The news is full of stories about the consequences of inequality on economic opportunity. It is a hot button topic that is hard to get consensus on, and Congress may be stuck in gridlock, so President Obama has assured everyone that executive orders might be called for: "I've got a pen, and I've got a phone." If Congress will not give him the policy fixes he deems necessary, then he can go it alone.
Well, this isn't a post about constitutional protections against the abuse of power. But instead, I want to ask have we correctly identified the social injustices that we perceive in modern American society, and if so have we identified the fundamental causes of the injustice.
It seems easy to claim that the distribution of wealth is to blame. The rich have advantages, and the poor do not. Absent those opportunities, and the poor remain poor; and given those opportunties it is very difficult for the rich to not remain rich. This is one of the reasons why income mobility has always been more important to look at than income inequality at any slice in time. To use an analogy that my colleague Richard Wagner often uses for a different point, though it captures the point here as well --- if I took a still photo of horse at the track, I might conclude that horses can fly as I can catch them at a moment when all four hooves are off the ground; but if I had a movie of the horse running I would see that horses don't fly they gallop. But precisely because the counter-claim about mobility dampens the force of the inequality at any moment in time claim, it has become important to provide a counter-claim to that and to argue that climbing the economic ladder has become more difficult over time rather than less.
I know this will not happen, but I would like to see the discussion around these studies result in a public discourse that addresses the fundamental causes of poverty in America, and the problems associated with the truncating of life choices from individuals.
Liberalism seeks to establish constitutional rules of governance and design institutional structures precisely to realize a social order that permits neither discrimination nor dominion. In all of these discussions, I believe, it is important to stress as Hayek did, that democracy must be subordinate to LIBERALISM, whereas the modern state is defined by a quest for liberalism within DEMOCRACY. As long as the modern political situation remains, the quest to achieve a social order that is neither discriminatory nor permits the dominion of some over others will be in vain.
Living better together requires a set of general rules that treat individuals as equals in terms of the law. A fair sporting contest is one where the players all play be the same rules, not one where everyone achieves the same outcome. But the political/legal system in the US does not meet this structural bar in my opinion. And over the past several decades, we have seen the professionalization and consolidation of our public services of law and order, which ironically might be a significant reason for structural impediments to economic opportunity for some born into poorer economic conditions, and even those born into more fortunate circumstances but who get dragged down by the system in their youth. What could I mean?
Consider the following quote from Elinor Ostrom:
I have kidded people sometimes that I have ridden in more police cars than most scholars. I have also visited many jails. Most important, I have seen the ways that police officers serving an independent community, where local citizens have constituted it, deal with citizens. Citizens are treated differently when you live in a central city served by a metropolitan police department. Many of the officers in very big departments do not see themselves as responsible to citizens. They are on duty for specific hours and with an entirely different mentality.
When you are in a police car for eight hours with officers from a big department, you learn that they really do not know the area they are currently serving since they rotate so frequently. When I was in a policy car with an officer from a moderately sized department, the would start telling me about the local community, where there are trouble spots, and where few problems occur. They watch trouble spots that they see potentially emerging. They would sometimes take a juvenile to their home in order to discuss problems they are observing. They do not put kids in jail the first time they observe behavior that is problematic. In the big cities, officers tend to charge the juveniles who have been seen to commit small offenses right away. Many jails are overcrowded with juveniles in large cities. Problems of law enforcement in central urban districts have grown over time and are linked to the way urban governance has been shifted to ever-larger units. [JEBO 80 (2) 2011: 372]
The shift Ostrom is referring was a consequence of the metropolitan reform discussions in the 1960s and 1970s. But I think it is important to realize that with the escalating of the War on Drugs, even local units of law enforcement turned their attention away from their responsibility to local citizens to the administration of, and the financial resources provided, more remote and more centralized units of government. It is, as Lin points to here, about putting kids in the system, about meeting certain objectives in law enforcement that are easily measurable such as arrests. It is not about providing a safe and peaceful environment for their fellow citizens in the communities in which they also live. The militarization of police that has followed as a consequence of the escalation of the War on Drugs is another example.
But back to the topic and the connection I'd like to draw. In a recent paper published in Crime & Deliquency, it is estimated that 49% of all black males have been arrested for non-traffic related violations by the time they reach the age of 23. 49%! For white males the figure is 40%. Again 40%! What does the law and order system think this does to young males who attempt to go to school and find employment, but now must explain their arrest record? And this just for the fortune ones that do not have their life chances seriously dampened by having to spend time incarcerated. If we look at incarcertation, then what has happened to young black males is simply tragic. And, much of this for the non-violent crime of illegal drug use --- drug use I should point out that the last 3 presidents have readily admitted to engaging in during their youth. Truncating economic opportunity through bad public policy isn't an issue of The Other, it is, instead, Our America that should cause outrage among this generation and their parents and grandparents.
A functioning market economy operates on the incentives provided by property rights, the signals provided by prices, the lure of profit, and the discipline of loss. It is for all practical purposes a color blind institution -- except that is for the color of money. But ordinary politics operates on a different set of incentives, signals, rewards and penalties. The systemic bias in politics is to concentrate benefits on well organized and well informed special interests and disperse the costs on unorganized and ill informed masses. It is by its operational mechanisms discriminatory, unless structural rules are in place to counter the natural tendencies. This again is my reason for invoking the Hayekian point --- democracy within LIBERALISM, not liberalism with DEMOCRACY. LIBERALISM is defined here as a system that permits neither discrimination nor dominion. By pursuing liberalism within DEMOCRACY, one just shifts who the benefactors of government privileges are. The life chances of some are thus enhanced, while for others they are truncated by policy design.
America is not a completely fluid society as we might hope, it is also not true that market acquired wealth is the sole determining factor in economic opportunity and social bettterment. We face serious constraints from the body politic that are cutting off the bottom of the economic ladder for too many young people, and if you cut off the bottom of the ladder, you cut off their ability to climb. Inequality, I would argue, is a consequence, not a cause. The fundamental causes I would argue are to be found more in the institutional impediments that are destroying those bottom rungs on the economic ladder. I would first start wtih the War on Drugs, I would then address policies that make it costly to hire young people, and third I would tackle the state control of primary and secondary schooling.
What institutions and public policies do you believe are doing the most damage to the ability of youth to climb the economic ladder?
The Diane Rehm Show devoted some time to discussing John Steinbeck's The Grapes of Wrath, and several times during the show there were attempts to relate the story to our contemporary woes on inequality and impoverishment. Diane Rehm suggested at one point that every member of Congress should be given a copy of the book to read as it might change their attitude toward the plight of the disadvantaged.
I actually think it would be a good thing if members of Congress read The Grapes of Wrath, as I have been using the book in my own teaching for close to 30 years. However, there are a few things I would like to suggest. First, I wonder how people read the book if they understand that economics, especially price theory, is not optional. If economics is not mere political opinion, but instead a science, and the law of demand is analogous to the law of gravity in physics, how then will reason give shape to the historical narrative of the 1930s? Second, while getting the good folks in DC to read The Grapes of Wrath is a good conversation starter, a really vibrant public discourse would be one with contending perspectives. So I'd like to suggest to Diane Rehm that in addition to Steinbeck's famous novel, we provide every member of Congress with Ayn Rand's Atlas Shrugged. This is what I have done in my teaching for over 30 years. In fact, often I have introduced before Steinbeck, Charles Dickens -- especially his work, Hard Times. That way the students get to discuss the consequences of the Industrial Revolution and the Great Depression as well as the consequences of the effort to substitute government planning and regulation of economic activities as opposed to exchange and production guided by the market. In this teaching exercise, economic theory serves as the basis for literary analysis in much the same way that philosophy, or psychological theory, or critical theory has in more traditional literature classes.
If Diane Rehm is willing to supply the books, then I will gladly volunteer to teach and lead the discussion. We just need 15 weeks, a willing and excited audience, and the following required texts:
Charles Dickens, Hard Times.
John Steinbeck, The Grapes of Wrath.
Ayn Rand, Atlas Shrugged.
Paul Heyne, Peter Boettke and David Prychitko. The Economic Way of Thinking, 13th edition.
I can imagine a great public discourse emerging from such an educational experience related to wealth and poverty; inequality and injustice; power and the powerless; freedom and free enterprise; etc.
I'll Be There!
'We're the [economists that think rationally about emotional issues]. They can't wipe us out, they can't lick us. We'll go on forever ... cause we're the [economists that think rationally about emotional issues].'
"Market Design is economic engineering and the science that supports it." Al Roth
There is a lot to think about, and say, about all this from a Hayekian perspective. Indeed the Hayekian perspective explicitly rejects the engineering mentality in public policy, but it also explicitly endorses the good gardener metaphor for the policy maker. The right rules can cultivate (not design nor creat ex nihilo) a peaceful and prosperous order. As Roth says in his talk, game theory taught us how important the rules of the game we are playing are for the way the game is played. So when Roth is speaking of market design, is he talking about improving rules to cultivate better economic performance, or designing markets explicitly to engineer particular outputs? And finally, what does Roth's take on engineering market design say about the older literature on mechanism design theory as an answer to the Mises-Hayek challenge to socialism based on calculation and dispersed knowledge?
Often very differently!!! But also very interestingly!!! Embrace the opportunity to learn from those who look through a 'different window' and seek refinements of the analytical and institutional argument and historical understanding. What all is entailed if we take the epistemic turn seriously in the social and policy sciences?
Introduction HAYEK’S TWO EPISTEMOLOGIES AND THE PARADOXES OF HIS THOUGHT Jeffrey Friedman ABSTRACT: Hayek developed two contradictory epistemologies. The epistemology for which he is famous attributed dispersed knowledge to economic actors and credited the price system with aggregating and communicating this knowledge. The other epistemology attributed to human and non-human organisms alike the error- prone interpretation of stimuli, which could never truly be said to be “knowledge.” Several of the paradoxes of Hayek’s economic and political thought that are explored in this symposium can be explained by the triumph of the first epistemology over the second, including his historical interpretation of socialism as a planning mentality; his tendentious definitions of “liberty” and “justice”; and his opposition to economic redistribution even as he endorsed all manner of economic and social regulations.
THE FAILED APPROPRIATION OF F. A. HAYEK BY FORMALIST ECONOMICS Peter J. Boettke and Kyle W. O’Donnell ABSTRACT: Hayek argued that the central question of economics is the coordination problem: How does the spontaneous interaction of many purposeful individuals, each having dispersed bits of subjective knowledge, generate an order in which the actors’ subjective data are coordinated in a way that enables them to dovetail their plans and activities successfully? In attempting to solve this problem, Hayek outlined an approach to economic theorizing that takes seriously the limited, subjective nature of human knowledge. Despite purporting to have appropriated Hayek’s thought by acknowledging the information-transmitting role of prices, mainstream economists have missed Hayek’s point. The predominant tool of formal economics—equilibrium analysis—begins by assuming the data held by actors to have been pre-reconciled, and so evades the problem to be solved. Even the more advanced tools for modeling knowledge in economic analysis, such as the economics of information, assume away either the subjectivism of knowledge and expectations (rendering the coordination of beliefs and plans a trivial matter) or the frictions and “imperfections” of reality (rendering the coordination problem indeterminate).
HAYEK AND LIBERTY Andrew Gamble ABSTRACT: Hayek’s political theory is directed against coercion, which he defines as the intentional control of one person by another. The element of personal intention ensures a clear conceptual distinction between the freedom from coercion— i.e., the “liberty”—that is exercised in the private sphere, and the freedom of choice and opportunity that may be severely constrained by the impersonal, unintentional operation of market forces. Hayek’s narrow definitions of coercion and liberty therefore suggest that he was more intent on defending the benefits conferred on us by market forces than on affirming any value intrinsic in freedom—a suggestion confirmed by his lack of interest in species of freedom, such as autonomy, that might conceivably be fostered by state coercion. Hayek’s consequentialist defense of liberty, however, was grounded in economic doctrines such as his own view that prices served a vital epistemic function. Given his strictures against the ignorance of modern electorates, Hayek was driven to propose extravagant limits on democracy and to embrace traditionalism; a different Hayekianism might limit inequalities of wealth and encourage the ability to learn from experimentation.
THE ROAD TO SERFDOM’S ECONOMISTIC WORLDVIEW François Godard ABSTRACT: At the end of World War II, F. A. Hayek denounced the then-popular idea of central planning by arguing that, if pursued to its logical conclusion, it would entail totalitarianism. But there were at least two problems. First, judging by his example of Nazi Germany, state control over the economy appears to be a consequence, not a cause, of the monopolization of political power. Second, Hayek conflated socialism and mere interference in the market with central planning. Therefore, history did not so much falsify Hayek’s prediction as bypass it: Once the vogue for central planning faded in the West, Hayek’s book became irrelevant— except, ironically, in Germany. There, it was read as a manifesto for “good planning” through the rule of law. Alongside other “neoliberal” writers, Hayek had a profound (if little acknowledged) influence on the shape of the emerging Federal Republic and, through it, on the whole European institutional framework.
HAYEK’S BUSINESS-CYCLE THEORY: HALF RIGHT Daniel Kuehn ABSTRACT: The Great Recession has brought with it a renewed interest in Hayek’s business-cycle theory, which holds that loose monetary policy generates an unsustainable boom characterized by a lengthening of the capital structure. Hayek’s theory has received robust criticism for decades, although the criticisms have varied in quality. Various empirical disconfirmations pose the most serious challenge. The small empirical literature on the subject generally confirms Hayek’s predictions about variations in the capital structure, but has not persuasively linked the capital structure to the business cycle. A better option, then, may be to abandon Hayek’s business-cycle theory, preserve his capital theory, and graft it onto a Keynesian or monetarist understanding of the business cycle that is more consistent with modern macroeconomics.
HAYEK, SOCIAL THEORY, AND THE CONTRASTIVE EXPLANATION OF SOCIO-ECONOMIC ORDER Paul Lewis ABSTRACT: Hayek’s later work on the possibility of socio-economic order in decentralized market economies is an exercise in contrastive causal explanation as conceptualized by realist social theorists and philosophers. This interpretation of Hayek’s work lends support to the view that Hayek’s post-1960 writings can be thought of as an example of comparative institutional analysis. It also provides a means of reinforcing Hayek’s own efforts to establish the scientific credentials of his work.
THE “MIRAGE” OF SOCIAL JUSTICE: HAYEK AGAINST (AND FOR) RAWLS Andrew Lister ABSTRACT: There is an odd proximity between Hayek, hero of the libertarian right, and Rawls, theorist of social justice, because, at the level of principle, Hayek was in some important respects a Rawlsian. Although Hayek said that the idea of social justice was nonsense, he argued against only a particular principle of social justice, one that Rawls too rejected, namely distribution according to individual merit. Any attempt to make reward and merit coincide, Hayek argued, would undermine the market’s price system, leaving us all poorer and less free. Like Rawls, Hayek held that we should assess social institutions from behind a veil of ignorance, and he thought that doing so pushed us toward egalitarianism. Most of the distance between Hayek and Rawls at the level of policy stems from Hayek’s optimism about the operation of markets, his equivocation about the meaning of central concepts, and his appeal to under-argued slippery slopes. Hayek wavered, however, between claiming that private property and markets benefit everyone, compared to the feasible alternatives, and the principle that they maximize the opportunities of a randomly selected member of society, i.e., aggregate opportunity. Contemporary Hayekians claim that capitalism raises the position of the worst off in the long run, in future generations, whereas Rawlsians insist that inequalities between social positions should benefit the worst off now.
THE PLANNERS AND THE PLANNED Alan Ryan ABSTRACT: Much of what makes Hayek so controversial can be found in The Road to Serfdom, the theoretical basis of which is provided by The Counter-Revolution of Science. The Road to Serfdom, a polemic against the “planning mentality,” did not defend complete laissez faire, but argued that planning disrupts the coordination between prices and supply and demand; that effective planning is thus impossible in a modern industrial society; that it is coercive; and, of course, that it leads to totalitarianism. In The Counter-Revolution of Science, Hayek argued that the “planning mentality” is the result of the hubristic attempt to reconstruct society along scientific lines. But the likes of Edward Bellamy envisioned a planned but free society, while John Dewey contrasted planning, where people collectively choose their goals, against a planned economy that is coercively imposed. Hayek’s welcome strictures against a scientistic society and an overly ambitious social science aside, his binary approach to intellectual history distorted through oversimplification.
SOME IMPLICATIONS OF HAYEK’S COGNITIVE THEORY Michael Strong ABSTRACT: Hayek’s oft-neglected cognitive theory, articulated in The Sensory Order, provides a foundation for a theory of innovation that integrates cognition, experience, and the importance of freedom for the creation of entirely new conceptual categories and fundamentally innovative entrepreneurial endeavors. For Hayek, one sees only what one is prepared to see; that is, we can notice sensory and other phenomena only after we have classified the data into often-implicit abstract categories that are mediated to us physiologically. Learning takes places by using received categories while innovation takes place by creating new categories or moving data from one category to another, which is often an attempt to resolve anomalies. The new perceptual awareness required for discovery leads, in turn, to new categorizing and new perceptual horizons. Such innovation often requires not just freedom of imagination, but freedom of action, for one has to be able to try out many different perceptual possibilities.
HAYEK, EQUILIBRIUM, AND THE ROLE OF INSTITUTIONS IN ECONOMIC ORDER Karen I. Vaughn ABSTRACT: Inthe1930s, socialist economists used the assumptions of equilibrium theory to argue that a central planner could coordinate supply and demand from above. This argument led Hayek, over the years, to try to explain the limitations of equilibrium theory and, conversely, to explain how capitalism functioned without the assumptions of equilibrium being met. In a changing world of agents who are ignorant of the future, how is a functioning market “order” possible? One answer can be found in Hayek’s argument that evolved rules make people’s future behavior more predictable and, more to the point, that they contain previously accumulated knowledge that provides the building blocks for future economic growth. Hayek’s evolutionary theory was flawed, however, in failing to explain how people can know which rules are responsible for their success or failure so that they persist in using those rules and pass them forward in time. However, markets provide immediate feedback about success and failure through profits and losses. An evolutionary explanation of the economy would have permitted Hayek to dispense with the metaphor of general equilibrium, which was increasingly irrelevant to his understanding of economic order.
For economists of my generation (PhD 1989), Joseph Stiglitz was clearly at the top of the professional mountain during our studies. His theoretical contributions seemed to touch every field of economic science, and he wasn't affraid to think big thoughts even though he work was by the standards of the time quite technical.
But in the early 1990s, Stiglitz went to work in Washington and turned his considerable talents since then to questions of political economy, political philosohy, and public policy. He has become a sort of ideological warrior for public policies that are concerned with rampant market failure, and inequality born of disproportion wealth and power. He has also specialized in exposing what he considers to be ideologically driven stupidity in public policy by those on the opposite side of the economic policy spectrum from himself. However, for whatever combination of reasons I find Stiglitz always worth reading and listening to, which I cannot say about Paul Krugman. Perhaps it is because Stiglitz more often than not attempts to link his current policy arguments to the economic theory arguments that he won the Nobel Prize for during the more scientific stage of his career. Krugman is like wrestling with jello, Stiglitz like wrestling with a bear. The bear can eat you, but at least you know what you are dealing with.
Neither Stiglitz nor Krugman are very happy with the policy state of the world, but neither am I -- but from the opposite end of the economic policy spectrum. My view is that we have intellectually paniced in the economic emergency room, and have spent the last 5 years engaged in public policies that strive for short term relief from economic disruption at the cost of long run economic growth. They believe we haven't tried hard enough to curb the excesses of capitalism and to control the economic forces at work in our democratic societies of the west. From both the perspective that I hold and the perspective they hold, the economic malaise that plagues Europe and the US is invoked as evidence that the public policy path chosen was not the best path that could have been followed.
What do I point to for my position? Public debt, the Fed balance sheet, lingering unemployment and discouraged workers, and anemic economic growth. I draw my insights by following Larry White and George Selgin (on monetary policy), Casey Mulligan (on labor market) and Richard Wagner and Lawrence Kotlikoff (on fiscal policy). Or in a more longer term perspective some blend of Adam Smith, J. B. Say, Mises and Hayek, and Buchanan, what I call mainline economics in my book Living Economics. They draw their insights from Keynes, neo-Keynesianism, and New Keynesianism, or what could be termed the mainstream macroeconomic consensus. We look at the economic world through a different analytical window, and that changes the interpretation one puts on the facts they see out the respective windows.
I predicted to an economist friend (David Henderson) during the first year of the Obama administration that before he left office in 8 years we will experience 1970s style double digit inflation and double digit unemployment. It appears that my prediction will not prove to be accurate by any standard accepted measures, but if you look at some alternative measures my prediction actually isn't as off as it might appear. The great economic malaise of our age still appears to me to resemble the economic malaise of my youth in the 1970s and not what I have read about the Great Depression of the 1930s. Still for my bet with David, I will honor standard measures and thus unless something really unusual happens I will lose and owe David some money -- but since I tend to believe the alternative measures my payment will be cheaper in real purchasing power than what we agreed to back in 2009.
But what about the other side, how do they explain the economic malaise? Stiglitz has a very nice summary of his perspective at Project Syndicate. What I continue to find frustrating in these discussions is how readily economists of the Stiglitz persuasion can attribute the bad economic outcomes to bad public policies, yet still blame the market economy for the bad economic performance. There is simply no doubt that the past 5 years (I would argue for a much longer period) has been defined by policy efforts to control the market economy and to guide the economic steering wheel (to use an old phraseology of Abba Lerner).
The debate will no doubt continue, I just hope that this time around (as opposed to the 1940s) there will be enough intellectual fire-power on the mainline side to effectively resist a new professional consensus emerging and establishing a lock on the economic imagination that takes us away from price theoretic explanations and an appreciation of the self-regulating capacity of the market economy when allowed to operate unhampered by regulation and macroeconomic management.
Stiglitz, looking through his different window, concludes: "On both sides of the Atlantic, market economies are failing to deliver for most citizens. How long can this continue?"
The Mercatus Center is accepting applications for our MA, PhD and Smith Fellows programs for the 2014-2015 academic year.
The PhD Fellowship is a three-year, competitive, full-time fellowship program for students who are pursuing a doctoral degree in economics at George Mason University. It includes full tuition support, a stipend, and experience as a research assistant working closely with Mercatus-affiliated Mason faculty. It is a total award of up to $120,000 over three years. The application deadline is February 1, 2014.
The MA Fellowship is a two-year, competitive, full-time fellowship program for students pursuing a master’s degree in economics at George Mason University who are interested in gaining advanced training in applied economics in preparation for a career in public policy. It includes full tuition support, a stipend, and practical experience as a research assistant working with Mercatus scholars. It is a total award of up to $80,000 over two years. The application deadline is March 1, 2014.
The Adam Smith Fellowship is a one-year, competitive fellowship for graduate students attending PhD programs at any university, in a variety of fields, including economics, philosophy, political science, and sociology. Smith Fellows receive a stipend and attend workshops and seminars on the Austrian, Virginia, and Bloomington schools of political economy. It is a total award of up to $10,000 for the year. The application deadline is March 15, 2014.
1. The War on Poverty has largely been won, thanks to the forces of market innovation. The US poor live, on average, better than the average US household did in the early 1970s.
2. The best way to address the lingering pockets of persistent poverty is to get government out of the way by ending minimum wage/licensing regulations, opening up the public schools to competition, and ending the War on Drugs. It's a free market anti-poverty program.
PS: the comments are a very depressing window into the state of "political discourse" these days.