It’s tempting to think that the bond market is powerful because of corruption, but that is at most a proximate source of power. The real source of power is elasticity. The supply of financial capital is highly elastic; it moves around the globe in milliseconds. Try to tax it and the incidence of the tax will go elsewhere; burden it with regulations and it will flea to a more hospitable climate.

Imagine a world in which all factors of production were as mobile and elastic as financial capital. If labor and physical capital could flea instantaneously and at low cost from bad policies, there would be little danger from either the predatory or incompetent state. In short, it would be a libertarian utopia.

This utopia seems hard to realize. It’s hard to believe that labor and physical capital could ever be as elastic as financial capital is today. Nevertheless, I think this framework provides a way forward for libertarians who have given up on political reform (and maybe even those who haven’t yet). Even if we can’t make the supply of most factors of production infinitely elastic, maybe we can make their supply more elastic. To the extent we succeed, we reduce the power of governments around the world.

Here are a few ideas for building a more libertarian world through higher elasticity:

1. Labor would be more internationally mobile if there were no language barriers. Consequently, libertarians should (without coercion) support the removal of barriers to language standardization. In practice, this means subsidizing English, which is already the globally dominant language of business and science. As a libertarian, I obviously do not support forcing anyone who does not wish to use English to learn it, but Rosetta Stone’s market capitalization is only around $150 million as of this writing. It should take only a fraction of that amount to induce it to release the English version of its language learning software for free. Alternatively, other methods of learning English could be developed on an open-source basis. Because language has network externalities, this endeavor would not only improve the wellbeing of those who would learn English, it would help those who already know English by giving them more exit options.
2. We need better and more secure options for telecommuting and for being paid for work. In particular, it would be very good if people could telecommute across legal jurisdictions without the government in the jurisdiction in which they reside being aware of it. It’s hard to imagine how the modern state could be as redistributive as it is without income tax withholding. If people who live in the US, say, could work in a jurisdiction that does not have income tax withholding and be paid covertly, the power of the US government to tax would be greatly diminished. And if workers could shop around between jurisdictions in which to work, the governments in which the firms were located would be forced to adopt efficient policies to attract economic activity. Consequently, libertarians should support an Internet infrastructure that is decentralized, encrypted, and hard to tap, and a payments system that is hard to track, such as Bitcoin or some successor that operates along similar principles.
3. Almost all factors of production would be more elastic if we could open up new frontiers. Libertarians are excited about seasteading and space colonization. I am not so sure that they will be feasible in the medium term, but I do hope they succeed.
4. As I argued in a previous post, there are more mobile forms of physical capital in development, and these would serve to limit the amount of control the state can exercise. 3D printers are more mobile and elastic than assembly lines, and solar power is more mobile than the electricity grid. Science fiction has even better examples; witness the (Seed-driven) matter compiler in The Diamond Age or Mr. Fusion from Back to the Future.

I’m not sure what other options there are. Maybe commenters or other bloggers will weigh in. But if I were Peter Thiel or a Koch brother, something like this framework would guide my philanthropy. Libertarian ideas will never be popular; this is how we can create a better society anyway. No, we’ll never get to the utopia of infinite elasticity, but the land of pretty high elasticity is not such a bad place to live.

• The right model for thinking about the Greek government’s large and chronic deficits is the budgetary or fiscal commons. Richard Wagner says it well (in the context of the US government): “Most collective or corporate organizations, profit-seeking and nonprofit, do not suffer from continued deficits. What distinguishes the federal government from other corporate bodies is that the federal budgetary process illustrates the ‘tragedy of the commons.’ The federal budgetary process is a natural product of common property budgeting, where choice is divorced from responsibility for the consequences of those choices.” Interest groups within Greece compete for tax revenue, knowing that if they abstain, someone else will benefit from their abstemiousness. This leads to “overgrazing” of the budgetary commons, or chronic deficits.
• By bailing out Greece, other EU governments are extending the range of the commons. They are further divorcing choice and responsibility for decision-makers in Greece and in other profligate member governments.
• A Greek default need not harm the Euro very much. The strength of the Euro depends most heavily on the willingness of the European Central Bank to keep inflation low, and much less on Greece’s finances. If Greece’s default causes a debt crisis in Spain, Italy, and Portugal, this could eventually weaken the Euro as the ECB would be expected to apply monetary stimulus. But letting Greece default could also force those other governments to take their finances more seriously, and in any case, the principle of triage applies to bailouts as well as medicine.
• If the Greek government is not bailed out, as is my preference, things will sadly be very, very bad for Greece. Creditors of the Greek government would have to take a haircut; there would be no way around that. The Greek economy would suffer a long and deep depression. This would be painful for the Greek people, but the goal is to prevent something worse from happening down the road.
• Greece should never have joined the Euro because they now have no control over monetary policy. When people discuss so-called “optimal currency areas” they rightly emphasize labor and capital mobility, and factors which affect these. Perhaps one underappreciated additional issue is fiscal responsibility. If one government in a currency union is relatively fiscally responsible and one is not, then the responsible one will always be called upon to bail out the irresponsible one. If the bailout occurs, this is bad because it extends the fiscal commons, as discussed above. But if the bailout does not occur, the irresponsible government is harmed by more than it would have been if it had its own currency and monetary policy. Note that this logic applies to currency pegs as well, as Argentina learned.
• It is dangerous to anthropomorphize governments, but putting this concern aside, the right metaphor for better policy is not “austerity” but “enlightened self-interest.” The key question facing the Greek government is Can you solve the fiscal commons problem? Solving a commons problem is not about ascetic self-denial, but about far-sighted self-improvement: building the institutions that will make the country better off in the long run.
• In general, I think it would be a good thing if investors looked at sovereign debt more skeptically. First, sovereign debt is subject to the “Black Swan” problem. Second, bond markets are one of the major constraints governments face. (As James Carville said, “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”) It would be better if the bond market intimidated the government sooner rather than later on the road to insolvency.
• I worry a lot about a US sovereign debt crisis. With such a big economy, the fiscal commons problem is in many ways more severe. I think Congress could overcome the commons problem in order to avoid a debt crisis, but debt crises have a very quick onset. By the time people realize it is happening, it may be too late.