Coordination Problem

Capitalism and Democracy

Here is my final post as guest blogger at Free Exchange:

I BEGAN the week discussing the link between capitalism and democracy. In my initial post, I emphasized the importance of economic freedoms for generating political freedoms. In the current issue of Foreign Affairs, Michael Mandelbaum echoes this same logic: 

The desire for a democratic political system does not by itself create the capacity for establishing one. The key to establishing a working democracy, and in particular the institutions of liberty, has been the free-market economy. The institutions, skills, and values needed to operate a free-market economy are those that, in the political sphere, constitute democracy.

To reiterate the connection between capitalism and democracy, free markets tend to foster democracy because private property, which is central to any notion of capitalism, produces a sphere of autonomy that grants each individual certain liberties. Private property disperses power and shields each person from coercion. Further, well-defined property rights tend to encourage the emergence of private civil associations. As I discussed in an earlier post, these private associations provide individuals with an alternative form of governance where the state is ineffective or absent. A robust civil society fosters self-reliance and individual responsibility, characteristics necessary for any liberal democratic order.

Learning from Katrina

On the second anniversary of Hurricane Katrina’s landfall in the Gulf Coast, received wisdom and today’s media coverage dictates that the Gulf Coast has barely begun to recover. This is not a fair assessment of the facts. Recovery is occurring on a neighborhood level; views of recovery based on political jurisdictions do not reflect accurately the quality or sustainability of the recovery. The ability to leverage social capital and make use of the leadership emanating from the voluntary sector is critical to promoting recovery.

Government-led recovery programs are in many ways causing more harm than help. By failing to clearly articulate the rules that govern the rebuilding process and the resources that governments will provide, governments at all levels have made it difficult for residents and business owners to make informed and intelligent decisions about whether and how to rebuild.

Community organizations, businesses, nonprofit groups and religious institutions help families make informed decisions about rebuilding. Reopened businesses, resumption of church services and similar phenomena send positive signals that communities are coming back. Residents making decisions about returning rely heavily on these signals in the face of conflicting or incorrect signals from authorities.

Policy-makers must avoid political posturing and make and execute clear, credible commitments after disasters. Making promises that have little chance of coming to fruition slows rebuilding efforts and complicates life on the ground, as do complex and ineffective bureaucracies like Louisiana’s Road Home Program. Policy-makers would do better to promise relatively little — but then deliver on those promises.

The Mercatus Center at George Mason University is now almost two years into our five-year project to examine the aftermath of hurricane Katrina and in so doing be a resource to the people involved in the rebuilding regarding what can work and what gets in the way of a healthy and prosperous recovery. 

We encourage you to visit www.mercatus.org/katrina as well as take advantage of our RSS feeds to keep up to date on the latest from the region.

Above was excerpted from piece by Dr. Boettke in the Washington Examiner on August 29, 2007.

Knowledge Spillovers from Enterpreneurship

One of the really great benefits of academic life is the opportunity to travel and to meet new people that come at similar questions to the ones that you are asking but from a different perspective and providing different answers.  In short, a vibrant academic career is one that provides the constant opportunity to learn not only from your isolated studies with books and articles, but from the interaction with students, with colleagues, with everyday experience in markets, in politics, in civil society, etc., at both home and abroad.  It is a very wonderful lifestyle.

I have been studying the economic theory of entrepreneurship since the early 1980s when I first read Kirzner and Schumpeter.  I have been teaching a PhD level course on the entrepreneurial theory of the market process since 1990.  So when I was asked to give a plenary lecture on entrepreneurship at a Ratio Institute conference for young scholars it was an easy "yes" and I expected to fly in, share my ideas with young people interested in economics and fly back in time to teach my first PhD class on Monday.  My expectations for learning were not as high as is often the case.  In fact, my expectations were that most of my learning would come from reading during the layovers and flights between the US and Europe.  I chose as my reading Baumol's new book, Good Capitalism, Bad Capitalism, and the Econoimcs of Growth and Prosperity.  Baumol's book is good, but there isn't anything in the book that I haven't read before either by him or others.  So it was a good survey, and as is usually the case with Baumol's work I left it wondering two things (a) does Baumol recognize that what he is saying about productive and unproductive entrepreneurship was said by writers such as Mises and Hayek in the 1940s, and Buchanan and Tullock in the 1960s, and (b) will he ever be intellectually comfortable with purusing the logic of his own argument to its conclusion, or will he continue to "stop the story short" because it fits better with the prevailing public ideology of centerist politics.  Still, we are better off as a profession that Baumol produced this book and hopeful more members of the interested public will read the book with benefit and come to understand the benefits of entrepreneurial capitalism.

Guest Blogging at Free Exchange

I will be guest blogging at The Economist's Free Exchange blog this week.  My first post, on the compatability of capitalism and democracy, is available here.

Weathering Corruption

Russ Sobel and I have a new paper forthcoming in the Journal of Law and Economics entitled, "Weathering Corruption." I blogged on a working paper version of this some time ago. The version that will be published has some cool additions/revisions, including an improved estimate of FEMA spending's impact on corruption. Here's the abstract:

Could bad weather be responsible for U.S. corruption? Natural disasters create resource windfalls in the states they strike by triggering federally-provided natural disaster relief. By increasing the benefit of fraudulent appropriation and creating new opportunities for such theft, disaster relief windfalls may also increase corruption. We investigate this hypothesis by exploring the effect of FEMA-provided disaster relief on public corruption. The results support our hypothesis. Each additional $100 per capita in FEMA relief increases the average state's corruption nearly 102 percent. Our findings suggest that notoriously corrupt regions of the United States, such as the Gulf Coast, are in part notoriously corrupt because natural disasters frequently strike them. They attract more disaster relief making them more corrupt.

Download the full paper here.

Colloquium on Enterpreneurship, Institutions and Policies

Tonight I fly to Stockholm, Sweden for a conference sponsored by the RATIO Institute -- an economics and public policy research center in Stockholm.   I will give a plenary lecture on Entrepreneurship and Institutions, and the lecture will serve as the basis for a monograph that Chris Coyne and I will be writing on the subject during this academic year.

2006 Trotter Lecture --- NZBR

My 2006 Trotter Lecture --- The Battle of Ideas: Economics and the Struggle for a Better World --- has been published.  One year ago this month, Rosemary and I visited NZ for the first time and had wonderful experience due to the people associated with the New Zealand Business Roundtable (especially Roger and Catherine, and thanks to Fred's company and guidence I think I avoided embarrassing myself with my typically borish American behavior).  It was a great honor for me to give this lecture, to meet Sir Ronald Trotter, to visit what is perhaps the most beautiful country on earth.

Anyway, I hope this lecture stimulates some discussion on the role of the economist in public discourse.

The Marshall Plan

Niall Ferguson discusses how important the Marshall Plan really was to the redevelopment of Europe after WWII.

Thanks to Greg Mankiw for the pointer.

My understanding of the Marshall Plan was shaped by Tyler Cowen's 1985 piece on the subject that I read as a graduate student.  I think Tyler's analysis has passed the test of time.

Phelps on capitalism

Alex Tabarrok at Marginal Revolution links to a Phelps interview in the Financial Times.  Phelps emphasizes the dynamism of capitalism as opposed to the equilibrium bound economics of standard text-books.  As Alex points out, this represents a significant influence of the Austrians on Phelps with regard to entrepreneruship and market processes.  Here is an link from our reaction to the awarding of the 2006 Nobel to Ned Phelps.

More on Monetary Policy, Subprime Loans, and the ABC

In case you have seen it, Gerald O’Driscoll recently had an article in the WSJ on the subprime loan market, the Fed monetary policy, and moral hazard.Download our_subprime_fed_odriscoll_aug10.07.pdf