Coordination Problem

Why Does Capitalism Have Such a Bad Name?

I was tempted this morning to jump into the discussion on prematurity in science, but instead as I read the Washington Post I was struck by the storyline "Venezuela Poised to Hand Chavez Wide-Ranging Powers."  I read on and learned of sweeping nationalizations of key industries and that Chavez will radically reshape Venezuela's politics and economic system to be "an alternative to US capitalist policies."

How is this possible?  Haven't we been there and done that to the tune of economic stagnation and political tyranny in the Soviet socialist experiment?  Are we so oblivious to the evidence on the political economy of socialism that the delusional and romantic rhetoric of socialist economic planning, egalitarianism and global justice can still ignite fires in the minds of men?

The problem might be slightly different than that and instead be related to the bad faith policies engaged in by the capitalist countries of the US and UK --- especially the US.  Do we really follow "capitalist policies" in the US?

My colleague in the School of Public Policy Hilton Root --- actually Hilton and I were fellows together at the Hoover Institution on War, Revolution and Peace in 1992-93 --- has a new book manuscript The Curse of Alliances which directly challenges the presumption that the US has promoted open markets and democracy throughout the world. Instead, our foreign aid/foreign policy record is one of proping up autocratic tyrants and dolling out contracts to politically favored international corporations.  Crony-capitalism has discredited true capitalism, and geo-politics has prevented the rise of freedom.

Once we think seriously about these issues --- and I think Chris Coyne's After War is one of the most serious efforts in recent years to challenge the presumptions of US foreign policy --- we come to the conclusion fairly quickly that whatever we may be doing with US policy, we certainly are NOT promoting open markets and open politics in countries throughout the world.  No wonder capitalism doesn't inspire the populations of many less developed economies.  Open markets and open politics can be inspiring forces in the world, but special cronyism and geopolitics rather than inspire can fuel hatred and resentment through generating a sense of outrage at the injustice of it all.

Can Scientific Ideas Come Prematurely?

See Rafe Champion’s post on Prematurity in Scientific Discoveries by Ernest B Hook (Ed). Scientific explanations can be “premature,” i.e., arrive too early to be accepted or understood. Gunther Stent’s explanation for prematurity is that the “premature hypothesis cannot be connected to canonical knowledge by a simple series of logical steps.” This implies that “data which cannot be transformed into a structure isomorphic with canonical knowledge are a dead end.” The book provides many cases, such as the work done by French scientists on tic behavior (and the Tourette syndrome) in the late 19th century and which took nearly 70 years to come to the attention of the scientific community.

In a private email Rafe seems to be saying that the same could be said of Austrian economics (AE), it has arrived prematurely on the scientific scene. AE’s hypothesis could not be connected to the canonical knowledge of pre-WWII and mid-twentieth century economics and social sciences.

In Mises’s view, there was no “Austrian economics” before WWII. In his mind the opposition was not with neo-classical economics but with historicism. This being said, it is true that what has come to represent the body of AE today was developed roughly since the 1920s (economic calculation, the role of knowledge, entrepreneurship, etc). So at a critical point around 1930, AE branched off from the rest of neo-classical theory. From this perspective, it could perhaps be said that it became premature in its development (compared to the rest of the discipline).

How long can a theory remain premature is a good question. It also relates to entrepreneurial discovery. A new theory is comparable to an entrepreneurial bet. Sometimes it takes a long time for others to realize the value of what has been created (in spite of the energy spent advertising the new creation). For decades, Mises and Hayek’s view of socialism and economic calculation remained unimpressive (unknown?) to most social scientists. After the fall of the Berlin Wall, the approach suddenly became relevant (see Heilbroner’s “Reflections After Communism” in the New Yorker in 1990). My bet is that as the interest for innovation processes and new knowledge in markets increases, so will the interest in AE. Prematurity will come to pass…

Microfinance is a Band-Aid Solution to Poverty

A while ago, Stephen Daley and I co-authored a Mercatus Policy Series based on Daley’s field work research on microfinance in the Philippines (see also here and here). While microfinance may have some impact for some people in the slums of Manila, Daley’s field work research led us to think that most microfinance beneficiaries don’t graduate (i.e., don’t enter the formal world) and remain poor. Our conclusion was that at best microfinance is a band-aid solution to poverty. The real problem is elsewhere: it is located in the institutional context that influences how individuals exercise their alertness to discover gains from trade.

This is exactly what Amar Bhidé and Carl Schramm argue in today’s Wall Street Journal. They contrast Edmund Phelps’s understanding of entrepreneurship to that of Mohammad Yunus. They rightly say that “turning more beggars into basket weavers” (as Yunus’ view may imply) may not make Bangladesh less of a “basket case.” Instead, they contend that the poverty of countries such as Bangladesh results from their “comprehensive backwardness”—perhaps a harsh way of explaining that Bangladesh lacks institutions conducive to entrepreneurial activity. In contrast, Phelps makes the right points, echoing the views of Mises, Hayek, and Kirzner (Bhidé and Schramm actually mention Hayek and Knight in their article!).

Daley and I concluded that governments in developing countries could pursue a different course of action to help the poor. Fostering microfinance may not be a desirable solution in the long run. In the Philippines alone, the government could, for instance, remove legal discrimination based upon ethnicity that impedes the development of financial markets from the bottom up (informal lenders are very entrepreneurial).

Microfinance has become a “viable option” only because of a poorly functioning institutional environment. It’s good that Phelps, Bhidé (who is a friend of mine), and Schramm (whose book is, ironically, not very high on institutions) say the same thing.

Becker and Posner Cannot Avoid A Priori Reasoning

For those who haven’t seen it, Gary Becker and Richard Posner had an article against raising the minimum wage in yesterday’s edition of the Wall Street Journal. What I find interesting in the article is not so much Becker and Posner’s view (one wouldn’t expect less from them). No, what is interesting is that their defense is based on good (a priori) economic reasoning. See for instance their first paragraph:

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor.

They do mention that the magnitude of the effect on unemployment is uncertain and that some economists deny that low increases bring much unemployment. Indeed, it is difficult, they remark, to disentangle the effect of the minimum wage increase from that of other factors in the economy. However, there are good (a priori) reasons to think that an increase of 40% will create involuntary unemployment. As they put it:

Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40% increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don't they propose $10, or $15, or an even higher figure?

The effects of the minimum wage (involuntary unemployment and a  different allocation of resources, see here) can be known a priori (and the authors explain it well in their first paragraph). Becker and Posner cannot avoid using a priori reasoning to defend their position. This is another example of the “Friedman paradox” (see here). Of course, the authors can retort that their claims in the Wall Street Journal would have to be “verified empirically” if published in a scientific journal. This is part of the scientistic pseudo-experimentalism that many economists like to engage in. At the end of the day, the claims that the authors make are solidly based on economic reasoning whether they are printed in a newspaper or in the American Economic Review. Becker knows this but preaches some form of empiricism. As with Milton Friedman, the quality of his reasoning is why we like his work.

Empire: Public Goods and Bads

In the current issue of Econ Journal Watch, Steve Davies and I have the lead article, “Empire: Public Goods and Bads.”  Here is the abstract:

Theodore Roosevelt used the US military to create what he called “civilized societies.”  A growing literature focuses on the economic benefits of empires, benefits sometimes referred to as “global public goods”.  Some authors, such as Mitchener and Weidenmier (2005) and Ferguson and Schularick (2006), neglect the associated public bads.  This paper highlights the potential public bads.  We formulate the leading public bads.  We explore the public bads in the context explored by Mitchener and Weidenmier, namely, the Roosevelt Corollary and Latin America.  Our discussion also moves to the broader plane, suggesting that the Roosevelt Corollary set a precedent for subsequent US military interventions around the world.  We use the ratings of political institutions issued by the well-known Polity IV index to further support a skeptical view of imperial public good provision.  

2 New Papers by Boettke, Coyne, and Leeson

Pete, Chris, and I have two new papers of potential interest. Links and abstracts below:

"Saving Government Failure Theory from Itself: Recasting Political Economy from an Austrian Perspective," forthcoming in Constitutional Political Economy.

The economic approach to politics revolutionized the way scholars in economics and political science approached the study of political decision-making by introducing the possibility of government failure. However, the persistent and consistent application of neoclassical models of economics also seemed to suggest that once the full costs were accounted for, this failure was an illusion. This paper counters these arguments associated with George Stigler, Gary Becker and more recently Donald Wittman, at the core of the economic theory that underlies their approach. In contrast, we develop an alternative model of political economy grounded in the Austrian conception of the dynamic market process.

"Institutional Stickiness and the New Development Economics," forthcoming in American Journal of Economics and Sociology.

Research examining the importance of path dependence and culture for institutions and development tells us ‘history matters,’ but not how history matters. To provide this missing ‘how,’ we provide a framework for understanding institutional ‘stickiness’ based on the Regression Theorem. The Regression Theorem maintains that the stickiness, and therefore likely success, of any proposed institutional change is a function of that institution’s status in relationship to indigenous agents in the previous time period. This framework for analyzing institutional stickiness creates the core of what we call the New Development Economics. Historical cases of post-war reconstruction and transition efforts provide evidence for our claim.

Comments are open.

Austrian Theory of the Market Process II

I will be teaching my graduate course in the Austrian Theory of the Market Process II again this spring.  GMU is the only school at the PhD level in the US that actually allows students to "field" in Austrian economics. We have two courses in the field, but also there are courses offered in "Economic Philosophy", "Constitutional Political Economy", etc.  So students after their first year of PhD studies can specialize in Austrian economics and classical liberal political economy.  This is a great opportunity for students whose intellectual passions run in this direction.  And it explains why GMU graduates for the past 20+ years have gone on to make the contributions they have in academics, think tanks and public policy.

Anyway, here is the syllbus -- Download Austrian_Theory_of_the_Market_Process_Spring_2007.doc . 

What do you think are my sins of omission and sins of comission?

Trade Unions in Las Vegas

Do you know why Nevada’s trade unions are powerful? See The Economist this week for a short analysis of an interesting case. Trade unions’ role and importance have diminished in the last 30 years pretty much everywhere in the Western world. However, Nevada, of all places, has experienced an upsurge. This is somewhat paradoxical. Nevada has no particularly union-friendly labor regulations, its population is young, and the rate of foreign-born migrants is on the increase. Also, most of its economy is in services.

The Economist explains that some union-related industries (carpentry, cooking, etc) have grown a lot and so did union membership. Still, in the absence of labor regulation supporting collective bargaining and in the context of a reasonably fluid labor market, it’s hard to understand why trade unions would see their membership increase. The promise of easy money perhaps drives this surge, as employees want to make sure that the profits are “fairly distributed.” But in America, this generally fosters the entrepreneurial spirit rather than union-membership.

Hot Stuff from Mercatus

The latest Mercatus Policy Comments.

To know more about the impact of FEMA on US corruption, see here. Peter Leeson and Russ Sobel show how disaster relief programs increase corruption in the beneficiary States. Public officials face the incentive and opportunity to gain wealth through corrupt practices. US States that received more disaster relief have also had more instances of public corruption.

In the second Policy Comment, Emily Chamlee-Wright and Dan Rothschild argue that in the aftermath of large-scale disasters, policy makers often get it wrong (see here). This is because they offer top-down recovery plans and launch expensive and complicated programs to rebuild cities and compensate victims. These plans tend to ignore the spontaneous responses that emerge from individuals, communities, and businesses to rebuild their environment. These local recovery efforts are often more effective than government top-down programs. This is the tragedy of the post-Katrina situation in New Orleans: government redevelopment programs have overwhelmed and obfuscated local signals, thereby stalling and distorting the spontaneous recovery. This work is another good example of on the ground field research done at Mercatus-GMU.

There is more good stuff coming in the next few weeks.

Warm Winter and Oil Consumption

I have been wondering if the increase in temperature that we have experienced in many parts of the Northern hemisphere these past few weeks has had any impact on global oil consumption. An article in the French newspaper Le Figaro states (not very clearly) that, due to warm weather, world oil consumption is currently down by 650,000 barrels a day (compared to 05/06).

Since world consumption is around 82 million barrels a day (if I am not mistaken), this represents a drop of 0.8%. This self-correcting mechanism could help reduce world oil consumption over time (even taking into account population growth, technology, etc). But would it be enough to please Kyoto enthusiasts?