Coordination Problem

Off to Romania

When is Enough Going to Be Enough?

|Peter Boettke|

Wolfgang Kasper has a new article up at the Edward Elgar blog dealing with the failed policies of the Eurozone.  The teaser for the article states: "The Eurozone is in crisis, and only bold reforms can tackle the root causes.  In the following article, Wolfgang Kasper explains why we should be tuning the clock back to before the Maasstricht Treaty, and proposes that an understanding of institutional economics is crucial in order to comprehend the current politico-economic predicament." I recommend reading the entire piece.

Late in 2012, we published the second edition of Institutional Economics: Property, Competition, Policies.  The book is available in eBook, paperback and cloth.  This book is appropriate for use with advanced undergraduates as well as graduate students as a main text or supplemental text for classes addressing comparative instituitonal analysis and applied price theory.

Happy Birthday Professor Hayek

New MR University Course on the Great Economists

|Peter Boettke|

Starting with Adam Smith, Tyler and Alex are now tackling the topic of the great economists.  I have known Tyler Cowen for close to 30 years and his knowledge of the history of economic thought has always been one of the most impressive of anyone I've ever met.  Ironically, Tyler published most of his papers in the field of history of thought prior to attending graduate school --- including papers on Nicholas Barbon, J. B. Say, and various papers discussing the ideas of Wicksell, Mises, and Hayek.  I suspect this course to be informative and always putting the material in the most interesting light possible.

It Takes Varied Reiterations to Force Alien Concepts Upon Reluctant Minds

|Peter Boettke|

That quote, which I believe comes from Herbert Spencer, was often stated in my classes with Professor James Buchanan.  It is not intended as a knock, but as a call for continuous effort to communicate clearly the core points of your position. 

In this spirit, students and scholars of public choice and constitutional political economy should welcome then the new issue of Journal of Economic Perspectives and the article by Daron Acemoglu and James Robinson.  The abstract reads as follows:

Economics versus Politics: Pitfalls of Policy Advice

The standard approach to policy making and advice in economics implicitly or explicitly ignores politics and political economy and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We first outline a simple framework for the study of the impact of current economic policies on future political equilibria -- and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.

I am currently working on a book manuscript that has several working titles --- Against Triage Economics, or Ordinary Economics for Extraordinary Times, or Don't Panic.  The subtitle of which is Misadventures in Economic Emergency Room, and the punchline is that we must not let emotions get in the way of sound economics.  Emotional economics results in unsound economic policy.  Or to put it the way that Acemoglu and Robinson put it "sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria."  Politics, however, is often driven by emotions of the moment -- especially so in perceived crisis situations --- but when we respond to the emotions of the moment and structure public policies along those lines the long term impact is counter-productive.

When folks at Harvard and MIT are making the same argument as used to be heard only within the cardre of Virgina Political Economists and/or Austrian economists, you know the varied reiterations are starting to work.  Now is not the time to stop reiterating the basic truths of economics and political economy.

Review of The Great Persuasion and other recent essays and interviews

|Peter Boettke|

My review of Angus Burgin's The Great Persuasion: Reinventing Free Markets Since the Depression (Harvard, 2012) has been published at the Library of Law & Liberty.

Also, see my paper with Chris Coyne and Abby Hall that was just published in the University of Oregon Law Review on drug prohibition.  

Follow this link to see the video of Abby's presentation (starts at 70 min mark).

Bob Murphy recently interviewed me for the Lara-Murphy report, which should be available online somewhere though I haven't be able to track it down.

My paper with Jayme Lemke and Liya Palagashvili "Riding in Cars with  Boys: Elinor Ostrom's Adventures with the Police," has been published (online first) at the Journal of Institutional Economics.  

Two papers with Chris  Coyne and Pete Leeson have also been recently published (online first) -- "Earw(h)ig: I Can't Hear You Becuase Your Ideas Are Old," Cambridge Journal of Economics, and "Comparative Historical Political Economy," Journal of Institutional Economics.

 

 

Implications of Machlup's Interpretation of Mises's Epistemology

We argue that Machlup's (1955) interpretation of Mises’s epistemology is at least, if not more, plausible than Rothbard's (1957). The implications of Machlup’s interpretation of Mises and Austrian epistemology affect Austrians, non-Austrians and how they relate to each other. Machlup’s interpretation shows that Austrian’s epistemology is well grounded and that most criticisms of Austrian economics based on their aprioristic characteristic are misplaced. Furthermore, Machlup’s interpretation provides a potential road to re-built the academic interaction between Austrians and non-Austrians that was characteristic of the early twentieth century.

That's the abstract of a new working paper by Gabriel Zanotti and Nicolas Cachanosky. You can access the full paper here.

Efficient Institutions are Context Dependent

Peter T. Leeson

I’m grateful to Daron Acemoglu and James Robinson for their most recent post in our exchange. In it they pose several important questions, two of which in particular go to the heart of our disagreement about the reason for pirate democracy and the efficiency of institutions more generally.

Acemoglu and Robinson ask:

Leeson notes that a democratic organization, with a more equal distribution of political power and better checks on leaders, was efficient for pirates. Probably right. But the same reasoning suggests that it would have also been efficient for many other businesses and social and political organizations. But we see nondemocratic organizations persist in many of those spheres. So where are the efficient institutions?

I’ve tried to address this question in The Invisible Hook by comparing pirate ships’ organization to that of the legitimate ships from which pirates were drawn: 18^th-century merchantmen. As Acemoglu and Robinson suggest, although the former were organized democratically, the latter were not. Indeed, merchantmen were organized quite “autocratically”—i.e., via appointed officers endowed with substantial authority over sailors. If democracy was efficient for pirates, why not for merchantmen too?

The answer, I contend, is that democracy’s cost was far higher for merchantmen than for pirates.

Merchantmen were organized and outfitted by external financiers—wealthy landlubbers who had commercial expertise and capital, but weren’t sailors and thus hired seamen to sail their ships. To make sure crewmembers didn’t shirk, embezzle cargo, or steal the vessels they sailed on in owners’ absence, owners appointed officers to monitor and control them. Allowing crewmembers to democratically elect their officers instead would’ve been extremely costly in this context. Merchant sailors who could choose their officers democratically would have an incentive to elect the opposite kind of officer from what owners wanted—the kind of officer who would let sailors do whatever they pleased, destroying voyages’ profitability.

Pirate ships, in contrast, weren’t organized or financed by external landlubbers. Pirates stole their vessels jointly: they were both the owners and employees of their ships. Because of this, democracy’s major potential cost on merchantmen—the prospect of crewmembers electing lax officers and thus undermining voyages’ profitability—was absent on pirate ships. Pirates who elected lax officers, qua employees, would’ve undermined their own interest, qua owners. Their incentive was therefore to elect the kind of officer that maximized profit. Consequently, for pirates, democracy was cheap.

Efficient institutions are context dependent. The contexts—and thus costs and benefits of alternative institutional forms—that pirates and their legitimate counterparts faced were different. So it’s natural that efficient institutions in these "societies" would differ too.

Exploring differences or similarities in the specific contexts various societies operate in, which in turn generate differences or similarities in the constraints and prices their members face is, in my view, essential to understanding why we observe a variety of institutors in the world, but institutions that are the nonetheless efficient.

Moreover, it’s possible to use this approach to evaluate alternatives to the efficient institutions hypothesis, such as the de facto power hypothesis put forward by Acemoglu and Robinson. Consider, for instance, their suggestion that more equal power drove pirate democracy.

As Acemoglu and Robinson point out, “all pirates had cutlasses.” But pirates weren’t alone in this respect. For example, all sailors on 18^th-century Royal Navy vessels were armed too. Notoriously, however, Royal Navy vessels were organized autocratically, similar to merchant ships, not democratically, as were pirates. Or consider privateers, where, again, everyone "had cutlasses," but governance was considerably more democratic than on naval ships yet considerably more autocratic than on pirate ships. At least on the surface, these observations pose a challenge to the de facto power hypothesis. In contrast, the efficient institutions view can comfortably explain the institutional variation we observe across floating societies—from pirates, to explorers, to privateers.

The other important question Acemoglu and Robinson raise in their piece, which goes to the core of our broader disagreement about institutional efficiency, is the following:

How can we understand, if not as highly inefficient for economic prosperity and for the majority of the population, regimes such as North Korea?

Acemoglu and Robinson’s excellent and thought-provoking book, Why Nations Fail, sheds critical light on the reasons for why some countries languish with very low incomes (while others do not). The point I want to make is simply that incredibly low income need not imply institutional inefficiency.

In every society the “institutional opportunity set”—i.e., range of feasible institutions—is constrained. At least in the short run, a society’s “history” and “cultural” features, for example, limit the institutional choices its people can make. Since history and culture vary significantly across societies, institutional constraints do too. As I’ve argued elsewhere, these constraints suggest that we should think about institutional efficiency in terms of constrained, not unconstrained, optima.

Just as it’s not sensible to reason from the fact that I own a used Subaru instead of say, a clearly “superior” car, such as a Porsche, to the conclusion that my automobile choice is “inefficient,” I don’t believe it’s sensible to reason from the fact that in some societies we observe “inferior” institutions and thus low incomes instead of the much higher incomes we know “superior” institutional arrangements can generate to the conclusion that these societies’ institutional choices are “inefficient.” My budget constraint prevents me from owning a Ferrari: a used Subaru is my constrained automobile optimum. Likewise, institutional constraints can prevent some societies from adopting “superior” institutions that generate higher incomes: their “inferior” institutional regimes can reflect constrained institutional optima.

To say an institution is efficient is not to say its outcomes are ideal, or even that they’re “good.” It’s merely to say they’re the best that is currently possible given the constraints confronted in a particular case. Efficient institutions, in other words, are context dependent.

Why did Pirates Choose Democracy?, and Some Thoughts on the “Efficient Institutions View”

Peter T. Leeson

On WhyNationsFail.com, Daron Acemoglu and James Robinson provide a fascinating discussion of pirate democracy in which they were kind enough to discuss my work on the subject. As they point out, I characterize pirate democracy as an efficient institutional response to a principal-agent problem. Pirates were worried that if they delegated power to their captains, their captains would abuse that power, as their captains had done on the merchant ships pirates sailed on before turning to piracy. Constitutional democracy permitted pirates to address this problem.

Acemoglu and Robinson disagree with my explanation for pirate institutions, however, which they describe as a manifestation of the “efficient institutions view.” Instead, they argue that, like other democracies, pirate democracy is better explained in terms of power. As they put it, “Democracy arises when nondemocratic elites are forced to cede power to the previously disenfranchised.” In pirates’ particular context, Acemoglu and Robinson suggest, democracy likely “arose because the distribution of de facto power was fairly equal” among crewmembers.

So whose theory is right? My theory, based on a principal-agent problem, or theirs, based on power?

Answering this question, or at least shedding significant light on it, may be easier than Acemoglu and Robinson suggest. They state that “Leeson doesn’t present any evidence on why pirates chose democracy and the separation of powers,” and that “they don’t have any evidence either on why pirates chose the institutions they had.” But there is evidence on why pirates chose the institutions they had. And I present it in my 2007 JPE paper on the topic, and in my book, The Invisible Hook.

Before turning to that evidence, though, I want to briefly consider the broader issue of the “efficient institutions view,” which Acemoglu and Robinson critique by way of the former’s important work on the political Coase theorem (or rather its absence). According to that critique, Coasean bargains with institutional rulers can’t be externally enforced since the task of enforcement itself typically falls to rulers. Any such bargains must therefore be self-enforcing and, in general, self-enforcement isn’t up to the task. Coasean bargains thus precluded, inefficient institutions abound.

Acemoglu and Robinson are right to characterize my view of pirate institutions as efficient. Indeed, I follow George Stigler in regarding all long-lasting institutions as efficient. I’ve tried to defend this perspective in my work, which shows that a wide variety of institutions that seem obviously inefficient—and, indeed, sometimes downright absurd—are in fact, on closer inspection, efficient and not so absurd after all. (See, for example, my research on ordeals, trial by battle, human sacrifice, and vermin trials).

Am I then suggesting that the variety of institutions we observe reflect Coasean bargains after all? No. I’m suggesting that the absence of Coasean bargains doesn’t imply institutional inefficiency and often implies just the opposite.

My reason for thinking that long-lasting institutions are efficient isn’t rooted in the Coase theorem, which I agree is often (though, not always) inapplicable in institutional contexts. Rather, as it was for Stigler, my reason is rooted in the simple fact that inefficient institutions can’t survive long in a world of rational people. In this “efficient institutions view,” Coasean bargains aren’t required to get to efficient institutions. In fact, efficient institutions are often efficient precisely because they don’t reflect such bargains.

Coasean bargains aren’t free. Indeed, sometimes they’re very expense. Their expense stems from the cost of arranging and enforcing them, which in some cases isn’t possible at all, where they’re infinitely costly.

Efficient institutions maximize social wealth net of such costs. Where these costs prohibit Coasean bargains, as they often do, efficient institutions won’t involve Coasean bargains. If Coasean bargains were free, many institutions would surely look different than they look now, just as if platinum were free, railroad tracks would look different than they look now. But prohibitive transaction costs no more imply inefficiency in existing institutions than prohibitive platinum costs imply inefficiency in existing railroad tracks.

Returning to the reason for pirate institutions: Did pirates choose a system of democracy and separated powers to solve a principal-agent problem, as I argue? Or did they choose it because of equal power, as Acemoglu and Robinson suggest?

The evidence we have that bears on this question, and I adduce in my previous work, is surprisingly direct. Pirates actually tell us—or rather told their contemporaries—why they adopted their institutions. And their reasoning is preserved in the historical record.

As pirate Walter Kennedy testified at his trial:

“Most of them having suffered formerly from the ill-treatment of Officers, provided thus carefully against any such Evil now they had the choice in themselves . . . for the due Execution thereof they constituted other Officers besides the Captain; so very industrious were they to avoid putting too much Power into the hands of one Man” (Hayward [1735] 1874, 1: 42).

This pirate, at least, explicitly linked the desire to avoid captain abuse—the “ill-treatment of Officers”—which pirates suffered as merchant seamen in their pre-piratical employment, to pirates’ reason for adopting separated powers. This is about the most direct evidence for the principal-agent theory we can hope to get from the 18^th-century historical record.

This isn’t to say that small asymmetries in pirate power didn’t have important influences on pirate organization. For example, roughly equal pirate strength surely helped to make captains’ agreements with their crewmembers self-enforcing, enabling a piratical Coase theorem to operate. But if we take pirates’ own explanation for their institutions at face value, which I think we should, the raison d’etre of pirate institutions was a principal-agent problem.

APEE 2013 April 14-16

|Peter Boettke|

The annual meeting of the Association of Private Enterprise Education begins tonight.  I will try to live blog from the meetings if I can.

Here is a photo sent to me by my teaching and research assistant, collaborator and co-author, and outstanding young economist -- Liya Palgashvili, who made the early morning trip to see the sun rise. Hopefully the quality of the discussion over the next few days will match the quality of the views.

A Reappraisal of Hayek’s Epistemic Market Liberalism

Chris Coyne

Epistemic arguments play a significant role in the foundations of market liberalism as exemplified, in particular, by the work of F. A. Hayek. Competition in free markets is claimed to be the most effective device both to utilize the knowledge dispersed throughout society as well as create new knowledge through innovation competition. The fast pace with which new economic opportunities are discovered and costs are reduced is considered proof of the benefits of free markets to the common good. However, with its inherently unpredictable consequences, innovation competition is actually ambiguous in this respect. This feature raises questions over the stringency of market liberal pleas that oppose quests for redistribution and environmental concerns in an absolute fashion.

That is the abstract from Ulrich Witt's paper, "Competition as an Ambiguous Discovery Procedure: A Reappraisal of Hayek’s Epistemic Market Liberalism," published in the latest issue of Economics & Philosophy (gated).  Here is an earlier, ungated, version of the paper.

Why We Still Need to Read Hayek

|Peter Boettke|

John Taylor's Hayek Lecture at Duke.

 

A Second Look at Capitalism

|Peter Boettke|

The NYT recently wrote the following: “A specter is haunting university history departments: the specter of capitalism. After decades of ‘history from below,’ focusing on women, minorities and other marginalized people seizing their destiny, a new generation of scholars is increasingly turning to what, strangely, risked becoming the most marginalized group of all: the bosses, bankers and brokers who run the economy.”  Last night, Tom Ashbrook devoted his radio show "On Point" to a re-examination of capitalism.

The "second look" title is actually misleading because as I listened to the show it became obvious that the 'look' being provided was errily reminiscient of the perspective that we used to hear out of history departments (and other members of what McCloskey refers to as the 'clerisy').  Capitlaism is inefficient, unstable, and unjust.  And the commentators cannot distinguish between state monopoly capitalism, and laissez faire capitalism.  They are largely innocent of the basic principles of economics as a science of human action, and are highly questionable in their interpretation of historical evidence and data analysis.

I don't view this as depressing, but rather as simply requiring a renewed commitment by economists as teachers, as scholars, and as public intellectuals.  We have our work cut out for us, but we also have great intellectual tools to work with, and our success or failure is really in our own hands as communicators.

Living Economics Talk at FFF

|Peter Boettke|

 

An Introduction to US Monetary Policy

Steven Horwitz

That's the title of a new paper of mine released today by the Mercatus Center. It is intended to de-mystify monetary policy in a way that the layperson can understand.  It might be useful in the classroom as well.  Here's the abstract:

This study examines the history and operation of the Federal Reserve System (“the Fed”). It explores the Fed’s origins in American economic history and emphasizes the political compromises that produced it. It seeks to provide an accessible explanation of how the Fed attempts to change the money supply and of the structural challenges it faces as it attempts to get the money supply correct.. The paper uses the framework thereby developed to examine recent monetary policy, including quantitative easing. Inflation and deflation result when the Fed creates too much or too little money, and the study discusses the causes and costs of both in some detail. The paper concludes with an examination of alternatives to central banking, including the gold standard and a system of competition in money production known as free banking.