It his Amazon review of Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up.
First, neoclassically inspired public economics provides a very powerful and largely correct framework for analyzing when markets work well and when they fail. Second, markets are often fragile and easily destabilized unless properly regulated. Third, markets and regulating institutes are not alternatives but rather complements. Fourth, neoclassical economics cannot model state failure, and therefore overstates the latitude for government intervention in stabilizing the economy and correcting market failures. On reason for this failure is that government is subject to political forces that lead it to favor special interests rather than the general good. What Colander and Kupers tell us is that there is a second reason: the market economy is a complex, dynamic, and adaptive system more like a natural ecology than a man-made machine.
The complex economy cannot be controlled, as the planners would like, but it can be influenced by very carefully formulated and judiciously applied “rules of the game” that move market dynamics in preferred directions. In this respect, traditional planners are like the Queen of Hearts in Through the Looking Glass who cannot stand the fact that she cannot order the flowers in her garden to heed her bidding, and employs a bevy of “gardeners” to paint the flowers to her specifications. The situation is worse for an economy because there is no regulatory counterpart to painting the flowers. “The [effective] government does not impose norms, or even force individuals to self-regulate. Instead it attempts to encourage the development of an econstructure that encourages self-reliance and concern about others.” (p. 9).
Gintis’ Amazon review essays, such as this one, are often outstanding. For the pointer to the book, I thank Tyler Cowen.
I will admit my ignorance. What is the “market failure” that is so easily mentioned, and what is the wonderful “regulation” which supposedly corrects it?
Herbert Gintis above: “( A complex economy cannot be controlled but it can be influenced by very carefully formulated and judiciously applied “rules of the game” that move market dynamics in preferred directions. )”
My standard for reading is to associate each general term or idea with an example. This keeps my imagination from spinning off into agreement. I want the writer to communicate something definite, and not be a surrealist painter, or even an impressionist .
“Market failure” brings to my mind multiple stories of government regulation applied to help established businesses and restrict the competition/freedom which would deliver more to me. What is the “market failure” other than the disruption of government control?
Consider “very carefully formulated and judiciously applied rules of the game“. An example does not come to my mind. I know of ponderous, unreadable, complicated, and arbitrarily imposed regulations. Where are the “very” carefully crafted and delicately imposed ones?
“Rules of the game” sounds nice, but avoids the reality of arbitrary interpretation and detailed meddling which regulation actually imposes.
Consider “move market dynamics in preferred directions”. That is abstract expressionism. What can that mean? My first thought is rules imposed by politicians on say alchohol production and distribution, rules which are judiciously applied after paying bribes to the right people.
Whatever government regulation is curing, I don’t see the disease, but I do see the horrible side effects. It is time to cut back on the medication.
Overall I like the quote and its hazy swirls of thought in pleasing pastels. I just don’t know what it means.
When I think of “moving market dynamics in preferred directions,” I think of the Community Reinvestment Act and the FHA along with Fannie and Freddie, the purpose of all of which was to either make mortgage loans cheaper or nudge financial service firms into making loans to lower income individuals or to people and businesses in lower income neighborhoods than they otherwise would.
This is a good example, because it fits with the rest of that sentence, too. They were able to subtly influence credit markets to achieve their goals by, as Gintis describes it, “implementing very carefully formulated and judiciously applied policies,” and you can tell because low-income people with no down payment loans have maintained very low default rates, housing prices have remained stable and affordable and there have been no major financial crises to speak of for decades, right?
Oh wait….
Yes, a great example of judiciously applied regulation to correct the market failure of non-universal home ownership.
I love how those regulations produced a new economic activity, “predatory lending”.
Before, people saving a downpayment went to a banker to see what house they were qualified to buy. The banker did the math and evaluations and told them the news. When they were told “no”, the worst that happened is that they had to save more.
After the new regulations, the bankers were instructed to say “yes”, many of those borrowers couldn’t meet the payments, and they suffered the humiliation and loss of bankruptcy.
Only under judicious regulation could bankers be nudged into giving people money so that both the bank and the borrower lost.
In our enlightened times, the government harms people by subsidizing them.