Robert Nozick Vs. The U.S. Congress

This article appeared on on October 7, 2008

Now that yesterday's market nosedive shows the disappointing Congressional bailout has not calmed markets, let the post-mortem begin. Disasters like this latest financial meltdown don't just happen. Mistakes this huge require an impoverished political philosophy to grease the skids. Fannie and Freddie didn't design their horrific lending policies by chance. No, behind this lending fiasco lay the strong collective preference for the "patterned principles" of justice that Robert Nozick attacked so powerfully in his 1974 masterpiece, Anarchy, State, and Utopia.

Believers in patterned principles hold that there is some preordained social order that is more just than others. Accordingly, the function of the state is to use the levers of powers to manipulate behavior to achieve the desired outcomes. These patterned principles stand in opposition to historical principles of justice, which are content to establish the rules of the game and then let the legal moves by individual players determine the social outcomes. For Nozick, the key rules were rules of justice in acquisition (to set up the initial property rights) and justice in transfer, whereby those rights (and others derived from them) could be exchanged or combined through voluntary transactions.

Because Nozick was no utilitarian, he did not dwell on the powerful efficiency features of this system, which shine through for ordinary real estate transactions. The key function of the legal system is to minimize the transactional barriers and increase the velocity of voluntary exchanges, all of which generate mutual gains for the parties. So long as one is sure that the given distribution of resources is obtained by legal moves from the original position, don't worry about the relative positions of one person vis-à-vis the others. Don't, in other words, use state coercion to create a distinctive pattern of rights deemed ever so desirable in the eye of some political beholder.

Congress, alas, is a pattern junkie. In his perceptive Wall Street Journal op-ed, How Government Stoked the Mania, Russell Roberts noted that the current congressional fixation called for a relentless increase in homeownership relative to renting, with certain minimum fractions allocated to low-income families. Pray tell, what patterned principle dictates that we should have 12% of all mortgages made to low-income borrowers in 1996, 20% in 2000, 22% in 2005 and 28% by 2008?

None. It is always easy to invent reasons, but they are all wrong. Homeowners, we're told, will take better care of their property and have a permanent stake in their communities. Perhaps. But then again, landlords, if left to their own devices, will select tenants with good habits in order to preserve the value of their real estate. They will bounce out bad tenants in order to keep the good ones in place. Their efforts could easily generate the desirable traits the pattern player hopes to get from beleaguered homeowners, who are likely to run down the leveraged property in their possession, knowing that lenders will bear the financial loss.

The grand objectives articulated by Congress--and to be fair, by Republicans who preach the virtues of the "ownership society"--are not freebies that can be satisfied at no real cost. Quite the contrary. Once Congress set in place a destructive lending policy, we could count on private parties to issue bad loans from which they profited, knowing that dear old Fannie and Freddie would happily pay face value for paper that everyone knew was worth a whole lot less.

But Congress lived in a dream world. It forgot that the quality of the paper would deteriorate as its ambitious social objectives let its underwriting go south. So, too late in the game, we learn from yet another case where Congress should have done good by doing nothing at all. Let people rent or buy in unsubsidized markets and then watch with supreme indifference what residential patterns emerge. That distribution would have been a lot less toxic than the brew generated by our fevered political leaders. So says our frustrated libertarian.