Libertarian Biases In Economics That Are Harmful To Society Most People

This article by a finance professor at the University of Arizona sticks a dagger into the heart of two ideological biases that have a profound effect on economic thinking and public policy.  The first bias is incorporated into a theory of the business cycle which assumes that all unemployment is voluntary.  It is known as the real business cycle (RBC) and it can be found in all textbooks.  In many cases it is the only theory of the business cycle that is presented.  Needless to say it comes from economists who spent some time at the University of Chicago and other "freshwater" colleges.  It is also incorporated into many models of the macro economy, which helps to explain their inability to forecast economic outcomes.  It is consistent with classical economic theory which assumes that the market is self correcting.  During a recession, wages will fall and businesses will hire unemployed workers at the lower price of labor. Workers are unemployed because they choose not to work at the lower market price for labor.  Unemployment insurance only worsens this problem.  The market would work better if government did not intervene in the market.

The second bias is the rejection of utilitarian theory in favor of Pareto optimization.  One of the implications of utility theory is that there is a diminishing return on the dollars that we spend.  For example, Bill Gates can satisfy most of his important needs without exhausting his supply of dollars.  Perhaps that is why he has given much of his money to a charity that provides benefits to those who cannot afford to take care of their basic needs.  The recipients get more value from his contributions than he would receive if he decided to increase his personal consumption.  Utility theory explains why Bill Gates and others contribute to charities, but it also justifies progressive taxation and income redistribution.  The assumption is that total utility, or social welfare, is maximized by taxing high incomes at a higher rate and using the money to provide benefits to those who are unable to satisfy their basic needs which have a high utility. Bill Gates chooses to give a large share of his wealth to charity, but he also favors a more progressive tax system that enables government to redistribute some his income to those in greater need.

Pareto optimization trumps utility theory in economics.  The optimum society is one that is based upon unanimous consent.  The optimum society would preclude us from making someone better off if it made someone else worse off.  Taxing those with high incomes at a higher rate would make the needy better off at the expense of the wealthy.  A flat tax system would be the ideal tax system.  Those who argue for a flat tax system are primarily those whose taxes might make someone else better off without their consent.  Libertarians have no interest in maximizing total social welfare.  Frankly, they bitterly oppose it for a variety of reasons.