Libertarians’ False Assumptions About Economics

Eric Zuesse

We’ll start with a typical example of libertarians’ big misconception:

Here was the libertarian white Texan Alex Jones, in a riff for the racist white populist billionaire Republican U.S. Presidential candidate Donald Trump, the day after Trump had declined to condemn on CNN a KKK endorsement. Jones says in that clip (1:03-): “There’s a lot of good people supportin’ [the progressive U.S. Presidential candidate Bernie] Sanders and I’ve probably been too mean to him, and I know how bad socialism is, but some of them are just helpless and want somethin’ free; that’s not how the world works, but he [Sanders] is obviously better than Hillary [Clinton, the extremely aggressive and corrupt Democratic candidate].” 

The libertarian Jones was wrong about Sanders and his supporters (though he was correct about Clinton). What Jones calls “socialism” includes the dictatorial form, communism, and that misrepresents what Sanders specifically stands for. Sanders calls his ideology “democratic socialism,” though it’s actually also democratic capitalism, because the nordic nations that Sanders cites as being examples  of “democratic socialism” are “mixed economies,” neither only “socialist” nor only “capitalist.” Libertarians equate that democratic ideology (“democratic socialism”) with communism, and this is one of their crudest misrepresentations: for example: Sweden isn’t at all like the USSR was. They’re fundamentally different systems. Libertarians are deceived to equate them — to imply that a proponent of the Scandinavian system is at all a proponent of the Soviet system.

Also false is the idea that progressives “are just helpless and want somethin’ free.” They’re instead people who want the most-thriving economy, in which the most wealth is being produced, and in which the degree of economic inequality is reduced by governmental policies that reverse the existing  governmental policy-direction, of concentrating wealth in a very few people. Progressives want governmental policies that spread wealth more evenly. That’s an essential part of progressivism. Regardless of whether one calls it “democratic socialism” or “democratic capitalism,” it’s not only  about more-even  wealth; it’s also  about higher per-capita  wealth. And in economic reality, increased equality goes with, instead of against, increased wealth. Our existing governmental policies, which encourage ever-increasing inequality of wealth, actually reduce  economic output.

For example: in a society where health-care is a right that’s available to all, instead of a privilege that’s available only to people who can pay for it — such as to pay to keep one’s teeth, or to buy a prosthetic — all citizens are employable; they can all be productive because their health is maintained; but, in a society like ours, many people can’t work because they can’t even pay the costs to be healthy; those people are being economically wasted. Also in a society where education is a privilege based on ability-to-pay instead of a right based on ability-to-learn, lots of people get shortchanged on learning, because they’ve not got the money, and so their aptitudes become wasted. The higher the amount of privatization, the more of the nation’s human-capital-base will become wasted.

In democratic-socialist-capitalist countries, a larger percentage of the nation’s human-capital-base gets developed. In our country, lots of that human-capital-base gets simply wasted — lots of people end up in prisons rather than in universities and then productive employment.

What Jones and other libertarians get wrong is their believing in the economic falsehood that there exists an essential trade-off  between prosperity and equality — the idea that more economic equality will mean less economic productivity. Libertarians such as he believe the existing false microeconomic theory, which advises against any and all concerns about the distribution of wealth, and which says that only the per-capita mean wealth  matters in an economy. Per-capita mean wealth is the society’s total wealth divided by the number of people. Even if all of the wealth belongs to the king and everyone else owns nothing, the per-capita mean wealth can still be the same as in a society where the wealth is more equally distributed; and libertarians say that the distribution should simply be ignored. Libertarians start with the false assumption that the distribution of wealth is irrelevant. They start with the assumption that the distribution of wealth is either irrelevant to the society’s per-capita mean wealth, or else that increased equality produces decreased  wealth. That assumption, in either form, is empirically false, as will be documented here. Instead, in order to increase per-capita mean wealth, the distribution needs to be made more-equal not  less-equal (such as it is in our present system, the system which concentrates wealth).

Another false libertarian assumption is that the lower the percentage of national economic output that goes to government, or the more of it that’s private, the higher the economic output will be — the belief that government is necessarily more wasteful than is privatization. Typically, libertarians say that any huge inequality of wealth ‘doesn’t exist but for government causing it.’ They ignore the fact that no economy exists without there being  a government: government is an essential part of an economy, it sets the rules and laws by which trading can occur. They think that less government means more and better economy — that there’s a trade-off between the economy and the government — as if the government is intrinsically  waste, instead of its being the prerequisite to the very existence of any  economy at all. They misunderstand the basic relationship between the government and the economy.

To the exact contrary of these libertarian beliefs, the highest mean per-capita wealth results from a government whose policies are specifically designed so as to reduce inequality of wealth. (Some people, such as Sanders, call that type of government ‘socialistic,’ indicating democratic socialism; others call is “progressive”; but, regardless of the name, it’s the best.) It produces higher  total wealth than does existing capitalism (a government that ignores the wealth-distribution), not lesser.

There are numerous empirical economic studies that clearly show these things to be the case: progressivism, or democratic-socialism-capitalism, produces not only a more-even spread of wealth, but also  a higher amount  of wealth.

Here are some of those studies (and they’re the core of what I’m saying here):

An important IMF study, from IMF economists Andrew G. Berg and Jonathan D. Ostry, was published on 8 April 2011, providing empirical evidence that even regarding economic growth, the most effective way forward is through increasing equality, not inequality. This study was titled “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” It found that, “Longer growth spells are robustly associated with more equality in the income distribution,” and that, “Countries with more equal income distributions tend to have significantly longer growth spells.” Moreover, even the conservative economist Robert Barro buried in his study for the Asian Development Bank in January 2008, titled “Inequality and Growth Revisited” (in “Figure 2” and “Figure 3”), his finding (from 2007 U.N. figures) that in all but the wealthiest countries, the “Effect of Income Inequality on Economic Growth” was clearly “negative”; in fact, “the impact of inequality on growth” was so “negative” that even though there was no correlation at all for the wealthiest countries, the findings for all countries was that: “a one-standard-deviation increase in the Gini coefficient [a measure of economic inequality] reduces the growth rate on impact by about 0.4% per year.” (And Barro, being a conservative, did all he could to hide this finding there.) Consequently, the common assumption by economists, that there is a “trade-off” between equality and growth, not only is false, but it is the exact opposite of the truth – there is actually a net-long-term-pro-growth association with low Gini (high equality).

Then, in February 2014, Ostry and Berg were joined by C.G.Tsangarides, in the IMF Staff Discussion Note, “Redistribution, Inequality, and Growth,” which asked (and answered), “So what does the historical evidence say? This paper is the first to take advantage of a recently-compiled cross-country dataset that … allows us to calculate redistributive transfers for a large number of country-year observations. Our main findings are: First, more unequal societies tend to redistribute more. … Second, lower net inequality is robustly correlated with faster and more durable growth, for a given level of redistribution. … And Third, redistribution appears generally benign in terms of its impact on growth.”

Additionally, on 30 October 2012, Ozlem Onaran and Giorgos Galanis authored for the International Labor Office in Geneva, “Is Aggregate Demand Wage-Led or Profit-Led? National and Global Effects,” and they noted: “To the best of our knowledge, this paper is the first in the theoretical, as well as the empirical literature to develop a model of the global effects of changes in income distribution as opposed to focusing on isolated single country effects.” Their study found that, whereas in some countries the GDP and income-inequality rose and fell together, this situation was the global exception instead of the global rule (they vary inversely); and, moreover, that even in the countries where they rose and fell together, this was driving down the global GDP by exacerbating the pressures in other countries to reduce their trade. “The world economy in aggregate is wage-led” – percolate-up, not trickle-down. For the first time ever, a study had been performed of the global impact of the “race to the bottom” in wages, and this study showed that the impact was decreased production. Whereas the aristocrats who skimmed the benefits from the race to the bottom in workers’ wages had made trillions from it, the world-at-large had suffered from it.

But that’s not all. In December 2009, was published The Spirit Level, by Kate Pickett and Richard Wilkinson, documenting that both across nations and intranationally, the illnesses that are commonest amongst the poor increase to the extent that Gini — a measure of inequality — increases. Of course, this finding would naturally tend to occur simply because when nations or states that are at a given level of per-capita (or mean) income and/or wealth have high Gini (inequality), a greater proportion of its populace are poor, and a smaller proportion of them are wealthy, which implies that the median person is relatively poor, so the typical conditions of poverty are relatively common in such a place; whereas if a nation with that same per-capita income and/or wealth has low Gini (high equality), the median person is considerably wealthier and so the common conditions of poverty are relatively uncommon. It’s just basic mathematics. However, the aristocracy were outraged that such a book was published; and, thus, on 13 August 2010, Britain’s Guardian headlined “The Spirit Level: How ‘Ideas Wreckers’ Turned Book Into Political Punchbag,” and Richard Booth reported that, “This summer, … a posse of rightwing institutes has laid into the work.” The aristocracy’s chief attack was expressed by one think tank director saying, “On almost no measure does the central claim of The Spirit Level, that income inequality decreases life expectancy, stand up to scrutiny,” and by another saying, “Their causal argument is full of holes.” These critics were saying that the authors had assumed that correlation equated with causation. However, inasmuch as – for the mathematical reason just stated here – it’s merely natural that, at any given level of per-capita income and/or wealth, higher inequality (higher Gini) will lower the median income and/or wealth, and will therefore increase the diseases of poverty; and, so, what those conservative propagandists were saying wasn’t merely false; it was mathematically stupid.

Within the United States, James Gilligan in 2011 issued Why Some Politicians Are More Dangerous Than Others, which documented that during the period 1900-2007, all Republican presidencies experienced increasing rates of unemployment, poverty, suicides, and homicides, whereas all Democratic presidencies saw decreasing rates of each of those four. Democrats tend to employ Keynesian macroeconomic theory, whereas Republicans use macro-theory that’s based upon microeconomic theory (which is overwhelmingly prove false by the empirical economic data).

Furthermore, also concerning the U.S. economy, a team of economists – David Autor, David Dorn, and Gordon Hanson – came forth in 2013 with an empirical analysis of data regarding the anti-mercantilist, pro-free-trade, theory that Adam Smith became so famous for having introduced, in his Wealth of Nations. They found that the empirical evidence they examined indicated it to be a false theory, even within its central focus, of free trade. Their article in the September 2013 American Economic Review was titled “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” It reported that:

“Rising imports cause higher unemployment, lower labor force participation, and reduced wages in local labor markets, … [and] contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in more trade-exposed labor markets. … Reductions in both employment and wage levels lead to a steep drop in the average earnings of households. These changes contribute to rising transfer payments through multiple federal and state programs, revealing an important margin of adjustment to trade that the literature has largely overlooked. … The largest transfer increases are for federal disability, retirement and in-kind medical payments. Unemployment insurance and income assistance play a significant but secondary role.”

Finally, in June 2015, Era Dabla-Norris and four other IMF economists issued “Causes and Consequences of Income Inequality: A Global Perspective.” This decisive empirical study found that existing microeconomic theory is trash. It summarized:

“We find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth. This positive relationship between disposable income shares and higher growth continues to hold for the second and third quintiles (the middle class). This result survives a variety of robustness checks, and is in line with recent findings for a smaller sample of advanced economies (OECD 2014).”

When Alex Jones said, “I know how bad socialism is, but some of them are just helpless and want somethin’ free; that’s not how the world works,” he was expressing what’s in microeconomic theory, but within recent decades enough empirical economic data has now become scientifically analyzed in order to test that theory out, and all of the studies show, consistently, that Sanders’ basic ideology (what he calls “democratic socialism”) is true, and that libertarianism (the theory — microeconomic theory — to which Jones and other libertarians subscribe) is false.

That’s just an empirical fact by now. It is a scientifically established reality, notwithstanding the common misconceptions that have been taught in the microeconomics textbooks. Microeconomic theory is false; libertarianism is false. It is scientifically false. Democratic-socialism-capitalism is the optimum political system, even from the standpoint of wealth-creation. Even if there weren’t added value from the wealth-redistribution, it’s the best system in terms of wealth-creation — the criterion that microeconomic theory (libertarianism) claims  to maximize (but consistently fails  to maximize).

There also exists overwhelming empirical evidence that the increase in equality of wealth produces, in itself, a happier and more peaceful society. But the point of the present article is that libertarianism, microeconomic theory, is false, even on its own narrow area of focus, which is wealth-generation, economic growth. In other words: libertarianism, or belief in microeconomic theory, is even worse than has been documented here. What has been described here is only part of the hoax, not all of it.

PS: One libertarian’s reader-comment to this said (and the entire exchange between “iseeitfx” and me “cettel” is shown here):

iseeitfx •

  “Libertarian economics”?


    Come on Eric, you can do better than that.

    Austrian economics would be the boogie man of reference if one should choose to take that school on?

    Good luck…..

    I do generally respect your thoughts however and encourage you to keep sharing.


cettel iseeitfx •

    Austrian economics is based upon micro-economic theory. In that regard, it’s like all other except Keynesian microeconomic theory, because only the Keynesian tradition avoids microeconomics entirely. Neo-Keynesian economics tries to accommodate Keynes’s macro-theory to existing micro-theory; but, otherwise, all of economics is based upon the existing micro-theory.

    When you talk about “Austrian economics,” it’s like talking about the difference, for example, between Protestants and Catholics. They both believe in the Bible.



iseeitfx cettel • 7 hours ago

    With all due respect, I suggest that you are misinformed regarding Austrian economics.

    If you would like to remedy this situation, the two links below would be great places to begin.



cettel iseeitfx •

    Those links aren’t even relevant to what I said. And in no way do they provide evidence to the contrary of my allegation that Austrian economic theory, going all the way back to its founder, Bohm-Bawerk, accepts microeconomic theory, as it had been introduced by Adam Smith and others.


Investigative historian Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of  CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.