A Conflict of Rhetoric

Lawrence Mitchell writes,

A very significant component of success – one that may even be more determinative than hard work – is luck. This is true, even if the advantaged have worked hard to maximize the benefits of that luck. By luck, I mostly mean circumstances of birth and natural talents and abilities (which might well include the propensity to work hard).

Why do the disadvantaged tolerate this situation? The American myth of self-reliance. No matter the vagaries of fortune, we consistently find that Americans at all levels believe in some variant of the Horatio Alger myth – the classic American rags to riches success story – despite strong empirical evidence that belies it.

Pointer from Mark Thoma.

On the other hand, James Otteson writes,

Human beings are capable of being worthy to be free. Human beings become noble, and, I would even suggest, beautiful, by the vigorous use of their faculties and they become dignified when their lives are their own…

This conception of moral agency allows one to be one’s own person, and to stand, or fall, on one’s own individual initiative, without having to beg for personal favors, without having to grovel at the knees of a king or flatter a lord or satisfy the pleasure of the Regulatory Czar. It grants people the freedom to go where their own abilities and initiative–not someone else’s mercy or condescension–can take them. Yet with that freedom comes responsibility for one’s actions. If you succeed, then you reap the benefits–and no one begrudges you your success because it means you have done well both for yourself and for others. If you fail, however, then you may pay the cost and (one hopes) learn from the experience.

…Contrary to widespread opinion, failure is not something that public policy should attempt to eliminate…failure, and experiencing the consequences attendant on having made decisions that led to failure, is an indispensible [sic] part of moral agency.

Those quotes are from Otteson’s recent book, The End of Socialism.

My sense is that these two authors talk past one another. Otteson’s rhetoric emphasizes personal decisions as the determinant of individual success. For Mitchell, it is the opposite–even a “propensity to work hard” is a matter of luck.

I find myself unwilling to accept either extreme. I am inclined to think that Otteson makes the scope of individual moral agency seem too large, and Mitchell makes that scope seem too small. However, I have yet to finish Otteson’s book or to start Mitchell’s.

Coincidentally, Charles Murray writes,

deeper personal qualities account for what we call political polarization, but that one specific dimension—our respective attitudes toward personal responsibility—accounts for a huge proportion of the polarization all by itself.

Read the whole piece.

James Otteson on Socialism

In a Russ Roberts podcast, Otteson says,

So, who is making the relevant economic decisions? Is it a third party, a person, group, agency who is making it on behalf of others? That’s what I’m calling the impulse toward centralism. Or, is it principally individuals or communities, localized communities, themselves? That’s what I’m calling decentralized decision making. And that is a spectrum.

This ties in to what I call the FOOL theor, meaning Fear of Others’ Liberty. Chances are, few people want to cede their own decision-making to a third party. But many of us think that others’ decisions are bad for them or for society as a whole, and we want a third party to make those decisions instead.

Incidentally, I have started reading Otteson’s book.

My Review of Peter Wallison’s Forthcoming Book

is here.

Wallison’s thesis is that policymakers in Washington underestimated the significance of the surge in nontraditional mortgages. What is perhaps even more deplorable is the way that these mortgages continue to be downplayed in the mainstream narratives of the crisis and in the policy responses that followed.

Meanwhile, CNN Money reports on programs that offer 3 percent down payments.

The new loans will only be doled out to those who buy private mortgage insurance, have a credit score of at least 620 and offer complete documentation of their income, assets and job status. And, to further mitigate risk, the agencies will require borrowers to receive home ownership counseling.

Once again, the government is pushing home borrowership, setting households up to fail and making the housing market more speculative. Of course, when the stuff hits the fan, the government officials involved will blame lenders, not themselves.

What I’m Reading

Vintage Bill James.

Given an option to do so, all men prefer to reject information. We start out in life bombarded by a confusing, unfathomable deluge of signals, and we continue until our deaths to huddle under that deluge, never learning to make sense of more than a tiny fraction of it. We get in an elevator and we punch a button and the elevator starts making a noise, and we have no idea in the world of why it makes that noise or how it lifts us up into the air, and so we learn in time to pay no attention to it.

As we prefer to reject any information that complicates our understanding of the world, we especially prefer to reject information about things that happen outside of our own view. If you simply decide that [data that you lack the energy to process] are meaningless, then you don’t have to worry about trying to figure out what they mean. The world is that much simpler.

Bill James is, of course, a famous baseball quant. He was not really the first–I would give that honor to Earnshaw Cook. But James was a dogged empiricist, always questioning and refining his own methods. Instead of manipulating data to support his opinion, he manipulated data in order to arrive at reliable answers. In that respect, I think he sets a great example for economists, which too few emulate.

But the reason I am reading vintage James is because the man could write. There are now many baseball quants, and some of them may have even more baseball-statistics knowledge than James, but they are not worth reading for pleasure.

The quoted passage is from the Bill James Baseball Abstract for 1985.

Pregnancy and Planning

1. My review of Isabel Sawhill.

Although Sawhill refers to these pregnancies as unplanned and to the children as unwanted, I would note that the mothers’ “revealed preference” is to have children. Not only do they become pregnant, they choose not to terminate their pregnancies or seek to place their children for adoption.

2. David Frum writes,

This is the fascinating irony of the pro-life movement. The cause originated as a profoundly socially conservative movement. Yet as it grew, it became less sectarian. Women came to the fore as leaders. It found a new language of concern and compassion, rather than condemnation and control. Most radically and decisively, the movement made its peace with unwed parenthood as the inescapable real-world alternative to abortion.

What I gather that Frum is saying that conservatives used to stigmatize unwed motherhood, and instead now they stigmatize abortion.

Will stigmatizing unwed motherhood make a comeback, led by liberals? I think that this is unlikely. I think they will continue to hold to a “no-stigma” approach toward women’s choices. Frum implies that the no-stigma equilibrium is for women to have more abortions. I am skeptical about this. My point in (1) is that the assumption that these are unwanted children is questionable.

The Year of Flawed Books

Writing a “best books of the year” post for 2014 means choosing among flawed books.

Six months after Piketty’s Capital made its splash with the “law of capitalism” that r>g, we have Pikettarians saying that, of course, Piketty never said that r>g explains the rise in inequality in recent years that concerns everyone, and in fact anyone who thinks he said that is a knave who has not read the book. I was among the many who never made it through Capital (it gave a new and different meaning to the expression “widely unread”), so I will take it on faith that the whole r>g thing was a head fake. Anyway, Capital does not make my list.

I think that number 1 is Complexity, by David Colander and Roland Kupers. On many pages, I highlighted insightful passages. On many other pages, I highlighted irksome passages. Look for a longer review from me next year.

Probably number 2 is Trillion Dollar Economists, by Robert Litan. It is a great achievement, but even so I wanted a different book.

Number 3 might be Isabel Sawhill’s Generation Unbound, about the pathology of unwed motherhood (it’s not just for teenagers any more) and what to do about it. However, I think that the question of whether “society” should be trying to prevent births of a certain type (namely, from unplanned pregnancies) is more difficult than she makes it out to be. Again, I have a review forthcoming.

Number 4 might be Charles Calomiris and Stephen Haber, Fragile By Design. The financial crisis continues to stimulate books on banking and related topics, and of the recent lot I thought this one had the strongest historical and international perspective. However, in the end, I found its main thesis, that U.S. banking policy is hindered by populism, unpersuasive.

Number 5 might be Mark Robert Rank, PhD, Thomas A. Hirschl, PhD, and Kirk A. Foster, PhD, Chasing the American Dream, which provides a good empirical study of income dynamics using longitudinal data.

Finally, there is a category of books written by friends of mine, in which I recommend Russ Roberts’ How Adam Smith Can Change Your Life, Megan McArdle’s The Upside of Down, and Elizabeth Green’s How to Build a Better Teacher.

UPDATE: Here is Tyler’s list.

Mission-Driven vs. Philanthropic

Peter Thiel says,

mission-oriented companies are often defined by a unique mission that maybe others don’t think is important, whereas a lot of the social entrepreneurship efforts gravitate towards things where you have many copycats doing relatively similar things.

From an interview with Ezra Klein. Pointer from Tyler Cowen.

One of the main recommendations of the Colander-Kupers book is to expand what they call the “for-benefit” sector. By that, they mean corporations that seek both profits and social benefits. To be fair, they tout this more as an alternative to government programs than as an alternative to profit-maximizing firms. As you know, I have been given to ranting against non-profits, on more than one occasion.

Sentences I Might Have Written

A tropical forest is a complex system, but a suburban garden is not. The reason is the the former is deeply interconnected, and it is the interconnected links that define it. A tropical forest will likely collapse if you disturb the natural balance too much, while in a suburban garden you can generally safely remove entire flower beds without affecting its overall health or integrity.

The standard way of doing policy considers our social system as a suburban garden. It tills, plans, and cultivates as if the parts are not interrelated.

That is David Colander and Roland Kupers, writing in Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up.

I am only part way through the book (by the time this post goes up I may be nearly finished). My initial reaction is that it is either more or less Austrian economics. It could be more if I decide that the explicit complexity theory really adds something to what otherwise is a very Austrian critique of mainstream economics. It could be less if I decide that I am disappointed by what I fear will be a treatment of government that I find unsatisfying.

In any case, it looks like one of the better books of 2014. In fact, relative to a very weak 2014 crop, so far this is looking like the best. I first became aware of the book here, but Tyler Cowen never gave it more than an “arrived in my pile” mention, which suggests that he did not find it worthwhile.

Coincidentally, Jason Collins points to an essay by Brian Arthur, who coined the term complexity economics. Arthur also has some sentences that I might have written.

think of the agents in the economy – consumers, firms, banks, investors – as buying and selling, producing, strategizing, and forecasting. From all this behavior markets form, prices form, trading patterns form: aggregate patterns form. Complexity economics asks how individual behaviors in a situation might react to the pattern they together create, and how that pattern would alter itself as a result, causing the agents to react anew.

…It views the economy not as machine-like, perfectly rational, and essentially static, but as organic, always exploring, and always evolving – always constructing itself.

Herbert Spencer on Exit and Voice

In 1850 or 1851, he wrote,

If every man has equal freedom to do all that he wills, provided he infringes not the equal freedom of any other man, then he is free to drop connection with the state–to relinquish its protection, and to refuse to pay toward its support…

Let men learn that a legislature is not “our God upon earth,” though, by the authority they ascribe to it , and the things they expect from it, they would seem to think it is.

These are selections from chapter 19 of Social Statics, reprinted in a new volume of readings from the Adam Smith Society, edited by James R. Otteson. The title of the volume is What Adam Smith Knew: Moral Lessons on Capitalism from Its Greatest Champions and Fiercest Opponents. This looks like an excellent collection of readings for a course in social and political philosophy.

What strikes me about Spencer’s chapter is how clearly he makes the case that exit is more legitimate than voice.

I think that my counter to Spencer would be this:

1. In modern society, we must interact, both directly and indirectly, with many strangers.

2. If we had competitive government, in which each person could choose which set of rules to obey, the cost of interacting with strangers might increase. When you sell me food, how do I know that you submit to a quality-assurance regime that gives me confidence that you are not cheating or poisoning me? Today, I can assume that the simple fact that you live in the United States makes you automatically subject to its rules. With competitive government, I would need some sort of signal.

3. As we expand the list of interactions, the signaling costs may mount up.

I do not think that this signaling-cost story is sufficient to explain and to justify the existence of government. I do not think that government emerged because people got together and said, “Sigh. Yes, government is a really problematic institution, but without it we would have to waste a lot of resources on signaling that we are going to treat strangers decently.”

I do think that there is something to a Hansonian view that we tend to want to affiliate with high-status people, and that certainly includes people with power. And I think that this view accounts for a lot of the support that the state receives. Spencer strikes me as anticipating this view, or coming close to anticipating it, for he complains of

that sentiment of power-worship which still misleads us by magnifying the prerogatives of constitutional governments as it once did those monarchs.

George H. Smith gives a quite different Spencer. In a footnote, Smith writes,

he insists, in Social Statics (1850), that ethics, including the Law of Equal Freedom, applies only to the “ideal man,” i.e., to a future society populated by people with highly evolved moral sentiments.

Pointer from Alberto Mingardi, who himself has written a book on Spencer.

In another essay, Smith writes,

When this remarkable man moved from an early optimism (during the 1840s and 50s) to an extreme pessimism (beginning roughly in the 1880s) about the prospects for individual liberty, when he predicted the rise of militarism and total war in the twentieth century and the political centralization and regimentation that such militarism would bring in its wake, he let it be known that classical liberalism was dead for the foreseeable future. And he was right.

Francis Fukuyama on Big Banks

In his latest book, Political Order and Political Decay, he writes,

Though no one will ever find a smoking gun linking bank campaign contributions to the votes of specific congressmen, it defies belief that the banking industry’s legions of lobbyists did not have a major impact in preventing the simpler solution of simply breaking up the big banks or subjecting them to stringent capital requirements.

It is taking me a long time to finish Fukuyama’s book. It is long and repetitive. I think that every time I read something from him, my temptation is to condense it to something much shorter. If I post a review, I will let you know, and my guess is that if you read my review you will not need to read the book.

He favors a combination of state capacity, rule of law, and democracy. In terms of our three branches of government, the executive branch is responsible for state capacity, the courts are responsible for the rule of law, and legislatures are to respond to democracy.

(Bryan Caplan is not happy with the concept of state capacity. He suspects that it is a meaningless yay-word. If nothing else, Fukuyama seems to me to endow the word with meaning. It means that bureaucrats are effective and ethical, as in Singapore, rather than ineffective and corrupt, as in India.)

Many on the right consider the administrative state, meaning government agencies operating independently, to be a bug. For Fukuyama, it is a feature. In his view, one main reason that these agencies function poorly in this country is that they face too much interference from Congress and from the courts. In my view, agencies are as easily captured by special interests as are legislators.

If David Brooks ever gets around to reading this book, he will heart it. Like Brooks, Fukuyama longs for a political system in which an autonomous elite governs on behalf of the public good. In Fukuyama’s view, the libertarian efforts to constrain government, including checks and balances as well as federalism, end up backfiring. They make government less effective while not constraining its growth.

The ideas are worth chewing on. Do I believe that the elites would, for example, fix the unsustainable entitlements promises if we had a parliamentary system? Or do I believe that a stronger government would be worse rather than better? It’s a tough call.