My Explanation for Economists’ Divergent Beliefs

In the new EconJournalWatch, editor Daniel Klein asked a symposium of economists to explain why

In the United States, on matters of the welfare state and the regulatory state, virtually no economist favors one while opposing the other.

I gave what I thought was the most obvious and straightforward answer.

Economists for whom market failure is relatively more salient and government failure is relatively less salient will tend to favor government activism, and conversely.

If you are interested in more elaboration, read the rest of my essay.

9 thoughts on “My Explanation for Economists’ Divergent Beliefs

  1. Nice essay. In my experience, many economists pay lip service to government failure, but do not really understand it, except at the most basic level. Unless one sees/experiences government failure up close and personal, it remains a vague and unsatisfying concept, as opposed to the traditional, long-established market failure literature.

  2. But why is government failure relatively more or less salient for some folks?

    In your essay, you theorize that it depends on where your formative (undergrad and grad) experiences were. At least, that will make you somewhat more or less likely to tend toward one end or the other of salience.

    I’m not sure I buy that as a causal connection though. But, I am intrigued.

  3. This suffers from too broad of categories. Extreme positions indicate lack of sense or thought and the avoids the real issue of how little is too little and how much is too much.

  4. The first quest would be is there really such a bifurcation. It seems the answer is yes. Perhaps it stems from picking sides early on to be either team for or against partly based on strawman assumptions about the other team. Then once you have chosen sides you begin the long process of looking only in places that reinforce your beliefs.

    • Yeah, that pretty much matches my intuition as well.
      When there is so much evidence of the other side’s malfeasance/incompetence, and of your side’s good intentions, it is quite easy to convince yourself of the One True Way. It seems to be a byproduct of humananity’s adaptations to social cohesion within groups.

      • So, what explains the correlation between the two issues of welfare and regulatory?

        I’ve wondered if it has to do with a form of narcissism. I don’t mean that as an insult but more the technical psychological feature. If you don’t see a difference between the self and non-self of government and market, then taking other peoples’ money to fund your preferred solution to your prioritized problem set makes a lot of sense.

  5. To make government failure more salient, I like to remind people of small-scale governance in their world. They’re more familiar with how it works, and I can only hope they extend the idea to wonder how things are working in Washington.

    For example, does the student council of a high school or college accurately reflect the interests of the entire student body? Are they competent to do anything about it, even to the extent that they do?

    How about your neighborhood association? Most often, they seem to be composed of people who have nothing good to do with their time, e.g. retirees and home makers. They’re neither representative nor especially good at it.

    How about the leadership of your favorite club that you go to? How did they get that position? And again, how often are they particularly effective, versus just being good enough that everyone doesn’t rebel?

    And so on.

  6. Many entries in your list of market failures are not failures at all.

    1) I don’t think having regrets qualifies as a market failure. Regret is an organic element of any decision making process: fear of possible regrets certainly affects our decisions. If markets are about people making choices, regrets are indispensable feature of markets.
    2) It’s good to know laws of probabilities, but they are of secondary importance in situations where probabilities themselves are uncertain. Also, probabilities enter the decision making process along with the values which market participants place on outcomes (also uncertain) and on probabilities themselves. Some people value rare events of high magnitude. Others prefer to ignore them. Again, different people evaluate probabilities and outcomes differently – that’s why people use markets to trade.
    3) The concept of efficient markets cannot be based on everyone having adequate information. It is obvious that information is always incomplete, local, particular, granular. Also, different pieces of information are weighed differently by different people. That’s also one of the reason they trade.
    4) I also have doubts regarding externalities, market power, and particularly regarding uninsurable risks. The latter implicitly assumes that high cost of bargaining is something undesirable, that dominance is unfair, and that some risks should be insurable. These are all normative statements.

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