Market fundamentalism is far from the mainstream of economic thought. The mainstream folks consider their work non-ideological and merely technical because they all share the same tacit presuppositions of political economy. It would be healthy if they looked through a different window, and spent some time reading those Nobel economists I mentioned above, or the Nobel worthy economists I mentioned as well.
Read the whole thing. I had a hard time choosing an excerpt. It also could use more fleshing out, in my view.
What Boettke is wrestling with is an asymmetry between mainstream economics and those of us with a free market bent.
Here is how I would describe the asymmetry. I think that the free-market types understand the main arguments of mainstream economists, but I think that mainstream economists only seem to deal with a straw-man version of free-market economics. Keep in mind, however, the Law of Asymmetric Insight: when two people disagree, each one tends to think that he understands his opponent better than the opponent understands himself.
I think that we on the free-market side understand behavioral economics. We understand asymmetric information. We understand market failure. Thus, we differ from the straw-man version of us that mainstream economists dismiss.
On the other hand, mainstream economists appear to me not to appreciate the two most important arguments that we have. One is the socialist calculation argument. My sense is that mainstream economists either do not believe that the socialist calculation problem is real, or they believe that it only applies to socialist dictatorships. In fact, any government program to spend, tax, or regulate will encounter the socialist calculation problem. That is, government planners face a fundamental information problem themselves. Knowledge is dispersed. What planners do not know is important, and indeed it can be more important than what they claim to know about market failure.
The second argument is the public choice argument. This is often over-simplified as “government officials act based on self-interest.” The deeper issue, which Boettke mentions in his post, is that markets and government should be looked at in parallel as institutions. The market process has certain strengths and weaknesses. Government has other strengths and weaknesses. The mainstream approach simply assumes away all weaknesses of the political process. Once an economist identifies a market failure and a policy to treat it, the next step if to play fantasy despot and recommend the policy.
Finally, I have to say that this is not mere abstract philosophy. The socialist calculation problem is real. It affects financial regulators, who in the period leading up to the financial crisis used crude “risk buckets” to alter the incentives of banks. That approach was woefully information-poor, and it created huge incentives for banks to do exactly what they did with risky mortgages. See Not What They Had in Mind. The socialist calculation problem affects every agency of the government, from the FCC to the FDA to the panel of experts who is supposed to determine which medical procedures to allow.
The institutional weaknesses of government are real. Read Peter Schuck’s book. You can get the flavor of it from his talk and my comments.
The death panels or NICE or whatever you want to call them is the most glaring example of this. Knowledge in medicine is a day-by-day thing. In fact, it changes intra-day. Pretending that this can be fed to some panel is preposterous and yet people seem to really believe it.
(that’s not to say that individual doctors know all the information instantaneously either, but dispelling that strawman doesn’t support a poorly motivated and isolated centralized panel)
As to the gist of the article itself, just imagine how left academic economists would be if they weren’t into economics!
I think that’s a good summary of the same differences between non-economist mainstreamers and free market types, too.
I think perhaps where the disconnect occurs is that those on the left don’t see themselves as socialist central planners, so they don’t have to worry about the socialist calculation problem. E.G., Basel and the OCC aren’t telling banks what kind of loans they should be making or to whom or in what amount; of course they don’t have all the knowledge and information to do that. All they’re doing with risk-weighted capital regulations is requiring banks who make riskier loans to maintain a larger capital cushion to protect the bank’s depositors. What on earth could be wrong with that?
It’s a seductive line of reasoning because you can start off with something very simple, like mandating that a bank should hold a capital cushion of ten cents for each dollar of assets, which sounds sensible and all well and good, but the problem is that the second, third, fourth et al order effects of policies like that are difficult to predict, both in their nature and their magnitude. So thirty years later you have unwittingly created this whole new industry of originators, investment banks, broker/dealers, rating agencies, and servicers whose entire raison d’etre is seemingly helping commercial banks evade that 10% capital requirement, but it all happened very slowly and gradually and most of it out of the public eye. Plus, there were all these other changes in technology and the size and scale of the financial system happening gradually over the same period of time which made it hard to recognize exactly what was going on and why.
Or read this on Schuck: http://econlog.econlib.org/archives/2014/07/schuck_on_why_g_1.html
Discussion of this subject here seems to have reached a stalemate that precludes intellectual progress.
You write as if progressives are unaware that knowledge is dispersed. Do they think government actors know everything? Presumably they think we know enough that the policies they propose, with all their inevitable faults, will have better consequences than leaving things to the market and its imperfections. In discussing public choice, you write as if serious people think that the market has no strengths and government no weaknesses (so they can “play fantasy despot”).
By putting things this way you produce a mirror image of the kind of argument you attribute to the Left, in which noting the existence of market failure virtually settles the question of what to do. In each case, one thinks that it is a significant intellectual contribution to point out the inadequacy of an extreme and implausible version of the other side’s view, so one feels free to omit the only important step, which is showing that the course of action one proposes will likely have better results.
I don’t know the best way to take that step (accumulation of examples?), but no one will be motivated to do it as long as he thinks that refuting simplistic opinions is a good day’s work.
I’d be interested in seeing some quotes from left wing thinkers indicating that they are aware of tge limitations of government action versus markets.
“so one feels free to omit the only important step, which is showing that the course of action one proposes will likely have better results.”
The problem is that reducing government is rarely tried. Every crisis leads to more government, even if the evidence was clear that the government didn’t stop the crisis from happening, so maybe its not good to double down.
The taxation of bad externalities improves social calculation, even if the cost is not well understood, so no, uncertainty does not always weigh in favor of markets. Nor are markets free from miscalculation or government free from following their lead. Nor should we assume there is any utopia free from the difficulties of public choice, but that it already permeates all, markets, institutions, and law alike.
“even if the cost is not well understood”
Kind of depends on how poorly the price is understood don’t it?
“Mainstream” Academic Economics leans left because they’re Academics.
It’s far easier to get published, tenured and loudly applauded in the academy if you’re telling a story about how the world needs to put the academy in charge of everything.
To be fair to the mainstream economists, the socialist calculation problem should really be relabeled as the organizational calculation problem. Every organization must deal with the same type of information problems. Many organizations do a better job at organization than the market at particular times and places and within a niche. I believe Coase’s early work did a good job identifying this idea.
In this context, the problem with government may be a combination of police powers, which other organizations rightfully don’t have, and an obtuse feedback mechanism.
I suspect that when the government does a pretty good job of calculation it is because there is a pretty good emulation of a market going on within that part of the government. Voting is a form of market emulation, for example. Not a great one, but to the extent it does a good job is the extent to which it emulates a market. When disinterested parties are given a seat at the table, that’s when things get screwy, and not coincidentally when it stops looking so much like a market.
Another really good, insightful post. Mainstream economists also neglect the lessons of law and economics. The ‘identify market failure and then the government regulates to fix it’ not only ignores the public choice literature but forgets about the common law. The failure is ordinarily a failure of the market and of the rules of the market prescribed by the common law. The choice is rarely between anarchy and market failure v government regulation but it is between two methods of public control – the common law system of privately enforced rights and the administrative system of direct public control – and should depend on weighing up the costs and benefits of the decentralised private enforcement of the common law v centralised regulation in particular contexts. There is only a case for centralised regulation if it improves on the common law.
As the old saying goes, behind every apparent double standard is a rigorously enforced unspoken single standard.
Mainstream economists believe that the masses suffer from market failure, asymmetric information issues, etc.
They also believe that they, the educated elite, do not suffer from these problems, and should rule. It’s the same reason why they may talk about being the party of the poor, but they would never be willing to legislate for the opinions of the poor when it comes to gay marriage.
I tend to think the left bias derives from institutional incentives. First they have to win grants. That means they have to convince someone of the importance of their investigation. It is easier if your problem is bigger. Second, they have to fill papers. This is more convenient with math and aggregates fit the bill for both of the first two foundational requirements.
I see it as similar to NPR’s problem. Nation-scale “focus” almost assures a centralization bias. Nothing more is required. Positive feedbacks handle the rest.
The odd part is that they don’t see the problem. I do. A businessman would pUT counter balances in place. So the academia market must be in failure.
>—“The mainstream approach simply assumes away all weaknesses of the political process.”
THIS is a demonstration of how you understand your opponent’s position better than he understands yours? The irony here is breathtaking.
Everyone understands that the political process is a mess. Yes, they all blame the other guy but who are these people who think the political process has no weaknesses? Half of what Krugman writes is complaints about the political process.
Yes, Krugman complains that the politicians won’t get out of the way and let the credentialed bureaucrats make all important policy decisions. No assumptions or blinders there.
Yes, he complains that the process isn’t a platonic ideal, then makes policy prescriptions as if it were.
The Left’s complaints about the political process are very narrow; things would work fine if only the Right would stop disagreeing with them. That to me, reinforces that they are unable to appreciate what Kling points out.
On the other hand, Obama has started to assume away the challenges of the political process…
But seriously, I suppose we’d need fMRI to determine the real winner of the ideological Turing test, but until then my money is on Arnold et. al.
Certainly, even if half of what Krugman writes is what you say (and I doubt it), it is certainly not what Arnold is referring to. Can you point to examples of Krugman discussing unintended consequences of his desired government policies? Is it half his writing?
You misunderstand my point. I am not claiming that Krugman is some exception to “the Law of Asymmetric Insight.” He most definitely is NOT an exception to it.
I AM pointing out that Arnold goes immediately from stating that this law applies to each side to saying that it really applies primarily to only one side. This is actually a hilariously unintended case of the law at work.
I think that Bottke is right to say that mainstream economics is not dominated by market fundamentalism. Arnold goes directly from citing a “law” that applies to each side in a debate to saying this “We understand asymmetric information.” If that’s true then the “law” is wrong. You can’t have it both ways.
Neither Krugman nor anyone else expects the things they don’t expect. BOTH SIDES do understand that their attempts to institute the policies they prefer will be mangled in the political process with unpredictable results. They both complain about that endlessly. It is hardly unnoticed. Each side continues to advocate for the policies they think are best anyway because they believe that something closer to what they think is optimal will work better than something farther from it.
“Everyone understands that the political process is a mess.”
I like gridlock. Its working as advertised. Do nothing is better than Doi Something! most of the time.