(Note: Ozy Is Not An Economist. Ozy’s entire knowledge of economics comes from blogs, books, and AP Macroeconomics. Please do not take this seriously.)
I think a truly free market requires a strong social safety net, for two reasons. (By “strong social safety net” I mean “giving poor people and unemployed people way more money than Americans currently do.”)
The assumption of a lot of people who talk about economics, I think, is that the employer and the employee are in a roughly similar position: that is, that it’s a free exchange of money for labor. The problem is that (except for a very few employees with specialized skills) there are way more employees than there are employers. I can fire you, take out a want ad, and find someone new relatively quickly; if you quit, you’re facing months or potentially years without a job that matches your skills. (This is basically the concept of the reserve army of labor. I’m a sociology major, I have to work Marx in somewhere.) Therefore, the employee needs the employer more than the employer needs the employee, which means the employer can treat the employee like shit.
On the other hand, the social safety net equalizes the employer and the employee’s position to a degree. If I’m not paying you enough or making you work crap hours or refusing to let you take breaks, you can think “this fucking sucks! I’d rather be unemployed!” and then you can quit. To keep their employees, the employer has to offer a better deal than unemployment and the social safety net. (This appeals politically much more to me than increased regulation, because it lets the individual decide what qualifies as “worse than unemployment”– although of course regulation is important for working conditions that employees probably wouldn’t know about, and “appeals politically to Ozy” is not the same thing as “works better.”)
At the same time, the free market relies on a lot of entrepreneurship. Entrepreneurship increases competition, which means that companies have to offer customers a better deal, so prices go down and quality goes up and there’s innovation and everything is sparkle rainbow ponies. On the other hand, about half of new businesses go bankrupt. How many more people would be willing to start businesses if they knew that even in the worst-case scenario they wouldn’t go completely broke and have to live on ramen? I’m going to guess the answer is “quite a few.”
In short: support the free market, give money to poor people.
Thing of Things 
I’m not sure how much argument there is against the social safety net as an ideal. The problem is that execution of the thing involves potentially creating problems. Some people argue that ANY execution (that governments have tried or might try) has larger problems than the benefits having the safety net creates.
Also, it’s much harder to hire someone to do a job than you make it out to be. Onboarding costs (in money and time of people who already work there) can be really high. It’s actually really hard to fire someone at a large company (according to my mother who can’t fire a direct report under her who is rude to clients and skips work every so often with no notice).
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The consequences of not having ANY social safety net is some people — real human people, not autonomous economic workbots — will die of malnutrition and curable and preventable illness any time there is a disturbance in the job market
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The second policy would increase moral hazard. Suppose that I think that my business would have a relatively low (but not too low) chance of success. Without a welfare state, I would judge the venture to be too risky, but with a welfare state, I have an increased incentive to take on risk because the taxpayers will foot part of the bill if I fail. If anything, it’s more of an argument for restricting entrepreneurship – “If you fail, we’ll have to support you, so we won’t let you put yourself in a situation where you can fail”.
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Entrepreneurship creates huge amounts of value sufficiently often that this seems likely to be a good thing for society.
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If you change the incentives to be an entrepreneur, you shouldn’t expect the current relationship between entrepreneurship and creation of value to continue to hold.
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Why not?
Entrepreneurship is a high personal risk with a high personal reward and a high reward shared among society.
With a social safety net entrepreneurship is a medium personal reward with a high personal risk, a low risk to society, and a high reward to society.
Since all of society benefits from a successful entrepreneur creating jobs and new innovations shouldn’t society share some of the risks through things like support for the unemployed, bankruptcy law, and corporate limited liability?
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The high reward is shared among society only if the entrepreneur is successful. Otherwise, it loses whatever the entrepreneur would have done otherwise. Also, a social safety net would decrease the risk for the entrepreneur, and therefore create more failed entrepreneurs that the social safety net would have to support.
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Which is why society should create that safety net.
Society reaps the benefits of the entrepreneur’s success but shares none of the risks. That’s not right. If society wants the benefits it should share some of the risks.
Also that social safety net will create more failed and more successful entrepreneurs. Quite possibly making a net profit for society.
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“If you want the benefits, you should assume some of the risks” only applies if you are assuming some of the benefits against the will of the person providing the benefits
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That’s pretty much the definition of taxes.
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The utility of a successful business to its founder is roughly a logarithmic function of its eventual profits or market cap, due to diminishing utility from marginal personal consumption/wealth. The utility of a successful business to society is roughly proportional to its eventual profits or market cap. So if we rely only on founders’ personal incentives and willingness accept risk, fewer business will be founded than would be societally optimal, with the effect especially strong for the business plans with the highest possible profits/market caps and associated highest risks.
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This is only tangentially related to the point of this post, but the paragraph on entrepreneurship reminded me some analyses I’ve seen of the European vs. American entrepreneurial environments, and why America’s is better. (I don’t think the one I’m thinking of was by Paul Graham, but I do think he’s written something about this; unfortunately I can’t find any links.) Compared to Europe, America has lax bankruptcy laws and doesn’t attach much stigma to having had a failed business venture, which makes it easier to take risks. Of course there’s always going to be moral hazard associated with this too.
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Right, the existing system in the U.S. provides lots of protection (and corresponding moral hazard) for rich risk takers. Ozy is proposing a system in which poor risk takers would have protection as well. Which would probably be much more expensive, but would certainly be more fair. And if encouraging risk-taking is a bad idea, we should probably stop encouraging it for rich people rather than retaining our present system (recent financial crises might well suggest that we are in fact encouraging rich risk takers too much).
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Right. As far as I know this is very true. It is easier to start a business here in the US. This is a good thing for us.
Another EU property that hurts: it is harder to fire people there. This has a positive: more worker safety. It has a negative: companies who are slow to hire.
Thing is, I think this argues for government provided safety nets. Yes, there is moral hazard, but there is moral hazard for employers to treat their employees like shit. But if we have a bottom you cannot fall below, risk taking is encouraged, less regulation is needed.
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Similar points were made by Tyler Cowen and TGGP in 2007:
http://marginalrevolution.com/marginalrevolution/2007/03/safety_nets.html
“The welfare state is the Randian’s secret dream” 😉
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What I’ve referenced here before!
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“Therefore, the employee needs the employer more than the employer needs the employee, which means the employer can treat the employee like shit.”
I think this can be true, but it can also be exactly the opposite of true, depending on what industry you are talking about and at what time.
I for one have experienced almost nothing but the opposite. I’m constantly surprised at how nice employers are to me. I’ve been lucky.
Something you touched on, which I think is very important is asymmetric risk-aversion. A company can afford to take a risk on 10 employment relationships and amortize the cost of the 1 that failed. A single failed employment relationship is a huge personal disaster for the employee.
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The other comment I would make is: which poor people? Most discussions of the welfare state take it as assumed that the poor of other countries are not our problem. That obviously, what we’re talking about is taxing the rich-world rich, and giving to the rich-world not-quite-as-rich. Why not give it to the people who suffer from absolute poverty instead? I haven’t heard a convincing answer to that.
I regard allowing much more immigration from the third world as a moral necessity. Do you? Can the welfare state be squared with squared with that?
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That’s part of why I oppose immigration. Letting unlimited immigrants in because it’s good for the immigrants is not very different from taxing everyone at unlimited rates and spending it all on foreign aid to benefit people who are in poverty where they are. Maybe you should just bite the bullet and stop supporting immigration (and stop being a utilitarian).
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I think you’ve bitten the wrong bullet.
I don’t agree with your comparison at all. Letting in an immigrant is in no way similar to handing out tax money as charity. Immigration is *very* positive-sum and tax-charity is zero-sum. Restraint of immigration is coercive, and so is tax-charity. Tax-charity may still be a good idea, but if it is its still resting on a much weaker justification than immigration is.
The case for immigration doesn’t rest on utilitarian grounds. The case is strong on there, but it is also strong under Rawlsianism, or nonaggression Libertarianism, or even Christianity. It really don’t require any controversial ethical assumptions to argue for open borders.
Here’s Bryan Caplan making the case. http://econlog.econlib.org/archives/2014/04/america_should.html
Oh, one more thing: The tension between the welfare state and immigration is entirely a political one. If we wanted to, we could simply let them all in and exclude them from the welfare state. “How can immigration be reconciled with the welfare state” should always be read as a political question, not a legal/administrative one.
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I recall reading somewhere that Sweden has a higher entrepreneurship rate than the U.S. despite more people per capita in the U.S. Than in Sweden claiming that they want to start a business, and this could a consequence of American would-be entrepreneurs’ fear of losing their employers’ health insurance, while Swedes have health insurance provided by the government. (They had some survey data to back this up. This was pre-2010; I don’t know how PPACA has changed incentives.) I’ll try to dig up the source when I can.
OT: My phone autocorrected my handle to “sulfuric kaon,” which is *so* going on my list of potential band names.
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Yea, contrary to the stereotypes for being really socialist, the Scandinavian countries are quite libertarian on issues other than labour law and the overall size of the welfare state.
http://www.heritage.org/index/country/sweden
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I’m moving closer and closer to what I would call “basic income libertarianism.”
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“More people per capita” is a meaningless statement, because “per capita” means “for each person”.
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What does the tag “capitalism is NOT MADE BY BIRBS” mean? (Google and Tumblr seem to think it’s a misspelling of “birds” and I’m not sure how that fits here)
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Last question. When my post gets automatically put on tumblr, blog tags become tumblr tags; therefore, I need to use my tumblr tags in the post, to keep things organized and be convenient for people who have blacklisted a particular tag.
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Almost every argument I’ve heard against the social safety net is a moral hazard argument — some version of Reagan’s famous “welfare queens”. What bothers right-wingers is not the safety net per se, but the temptation to exploit it. (I think they think that temptation is much more widespread than it actually is. Few people are content to be on the dole long-term, mostly for status reasons, but also because it’s not much fun even if you’re getting enough to survive.)
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Sorry if this comes off as flippant, but I keep reading blog posts much like this one where a member of the american blue-ish tribe comes up with a genius new argument that basically describes Scandinavia.
Up here in the frozen north, we are taught that these are obvious benefits of a strong social safety net in primary school….
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I am all for safety nets.
But your argument on bargaining position is full of holes. The value of the worker is determined by their marginal productivity. The reason employers treat us so well is because we can and frequently do leave the employer and go elsewhere. Thus it is competition between multiple employers which establishes our value.
On average, Americans work significantly fewer hours with substantially better and safer working conditions than did our ancestors 200 years ago and we are on average paid 18 times more. So, the long term historic trend is to treat us and pay us better and better and better. The reason again is that our marginal productivity increases and we are worth more to all employers competing for us.
Now, I am sure your argument is that you can imagine being treated and paid EVEN BETTER. So can we all. Humans are great at imagining ideals and this is a good thing. The key is simple, we need to increase our marginal productivity. Long term, this translates into our ideal.
But that said, efficient and effective safety nets are a swell idea too, and they do help with switching employers and keeping the bastards honest.
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