Two Thoughts on Douglass North

1. Deirdre McCloskey treated him as an adversary.

2. I cannot think of any other Nobel Laureate who produced anything as significant after winning the Nobel Prize as Violence and Social Orders (My most recent essay about that book is here, and more links to my use of his framework can be Googled), or even come close.

Tyler Cowen has more.

Garett Jones is Endorsed

‘Pseudoerasums’ writes,

Your “moral circle” is wider with intelligence and patience than without.

…To paraphrase Garett Jones…smart, patient people are more Coasian; they find a way to cooperate and build good institutions.

It is a very long essay, and all throughout I was thinking of Garett Jones, so it was nice to see him turn up at the end. Pointer from Tyler Cowen.

The substantive point is that you can expect good institutions when you have a population that is high in intelligence and patience. Although the author of the essay does not go this far, I would suggest a causal pyramid with population intelligence and patience at the bottom, institutions the layer on top of that, and economic outcomes and other indicators of human development on top of that.

See also the appendix to my recipe for good government piece.


I review the latest book by George Akerlof and Robert Shiller. I generally admire both authors. Ordinarily, if I do not like a book, then I do not write a long review. However, because both authors are Nobel Laureates, and because the book has received some positive press, I made an exception and let go with both barrels.

The authors do not deny that markets often work. However, if phishing equilibrium is limited to specific types of products, then the authors do not say so, nor do they give any criteria or characteristics to look for in order to predict in which markets phishing equilibria will be most prevalent.

But you have to read to the whole review to get the flavor.

Recall that Alex Tabarrok did not much are for the book, either.

The Basic Social Rule

My latest essay:

I claim here that humans have a fundamental rule of social morality, which is: Reward cooperators; punish defectors. The use of this rule is what enables humans to work effectively with strangers, making possible sophisticated economies and civilizations. However, this rule can cause problems when people mis-classify the social actions of others.

Please read the whole thing and comment. These are ideas that I also plan to include in the Book of Arnold.

Kirzner vs. Samuelson

David Glasner writes,

In Kirzner’s view, the divergence between Mises and Hayek on the one hand and the neoclassical mainstream on the other was that Mises and Hayek went further in developing the subjectivist paradigm underlying the marginal-utility theory of value introduced by Jevons, Menger, and Walras in opposition to the physicalist, real-cost, theory of value inherited from Smith, Ricardo, Mill, and other economists of the classical school.

…as the neoclassical research program evolved, the subjective character of the underlying theory was increasingly de-emphasized, a de-emphasis that was probably driven by two factors: 1) the profoundly paradoxical nature of the idea that value determines cost, not the reverse, and b) the mathematicization of economics …The false impression was created that economics was an objective science like physics, and that economics should aim to create objective and deterministic scientific representations (models) of complex economic systems that could then yield quantitatively precise predictions, in the same way that physics produced models of planetary motion yielding quantitatively precise predictions.

neoclassical economists who developed this deterministic version of economic theory, a version wonderfully expounded in Samuelson Foundations of Economic Analysis

Pointer from Mark Thoma (!).Read the whole post, which refers to this lecture by Israel Kirzner. (Kirzner starts about 17 minutes in)

The Samuelson tradition keeps wanting to treat production technology as known and costs as objective. It is long on math and short on philosophy. For an exploration of subjective cost, see James Buchanan’s Cost and Choice. For an analysis of the ideological implications of subjective cost, see my essay.

I Would Not Publish This Paper

by Sharon Mukand and Dani Rodrik. From the abstract:

We distinguish between three sets of rights – property rights, political rights, and civil rights – and provide a taxonomy of political regimes. The distinctive nature of liberal democracy is that it protects civil rights (equality before the law for minorities) in addition to the other two. Democratic transitions are typically the product of a settlement between the elite (who care mostly about property rights) and the majority (who care mostly about political rights). Such settlements rarely produce liberal democracy, as the minority has neither the resources nor the numbers to make a contribution at the bargaining table.

Pointer from Tyler Cowen.

My problem is that the paper does not discuss North, Wallis, and Weingast, the subject of my recent review. NWW would say that a non-liberal democracy is just another form of a limited-access order. NWW have a much richer discussion of the elements needed for a transition from a limited-access order to an open-access order.

North, Wallis, and Weingast

It is not a new book, but still I wanted to review it.

Open-access orders are likely to be highly stable. Everyone who is ambitious and able to organize others is free to attempt to earn a profit or address a political problem. This gives citizens a feeling of having a stake in the system. Moreover, the layers of beliefs, norms, and institutions that precede the open-access order all serve to reinforce the order once it is in place. For example, Americans are culturally committed to free speech, disdain for corruption, and obedience to the Constitution.

This leads one to be relatively optimistic about the prospects for the United States, regardless of how one feels about recent political and economic trends.

The Greek Crisis and the Subprime Crisis

Ana Swanson writes,

Matthijs compares the situation to the U.S. subprime crisis. Who was really at fault for the housing crisis in the U.S.: The subprime borrowers who bought houses they couldn’t afford, or the predatory lenders who encouraged them to take them out?

I, too, see parallels with the subprime crisis. However, I do not think that predatory lenders are to blame for either. In both cases, bank regulators were responsible for allocating credit. In the first instance, the regulators encouraged banks to treat mortgage loans as low risk. In the second case, they encouraged banks to treat all European sovereign debt as low risk. See The Regulator’s Calculation Problem.

The irony is that after messing up credit markets, the regulators ask for and receive more power. With the sub-prime crisis, the regulators were rewarded with Dodd-Frank. I presume that the ultimate outcome of the Greek crisis will be similar.

Anil Kashyap on Greece

Probably the best analysis so far. Mostly, it is a recap of the past. But in talking about the pending referendum, he writes,

if the public sides with Tsipras government, then there will be a very sharp recession over the next few months. Tax collection is likely to collapse. The Tsipras government is unlikely to survive the economic collapse.

He also writes,

Greece should have defaulted in 2010. Its debt burden then was unsustainable and nothing since then has changed this. It is true that financial markets were much more jittery at that time, but the money that was raised to pay off the creditors in that bailout could have been diverted to support Greece and other weak countries. Once the bad rescue of 2010 was undertaken, it was inevitable that some form of debt relief was going to be necessary.

Imagine how different the political dynamics in Europe would have been if the German and French banks had been explicitly bailed out.

Pointer from John Cochrane (and from Greg Mankiw and James Hamilton). Of course, I think that explicit bailouts are exactly what the political system will not allow. Even going forward, I still think that “opaque bailout” is the most likely outcome. But I also think that there are some lessons for us.

1. At some point, you do run out of other people’s money (that is actually more true for us than for Greece, because we are bigger and therefore harder to bail out).

2. When you run out of other people’s money, political tensions rise considerably. See my essay Lenders and Spenders.