Russell Roberts's Blog, page 442
March 3, 2020
Complexity Unfathomable
In my most-recent column for AIER I ponder the unseen – indeed, the unfathomable – complexity of modern economic orders. This complexity is lost on most people because they mistake the words, graphs, and statistics used to describe modern economic reality for that economic reality itself. A slice:
Leonard Read’s “I, Pencil” is the best-known attempt to convey the vital insight that economies are far more complex than they appear to the naked eye. “I, Pencil” reveals that behind even an item as seemingly simple as a pencil there teem untold numbers of specialized workers, from around the world, who are, without knowing it, cooperating with each other to make possible an abundance of pencils. Yet judging from the incessant stream of naïve proposals that issue forth from the commentariat and politicians, very few people understand just how complex the economy actually is. The assumption seems to be that the economy is no more complex than are the words, graphs, and columns of data that are commonly used to describe it.
This assumption is wildly mistaken. It’s the equivalent of assuming that anyone can play quarterback in American football at an elite level merely by observing with the naked eye the play of New Orleans Saints’ star quarterback Drew Brees.
There are indeed a small number of things that can be learned about quarterbacking by observing an all-time great such as Brees. How many steps, on average, does he take back from the line of scrimmage after receiving the snap from center? What kind of physical condition is he in: lean, or bulked-up muscular? Does Brees throw overhead or side-armed?
Observing Brees’s play isn’t utterly without value to anyone who aspires to play well at that position. But the overwhelming majority of conscious actions, reflexive movements, thoughts, split-second decisions, knowledge, and ‘feel’ that Brees performs and relies upon to play quarterback well are unobservable and unmeasurable.
Indeed, Brees himself is unaware of many of the facts that contribute to his skillful play. For example, he surely knows nothing of the particular genetic code that determined the precise arrangement of the muscles and ligaments in his throwing arm – an arrangement that, were it just slightly different, might prevent him from succeeding as a quarterback.
Behind what is seen in Brees’s play teem an immeasurable amount of relevant, factual details all of which contribute to his success yet none of which is visible to the naked eye, and very little of which is accessible to third parties even with close diagnoses and high-tech statistics.
If only implicitly, everyone understands the above-stated reality about Drew Brees and other successful athletes. No one would propose that careful observation and measurement of Brees’s play could result in a written set of rules and instructions that when articulated to a careful reader thereby enable that reader to play quarterback at any skill level, and much less at the high level routinely achieved by Brees.
And yet an even more ridiculous supposition about the economy is regularly made by pundits, professors, and politicians. They suppose that through statistics and theorizing they can learn enough about how the details of how the economy actually works in order to enable government to mimic the economy, but in ways that rid it of real or imagined ‘imperfections.’
Pittsburgh Tribune-Review: “Creating prosperity”
In the August 29th, 2008, edition of the Pittsburgh Tribune-Review I reflected on politicians’ contributions to human prosperity. You can read my reflections beneath the fold.
Quotation of the Day…
… is from page 152 of Randy Holcombe’s important 2018 book, Political Capitalism: How Economic and Political Power is Made and Maintained:
The idea that regulatory agencies represent the interests of the general public amounts to wishful thinking on the part of those who have an unrealistic assessment of the incentives involved in the regulatory process.
DBx: Bizarrely, the world is not much populated with people skeptical of strangers possessing the power to coerce. And the world also has, equally bizarrely, an abundance of people who are skeptical of, even hostile to, market-disciplined commerce – commerce governed by the rules of private property, contract, and tort and saddled with no obstructions or other privileges imposed by legislation. Such commerce – although of course never perfect by any standard – works amazingly well in large part because every person operating in it has the right to say “no” to any offers, along with the right to make different offers to whomever they wish.
With the right to say “no,” no one is compelled into a worse position. Yes, people sometimes make mistakes the results of which put those who err in worse positions. (“I thought that saying ‘yes’ to the person selling time-shares would serve me well, but it didn’t.”) And yes, sometimes someone’s saying “yes” to an offer reflects that person’s unusually bad circumstances. (“I wish that I had a better job offer than the one that I accepted as a motel maid, but my skills at the moment are very low.”) But the incentives in markets are clear: if you want to gain by trade, you must make to someone else an offer that he or she finds attractive. This latter fact applies to Jeff Bezos no less than it applies to an immigrant with only the barest of skills.
Matters change greatly when the state superintends, with the power to override, voluntary market choices. No private citizen can say “no” to commands issued by the state. (Well, strictly speaking, each private citizen can say “no” to such commands, but only if he or she is willing to be caged and ultimately executed for his or her haughty refusal to obey those who command.) Unable to say “no” to the command to help subside firm X, to the diktat to pay a penalty for patronizing firm Y, and to the order not to compete with firm Z, there is no reason to expect that the resulting pattern of outcomes will be one of mutual benefits.
And unless those who support government power to superintended and override peaceful, voluntary commerce among consenting adults have a substantive and coherent explanation for how government officials will gain the knowledge necessary to enable them to issue their commands in ways that improve upon market processes, and a substantive and coherent explanation for why government officials will exercise this discretionary power not in ways that differentially benefit them and their cronies but benefit instead the general public, supporters of such government power should be taken no more seriously than we take a person wearing feathers who promises that his dancing and sacrifice of virgins will appease the gods and bring prosperity to all.
Although the language in which they offer their schemes of tariffs, industrial policy, and other interventions masks this reality, all who offer such schemes today – protectionist schemes, industrial-policy schemes, you name it – are the intellectual equivalent of feather-wearing prancing priests who propose to save the village by sacrificing virgins. Such people – despite the illusion they cast to the contrary – have no idea what they’re talking about.
March 2, 2020
Don’t Keep the Faith
Here’s a letter to a young man who is unhappy with what he calls my “inflexible resistance to reasonable industrial policy proposals.”
Mr. Kallio:
You write that my “faith in economics 101 and perfect market prices blinds” me to “the possibility that reasonable industrial policy will protect industries and jobs that markets don’t value enough.”
You misunderstand the argument for markets and against industrial policy. This argument does not rely on market prices being “perfect.” Instead, it relies on the existence of market prices set by producers who spend their own money on producing goods and services to be offered for sale to consumers – consumers who spend their own money – with no party obliged by government to deal with another or prevented by government from dealing with others. While none of the resulting prices is ever perfect, each price sends a reasonably reliable signal about the relative scarcity, at each moment, both of different consumer goods and services and – very importantly – also of different inputs.
That market prices work well enough is attested to by the enormous and still-growing affluence of ordinary people in market economies. The success of market prices also is revealed when one recognizes the astonishing complexity of global supply chains, which were not – and could not possibly have been – designed by anyone.
The case for relying upon markets is backed not only by overwhelming historical and empirical evidence, it’s based also on sound economic theory. In a contrast that couldn’t be more stark, the case for relying upon government officials to override market processes by consciously allocating resources is backed only by magical thinking. The few alleged successes of industrial policy are all questionable. And industrial-policy proponents have a grand total of no theoretically coherent explanations of how government officials will acquire and process enough of the detailed knowledge that must be acquired and processed if these officials are to improve upon market processes and outcomes.
The people who rely upon faith to support their position are not those of us who oppose industrial policy; it is industrial-policy proponents themselves.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
Some Links
High literacy is a joke in a place like Cuba, where there is no free speech. Before the Bastista and Castro dictatorships Cuba had freedom of the press, more than 50 daily newspapers and the most television stations in Latin America. Today state media tells Cubans what to think.
Peter Suderman lays bare many of the problems with Bernie Sanders’s health-care scheme.
Having gained full control of his nation’s legal and judicial institutions, Chávez did not use it to benefit poor Venezuelans, contrary to the mythology spread by far-left admirers. Instead, Chávez began to transfer the wealth of the country to his cronies.
Mike Munger writes about the future of academic publishing.
Quotation of the Day…
… is from page 48 of the original edition of Lee Francis Lybarger’s 1914 book, The Tariff (original emphasis):
The Tariff is one of the greatest obstacles all over the earth today to international peace. From its very nature it tends to emphasize political boundaries and to perpetuate national and race hatreds. The arguments in its behalf must constantly make a wide distinction between home goods and foreign goods. This of necessity tends to perpetuate and intensify the association of “foreigner” with “foe.”
DBx: Commerce civilizes. Commerce also, in part by making war even more absurd and destructive than it naturally is, pacifies. Nationalism, to the extent that it artificially obstructs commerce that crosses political borders, works counter to commerce’s civilizing and pacifying consequences.
It might be that, as a practical matter, the nation-state is here to stay, at least for the foreseeable future. It might also be – and also as a practical matter – that the nation-state is the least-imperfect of all feasible political arrangements today, given human nature and current expectations, and given also current conceptions of political realities and possibilities. But the validity of these “it-might-bes” ought not blind us to the always enormous, and often sanguinary, danger lurking within nationalism.
Nationalism too blithely embraced – which it is too often – confuses the individual with some group, and leads quickly to the sense that the individual is subordinate to the group of which nationalist ideology proclaims him or her to be a part. Nationalism – as is true of all forms of collectivism – blinds those who embrace it to the emergent orders that arise from individual choices and actions.
This latter blindness isn’t an inevitable logical consequence of nationalism, but I believe it to be a highly prevalent psychological consequence. The relevant actor, in the nationalist’s mind, is the nation – or, more precisely, the nation as represented by its state: the nation-state. The nation chooses; the nation acts; the nation suffers tragic losses, achieves glorious victories, and marches toward a splendid future.
The nation is personified and thought of as a protective and semi-divine creature who, while lovingly concerned (we are solemnly assured) with the individual’s welfare, demands that that welfare be subordinated, no questions asked, to its own. Think “Uncle Sam.” Think the various “Motherlands.”
If we must have nations, let us at least have each nation leave its citizens free to engage in peaceful commerce with whomever these individuals choose and on whatever terms they wish and can, on their own, arrange. Trouble is, the very existence of nations creates a false perception that commerce with foreigners differs from commerce with fellow citizens. And thus nationalism fuels suspicion of commerce with foreigners – a suspicion that, unfortunately, usually is as strong as it is stupid.
March 1, 2020
Bonus Quotation of the Day…
… is from page 225 of the Mercatus Center’s 2016 re-issue of my late colleague Don Lavoie’s brilliant 1985 volume National Economic Planning: What Is Left?:
Planning in practice is characterized precisely by this public image of comprehensive control combined with an intense concentration of arbitrary government power but inevitably lacking the detailed knowledge to exercise that power intelligently.
DBx: Yep.
Not since the failure of the market-socialists in the 1930s to meet the Mises-Hayek challenge to explain how government planners would get enough information to successfully replace market processes with bureaucratic commands have proponents of planning or industrial policy made any serious effort to explain how the state will acquire the knowledge it needs to successfully ‘plan’ or to ‘steer’ any economy larger than a few dozen people. Industrial-policy advocates such as Oren Cass, Daniel McCarthy, and Marco Rubio simply ignore the problem or assume that it will be solved by some unmentioned miracle.
The knowledge problem, as it is called, is no piddling one. It’s not a detail that can be overlooked or one whose solution can be expected to emerge naturally when resource-allocation decisions are in the hands of government officials. Yet the fact that people such as Cass and McCarthy hardly even acknowledge the existence – and much less the severity – of this problem reveals the recklessness with which these advocates of industrial policy ignore economics – and history.
These people seem to think that they’ve adequately dealt with the knowledge problem by (falsely) accusing those of us who today insist upon its relevance of missing the nuance in Hayek’s analyses – of peddling “simplistic absolutisms.” Having thus dispensed us ‘simplistic absolutists’ into the bin of people who can be ignored, advocates of industrial policy then go on about their business asserting that government officials empowered to override market processes will (merely by assumption) succeed in the way that these advocates of industrial policy assert they will succeed.
But unless and until these advocates of industrial policy offer some positive explanation of just how government officials will get more knowledge and information than is used by the market participants whose decisions these officials override, these advocates of industrial policy deserve to be ignored.
Offering such a positive explanation, note, is a necessary but not a sufficient condition for industrial-policy advocates to establish the validity of their case. Any such positive explanation, once offered, would then be compared to reality – more specifically, the ability of government planners in the real world to get, process, and act upon information would be compared to the ability of private market actors in the real world to get, process, and act upon information. Only if it were shown that government officials, under plausible circumstances, are likely as a rule to out-perform private market actors would there be a credible economic case for industrial policy.
Some Links
Ideally, the court will hold that the CFPB’s structure regarding its director — never mind its other gross defects — is unconstitutional. It is generally wholesome to prune presidential power, which has grown in tandem with Congress’s desire to delegate its powers to other institutions. Sometimes this desire is symptomatic of sloth. Other times it is symptomatic of defeatism, acknowledging the impossibility of Congress directing or even monitoring the sprawling administrative state that Congress has created. In this case, however, the court’s protection of presidential power would rebuke Congress for its slapdash construction of a CFPB that fits nowhere in the Constitution’s tripartite design of government.
Yale University historian Carlos Eire is rightly appalled by Bernie Sanders’s failure to be appalled by Castro’s Cuba. Here’s Prof. Eire’s conclusion:
The “good” things Sanders finds in communist Cuba should seem immensely disturbing to Americans, even frightening. His vehemence in defending these “good” things, which in truth are hollow victories stained with blood, should also set off alarms, for this peculiar obsession reveals more than some character flaw.
Sanders’s insistence on finding positive things to say about Fidel Castro might be the clearest indication he has yet given American voters of his own sources of inspiration, and of his vision for the future of the United States.
Also appalled by Sanders’s appalling admiration for tyrants is Yuri Pérez. (I note here that, therefore, we all should be equally appalled by the appalling admiration of so many American Democrats for Sanders.)
Nick Train reviews Virgil Storr’s and Ginny Choi’s Do Markets Corrupt Our Morals?
Currently, the world is in the midst of a second economic revolution that is both broader and stronger than the Industrial Revolution, but few are aware of it. During the past half century, expansion in international trade, increased entrepreneurial activities, improvements in economic institutions, and changes in demographics have triggered a remarkable increase in the living standards of people throughout the world.
Quotation of the Day…
… is from page 262 of George Will’s superb 2019 book, The Conservative Sensibility:
Government, Burke said, exists to deal with wants. Modern government, however, exists in part to generate wants, to stimulate appetites for public goods and services that the political class will be rewarded for providing.
DBx: Yes. Why so relatively few ordinary people see this reality is a mystery, for they, in the end, are victimized by this political dynamic.
Not mysterious at all, however, is intellectuals’ role in this process of expanding the reach and power of government. Intellectuals are prone to fancy themselves as the designers and supervisors of – and as the consultants to – all such government interventions. The typical intellectual – and, increasingly, regardless of where he or she perches on the political spectrum – is under the delusion that social and economic arrangements that differ from the ideals floating in his or her head can and should be engineered to look more like what floats in his or her head.
What arrogance.
Of course, the only agency apparently capable of such an engineering feat is the state. That society and economy are so unfathomably complex as to make the state in fact incapable of such successful engineering is a reality utterly lost on most intellectuals.
Yet the situation is worse even than is conveyed in the above quotation from George Will. The reason is that, because the state has the power to coerce, holders of state power can extract payments from private people simply by ‘promising’ not to inflict harm on them. “Nice access to low-cost inputs from China you have there, Mr. Factory Owner in Alabama or Ohio. It’d be a shame if that access were obstructed by tariffs, now wouldn’t it?”
The late legal and economics scholar Fred McChesney, in his pioneering 1997 book, Money for Nothing: Politicians, Rent Extraction, and Political Extortion, offered a compelling theory of rent-extraction: politicians are not mere sellers of the tariffs, export subsidies, occupational-licensing restrictions, and other special privileges; politicians actively produce these privileges. And they profit both by creating, selling, and imposing such privileges and by threatening to create and impose such privileges and then refraining from carrying out their threats. In each case the outcome is determined by which private faction bids the most: those who gain from imposition of the special privilege or those who would be harmed by that imposition.
Politics is a racket. And politicians are, of course, major players in such racketeering. The notion that politics and politicians can be relied upon to use discretionary power to bring society and economy more in line with some intellectual’s ‘vision’ is completely bonkers – unless, of course, that vision is a society and economy ever-more like one infested with the Mafia, a society and economy swollen, poisoned, and debilitated by rampant rent-seeking and rent-extraction.
February 29, 2020
Some Links
Cass claims that his analysis using a fictional one-earner family and contrived, improvised expenditure data demonstrates that “The U.S. economy of recent decades has eroded, rather than reinforced, the American model of thriving, self-sufficient families. In the decades to come, we will need to do better.” My alternative conclusion using real-world BLS data on actual out-of-pocket consumer expenditures and income for the average, typical consumer unit that more realistically represents the experience of a typical American is much different. The average American household is flourishing and thriving today compared to 25 or 35 years ago and is actually able to cover a year of major expenses with two fewer weeks of income than in 1985. While Cass recommends that policymakers rely on his COTI to “interpret the nature and quality of economic progress,” I recommend that policymakers ignore the COTI because it’s contrived and flawed as I and many others have concluded. Instead, policymakers should rely on better and more realistic analyses and data to assess what I conclude is the ongoing economic progress of average Americans as they continue to enjoy an ongoing, upward trajectory in their rising standard of living.
And see Scott Winship’s follow-up.
Eric Boehm wisely warns of the U.S. government’s increasing indebtedness.
Deirdre McCloskey was interviewed recently on C-SPAN.
Steve Landsburg explains the rules of excommunication.
“The bottom line is that the costs of Trump’s tariff are being shouldered by U.S. businesses and consumers.” – This summarizes Dan Ikenson’s conclusion of his careful analysis of the burden of Trump’s tariffs punitive taxes on American buyers of imports.
Jeffrey Tucker celebrates the movie West Side Story as it approaches its 60th anniversary. Cool!
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