Coordination Problem

Leftists for Hayek -- Ted Burczak's challenge

Steve Horwitz reviews Ted Burczak's Socialism After Hayek in the July issue of Reason.

To read the review Download burczak_review_reason_final.doc

Theory of Complex Phenomena --- GMU Style

Rob Axtell moved to GMU last year and heads up the Center for Social Complexity.

Peter Leeson Wins Prize

Co-blogger, Pete Leeson, has been awarded the thirteenth $10,000 award from The Fund for the Study of Spontaneous Orders for his research on real world examples of private property anarchism and related problems of social organization.  As readers of this blog know, this prize is well-deserved.

Pete's research addresses the standard conclusion that under anarchy cooperation tends to break down due to issues of social heterogeneity and differences in physical strength.  While existing research on private property anarchy focuses on the importance of reputation for facilitating interactions, Pete broadens his focus to consider alternative coordination-enhancing mechanisms.  In addition to reputation, lost business and exit, insurance, bonding, credit sales, and social signaling can also facilitate economic and social interactions in the absent of the state.  His main conclusion is that anarchy's power to create widespread order is stronger than usually believed.

You can find Pete's work in this area on his personal website (link on the left).  Some his main papers on these topics are here, here, here, here and here.

Please join me in congratulating Pete on this wonderful achievement and for his contributions to our understanding of the feasibility of stateless orders.

Rizzo and Thaler on libertarian paternalism

Wall Street Journal blog has Mario Rizzo and Richard Thaler discussing the policy implications of behavioral economics and new paternalism.

The Amplification Effect

Nabamita Dutta and I have a new working paper that explores foreign aid's impact on recipient countries' political institutions. The paper is entitled, "The Amplification Effect: Foreign Aid's Impact on Political Institutions." You can download it here.

Here is the abstract:

How does foreign aid effect recipient countries’ political institutions? Two competing hypotheses offer contradictory predictions. The first sees aid, when delivered correctly, as an important means of making politically-centralized recipient countries more democratic. The second sees aid as a corrosive force on recipient-country political institutions that makes them more dictatorial. This paper offers a third hypothesis about how aid affects recipients’ political institutions we call the “amplification effect.” We argue that foreign aid has neither the power to make dictatorships more democratic nor to make democracies more dictatorial. Instead, aid only amplifies the existing political institutions of recipient countries. We investigate this hypothesis using a panel that covers 73 countries between 1975 and 2003. Our findings support the amplification effect. Aid strengthens democracy in already democratic countries and dictatorship in already dictatorial regimes. It does not, however, alter the trajectory of political institutions in democratic or dictatorial recipient nations.

Vernon Smith is optimisitc

The other brilliant Smith, not Adam Smith, but Vernon Smith, is optimistic that the gains from trade will prevail over government stupidity in the coming years.

Subscription is required at the WSJ.

Another Fine Mess You Got Us Into!

Well it turns out this is a misquote of Laurel and Hardy, but it is accurate when applied to government intervention in the financial sector.  Christopher Westley has a nice break-down of the problems with the mortgage market.

Fred and I have been discussing these issues with our friend Ed Weick for close to 2 years.  Ed is a successful businessman and investor, and a dedicated student of Austrian economics, and he has been quite concerned about the state of the financial sector in the US (and the world).  Ed has not always been for nervous, during the 1990s and the dot.com bubble, Ed stressed that resources do not fall into "black-holes", but are reallocated during adjustment processes into more productive directions.  The current situation, however, Ed contends is different.

Whenever you seek to lay out an argument for system wide financial catastrophe, I would argue that you need to specify: (a) the trigger, (b) a contagion mechanism, and (c) a reason why the financial catastrophe will not lead to just a readjustment, but instead into a systemic downturn.

My position on the current state of affairs, is that while government policies will continue to result in wild disturbances against a long term growth trend, but the as long as the long terms growth trends are dominated by gains from trade (Smithian growth) and gains from innovation (Schumpeterian growth), then government stupidity will not produce a system wide downturn.  In other words, Smithian and Schumpeterian forces will off-set government stupidity.

In addition, I think a lot of the stories about the mortgage mess we are in fail to account for the market innovations that have evolved over the past two decades which diversify risk and manage the downside risk of stupidity in government.

So I believe that a serious market correction is in order, and that reallocation of resources will occur, but I don't see yet the contagion mechanism that will turn the adjustment process into a financial catastrophe for the entire US economy (let alone world economy).  Save government nationalization of industry, closing down trading opportunities (domestic and international), and all out militarization, another Great Depression does not seem to be the relevant scenario.  Tomorrow will still be better than today, the future our kids will inherit will be one of unimagined material progress and generalized prosperity.  But if in the wake of market corrections to financial distortions government policies are instituted which curtail market processes of adjustment that re-price assets and reallocate ownership, and socialize risk rather than "privatize" risk burdens, then the more dire predictions currently offered may prove to be too optimistic.  I am still betting that Smithian and Schumpeterian forces are out pacing government Stupidity.

Who's Your Daddy?

Mario Rizzo goes Hollywood?  Not really, but he is getting increased attention from the media.  The Economist blog has caught on to his excellent work critical of the arguments for the new paternalism.

Russ Roberts on the Use of Knowledge

Russ Roberts at Cafe Hayek has a nice discussion of the use of knowledge in society and its continuing relevance as also discussed at EconTalk.

Basketball Update -- U16 Fairfax Stars

As anyone who has visited this page, or my personal homepage, will learn quickly that I spend a lot of time with basketball.  In addition to being a fan and student of the game, I also work as a assistant freshman coach at Robinson HS, and as a head coach for the Fairfax Stars AAU Basketball organization.  Basketball coaching was my original career aspiration when I left for college, and my summer job between HS and college was as a counselor at a basketball camp.  I've worked at clinics as a coach in NJ, PA, and VA since the 1970s.

For the past 15 years I have been coaching youth basketball at a variety of levels in NY, NJ, and VA. Here is a photo my U16 Fairfax Stars AAU team right before they played for the championship in the bronze bracket of the Hoop Group's Southern Invitational Tournament at the University of Virginia.  The boys exhibited great team play throughout the tournament as 4 different boys led the team in scoring over the course of the tournament (Allen Stalp #20 [twice], Stephen Boettke #5, Mo Ibrahim #42, and Spencer de Mars #32). And in most of the games all 11 boys scored at least 1 basket, and contributed in numerous other ways to the teams effort with rebounds, assists, steals, hustle plays and smart play.  We beat 2 teams from NJ, and 1 team from DC, but lost in our pool play to a team from Baltimore, and then in the final of the bronze bracket to Team Kobe (a team sponsored by Kobe Bryant -- the practice of NBA players sponsoring AAU teams is now common place; hard for an economics professor to compete with that!!!).  We cut the lead to 8 midway through the second half, but they never let us get closer and in the end just proved too big and talented.  But the boys really played well, and I can only hope that we can build on this as we enter a very challenging summer schedule that includes trips to Mass., and West Virginia, and perhaps to Tenn., and Florida.

With regard to the picture, I am the guy on the left --- for you basketball watchers, in my prime I had a body that sort of resembled Pearl Washington --- in shape but with thick thighs, and a big butt; now my body type is more along the lines of the great coach Rick Majerus. I am trying to fix that, but haven't been as successful as I would have hoped.