Rush hour traffic in Raleigh gives the mind a lot of time to idly wander, and so was born a thought along the lines of Daniel Klein’s Rinkonomics: the trafficonomy.

Traffic jams are in fact a lot like the free market. This is not a pejorative comparison, as if we could alleviate the jam. I say traffic jams and not traffic in general because most of us live in developed economies. An open road isn’t much of an economy; it’s more akin to picking up plenty which naturally exists all around you. In the market, a multitude of people compete with one another for scarce resources with the goal of achieving their own betterment. In a traffic jam, a multitude of cars are competing with one another for scarce road space with the goal of getting somewhere.

A common feature of all traffic jams is that open space doesn’t last very long. If it exists, a car from behind will move into it to better his own position. This has the result of equalizing all the lanes on the road: people take opportunities, which means you as an individual are about as likely to get ahead by staying in your own lane as you are meticulously moving around lanes, as experience nearly always corroborates. The wide opportunity-seeking spreads the benefits of moving forward over all those who seek them, which though there are some who move ahead a great deal and some who might even do worse than if they had stayed put, results in an average benefit that is rather small.

What this process does do, however, is optimize the pattern. Though traffic jams are often seen as the result of non-optimality, this is an exogenous non-optimality of the system. Given the roads, a traffic jam is always pareto optimally or near pareto optimally organized. There is no one who could be further ahead without someone being correspondingly further back, and no concerted effort among the drivers or ulterior design from above could improve the overall condition. The ambition of the individual drivers necessarily organizes it this way.

The economy works much the same way. People cannot cruise through life, picking their spoils and arriving at their destination without resistance, as through a highway at midnight. We encounter people after the same spoils we are after, and like a Hummer cannot legitimately plow over the Prius in front of him, we must settle such disputes without coercion.

A space in the economy, much like a space in traffic, is a practical invitation for someone to come in and take it. If it is a big and previously unnoticed space, many people can flow into it until the benefit of moving to that area is no longer worth the benefit. There is no more profitable space left. True innovation, much like finding extra space on the road, is comparatively rare.

But even where there are no spaces, a car can still better its position on the road. If the neighboring lane is moving faster than its own, the driver can force its way into the other lane. The movement of more ambitious drivers will tend to equalize the speed as well as the density of the lanes. But there are costs of doing so (risk of the new lane slowing down, ire of other drivers) which keep enough people out that lanes do indeed move faster than others at certain points.

In the same way, even when one has no capacity or inclination to innovate, one can still turn a profit by investment or speculation. If one sees that a certain commodity will be more expensive in the future than it is now – that is, if the neighboring lane seems to be moving faster than your own – then one can buy hordes of that commodity to sell later, moving into the other lane. This has the double effect of raising the current price and lowering the future price when it is sold – roughly equalizing the current and future price, as more people jump on. Thus, like shifting lanes in a traffic jam, expectation is already reality. By the time all but the first few speculators realize what has happened, the price is already at its expected level. Like any driver will tell you, moving around in a jam is usually useless and often detrimental. This is why index funds – unmanaged and constant bundles of stocks – do as well and often better than more meticulously managed funds. It’s exactly the same mechanism governing both traffic and the market.

As a last point to flesh out the analogy, the road itself is not the economy, nor is it the institutions that govern the economy. The road is the earth, and the physical state of its resources. Just as the road is exogenous to the driver, so the earth is exogenous to the economy. We can no more create more raw materials than a driver can create more road. Poorer countries will be more “jammed”, so to speak, than richer countries, as there are fewer resources to work with (though free trade can alleviate even this problem to some degree). But just as a traffic jam allocates road space optimally given the road, the free market allocates resources optimally given the earth’s resources.

Q: What is the fundamental problem with government?
A: It is unconstrained. There is no process to achieve the optimal amount of regulation or private sector intervention, and even if it is perchance achieved at one point, there is nothing to keep it there. The line between desirable and abuse of power is not in fact a line; it’s a gradient. If the government has the power to tax a little, at what point do we stop them from taxing a lot? If the government has the power to bust trust companies, what’s to prevent them from using (and refraining to use) that power to shape the marketplace to their liking?

The Public Choice school has written much on this problem. Though there may indeed be market failures, nothing justifies government intervention in the private economy, simply because regulatory capture and interest groups are such a systemic problem. Without a strict separation of economy and state, the state will accrue (and has accrued, in every case worldwide) vast powers over the economy that were never intended and are almost always detrimental. Government failure, simply put, is worse than market failure.

But instead of giving up on government, what if we could implement market processes to government policy?

Prices on the market are a lot like government regulation. If Motts charges $2 for a jar of applesauce, what’s to stop them from charging $3? Why not $5? There is again no clear line between desirable and abusive. But the market economy has a feature that government does not: competition. Competition, both among producers for consumers and among consumers for products, drives prices down and up, respectively, until they reach an equilibrium. Motts cannot charge $10 for a jar of applesauce because people will simply buy Dole applesauce, and Motts will not get any money. Dole cannot charge below cost for applesauce because people will flock to their product and accelerate their loss of money until they fail. The equilibrium price is where these two forces upwards and downwards stabilize. This is the beauty of the spontaneous order of the marketplace, not only that such a price equilibrium is attained, but that this price allows for the optimum allocation of goods.

What would such a spontaneous order look like for governments? The first prerequisite of a competitive market is competition. States right now barely compete with one another. To be certain globalization has brought much good in the way of liberalizing economies worldwide in order to attract business, but this is only scratching the surface of the possibilities afforded. The only prerequisite of a microfederalist supersystem is completely open borders.

Open borders allows for people to “vote with their feet”, so to speak. If a government taxes too highly (the price is too high), or is inefficient in providing public services (bad quality), people can simply move out to more friendly states. Likewise if a government gives too much in the way of welfare benefits (charging below cost), people will flock to it and bankrupt the state (c.f. the Comparative Government Thought Experiment). Governments will immediately eliminate both welfare benefits and taxes, making for a series of very lean states.

States must also be allowed to fail economically. The failure of a state, much like the failure of a corporation for its employees, will not necessarily mean the end of the world for its populace. More efficient neighboring states can buy out failed states by assuming their debts and incentivizing their residents (stockholders).

Conversely, states must be allowed to divest themselves of regions, creating separate states. The marketplace works through acquisitions, mergers, failures, and divestitures to arrive at the optimal firm size in a particular market – from large single-firm markets with high barriers to entry (like utility companies) and those with high economies of scale and a few major players (like electronics companies), to markets with low barriers to entry and multitudes of smaller competitors (like parts of the food industry). There is no possible way to determine optimal firm size without this process. Likewise there is no way to determine optimal size of governments, in population, geographical size, or scope of authority, without it either. Though exorbitantly overstretched governments can currently fail on account of unwieldyness (see the disintegration of Europe’s imperial colonies in the last century for geographic overstretching, and the collapse of the Soviet Union for overstretching in authority), the current governments of the world are almost certainly still larger than optimal, sustained only by lack of competition.

A competitive microfederalist system would make procedural problems practically irrelevant. Public Choice problems are eliminated, as regulatory capture would be fatal. Governments would face different sorts of pressures. It would force every form of government, from democracies to dictatorships, into acting in roughly the same manner – operating at regulatory equilibrium (as a sidenote, it also obviates the need for a voting test), much like firms within a market will behave competitively despite being organized differently internally (though, like the case for Market-Based Management for companies, one could make the case that democracies will be inherently more efficient than dictatorships). This has the benefit of leaving to the market everything that can be left to it, while taking care of genuine public goods problems (roads, pollution, etc.) without giving unconstrained power to any institution.

Furthermore, this system provides for choice in regulatory preference. Just like Coke and Pepsi have natural markets of people who prefer one over the other, governments could tailor their policies to their localities. Gay marriage (or marriage benefits at all) would be adopted by some governments, and not by others. Predominantly Islamic states could without problem live under Shia law. None of this is problematic with open borders, because like a homeowners’ association that requires neatly mown lawns and bans red drapes, there is always the option to leave: all associations are voluntary.

What then distinguishes a government from a private institution like a homeowners’ association? Solely the use of force. Governments have a geographic monopoly on coercion, and can (probably must) provide police protection to their residents. Homeowners’ associations and private institutions do not have this power.

Hayek’s concept of spontaneous order through competition is a powerful and practical philosophy of beauty. An open-border microfederalist system eliminates both market failure and government failure, complementing each institution with the other, and holding both in competitive equilibrium.

Institutions Versus Individuals
Among political theorists, there is a debate among those who view the ends of government as protecting natural rights, and those who view its ends as promoting the maximum felicity of its citizens. The dichotomy may seem to be one of moral versus practical concerns, but political philosophers describe the whole question as moral – that is, regarding the ends of the institutions.

On the surface, this is not an entirely inappropriate use of the term. Morality indeed concerns ends – the ends of man. It is related to praxeology in that while praxeology is merely descriptive (i.e., “If mans ends are X, he will act by doing Y”), morality is normative (i.e., “Mans ends should be X”). In the same way, moral theories of government normatively prescribe the ends of government: government should act towards the ends of the rights of man, or towards the happiness of man.

However, the appropriateness ends there. Morality as such can only ever apply to the ends of individuals. The ends of institutions are fundamentally different in nature. The questions of individual aims – morality – involve conscience and self-interest (properly understood). The questions of institutional aims, on the other hand, must be answered institutionally. As Mises writes, the individual is the only proper locus of action (The Principle of Methodological Individualism): people must design institutions conducive to directing the actions of other people; the institution itself does not act.

It is thus not honest to call problems of the aims of government moral issues. I would like to posit the term morology, since there is no such distinctive term in use today as far as I’m aware.

Imperfect Information
An action may be said to be irrational insofar as it is inconducive to attaining the immediate goals of the actor (Whether or not such action exists is up for debate, depending on how broadly one defines immediate goals). Likewise, an action may be said to be immoral insofar as it is inconducive to attaining the Good. We act immorally because we do not know (or believe) what the Good is – thus, with perfect information, it is irrational to act immorally, now that one’s true and objective interests are known. In this way, praxeology becomes identical to morality.

Institutionally, though morology often takes on a normative tenor, it can never presume perfect information (no, not even Ayn Rand). Notwithstanding the few fringe theories that may presume objective a priori knowledge of the ends of institutional existence, most rights-based theories exist for reasons aesthetic or of consistency. Utilitarianism’s only normative claim is that the maximum utility of its constituency is the best goal we can know to strive for, which in most variants precludes any further normative claims.

Thus, praxeology may be compared to morality in that they both deal with individuals, and morology may be compared to praxeology in that they both deal with subjective values by way of imperfect information, but morality may in no way be compared to morology. It differs on both dimensions, making it doubly improper to call the ends of government a moral question.

In discussions about piracy, even among people who are otherwise ok with free piracy – downloading – those who copy CDs or DVDs and physically resell them on the black market are often condemned, to the point that there is a wide consensus on both sides that the outright prohibition of this sort of activity is not only ok, but beneficial. However, this attitude is only the result of considering only the action itself, without considering the results: in reality, such activity can only be short-lived without legal sanctions on free trade and distribution.

Speculation is an important function in the market economy. If a good is priced differently in one place than another, the speculator will buy it in the cheaper place and undercut the sellers in the more expensive place. In doing so he makes a profit, but he also drives the prices in the two places to equilibrium. Similarly, if a good is expected to be priced differently across time – for example, wheat that floods the market after harvest time – speculators buy the good at its cheapest, and hold it until it becomes more expensive. In exactly the same way, the speculator makes profit, but also stabilizes the price across time. Agricultural cycles are in fact so predictable that speculators can act in such a way that consumers barely notice a difference in food prices from the summer to the winter.

The entrepreneur is also an essential mover of the market economy. When he sees inefficiency in an industry, he sets up shop as a competitor, undercutting the competition with lower prices, or better quality due to his own increased efficiency. This drives all other players in the industry to either improve efficiency at least on par with the entrepreneur, or exit the industry. Thus, like the speculator, the entrepreneur profits by driving the market towards equilibrium. Neither one may ever rest on his laurels with the expectation of a steady profit stream; all profit is temporary and for both is contingent upon the continued provision of new services.

Our physical pirates then are acting both as speculators and entrepreneurs. A record label sells a new CD for $15; the pirate sees that he can reproduce and sell the exact same CD for $5 – a double benefit both of significantly undercutting the record label, and being significantly above his own costs of production. In this way they act as entrepreneurs, who without legal sanctions on their behavior would drive the record labels to the greatest efficiency in production. Thus, their continued profit is, ironically, completely dependent on their being illegal, as in a market where they could operate legally, the proliferation of physical pirates would drive their profit to zero as the market reached equilibrium.

These physical pirates are also in a sense acting as speculators across time. With the realization that the resting price of media is the cost of reproduction, the pirates profit from the disequilibrium imposed by the legal restrictions. Where in a free economy their activity would equalize the price of media to its marginal cost of production, the price floors of copyright law give both the pirates and the media companies a constant profit stream and essentially allow them to rest on their laurels – something completely unnatural in a market economy.

But, you ask, how can artists, actors, and directors be compensated for their work if their recorded media is worth nothing? For the answer, I direct you to the article from a few years back, A Model of Post-Copyright Incentive. Let us not therefore condemn the street vendors of China peddling pirated CDs and DVDs – rather, let us rejoice that the market is in some small way taking hold of China, and let us also hope that the American imagination can be shortly recaptured by the free market.