Economics and Agency

Alberto Mingardi asks,

Shall we pretend events like globalisation and the feeding of billions are the clear result of the actions of some brilliant men, and that’s it? Shall we produce a Marvel comics version of the free market, that instead of focusing on the invisible (indeed) interactions of many, praises just the courage and intelligence of few?

Read the whole thing. I believe that the issue of agency is indeed very important.

1. As individuals, we are inclined to view our successes as due to our own efforts and choices and our failures as outside of our control.

So, if you have some good things in life, you tend to overstate how much you earned them and understate the extent to which you were fortunate. When you look at others, you tend to see a more appropriate mix of earned success and luck. As a result, to most people, the economy looks unfair. We can see the element of luck in the success of those doing better than us. We don’t see the element of luck in our own success.

One wise piece of advice I got from a co-worker is that they way to be happy is to compare your salary and work effort to that of colleagues who work harder and earn less. Instead, most people do the opposite, and it makes them unhappy. It is a very difficult trick to see your own salary as being lucky in comparison with someone else’s.

2. We are more inclined to think of economic outcomes as determined by deliberate agency than by emergent phenomena.

Thus, we attribute the state of the economy to policy. In my view, we much over-rate the control that the Fed has over the stock market and the economy.

The politician who promises to “fix” the economy can take advantage of both of these inclinations. He can appeal to people’s bias toward seeing the system as unfair by saying that the system is broken. And he can take advantage of people’s bias to over-rate his ability to control economic outcomes by saying that he can fix the system. Of course, after he has been in office a while, unless he has gotten lucky, these inclinations will work against him and in favor of a challenger.

A Very Sobering Sentence

from Jonathan Haidt.

in the academy now, if truth conflicts with social justice, truth gets thrown under the bus.

Earlier in the interview, he says,

For many years now, there have been six sacred groups. You know, the big three are African-Americans, women and LGBT. That’s where most of the action is. Then there are three other groups…Latinos, Native Americans, and people with disabilities. So those are the six that have been there for a while. But now we have a seventh–Muslims. Something like 70 or 75 percent of America is now in a protected group. This is a disaster for social science because social science is really hard to begin with. And now you have to try to explain social problems without saying anything that casts any blame on any member of a protected group. And not just moral blame, but causal blame. None of these groups can have done anything that led to their victimization or marginalization.

Read the whole thing.

One Language of Politics?

A piece in the UK Spectator says,

A senior editor of Nature, one of the leading academic journals, refused to consider it for review because she regards scientific research into the personalities of the long-term unemployed as ‘unethical’, and a sociology professor whom the publishers had asked to peer-review the book refused to do so on the grounds that any book linking benefit dependency to personality must be nonsense because personality is a ‘capitalist construct’.

Pointer from Tyler Cowen. The controversial book argues that welfare claimants have personalities that make them difficult to employ. It’s fine if you prefer the oppressor-oppressed narrative to the civilization-barbarism narrative. But instead of shutting the other side down, you should be standing up for their rights to make their case.

Socialism’s Poster Child?

David Deming writes,

You don’t have to be a student of ancient history to know socialism doesn’t work. The collapse of the Soviet Union in 1989 was an unequivocal demonstration of the moral and economic superiority of capitalism. The misery caused by socialism is unfolding today in Venezuela. Since Venezuela embraced socialism in 1999, poverty, crime and corruption have all increased. Grocery shelves are empty and the annual inflation rate is estimated to be as high as 200 percent.

For the left, the poster children for socialism would not be the Soviet Union or Venezuela. Instead, think of Sweden or Denmark. But one can argue that those are welfare states, not socialist states in the sense of government ownership of the means of production. But consider Singapore:

A majority of the top dividend-paying stocks on the Straits Times Index are government-linked

That is according to Andy Mukherjee. Pointer from Tyler Cowen.

I would suggest focusing on the relationship between knowledge and power. In small states, like Singapore, Sweden, and Denmark, there is relatively little discrepancy between knowledge and power. It is possible for government officials to know more of what they need to know to carry out policy effectively.

Large states are harder for a central government to manage. Decentralized institutions, including markets, do a better job of aligning knowledge with decision-making power.

See my essay on the recipe for good government.

What Books to Read?

Diane Coyle asks,

What ten books would you absolutely want a young person to read – whatever their subject – to be well-rounded? The idea is a kind of summer reading list for someone about to go to university – what kind of broad mental hinterland should they have before arriving to start a social science degree?

Pointer from Tyler Cowen.

Of the ten she lists, I have read Hume, Kahneman, Camus, and Jacobs. I have strong impressions (possibly too shallow) of what is in Darwin, de Beauvoir, and Scott. I have no strong impression of the other three.

a. I have compiled these sorts of lists before. I think that perhaps more important than which books you put on the list is your thought process in assembling them.

b. There is nothing magic about the number 10.

c. Some of the books that would be in my list have yet to be written.

My first category might be called war and society.

1. Violence and Social Orders, by North, Weingast and Wallis. A very powerful political economy framework that I think works.

2. The Best and the Brightest, David Halberstam, about the Vietnam War. It is an epic tale of government failure.

3. Alone, William Manchester’s second volume of his biography of Winston Churchill. If Vietnam was the costliest intervention mistake made by a western democracy in the 20th century, then the failure to heed Churchill’s warnings about Adolf Hitler was the costliest non-intervention mistake.

My second category might be called late 20th-century perspectives on 21st century technology and society.

4. The Diamond Age, a work of science fiction by Neal Stephenson, is longer and more confusing than I would like, but it offers a vision of the impact of technology on society that raises many of the important issues, particularly the class divergences that people are talking about today.

5. The Transparent Society, by David Brin. That also was a very farsighted book, about the issues of privacy and security that are being much discussed today. See my review.

6. The Age of Spiritual Machines, by Ray Kurzweil. He later updated and expanded his thinking in The Singularity is Near, but I think that the older version may be more interesting, because of the long list of predictions made in 1999 for 2009 and 2019 that we can now evaluate.

My third category might be called fictional insights into human nature and power over others.

7. One Flew Over the Cuckoo’s Nest, by Ken Kesey. Don’t bother with the movie, even though it was voted Best Picture. For me, the book offers insights into the dynamics among people who feel entitled to power and people who are nervous about freedom.

8. Animal Farm, by George Orwell. Another book on the determination to exercise power.

9. Lord of the Flies, by William Fielding Golding. I see it as a story of reversion to barbarism.

I do not know how to categorize my next pick.

10. The Blank Slate, by Steven Pinker. The book gives you a lot of modern European philosophy and a lot of evolutionary psychology.

My next category might be “dueling asymmetric insights.”

11. Moral Politics, by George Lakoff. Lakoff, a progressive, offers an interesting theory of the appeal of conservatism. Recommended for conservatives so that you can understand how progressives think of you.

12. The Vision of the Anointed, by Thomas Sowell. Sowell, a conservative, offers an interesting theory of the appeal of progressivism. Recommended for progressives so that you can understand how conservatives think of you.

Finally, I have my category of works yet to be written.

13. Readings on The Industrial Revolution. This would include timelines for growth rates, innovations, and trading patterns. It would include excerpts from various theories (Clark, North, McCloskey, etc.) of why the Industrial Revolution emerged at the time and place that it did.

14. Readings on the Great Depression. This would include a chronology of events, and it would include excerpts from various theories of why it started and why it persisted. It would include analyses of the political legacy of the Great Depression

15. A project that I am currently toying with (probability of attempting of about .2), on the challenge of trying to extricate yourself from political tribalism. A bit of Robin Hanson, a bit of the three-axes model, a bit of Martin Gurri. Possibly embedded in a work of fiction.

Kling on Matt Ridley

My review of The Evolution of Everything is here. I end my review with a series of questions.

If ideas emerge from the “adjacent possible,” how is it that some rare individuals thousands of years ago were able to anticipate ideas that only began to penetrate our culture in the late 18th century, when Adam Smith published his most important works? And why does the idea of evolution continue to face so much resistance today? As Ridley points out, on the one hand there are many religious conservatives and others who insist that biology comes from design, not from evolution. And there are many on the left who insist that economic well-being comes from government planning, not from markets. Are those of us who see decentralized evolution as superior to central planning forever doomed to be in the minority? Or is it possible to envision evolutionary progress on that front as well?

The Quotable Roger Scruton

In Frauds, Fools, and Firebrands, he writes about those who condemn the commoditification of labor,

are we not tired, by now, of this tautologous condemnation of the free economy, which defines that which can be purchased as a thing and then says that the man who sells his labour, in becoming a thing, ceases to be a person? At any rate, we should recognize that, of all the mendacious defences offered for slavery, this is by far the most pernicious. For what is unpurchased labour, if not the labour of a slave?

1. I am reminded of Milton Friedman’s famous retort to a general defending the draft. The general asks, “Would you want to lead an army of mercenaries? Friedman replies, “Would you rather lead an army of slaves?

2. I am reminded of the widespread requirement of high school students to complete hours of “community service” in order to graduate.

Scruton says to the left: Condemn paid labor all you like. It is more voluntary than the alternative.

Separately, on the philosophy of science, Scruton writes,

Philosophers of science are familiar with the thesis of Quine and Duhem, that any theory, suitably revised, can be made consistent with any data, and any data rejected in the interest of theory.

That is certainly my view of macroeconomic theory.

Russel Arben Fox on Jacob Levy

He writes,

It introduces, in clear and compelling language, a new way of making sense of the development of liberal ideas, by distinguishing between what he labels “rationalist” (consistent, transparent, state-centric) and “pluralist” (variable, private, culture-dependent) responses to the threats to individual freedom which have arisen throughout the history of liberalism.

Pointer from Tyler Cowen. I also recommend this podcast with Levy, Aaron Ross Powell,, and Trevor Burrus.

Should a restaurant owner be allowed not to serve someone based on race? The “rationalist” theory of liberalism says “no.” The pluralist theory of liberalism says “yes.” An often forgotten aspect of Milton Friedman’s Capitalism and Freedom is that he took the pluralist side on this issue.

Before you jump to the pluralist side of this debate, consider what Fox calls

the rational reformer who wishes to get rid of inconsistent trade barriers and idiosyncratic excise and sin taxes, all in the name of maximizing the benefits of creative destruction

Think of the Commerce Clause as being on the rationalizing side.

Still Trolling Anarchocapitalists

David Henderson writes,

A problem that any stock exchange must deal with is enforcement of contracts. Imagine, for example, that someone sells a stock short, but contrary to his expectations the stock price rises, and he must satisfy his contract by buying the shares come settlement time. What if the short seller balks and doesn’t stick to his agreement? This did not happen often, writes Stringham, because traders had to worry about their reputations.

But couldn’t those who were cheated by short sellers have gone to the government to make the short sellers keep their word? They could not, and the reason is simple. Stringham points out that short selling was illegal and, therefore, going to the government was futile. If anything, those who had wanted to renege on their short-selling contracts could have gone to the government to get it to support their reneging. But Stringham quotes an analyst of the time pointing out that this didn’t happen much. People were expected to keep their commitments and largely did.

This is strong evidence against the claim that complex market transactions between strangers need some form of external government enforcement.

Some remarks.

I am not claiming that private governance in the absence of government support is impossible. I am claiming that it is costly. In this example, my claim would be that short selling is more costly when it is illegal than when it is legal, because short-sale contracts are perceived to be more difficult to enforce when they are illegal. That claim may be incorrect, of course. But I would bet that if you compare markets where short-selling is legal with markets where short-selling is illegal, the transaction costs will be lower in the former.

Also, consider alcohol and drug prohibition. Both of these almost surely raised the costs of transactions, and in both cases violence plays a role in market governance.

Having said that, I would point out that examples of markets that the government treats as illegal are not good examples to prove my point. When government makes something illegal, it artificially raises transaction costs in those markets, because people fear prosecution. So even if costs turn out to be higher in illegal markets, I cannot argue that this is due to absence of government. It may be due to the hostile presence of government.

As far as I can tell, we are left with purely hypothetical thought experiments. Take an example of a complex economic activity that involves a lot of specialization and trade. The famous pencil, or a toaster, or an I-phone. The parties involves in the process of assembling such goods involves do not know one another. They cannot gauge reputations, nor can they even know whether other parties care about their reputations. Now, remove all government enforcement of contracts, and imagine what happens.

What I imagine is that the parties have to come up with multi-layered contractual arrangements and enforcement mechanisms that are incentive compatible and fully state-contingent, so that everyone can be sure that disputes won’t erupt into violence. I am not arguing that this cannot be done. What I am claiming is that these transaction costs will be lower when in the back of everyone’s mind there is the understanding that there are government courts that have coercive powers to enforce decisions.

Government does not provide optimally or costlessly the legal infrastructure that facilitates complex trade among strangers. However, my intuition is that in the absence of government such infrastructure would cost much more to put in place.

The Libertarian Solution to College Sports

Glenn Reynolds wrote,

If the NFL and NBA want farm teams let the build their own.

The Washington Post has done a nice expose series on the money that gets spent on college sports. But even on its editorial page, the Post only talks about reforms that tinker around the edges.

I agree with Reynolds. I suspect that the romanticization of college sports comes from the same human tendency that produces the romanticization of government. Lots of people will tell you that they hate pro football and hate pro basketball, but they love college sports. Because it is non-profit.

I have the same problem with the Olympics.

And with non-profits organizations.

We over-rate the status of people who do things for “free” and we under-rate the status of those who seek to earn profits.