On the Unseen and the Unseeable

Steven Horwitz

While my co-bloggers and other homies were hanging out with the new Nobel Laureate last night, Jeremy Horpedahl and I had opening session of our SLU student reading group.  This semester we’re reading Sowell’s Knowledge and Decisions and Buchanan and Wagner’s Democracy in Deficit, neither of which I’ve read since grad school.  I’ve always loved Sowell’s book and picking it up again this week has confirmed that judgment.  Even in the first two chapters, there are a ton of rich insights, including a whole bunch about the family, which I never would have noticed the first time around.

One passage struck me particularly though.  On p. 41-2 he writes:

“Society” is not the only figure of speech that confuses the actual decision-making units and conceals the determining incentives and constraints. “The market” is another such misleading figure of speech.  Both the friends and foes of economic decision-making processes refer to “the market” as if it were an institution parallel with, and alternative to, the government as an institution.  The government is indeed an institution, but “the market” is nothing more than an option for each individual to choose among numerous existing institutions, or to fashion new arrangements suited to his own situation and tastes…. “The market is simply the freedom to choose among many existing or still-to-be-created possibilities…“The market” is no particular set of institutions. Its advantages and disadvantages are due precisely to this fact....The diversity of personal tastes insures that no given institution will become the answer to a human problem in the market. The need for food, housing or other desiderata can be met in a sweeping range of ways.

There is so much great stuff packed into that passage that I hardly know where to begin.

I think the core insight here is really important (and it’s one that Dave and Pete get across nicely in their textbook):  Markets aren’t a single institution, they are a decision-making process that opens up multiple institutional solutions for various problems.  Thought about broadly enough, they encompass what we often call “civil society” and the sorts of arrangements that I’m sure Lin Ostrom was talking about at the very same time as we were discussing the book last night!  Sowell is quite right to castigate the market’s friends for using sloppy language.  (Even the old joke about how many economists it takes to change a light bulb – “None, the market will do it” – captures this problematic way of talking.)

The reality is that in many cases we do not know how exactly people will solve their problems if left to their own devices under a stable system of legal rules and an orderly monetary system.  We are often making a “meta-argument” that those sorts of decision-making processes are better than political ones.  This, of course, is a key theme of Sowell’s book.

The problem with arguing this way is that it’s another example of good economics being bad politics:  trying to convince people that a process whose results can’t be known with any certainty is a better way to solve problems than a more visible “doing something” is a very tricky task.  Nowhere is this more clear than the debates over health care and the stimulus.  Arguing the “market” side of these issues puts us in the position of saying “the market” can address the problems at hand, which quite rightly leads skeptics to say “ok, how?”  And our answers will always be in the form of analogies, generalities, and speculation based on theory and history.  We simply cannot say for certain exactly what the institutional responses will be because it is precisely the function of “the market” to discover them. 

Political solutions have the rhetorical advantage of saying “here’s what the new institutional arrangement will look like.”  Of course, as Sowell has argued elsewhere, these solutions are frequently named after their hoped-for rather than likely results (e.g., a “jobs bill” or the “Environmental Protection Agency”).  And we have plenty of reasons to think they will not actually produce the hoped-for results, but at least, in the public’s mind, there’s a specific solution being proposed.  In the reading group last night, we got into a digression about how we “can’t do nothing.”  As Jeremy rightly noted, “who is we?”  I’ve made this argument as well, in pointing out that “we,” in the sense of entrepreneurs and workers, are doing something by trying to find new opportunities and new ways of creating value even as the recession continues.  But this is really an uphill climb.

One final point:  Sowell’s argument here can be read as another take on Bastiat’s “seen and unseen.”  It’s not just that people can’t envision the unseen consequences of government policies, it’s also that the ways in which markets and civil society will evolve solutions to problems are themselves “unseeable.”  The defender of markets is challenged on both ends:  the costs of government intervention (e.g., the jobs note created due to the stimulus package, for any number of reasons) are hard to see because they never happen and the social benefits of markets and civil society are hard to specify in advance because the specific institutions that will deliver them haven’t appeared yet and the whole point of those decision-making processes is to discover them, which is something we currently do not and cannot know outside those very processes.  Order is defined in the process of its emergence, indeed.

In the end, I think we are left with analogies/allegories, history, and informed speculation (as well as theory of course) to help us make the case for the unseen and unseeable.  There’s a reason that three of the most persuasive essays making the case for markets are in the form of stories:  “I, Pencil;”  “The Candlemakers' Petition;” and “The Broken Window Fallacy.”  When the case involves making the unseeable visible, it’s no surprise that story-telling becomes a powerful mode of communication (and this is why Russ Roberts may well be the modernized Bastiat).  Rather than duck this implication, I’m increasingly convinced we need to embrace it in our public role as economists.  Sowell’s insightful take on “the market” convinces me even more.

Comments

[Roger Koppl]

Nice, Steve. Vernon Smith gives an example with airline deregulation. No one saw the hub and spoke system coming. That's a rather simple pattern and you might have expected "pattern prediction" could have anticipated it. Nope. We all missed it, including the great Alfred Kahn who designed the deregulation. In my mind we're talking about the noncomputability of the future. As regulars on this blog know, I think that we should all be running out to learn all about Velupillai's "computable economics" to better understand such noncomputability.

I don't think you said anything I would disagree with. But I wonder whether you might be implicitly understating the design problem with "deregulation" and pro-market policy. We have a mixed system with all sorts of bad things such as licensing restriction and regulatory agencies. That's a fact on the ground. Presumably, if such measures had never been adopted, all would be for the best in the best of all possible economies. But there they are, those unfortunate interventions. It's not so easy to unravel those "interventions." Simply lifting them off one by one will likely have bad unintended consequences which will sometimes be worse than the problems created by the original restriction. Vernon Smith provides an example once again, namely, deregulation of electrical power markets. He pinpoints the flaws nicely. The point here, though, is that piecemeal deregulation creates the risk of problems like those created by the partial deregulation of electric power markets. Lifting all restrictions at the same time is hardly an option either, I think. (I'm not even sure what that would mean.) If we could somehow do that, I think we'd have a situation parallel to post-Soviet Russia, including so strong a short-run decline in output and coordination that life expectancy would fall. All the private services crowded out by government bureaus and regulations would be missing for while and lots of folks would suffer greatly in the wake of total deregulation. (Again, whatever that could even mean!)

So what? So we have to think harder about how to get there from here. We have to think harder about the design problems of deregulation. Computable economics shows us that the epistemic perils of *de*regulation are no less than those of regulation. Thus, we need to work out really carefully how we going to unwind the system. Vernon Smith's techniques of "economic systems design" are vital to working out the design problems of deregulation. There is a lot of work to do.

[Bill Dupre]

Great stuff! Right before reading this I read this (http://krugman.blogs.nytimes.com/2010/02/03/what-small-government-looks-like/) attempt by Krugman at being pithy. Thanks for brightening my mood.

[Steve Horwitz]

I agree completely Roger. The mixed economy is a ticking bomb and defusing it requires cutting the right wires in the right order. It is possible to make matters worse through the wrong sorts of "partial" deregulation. As a matter of political reality, it will happen step by step and we best be careful which wires we cut when.

[Jerry O'Driscoll]

Knowledge and Decisions is a great book. I commented on a draft of it. Later, Liberty Fund did a conference on it.

I used to use it in my undergraduate Law&Economics class at NYU. I emphasized the argument in the passage Steve cites.

We do have a mixed economy and I take Roger's points. But I don't how you can plan deregulation: it's an oxymoron.

As Hayek detailed in The Road to Serfdom, regulation leads to a dynamic in which each regulation creates distortions leading to the need for further regulation.

Murry Rothbard argued, correctly I believe, that dergugulation sets up the same kind of dynamic in reverse. It will be unpredictable and messy (like liberalization in Eastern Europe). You must press forward and not flag in your effots.

[Roger Koppl]

Jerry,

You said, "I don't how you can plan deregulation: it's an oxymoron." I'm just channeling Vernon Smith and his group on economic systems design. Designing deregulation in electric power market is one of his big illustrations of economic systems design. They wrote an article on it for Cato. http://www.cato.org/pubs/journal/cj21n3/cj21n3-11.pdf. See also his 2008 book on Rationality in Economics. FCC frequency auctions are another example. You need design to replace the evolutionary process that was aborted by regulation or other interventions. That's a tall order, which is why you need the experimental economics lab to "test bed" your design.

The California energy crisis of 2000 and 2001 is a perfect illustration of cutting the wrong wire first, in Steve's nice metaphor. Basically, they snipped the wholesale wire, but not the retail wire and the result was rolling blackouts.

I must confess, I do not share your "press forward" doctrine. Like David Hume, I favor muddling through. America's Declaration of Independence expresses the thought nicely: "Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. "

[Ryan M]

For what it's worth, there's a similar passage in "The Vision of the Anointed:" "Since capitalism was named by its enemies, it is perhaps not surprising that the name is completely misleading. Despite its name, capitalism is not an 'ism.' It is not a philosopher but an economy. Ultimately it is nothing more and nothing less than an economy not run by political authorities. There are no capitalist institutions; any number of institutional ways of carrying out economic activities may flourish under 'capitalism' - that is, in he absence of control from above." This is on page 207 of the softcover edition.

[Jerry O'Driscoll]

Roger,

I counter with a very famous quote: "Extremism in defense of liberty is no vice; and moderation in pursuit of justice is no virtue."

[Roger Koppl]

Okay. I don't mind disagreeing with Hess and Goldwater.

[liberty]

"Great stuff! Right before reading this I read this (http://krugman.blogs.nytimes.com/2010/02/03/what-small-government-looks-like/) attempt by Krugman at being pithy. Thanks for brightening my mood.

Posted by: Bill Dupre | February 03, 2010 at 11:14 AM"

I wonder if there was ever a time when Co. Springs had all those things, but provided privately?

[Jerry O'Driscoll]

Roger,

Those were the days.:)

[commonsenseliberty.wordpress.com]

Thank you for making a clear and lucid point. Many of my liberal friends seem to think that a "market" is something or someone--that is, an entity with volition. In their minds, a "market" as a whole decides who gets what. As you note, essays like "I, Pencil" get the point across wonderfully.