On my way from Bratislava to the Vienna Airport, the countryside was filled with wind turbines. I don't know anything about wind energy, except that there is a debate currently going on in the state of Delaware about putting wind turbines off the Delaware shore between Bethany Beach and Rehoboth Beach.
What are the strengths and weaknesses of wind turbines? Are they are market phenomena, or purely a government creation?
You might think I'd know something about wind turbines since they grace the cover of the latest edition of The Economic Way of Thinking. Neither Prychitko nor I had anything to do with cover choice, and given my last question this might be a particularly "interesting" choice of cover photo if it turns out that the construction of wind turbines are not a market phenomena but a government program. What does the economic way of thinking have to say about wind turbines?
That is the subtitle of Dan Stastny's very insightful book, The Economics of Economics (Wolters Kluwer, 2010).
In discussing our program at GMU to would-be graduate students or potential donors and other interested parties I often stress that economists have a professional obligation to communicate their research findings and the knowledge of the discipline to four distinct audiences: scientific peers, students, policy makers, and the general public. The true master economist, such as Milton Friedman, can communicate effectively to all four levels. But not everyone is so talented as Milton Friedman.
At GMU, however, we do provide opportunities for graduate students to learn and develop their communication skills so they can pursue their comparative advantage at any 1 or more of these levels. The most successful of these students can and do master more than 1 level. Even though priority is given to the ability to communicate with one's scientific peers, we recognize that value in pursuing one's comparative advantage and in mastering the art of economic communication (in spoken and written word) more generally. This is what makes our department unique more than anything else, we respect as a group all four communicative activities of the economist. We also see a strong connection between all four communicative acts --- understanding the science improves our ability to talk to students, policy makers and the public. In short, economics from our perspective is not just a game to be played by clever people, it is a discipline of immense importance for our understanding of, and the potential for improvement in, the human condition.
Dan concludes this wonderful book by informing his readers that for economics to be respected and to have its teachings heeded, "it may not only needs its Samuelsons, Friedmans or Hayeks, but also its Cobdens, Brights, and Bastiats. When economists figure this out, there will be a better chance that they may at last become as important as garbagemen, at least in the eyes of those who consider handling of ideas as momentous as handling of garbage."
I haven't traveled to this region of the world since the early part of the decade (the year after the Prague flood was my last visit to Prague), so it is fascinating for me to compare and contrast the subsequent developments both in terms of intellectual infrastructure, and of course economic life and business development.
I have always been drawn to what I have termed the political economy of everyday life, which is a research program that attempts to get at the implicit rules that govern social intercourse outside the sphere of state control or even state view. This research program tries to triangulate the data analysis with use of traditional economic measures, historical treatments of culture, institutions, and policy, and economic anthropology/ethnography. This had led in the early period of transition to interviews with key policy makers and emerging entrepreneurs, to discussions a decade into the transition with traders and brokers, and even discussions with various individuals that exist at the edge of legitimate society about the mechanisms of self-ordering. I did not do any research on this trip, but simply tried to observe and absorb what is what.
An example of this style of work is the field work that was done by James Tooley and his team on private schooling throughout the developing world. But I have often tried to get the graduate students working with me at GMU to really embrace this idea --- to only various degrees of success. There are a variety of reasons why I think that is so: a risk/reward calculation professionally is perhaps the major issue, but the necessary preparation for conducting such a study is another (language skills which is a major stumbling block for myself is also for others). To really do this well, an economist must not only have a toleration for reading anthropology and ethnography work that most economists by temperament just do not possess, but they also have to invest in the relevant skill set or try to cooperate with others to fill in the gaps. And the relative expense of such research projects is another. The first stage is a "soak and poke" stage of simply absorbing the situation and learning what might be the right questions to even ask without even asking any questions. And finally the curiosity to want to see the hidden reality of economic life of a culture different from your own is a rarer intellectual characteristic than I originally thought it was among those who are attracted to economics as a discipline. We economists do have a penchant for parsimony (rightfully so), and with that goes a desire for "thin" description and "clean" empirical work. The area studies scholars one must read and work with to do an ethnography of economic life have a penchant for "thick" description and "dirty" empirical work. So how does one conduct a rational choice analysis of the messy world of political economy of everyday life?
Despite the high costs of such an exercise I still think work along these lines can transform the way economists think about social order and institutional analysis. Though after not traveling in a region for close to a decade, I return to the "soak and poke" phase. I cannot even imagine how I would think of a research project along these lines in Russia these days, as I imagine I would need to scape the thoughts I had from my notes during my stay at The Russian Academy of Sciences in Moscow in the 1990s. But it would be fascinating for me to see how that society has been transformed in the intervening years.
In the meantime, I am trying to soak up the environment and talk to economists, students and policy makers about the more general points that economic science teaches us. In short, I am mainly talking here in Bratislava and Kosice about "thin" description and "clean" empirical work done by economists and the implications for the big policy questions of our age.
No I am not making any public confession of time spent with Ed Stringham gallivanting in Prague, though he is supposedly in town as I type. I am "lonely and boring" as one infamous calling card said that was given to me on the streets of Prague one night a decade ago in Stringham's presence predicted. My adventures are not that exciting to anyone but an economist. I am a very conventional guy who happens to hold unconventional views on politics and economics. Though Pete Leeson and Rosemary apparently like to inform everyone who will listen that I am a "salty dog" in my use of language. I am working on that vice, but like my waistline that battle has yet to be won.
Anyway I first came to Prague in the early 1990s and it has remained among my favorite places in the world to visit. I love the look and feel of the city. At the time of my first visit the city was full of signs that read: Praha Loves Mozart. And different performances of Mozart were on-going in churches and in theaters, etc. Mozart is said to have loved Prague as much as Prague loved Mozart.
I am here giving lectures at both the Cevro Institut and at the University of Economics. The faculty at both include individuals that I have known and in many instances been friends with for well over a decade, and their students are simply fantastic additions to the growing international community of "Austrian" economists and classical liberal political economists.
I cannot speak highly enough about the vibrant economic community that exists at VSE and CEVRO with the students, and encourage all students interested in Austrian economics and classical liberalism that are considering a place to pursue their studies, spend a year abroad, or earn an advanced degree to consider the opportunities in Prague. Great location, great faculty, and wonderful community of students. I would not be surprised to see signs next time I come that read: Praha loves Austrian Economics, and I know that Austrian economists should love what is going on in Praha at both the CEVRO Institut and at the University of Economics. Prague clearly joins Madrid and Guatemala as the major intellectual centers for Austrian economics outside of the US. London is potentially catching up with the developments at Queen Mary and King's and with IEA and Cobden Centre. And there is also a strong concentration in Aix-en-Provence. I am sure I am missing out on some and I apologize. But I am at the moment simply in awe of the spirit and commitment of these Prague-based Austrian economists.
*Over the years they have had Milton Friedman, Gary Becker, James Buchanan, Vernon Smith, Richard Epstein and Deirdre McCloskey into lecture and they have provided translations of books by Hayek, Mises, Rothbard, etc., as they have revitalized economic education and economic research in the post-communist era in Prague. In the most recent rankings of Czech economics departments, the department at University of Economics was ranked #1 overall. Very impressive accomplishment for these individuals and a testament to their creativity and work ethic in the realm of economic education and research.
Sitting in the Cafe Paris in Prague checking email, I receive a challenge from an old friend. He sends me John Cassidy's "Enter the Dragon: Why "State Capitalism" is China's Biggest Knockoff," New Yorker (December 13, 2010). The abstract is here, to access the full article you need a subscription or you could have a friend send you a scanned copy of the pdf as I did. The challenge put to me is, do you have an answer to Cassidy's claim that it is "state capitalism" and not free trade that led to the wealth of nations in the West (e.g., UK and USA). I don't know if a blog post is the best place to respond, but I wanted to put up some links and arguments that I think have already provided a response.
First, let me say that I probably read John Cassidy more than any other economic journalist at the moment. This is true for two reasons: (1) I find his writing style and his ambitions to be admirable, and (2) I disagree with almost everything he argues. This article is no different. In the course of a book review essay, he covers basically 300 years of history and attempts to draw policy implications for our contemporary world. So I actually appreciate my friend sending me the article in full.
Second, the argument that Cassidy tries to marshall is certainly not new to him. Great Britain was protectionist and the US was protectionist during their time of growth. So, therefore, protectionism is the key to growth, the argument goes. This is a classic example, I would argue, of the fallacy of "after this, therefore because of this" in economic analysis. Yes, Great Britain was protectionist, but as Barry Weingast often argued in the discussions surrounding John Nye's wonderful War, Wine and Taxes, which also includes an argument about the myth of free trade Britain, the critical issue is domestic economic freedom. It turns out that Britain was an extremely free domestic economy at the time that we are discussing. Cassidy could have cited John's work as well, but he would have missed the critical issues in Nye's brilliant work --- namely the political economy of fiscal institutions as a function of fiscal technology.
The argument that Cassidy gives is also basically found in Liah Greenfeld's The Spirit of Capitalism. Though Greenfeld doesn't talk about Great Britain but the USA,and her argument is basically that while the USA used Jeffersonian rhetoric they followed Hamiltonian policies. Policies of protectionism and which developed a strong national identify, etc. If we didn't temper our Jeffersonian rhetoric with Hamiltonian action, the US never would have developed into a capitalist juggernaut. At a conference on Deirdre McCloskey's next volume, Bourgeois Recalculation (though don't forget her current volume, Bourgeois Dignity and see this interview by William Easterly), I actually argued that Greenfeld's book is my least favorite book of the past decade because of this argument and the problem once again of "after this, therefore because of this" type argument in a book supposedly addressing economics. Though the reality is that Greenfeld is one of the great spokesperson for the anti-economists economic analysis in the guise of historical sociology. Where are the mechanisms in her "theory"? Observation is not analysis, it requires analysis. And the tools of analysis are provided by economics. And just like Weingast's comment about the domestic economy in Britain, you would have to ask about the extent of domestic freedom as well as the magnitude of "state capitalism" in 19th century USA.
Let me be clear about why I keep repeating this "after this, therefore because of this" line. The problem is, as Adam Smith pointed out long ago, that the market economy is so powerful and resilient that it can overcome hundreds of impertinent regulations that human folly has thrust upon it. The market cannot side-step impertinent regulations forever, there is some tipping point. But the fact that it can side-step and meet head-on so many and still produce wealth creates a problem I have discussed before. Regulations and other "bad" economic policies are passed, but the market nevertheless muddles through and we are still better off tomorrow than we are today, and thus the advocate of regulation points to the fact that regulations were passed yet growth continued and says "see these policies are not counter-productive as you market fundamentalist would have us believe." But this perspective, fails to consider the "unseen", the true cost of the policies that are captured in a counter-factual. What economic growth would have been had no impertinent regulations and restrictions been passed at all.
Did the USA pursue Hamiltonian mercantilist policies that were at odds with the Jeffersonian rhetoric? Of course. But we also did a lot of things that were consistent with Jeffersonianism and the involvement of the government in the economy was minimal by any reasonable measure. So not only do works such as Greenfeld, which Cassidy does not discuss, as well as the works Cassidy does discussion miss the point about "what is seen and what is unseen", they are confused on the magnitude of what they see! We have to do the detailed historical work to counter this new myth making a state capitalist Britain and state capitalist USA during their industrial development phase, but there is an extensive literature that already counters much of what is being argued.
Before I go there, let me in the interest of full disclosure point out that Alex Fink and I recently participated in a symposium in the Journal of Institutional Economics motivated by a paper from one of the authors Cassidy does rely on -- Ha Joon Chang of Cambridge University. Our contribution is entitled "Institutions First", and we focus our critique mainly on Chang's confusion of institutions with policy, but we could have ventured into even more areas of misdirection. In reading Chang's paper and the book Cassidy relies on, I was reminded of a story Murray Rothbard once told me. He was at a conference and a speaker presented a paper critical of Rothbard's work and said, "I feel bad criticizing a man who wrote a thousand page book but only made 10 errors." When Rothbard got up to reply, he told us with his characteristic cackle that he responded. "You feel bad, I have to comment on a 10 page paper that has 1000 errors in it." There are many errors of fact and judgment in Chang's book and in the article about development, that the conversation is hard to get started. So you have to focus.
The Cassidy article has the same problem for the economist. So lets focus on this claim that "state capitalism" is the cause of the wealth of nations, and to look at the evidence on the Asian Tigers which supposedly provides the most recent evidence in favor of this hypothesis. David Henderson years ago challenged the Myth of MITI, and my former doctoral student Ben Powell actually wrote his thesis on the issue of state-led industrialization versus real economic development. And I think the most comprehensive book of a theoretical nature on the subject is Don Lavoie's National Economic Planning: What is Left?And inside of my edited collection, The Collapse of Development Planning, you can find several essays which challenge the mythology that state-led development was the cause of the Asian economic growth.
"State Capitalism" is not the source of economic growth and development. There is no doubt that mercantilist processes are in operation in China, just as there was mercantilist policies followed in the US from Hamilton to today. The question is always whether they dominate the economic scene or are merely one of the hundreds of impertinent restrictions that human folly has thrust upon the market economy. Rather than cause of growth these restrictions are impediments to real growth and development, and to the realization of generalized prosperity for a nation and its people. The Dragon would be better served by following the spirit of enterprise rather than the spirit of capitalism, if by capitalism we mean the myriad of special interest legislation that passes as industrial policy.
Following up on Pete and Steve's earlier posts on the disaster in Japan, yesterday L. Gordon Crovitz had a piece at WSJ.com on natural disasters and information. Crovitz draws on Hayek to explain why natural disasters are so difficult to predict. Here is a key excerpt which opens with a quote from Hayek's "The Pretence of Knowledge"
"Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones," he said. That makes it impossible to produce simple and reliable forecasts.
Hayek was not addressing nuclear power in particular, but his broader lesson helps put the Japanese events in context. "In the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable," he said. That is because the "great and rapid advance of the physical sciences took place in fields where it proved that explanation and prediction could be based on laws which accounted for the observed phenomena as functions of comparatively few variables—either particular facts or relative frequency of events. This may even be the ultimate reason why we single out these realms as 'physical.'"
But at least some physical systems turn out to be so complex that they resemble unpredictable social sciences more than the certainties of simpler physical science.
In short, should we be more fearful because the engineering at the Japanese nuclear facilities worked as planned, or because the plan assumed more predictability than was possible?