Coordination Problem

Society for the Development of Austrian Economics 2008 Call for Papers

The Society for the Development of Austrian Economics has issued its annual Call for Papers for its 2008 sessions as part of the Southern Economic Association meetings in Washington, DC, November 20-23, 2008.  We will have 12 sessions as part of the Southerns, so there are many opportunities for participation.  Deadline for submissions is April 1.  Paid-up members of the SDAE have priority for session slots, so if you are not a member and are interested in joining, or have been a member in the past and need to renew for 2008, you can renew online using Paypal here. 

Membership is $20 per year and entitles you to priority for the sessions, eligibility for our annual article and book prizes, and enables you to receive The Review of Austrian Economics for $38 per year, which is a substantial savings off the list price. 

Questions about membership can come to me and questions about panels for 2008 can go to the SDAE President-elect Emily Chamlee-Wright.

How important are the Data collected in the World Bank’s Doing Business Survey?

Simeon Djankov has done a good job with the World Bank’s Doing Business (DB) survey (see here for positive comments of mine). However as time goes by, it is less clear to me that the type of data collected in the DB survey really matters to the big picture of Western countries—that is, per capita income levels and real growth.

A recent example is New Zealand. The country has slipped in the rankings of the Heritage – Wall Street Journal Index of Economic Freedom (IEF) from third place last in 2004 to sixth in 2008. However, it ranked second in the latest ranking of the DB survey behind Singapore.

As Roger Kerr (see here) mentions: “The freedom indexes [Heritage and Fraser] are a much more comprehensive indicator of a country’s economic health than the World Bank’s annual Doing Business survey.” The DB survey focuses on regulations affecting the costs to start a business, property registration, contract enforcement, etc. As Hernando De Soto has shown for 20 years, these are very important factors in developing countries. However, OECD countries all offer reasonably good conditions for doing business. While scoring high in the DB survey will make some difference in terms of economic performance (since these costs affect the level of entrepreneurship), it is not clear to me that the differences among OECD countries are such that DB scores would be a huge factor in the differences in per capita income and real growth (has somebody done the study?).

Rather, what really matters for OECD countries in my view is the size of government spending, the level of taxation, the structure of the tax system, the level of public debt, a sound money, and openness to trade. In some of these areas, New Zealand is now scoring worse than in the recent past. The IEF mentions that both total government expenditures and tax rates are high. New Zealand has scored worse this year in 5 of the 10 categories of the IEF.

To be fair, the differences among the countries in the top 10 are (somewhat) small. Moreover, it might be hard to discern the impact of being sixth instead of third. New Zealand still displays good performance on many levels. However, what matters is the long term impact of high government expenditures and taxes. These two issues are a drag on the economy, as they reduce the level of entrepreneurship. Eventually this shows in income per capita level and growth rates. As Kerr explains: “New Zealand’s trend rates of productivity and GDP growth have been sagging at a time when the economy should have been booming, given record terms of trade.”

While NZ scores well in the DB survey, the signal the IEF sends is of a different nature. Moreover, the country fell to 24th place in the latest issue of the World Economic Forum’s Global Competitiveness Report (here). All this shows that “New Zealand has been making policy changes in the wrong direction” (Kerr) and this is the real issue. It explains why Kiwis have not become tigers (see here and here). Many policy choices are very difficult to reverse once they have been made, and it may take nothing short of another crisis to change directions. These important policy changes (that went in the wrong direction) are not captured in the DB survey, which is why it may not be as relevant (to Western countries) as I once thought it was.

After War in The Charleston Gazette

Here is a review of After War by Paul Nyden at The Charleston Gazette.

The Institute for Humane Studies will be holding a book forum and reception for After War in Washington, D.C. next Thursday (Feb 21) from 6:30 - 8:00pm.  Details are available here.

Easterly Responds to Gates

In a previous post, Pete discussed Bill Gates's call for "creative capitalism."  Here is Bill Easterly's response.  Here is an excerpt:

Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor's needs by boosting the "recognition" of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet. First of all, the recognition motive has proven to be awfully weak compared to the profit motive. Otherwise we would have had a lot more than the $5.1 billion of annual American corporate philanthropy to the Third World (as of 2005, which has the most recent reliable figures). That was four one-hundredths of 1% of the $12.4 trillion of U.S. production for the free market. Is it really the poor's only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?

Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.

Laissez-fairist U.S. Presidents

A few weeks ago at a dinner, I was sitting across from the great Leonard Liggio. Over the course of the meal, we talked about various U.S. Presidents and I asked who, in his opinion, the real laissez-faire supporters among all the U.S. Presidents were. Leonard came up with the following list (there are only six of them). The order is from the most laissez-fairist to the least (dates of presidency in brackets):

• Grover Cleveland (1885-1889 and 1893-1897)
• Martin Van Buren (1837-1841)
• Andrew Jackson (1829-1837)
• Thomas Jefferson (1801-1809)
• Calvin Coolidge (1923-1929)
• Ronald Reagan (1981-1989)

Martin Van Buren (see photo above) is often hailed as the greatest free-market supporter among all U.S. presidents (he consistently advocated low tariffs and free trade), but Leonard Liggio thinks Grover Cleveland (see photo below) was even better (he also advocated low tariffs and free trade, and he supported the gold standard). Andrew Jackson was no friend of public debt (in 1835 he managed to reduce the debt of the U.S. government to its lowest level since George Washington) and he opposed the Second Bank of the United States.

Calvin Coolidge is perhaps the last president (to date) who truly sought to reduce the size of the Federal government. Andrew Mellon was Secretary of the Treasury under Coolidge and orchestrated a radical tax reform that we can only dream of today. Ronald Reagan dramatically slowed down the growth of the Federal government (as measured by the Federal register for instance) and carried out tax reforms (but not of the magnitude of the Mellon tax cuts).

Taking Leonard Liggio’s list as a benchmark, out of 42 presidents in U.S. history, only six of them can be regarded as true supporters of laissez-faire in one way or another. 1/7 is a pretty small ratio (but it’s probably better than in most other countries in the world). Also, only two of the six were presidents during the 20th century, and they are the least laissez-fairist of the bunch. If the “tendency” were to continue, there shouldn't be any laissez-faire-minded president in the 21st century. Clearly, it appears impossible that any of the current candidates to the U.S. presidency would make it on the list someday (including current President George W. Bush—see Peter Boettke’s post on this).

The Case for Wal-Mart Winning the Nobel Peace Prize

I could not have said it any better than Fazil Mihlar of the Vancouver Sun.  Choice excerpt:

CONSIDER THAT WAL-MART:

- Provides employment to 1.9 million people; the best defence against poverty is a job.

- Creates thousands of job opportunities for people in developing countries like China and India; this keeps hunger at bay in many households.

- Doles out hundreds of millions of dollars each year in dividends that help fund the retirement of millions of people; the company had sales in excess of $348 billion and a net profit of $11.3 billion in 2007.

- Sells food, clothing and other necessities to Canadians, Americans and others at prices that are 15 to 25 per cent below what other supermarkets charge; this helps millions of low-income families stretch their dollars.

...

While Wal-Mart's primary intent is not to do all the aforementioned social good, what it has done and is doing is raising the living standards of millions of families around the world.

So if we are concerned about consequences and not just intentions, doesn't Wal-Mart deserve the peace prize?

Two quick points:

1. I love that the author makes the important distinction between intentions and consequences, which is a point that cannot be stressed enough.

2. I also love that the case is for the Peace Prize.  To the extent that Wal-Mart (and market capitalism more generally) have both encouraged people to deal with each other on the basis of voluntary exchange rather than force and have raised the standard of living so greatly, especially of the poor, they have made the world a more peaceful place.  And in the long run, their contributions to peace are probably far greater and longer-lasting than the politicians and social missionaries who normally get the Prize.

Having spent some time in (The People's State of) British Columbia, I confess my great surprise at seeing this in a Vancouver paper.  I can't wait to see the letters to the editor on this one.

Baptists and Bootleggers in the History of the Family

Busy at work on chapter 3 of my book, I was re-reading some material today on gender in the 19th century, and the doctrine of the "separate spheres" in particular. The idea here was that men and women weren't unequal, just "different." Men's reason and competitiveness made them well-suited to the "public spheres" of the market and politics, while women's empathy and care made them well-suited to the "private sphere" of the household. This doctrine became a way to reconcile the increasing sense that men and women really were equals (thanks mostly to the revolution in marriage that made it based on consent and love along with the spread of classical liberal ideas about the inherent rights of individuals)  with the objective circumstances of the 19th century where men had legal advantages such as coverture that enabled them to control economic resources, as well as having the franchise, which women lacked.  How to convince women that they really were equals?  Divide up the "spheres" and proclaim that the spheres are equally valuable and that men are best fitted to one and women the other.

On the economic side, the separate spheres idea became the ideological justification for the calls for both a "family wage" well above free-market rates of pay so that working men did not have to suffer the indignity of their wives or children having to work and various restrictions on women's employment (limited hours, certain jobs off-limits). It will come as no surprise to this crowd that the trade unions were generally in strong support of both of these ideas as the call for a family wage became a way to raise members’ wages, and the restrictions on female employment had the anti-competitive effect of preventing employers from hiring lower-wage women rather than higher-priced union labor.

What's caught my attention today was that Stephanie Coontz in her discussion of this stuff notes that many middle-class observers “not normally sympathetic to unionism” supported these proposals, including members of the clergy interested in protecting fragile women from exposure to the mean old world of work. Well duh! A non-economist like Coontz (who is smart and very well-read) is unlikely to immediately think "Baptists and Bootleggers." Of course the unions and the clergy/moralists were on the same side on this one. As Bruce Yandle noted over 20 years ago, those who gain economically from making a particular activity illegal (e.g., bootleggers gaining from Prohibition) frequently find themselves on the same side of the moralists who wish to abolish their activity altogether (e.g., the “Baptists” supporting Prohibition).  In our own time, this is often why elements of corporate America find themselves in coalitions with environmentalists wishing to regulate or abolish economic activities that are in competition with those of the supportive corporations.

Once again, what comes as a sort of "interesting and surprising observation" to other social scientists (that the clergy found themselves oddly allied with the unionists in arguing for various forms of labor market intervention) is old hat to economists. As much as my recent work has taken me wandering through other disciplines in ways that have genuinely educated me, moments like these make me realize that, in the immortal words of Dorothy, there's no place like home.

Larry White on the Gold Standard

Larry White, the man whose Free Banking in Britain put the idea of "free banking" back into intellectual circulation almost 25 years ago, has a new Cato Daily Podcast and Briefing Paper defending the gold standard against a variety of criticisms raised in the scholarly and popular literature.  The Briefing Paper is an excellent and concise piece of intellectual ammunition, highlighted by Larry's characteristically clear writing and a boatload of great citations, both theoretical and historical, to follow up on for those new to these debates.

It's also good to see Larry back in action after some recent health problems. 

The Micromagic of Microcredit

Just in case you have missed it and you are interested in the subject, I would like to mention that Karol Boudreaux and Tyler Cowen have an article on microfinance in The Winter 2008 issue of The Wilson Quarterly (see here). It offers a very good and thorough coverage of the issue.

Microfinance is one of the most important innovations in development aid in the last 30 years. Cowen and Boudreaux are right in saying that with microcredit “life [for many poor people in developing countries]becomes more bearable and easier to manage.”

However, as Stephen Daley and I have argued (see here, here, and here), if one judges microfinance (which encompasses microcredit) on its own standards, it has (so far) fallen short of achieving its own goal (which is to lift people out of poverty into the formal economy—to help them graduate). While graduation is rare, microcredit can help families get a better life at the margin. This is probably enough to continue doing it (with private funds) and it is surely preferable to many other alternatives promoted by government aid agencies (see also Peter Boettke's post on Muhammad Yunus).

Coordination in the History of Economics

This Thursday, Daniel Klein will be presenting his paper (co-authored with Aaron Orsborn), “Coordination in the History of Economics,” at the Workshop on Philosophy, Politics & Economics (hosted by Peter Boettke). Dan and I have discussed his ideas on coordination for a while. His paper directly indicts the way Kirzner uses coordination. I won’t be at the workshop on Thursday so I will provide some comments online. If you are interested in the discussion, open the link below.