Market Economics assumes, at a minimum that everyone knows who owns what, and transaction costs are low (actually assumes much much more...but these assumptions will do for the point of this example). If everyone knows who owns what, then everyone trades for mutual benefit. This is "unanimous rule", an ideal situation, according to libertarians and most with a conservative economic bent. I will, for the sake of argument, agree that unanimous rule (pure market economics) is ideal (for now) since this is really the libertarian assumption. As doctors say, "Above all else, do no harm." Or, as the the philosophers say, "the principle of non-maleficience takes precedence over the principle of beneficience." And the Economists (used to say) Pareto Optimality.

Economists are a bit smarter than the philosophers and doctors, because they have actually tried to model these situations...lot's of messy details.

If people in the majority wish to gang-rape a woman, they can't, according to market economics, because the woman owns her own body (has a property right to her body) and she did not come up with an amount of money that she would like to receive in order to permit the gang rape to proceed(it likely would be close to infinite, if there were a chance of death.)

Note that the principle of unanimous rule would be violated if she were not paid what she wanted and the rape proceeded without her receiving anything. So raping violates libertarian (unanimous rule) principles, as well as a host of other principles!

In the real world, however, we do not know who owns many or even most goods. That's often (but not always) why we fight with each other and have governments! Property rights have not yet been defined.

We often don't know who owns what. But, if transaction costs are low or zero; we still can make progress in our thinking using unanimous rule (libertarian) principles.

Let's take the case of our national defense. We really don't know whether the country as a whole has or does not have, a right to "national defense". Property rights have not been assigned to this entity.

Assume transaction costs are zero. So, we can take an open vote, and we assume that everyone HONESTLY casts their ballot for or against national defense. I emphasize honestly, because there is a real world actual cost associated with the *search* for peoples honest position.

So we take an open and honest vote and 40% vote against national defense and 60% vote for it. The majority certainly could ask all the people who voted against it, how much would it cost to get you to change your vote? In other words, we could say, "How much does it really bother you to be taxed 'X' amount, and get national defense in return" (remember, we're going for unanimous rule).

The problem is that those in the minority have a strong incentive to lie (a transaction cost) so they would get much too much money in a vote bribing scheme, because they wouldn't reveal how much it actually bothers them to pay the tax. They would exagerate. But remember, transaction costs are zero so in this hypothetical situation, people won't lie. Surely the most we would have to pay any of those opposed to being taxed for national defense, would be the cost of the proposed individual tax increase on everyone. But for some, who somewhat oppose substantially increased defense spending, we could get them to change their vote for less. They are unwilling to pay the full amount of the tax, but they want some national defense. So if we pay them a portion of what their increase in taxes is, they will change their vote. So, a free market *could* handle national defense issues, if transaction costs were zero. In a frictionless world, we could create a unanimous rule, libertarian solution.

But wait! Why is it that the majority has to pay the minority to get them to change their vote? Isn't it just as logical to ask the minority to pay the majority to change their vote, to maintain unanimous (libertarian) rule. Perhaps societies OWN the right to national defense, so if the minority wants to compromise that, this minority should pay off the majority. As long as either side is completely bought off, unanimous rule is preserved, but libertarian unanimous rule principles don't tell us which side is correct. And as long as transaction cost is zero, libertarian principles are neutral in regards to who should pay whom.

Is this surprising? After all, we started with the assumption that we did not know who owns what. This is why libertarians always favor a "strong judiciary," so they can have determined for them "who owns what". But libertarian (market) principles are *neutral" with respect to the initial division of property rights, including a possible right to a national defense.

But how should judges (government) decide when groups of people disagree. Should the majority pay the minority, or should the minority pay the majority. Actually, quite a lot of work by free market, transaction cost economists, has gone into thinking about this issue.

Some say the questions involve morality. But others, for example the "Law and Economics people" answer the question based on efficiency.

Should we pay polluters not to pollute, or should polluters pay us for using the air? Well, it depends on who owns the air. In the real world, there are transaction costs associated with organizing markets to pay polluters not to pollute, and there are transaction costs associated with organizing markets for polluters to pay citizens for their pollution. And there are huge transaction costs associated with getting people to be honest and setting up markets...so huge in fact, that we use government taxation or regulation to deal with pollution, and not the free market, and we also produce ideology (for example, religion and culture to try to increase honesty)

The Law and Economics people (for example circuit Judge Posner and I think Nobel Laureate Douglas North) say that judges should make decisions about who owns disputed property based on who can utilize and exchange the property with the least transaction costs. Actually they believe that societies will naturally evolve in time to assign property rights to individuals who can transact with the property the most cheaply. So societies will evolve toward more and more free exchange of goods and ideas (decreased friction in the economic system). According to Posner, it is a judges job, and the governments job in general, to help along the natural course of history. As far as I can tell, arranging initial ownership of property rights to goods to minimize cost of exchange, is as far as one can take free market economic ideas without also talking about "demand" curves and peoples "preferences".

Now, back to New Orleans. The majority of Americans (according to polls) favor its reconstruction. A minority do not. Who owns the joy of New Orleans, the wonderful Jazz that comes together in the city, the varied dining from a hundred different restaurants, the walk down Bourbon street with all of its sights and sounds (at least before I get married)...etc? Who owns the rights to all this conglomeration of different competing businesses, creating the unique ambience of the city?

Yes, it is one of those real world situations to which we don't know the answer. In other words, market economics is neutral about the question of who owns the ambience of the city (unless we invoke a transaction cost perspective). If the government were not involved, I would be willing to give say 100 dollars, but not for infrastructure, rather to help the needy. If, however, I know that the overwhelming majority of Americans are willing to give, say 300 dollars to rebuild the city, and that others in fact will actually give that money (say because they are taxed), I am now willing to give 300 dollars myself via taxation. Why am I willing to give more, now (just because others are taxed as I am taxed.)? Because if the vast majority of EVERYONE gives towards rebuilding New Orleans, the basic infrastructure of New Orleans will reappear, and millions of Americans, including me, may enjoy the city again. Giving to New Orleans is a "public good" because most Americans want it there as a whole(well, not quite *there*, but rebuilt somewhat away from the lowest parts of the area.)

The majority of us want to get together and are willing to pay for its partial reconstruction, provided we can guarantee that others (who also favor it) will pay, also.

How should a libertarian think about this? Let's assume transaction costs are zero, and let's assume 2/3rd's of Americans want to spend 300 dollars to reconstruct the city. Let's further assume a completed New Orleans has absolutely no value at all, to the other 1/3rd who vote against its reconstruction. If everyone is honest about his preferences (cost of ascertaining a persons true belief is zero) and the cost of market transactions are zero, then each of us in the majority, can use our government to combine our money (300 dollars a piece) confident that all others who actually favor this will pay this amount, too. So Gil and others like him pay nothing (and they are permanently excluded from New Orleans for life), but they pay no taxes. Unanimous rule.

But we can't do this, because the cost of people lying about their preferences is too high. The majority, who actually believes that the city should be constructed, should from a self-interested perspective, vote against the city, confident that each ones marginal contribution will do nothing to change the total amount given. So most in the majority will defect to the minority, no money will be generated, and the city will not be built, despite the willingness of the majority to pool money and build the city. So noone votes for New Orleans. So the city does not get rebuilt.

Why can't people organize their own money? Because the transaction cost associated with 200 million people each contributing 300 dollars is too high. Why? Because of the cost of contracting, but primarily because each person would have an incentive to lie about whether he wants to give, just as each has an incentive to lie about how much he favors national defense in a purely voluntary system. Each contribution of his neighbor benefits the individual, without the individual having to pay for it. So no one pays for it, and we will get no New Orleans and no National Defense.

So sometimes we settle things by majority vote with enforced taxes on everyone, when it is too expensive to create markets for certain types of goods. If Gil wants to stop the majority from organizing its money this way via the government, he must admit that he is being coercive, because I am fully willing to admit that my position coerces him.

And it is still a different discussion whether Gil and his friends in the minority should be willing to pay the majority to stop building New Orleans (if such markets for this type of exchange could exist). Again, Libertarian (free-market) principles are *neutral* on this disagreement, as well, unless one adopts the Judge Posner point of view.

Like many "real-world" problems, libertarian unanimous rule principles are helpful in deciding what should be done in New Orleans, or at least understanding who the winners and losers are. But when markets break down, as I have illustrated with the problem of the reconstruction of New Orleans, it is likely that someone will be coerced and we can only hope that this coercion can be kept to a minimum. We are very far from an ideal world.

And Gil and I would certainly agree that the current use of government funds is egregious, but this certainly does not imply that government should not be involved in the reconstruction of New Orleans, at all.

Michael Golding