The Libertarian Delusion

The free-market fantasy stands discredited by events. The challenge now: redeeming effective and democratic government

by Robert Kuttner

The stubborn appeal of the libertarian idea persists, despite mountains of evidence that the free market is neither efficient, nor fair, nor free from periodic catastrophe. In an Adam Smith world, the interplay of supply and demand yields a price that signals producers what to make and investors where to put their capital. The more that government interferes with this sublime discipline, the more bureaucrats deflect the market from its true path.

But in the world where we actually live, markets do not produce the “right” price. There are many small examples of this failure, but also three immense ones that should have discredited the libertarian premise by now. Global climate change is the most momentous. The price of carbon-based energy is “correct”—it reflects what consumers will pay and what producers can supply—if you leave out the fact that carbon is destroying a livable planet. Markets are not competent to price this problem. Only governments can do that. In formal economics, this anomaly is described by the bloodless word “externality”—meaning costs (or benefits) external to the immediate transaction. Libertarian economists treat externalities as minor exceptions.