because their institutions today are better (and to the extent they are better, this is primarily reverse causality whereby having wealth and security reduces the zero-sum worldview that leads to zero-sum institutions). Looking at rates has problems too as one would naturally expect higher growth rates in poor countries due to convergence. Perhaps the most reasonable compromise between these two extremes would look at amount of growth in absolute dollar terms rather than percentages?

Another issue with state capacity libertarianism is the fact that we live in a democracy and your people are not going to be in power all the time. Therefore, state capacity at some point is going to be used for evil, and it is accordingly good to limit state capacity even when good people are in charge.

Can clean drinking water ever be used for evil?

Of course it can. And there is a very long history of evil people doing that very thing. Some of the oldest institutions in North America have basis in settling access to water issues. One of the justifications of granting power to a State is to prevent the settling of these contentious
disputes by violence.

If you listen to Richard Epstein for a reasonable length of time, eventually he will mention riparian rights established in Roman law. This is about access to water, and there is very old jurisprudence in the Roman system litigating the various subtleties of this issue.

One could say that the duration of a system of government can be predicted based on their ability to manage access to water successfully.

It seems that water conflicts stem from a *lack* of clean drinking water.

Most conflicts come from access to a scarce resource. And with water many other interests come into play, valid interests such as private property. Many properties where I live have on their deeds easements to allow others access to water.

And the state capacity of value here isn't simply providing water, although it does that in towns and cities, it is in protecting access to water through water rights.

Another interesting thing that happens with state capacity is that when it gets carried away with grandiose schemes it neglects these basic functions of the state to the detriment of everyone.

Socialism in a green dress.

state capacity libertarianism is an oxymoron

This is the right site for anyone who really wants to
understand this topic. You know a whole lot its almost tough to
argue with you (not that I really would want to…HaHa). You certainly put a fresh spin on a topic which has been written about for many years.
Great stuff, just wonderful!

+1, and on your first point, Alex Tabarrok said something similar years ago, right here on this very blog.

I think it's pretty clear this isn't true. As a practical matter, WWII was a reboot for most of the nations in the world that are now wealthy.

No it wasn’t. World War II caused physical destruction in Europe and Japan but the developed countries of Europe and Japan still had all their human capital, businesses, and technology, which is why the countries that were already developed before the war like Japan and Germany were able to recover quickly while countries that were not developed before the war like the USSR, China, and the Philippines did not. Even by a raw GDP per capita measure, Japan and Germany in 1945 were wealthy countries, similar to where they were in the 1920s. The USA meanwhile suffered no destruction from the war (and the UK suffered limited destruction) but in fact gained from arms sales and technological development.

As a matter of simple math, if a country has a GDP per capita of $1,000 per year today grows GDP per capita at 5% per year (a feat few countries have managed), it will take 80 years, longer than the average human lifespan, for that country to achieve the USA’s current GDP per capita of $60,000 (and in 80 years, the USA GDP per capita would be much higher). Moreover, one of the most commonly used social mobility metrics is what percentage of kids born into the bottom 20% of the income distribution end up in the top 20% as adults. By this measure, *zero* of the countries in the bottom 20% by GDP per capita in 1970 are in the top 20% today, suggesting that social mobility between different countries is virtually nonexistent. So national wealth is mostly intergenerational, reflecting a long historical legacy rather than present-day actions.

You are now changing your argument. Steady development one thing. Human capital and know-how is something else. If you blow away much of a nation's capital, and they quickly claw back to prosperity like Germany and Japan did, your first argument is wrong.

Isn't it myopia to say "one thing" can be used for evil?

If in fact anything, including freedom, can be used for evil, it is not in fact a great argument for doing nothing.

"it is accordingly good to limit state capacity"

I won't "politicize" this claim, but it sure is a groaner. I mean State Capacity Libertarians are for tariffs by executive order now.

Taking such a perspective almost makes questions of institutional quality unfalsifiable from a growth perspective.

Naively though you would expect countries with better institutions to have better growth relative to the frontier scaled over long terms (because lower probability that growth can be attributed to fluctuating or chance conditions, and to catch-up).

E.g. China today probably has better functioning institutions in 2020 than Ethiopia, even though the difference between these two is that China's growth started earlier... Rates of growth wouldn't tell you that.

Suddenly? Gomer Pyle has the answer to that one.

Orchestration is one of the hallmarks of the advantages of a capitalist system. Or was that orchestras?

Operational data series they use begins in 1996 and it's not clear it really captures "state capacity". It seems like they hide the actual data and only show their regression results, which is not enlightening.

I'd add; my impression in part is that Libertarian responses, thus far, tend to proceed on the basis TC is challenging Libertarianism, in some manner calculated to increase its PR with the genpop.

But I would think he's actually challenging the "developmental state" economics of East Asia and others which propose a distinct role for the state in successful catch-up and convergence.

So the actual interesting responses will come from within "developmental economics" and Economic History and will relate to the spans and scales of growth they consider.

Hence why I am underwhelmed with "mid 90s to present, fixed country effects assumed".

"In any case, the debate will go on."

We can all agree on that much, since libertarianism is now a debating society with a lot of cranky people shocked, shocked, that what they believe so fervently isn't obvious to everyone. The Fukuyama books mentioned in the paper are excellent, by the way. Capitalism is going through a rough patch, with libertarianism being more an albatross of anti-government one-liners than anything positive. Do us a favor and call yourselves anarchists, that way people wanting a smaller government here on Earth can avoid the negative association with libertarianism.

Libertarians are about 5% of the electorate. They’re not an albatross of anything.

Capitalism in a rough patch? global extreme poverty fell from 2 billion to 734 million in 30 years.

People complain, that’s In our nature. Meanwhile, the world keeps getting better and better.

You seem to have missed the recent surge in socialism, a system of ideas that should be well past any possible surge. I separate socialism from welfare state liberalism. Also, you made my point. If capitalism has done so much for humanity recently, what explains the socialist surge? I suggest it was the response to the financial crisis in 08. If you said stand back and let it roll, you lost. That's a libertarian/anarchist view. Although libertarianism is indeed a minority view, it is , in my opinion, in the area of the right view, and prominent in the realm of ideas, as it should be. I'm in the classical liberal camp, following Hayek, Henry Simons, Frank Knight, and Michael Oakeshott, and then I would add Adam Smith, Walter Bagehot, and especially, Edmund Burke. Here's some Hayek...

"Hayek on Hayek: An Autobiographical Dialogue"

"MR. KRUEGER: I foresee some interesting discussion here and some controversy. Your main assertion, Hayek, is that planning leads to totalitarianism. Are there any qualifications you make to that statement? MR. HAYEK: Surely, there are. In the way in which you use “planning” in this discussion, it is so vague as to be almost meaningless. You seem to call all government activity planning and assume that there are people who are against all government activity. MR. MERRIAM: In other words, you do not like the American use of the word “planning” and you are introducing another one? MR. HAYEK: I do not know about the American use, and I still doubt whether it is a general use. It is your use. MR. MERRIAM: Across the street from here is the American Society of Planning Officials, with about twelve hundred members. There are hundreds of city planning boards and forty-eight state planning boards, and all kinds of planning has been going on in Washington for the last fifteen or twenty years. If you do not know that, I am reminding you of it now—and straight. MR. HAYEK: I know that, but there are a good many people in America who oppose planning who do not mean by that opposition that they think that there ought not to be any government at all. They want to confine the government to certain functions. You know, I do agree that this discussion here, as elsewhere, has been very confused. What I was trying to point out is that there are two basic and alternative methods of ordering our affairs. There is, on the one hand, the method of relying upon competition, which, if it is to be made effective, requires a good deal of government activity directed toward making it effective and toward supplementing it where it cannot be made effective."
"Hayek on Hayek: An Autobiographical Dialogue"

"MR. MERRIAM: What about the TVA? MR. HAYEK: There is a great deal of the TVA to which no economist in repute, and certainly not the laissez-faire people, will object. Flood control and building of dams are recognized functions of the government. I am under the impression that a good deal else has been tacked on to this scheme which need not have been done by public enterprise. But the principle of flood control and the like's being provided by the government is an entirely legitimate and a necessary function of the government. MR. MERRIAM: Even if it involved a development of hydroelectric power, as the TVA does? MR. HAYEK: That depends upon the circumstances. If the hydroelectric power really could not have been provided by private enterprise, I have no objection. MR. MERRIAM: That is not a matter of logic but of practical adjustment. MR. HAYEK: The whole question of whether you can or cannot create competitive conditions is a question of fact."

That's my view. Not really all that complicated philosophically, but requiring pragmatism and prudence in the real world, which is on the difficult side.

Libertarians have essentially zero impact on politics or policy. I should know, I am one (lower case L), and I have no representation at all and have never had representation. I wish it were otherwise, but the vast bulk of Americans are either like anonymous or Tom Cotton...their whole raison d’être is forcing others to do their bidding, with the threat of imprisonment or violence. It’s not about policy outcomes for them, it’s all about relative status.

I have no issue with Hayek’s logic here, but no one ever bothers to make that argument because now it’s pure rent seeking and corruption. Now we live in a low trust society, we’re closer to 2020 Nigeria than 1940’s United States. Civil society is gone. Liberals won that battle 30 years ago.

Talk to me when liberals are partnering with libertarians to build out a nuclear power grid to combat global warming. I’m ready when they are.

I’m confident it won’t happen because people like this rather watch the world burn than let anyone else rise in status. Screencap it here folks: anonymous and all Dems rather have the world burn than invest in nuclear energy.


You make some fair points.

I don't know if state capacity libertarianism is related if at all to the state owned enterprises like in China but here's an interesting link below with the remarkable (for this audience anyway) headline: "China’s state-owned companies enjoy record profits, even as private sector flounders". The Soviet economy failed because it was a flawed system is what we told ourselves last century but what's the morality tale now with China's success at doing the exact same thing the Soviets failed to do.

Even the Chinese state media link below states that's its not about public or private but about competition and cites Comcast and AT&T as being the most hated companies in America. The "regulated monopolies" approach of the US they claim leads to bloated inefficiencies while the Chinese SOEs force all 3 big telecoms they own to compete. The fact that China will lead the world in 5G while the US's telecoms write checks to members of Congress kind of bears this out, no? What does it say that the world's two largest economies prefer to have their monopolies, albeit one private the other public?

China's private sector contributes 60% of China’s GDP, responsible for 70% of innovation, 80% of urban employment and provides 90% of new jobs. Private wealth is also responsible for 70% of investment and 90% of exports.


Of note "Privatisation initiatives have been further delayed by the threat of an intensifying trade war."

There's the private sector, and then there's the 'private' sector. The CCP calls the shots even with 'private' companies like Alibaba and WeChat and China Mobile and countless others 'privately' owned and run that we've never heard of.

From liberal to classical liberal (when the original was hijacked by its opposite) to libertarian to state capacity libertarian, the philosophy gets more and more obscure. Ain’t no way this will be understood, let alone catch on. Maybe that’s the point.

I don't think Cowen should critique other people's models of his concept unless and until Cowen himself decides to model his concept. By all means, let's see how Cowen would formally specify his model, and let it be critiqued. Waiting for everyone else to do the modeling work, and then saying, "Hmmm, no, not quite..." is the easy way out.

Tyler makes a very clear exercise of demonstrating State Capacity Libertarianism in his Bloomberg article: Preparing for a Pandemic Makes Economic Sense. The title alone states that we should choose, as a matter of public health, to maintain a vaccine production sector within our boundaries despite the financial advantages of international trade. That the state, or city or county, should have the capacity to preserve public health is an economic issue. He puts numbers to this by indicating that in the event of an international pandemic there is a high risk that the price of vaccines will become irrelevant. The investment by DHHS of $226 million serves a hedge against this. He points out that China is also building state capacity by announcing public shaming for those who don’t put a pandemic ahead of politics. The economic damages from the SARS epidemic was estimated to have cost Asian economies $40 billion. The general concept that government is involved in the preservation of public health is not new. But the classification of players, actions and motivations of all parties involved, as well as attaching numbers to all of this is, what I understand, Tyler to be getting at with State Capacity Libertarianism.

(++ on the Anna Schwartz segment)

I didn't read the 33 pages, but there seems an easy answer to this:

"Using four measures of state capacity, it finds that state capacity and economic freedom are neither additive nor complementary. Rather, they are substitutes for one another."

Sure, free private enterprises could potentially do anything a state does .. but they don't. They only do those subsets of things that provide a profit model.

And not every good in the world has a profit model.

That's way there are public and private goods. The state gets involved with public goods because no one else would. We accept that even though the state is less efficient. The current situation is that the state also tries to provide private goods as well, with the same inefficiency.

He said, on the internet.

Now it's true that Apple wanted to lock people into eWorld, Microsoft into MSN, Compuserve into their little world ... and that's not really the same thing.

See, the problem here is that people can declare sup-optimal solutions to be optimal because they are private, even when they provide much less public good.

You're not accounting for the problem of the state's supplying too much of a thing and at too high a cost. Providing too much of a public good is at best wasteful and at worst harmful. The Central Utah Water Project comes quickly to mind, with its devastating effects on the ecology of the Great Basin and the malinvestment it caused in California, which still gets that water to this day.

...but, hey, what does that matter. We have more of a public good!

As I say below, true moderates can pick and choose, and aren't looking for a unified theory of why public, or private, ventures are always bad.

I don't know what the value of being a "true" moderate is. The economics of market distortions are pretty clear and pretty consistent. The phenomena of regulatory capture and pork-barrel spending are well understood. The fact that government spending is public spending, and thus ultimately paid by the taxpayer, whether they wish to spend that money or not, is still a fact.

It would be odd to toss all this knowledge away in favor of the view that maybe someday there will come a public initiative or public-private partnership the benefits of which are so great that it overcomes losses to consumer surplus, market distortions, public bloat, pork spending, and regulatory capture.

But if it makes me sound more moderate to say, "Gee, I guess such a thing could exist in theory," then okay. How many points to I get for being that kind of a moderate?

I think in your heart you must know that every human institution exhibits such failings from time to time. Business, religion, the press, charity, and yes government. They all fail. They all harm.

A moderate might take the pragmatic approach, and set them all against each other, in intertwined checks and balances. No one should have too much power, or become unanswerable to the others.

But I guess that's too hard for some people. They become socialists, believing capitalists are always to blame. They become fundamentalists, blaming unbelievers.

Or they become libertarians, blaming government.

For a world that is just too complex.

Keep it like this, anonymous. +5 i.p.

This is not really different.

The Senate is, strike that, should be enforcing such checks and balances today.

Anyone silent on that is complicit.

A rare fail for the internet referee.

Public choice economics: In short: Markets fail! Governments fail! Use markets. There’s at least a feedback mechanism and no one is murdered.

Democrats: Markets fail! The federal government should take full control.

I'm making two points that you're gratuitously ignoring. The first is that calls for "moderation" can't overcome facts. Saying "everything fails" is whataboutism-meets-cynicism-meets-nihilism. "Everything fails, so let's try my preferred way" is pretty weak sauce.

The second point I'm making is that you are not, contrary to your claims, the final arbiter of who is and is not a "moderate." I admit I made this point more subtly than usual, so I forgive you for missing it. You're free to say, "You don't seem like a moderate to me, RPLong," and who would disagree? But to present your own view of moderation as the standard by which anyone else should be judged is really slimy. Please don't.

Perhaps a true measure of an authentic centrist, moderate, or pragmatist, is to happily admit that there are places where public and private programs work best, and not to try to paint "one side" as necessarily "less efficient."

You don't want to go nuts, and for example try to make the US Post Office private, just because you can't stand to have a public anything.

Seems very handwavy.

Apart from actual public goods, what should the state take over? Public goods remember are non-rivalrous and non-excludable.

Why does abstract metaphysics matter? If a role for the state produces better results than a purely privatized system, then why isn't that the way to go? Fretting about dubious definitions reminds me of old time physicians who "stuck to the book" when diagnosing and treating diseases, bleeding patients because of theories about the Four Humours. Go with what works over theory.

Okay, that ignored the question. I’ll ask again.

Apart from actual public goods, what should the state take over? Public goods remember are non-rivalrous and non-excludable.

The definition is to ignore the area of obvious agreement, eg national defense or CDC.

...but rather the state partnering with the private sector, most clearly by helping underwrite basic science, but also specific industrial initiatives (5G, AI, robotics, alternative energy, etc.).

An ideological purist would cry 'picking winners!' and 'Solyndra' when an intelligent person would say that's just reasonable pragmatism. The federal government has deep pockets and no quarterly profit constraints. What's the harm in some help on those areas? Yes there will be failures, that's how science and development works. But what exactly is wrong with having the government to partner with on some bigger issues, for cash and coordination?

1. I’m not aware of a constituency marching in the streets for the dismantlement of the NIH or the CDC.

2. Partnering with the private sector for ...what? It’s a lot of handwaving. Can we point to an actual successful program or how this would work? All that comes to mind is Lockheed Martin, Boeing, and Raytheon etc.

....because we haven't, y'know, been actually DOING this? Again, tell me where my logic is flawed: you have a deep pocketed 'investor' who doesn't care about profits or quarterly reports. Why shouldn't we have that entity invest in important research and development?

We have. Apparently your breakthrough proposal is to fund the NIH and NSF. It’s funded.

At the margin it’s now funding absurdity like the sexual life satisfaction of trans men in communes.

We’re either well past the point of promising research lacking funding or we’re well past the point of governmental competence directing research funding.

You cant have both. The money isn’t going towards energy research. You need to own this. It’s going to studies of male to female transexual sexual gratification rates.

That’s the marginal study that receives funding.

I'm talking what should be.

The federal government should be helping critical industries with research funding and coordination.

Cowen attributes his evolving views about state capacity libertarianism to the influence of Peter Thiel's views on the subject. Does this mean that Cowen and Thiel have Hamiltonian views about the need for a robust government to promote the conditions for economic growth? How about a much needed investment in infrastructure. I greatly admire Cowen, as an economist and public intellectual. Thiel? I admire his talent for making money. As a public intellectual, not so much.

Sometimes I wonder which came first, which is chicken and which is egg, in Tyler's endorsement of Thiel, and Thiel's endorsement of Trump.

It's possible that State Capacity Libertarianism isn't that concerned with the moral foundations of government .. merely that it has "capacity."

Jumping sharks all over the place today.

Not only is Tyler amoral at best, he’s a secret Trump supporter now! Ignore his actual comments of course, anonymous can read Tyler’s mind.

TC's endorsement of Thiel came first. You can confirm this in the blog archives.

Neither of these is a forthright call for moral foundations in government.

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