Coordination Problem

Seeing Like an Anarchist

|Peter Boettke|

Chris Blattman in reflecting upon James Scott's latest book, Two Cheers for Anarchism, argues that viewing the puzzles of development through the eyes of an anarchist opens up the analyst to ideas that otherwise would be passed over.  The anarchist thinker will see the wide scope for mutuality and cooperation, and also have a tolerance for the confusion associated with social learning.  This provides an entirely different perspective to the field of development than the dominate way of thinking permits.

For those who have read Elinor Ostrom's work on common-pool resources, this scope for mutuality and cooperation, as well as the confusing process of social learning, will be evident in her studies of self-regulating systems of governance.  The argument that Lin had to deal with early in her career in the context of the metropolitan reform debate that the consolidationists saw lots of governance, but little government is true of development economics as well.  The consolidationists were wrong in that debate, and they are wrong when it comes to development economics in general.

As Blattman states: "Probably the biggest problem in international development is that it is not anarchist enough. The impulse of virtually every UN, World Bank, and NGO project or manager I’ve seen is to plan and order. But growing wealth and freedom is inherently messy, and the small NGOs and the bureaucrats that recognize this are the more successful (or, at least, the least disenchanted)."

This problem has been recognized by many researchers over the past decade or so.  Ragu Rajan, when he was at the IMF, wrote an important note on the problem of assuming working western style institutions in addressing the problem of development.  His paper, "Assume Anarchy?" was extremely important in getting economists to consider the problem of endogenous institutions in the process of development.

In my own work, I wanted to move the discussion from the earlier discussions in libertarian political theory of anarchism as a normative exercise to the positive political economy of anarchism in development and transitional political economy studies.  The emphasis in this work was on a plea for mechanisms that explain the operation of self-government.  Follow up papers were written on the shift to studying endogenous institutional design and Austrian economics, and also a reflection on Scott's previous book The Art of Not Being Governed.

These themes have become common in the research of many of the folks I have worked closely with here at GMU over the past decade -- Ed Stringham, Ben Powell, Scott Beaulier, Virgil Storr, Chris Coyne, Peter Leeson, and David Skarbek (to name a few).  Pete Leeson, for example, has written papers on "Two-Tiered Entrepreneurship," "Anarchy and Development" as well as "Better off Stateless".  Also look at the work of Claudia Williamson on "Informal Institutions Rule" and "Securing Private Property Rights."

Blattman's post is very important to get people thinking about the intellectual productivity of the anarchist perspective.  It opens up a new window for understanding in development studies.  It is, as Schumpeter argued, a pre-analytic cognitive act, which gives us raw material upon which we can engage in economic analysis.  This is what we have been doing at GMU in our research group since the early 2000s, and in some instances going back much further into the late 1980s.

 

Best Advice You Will Read Today If You Are An Aspiring Academic

|Peter Boettke|

Mike Munger provides some common-sense wisdom about this business of ours.

Economics as a Tool for the State, Rather than a Window to Enlightenment

|Peter Boettke|

Ronald Coase -- even at 102 years of age --  still has that rare gift -- simple and clear argument in economic thinking.  In bemoaning the drift of economics away from hands-on engagement with the economy, Coase in his recent essay in HBR argues that "Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates."

Coase's essay "Saving Economics from the Economists" concludes with the encouraging appeal for those who study the entrepreneurial market process and the institutions that either hinder or thwart the process of economic development:

It is time to reengage the severely impoverished field of economics with the economy. Market economies springing up in China, India, Africa, and elsewhere herald a new era of entrepreneurship, and with it unprecedented opportunities for economists to study how the market economy gains its resilience in societies with cultural, institutional, and organizational diversities. But knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.

 

Law, Economics, and Superstition: Human Sacrifice

The most recent paper in my continuing project on the law and economics of superstition: “Human Sacrifice.”

Abstract:

This paper develops a theory of rational human sacrifice: the purchase and ritual slaughter of innocent persons to appease divinities. I argue that human sacrifice is a technology for protecting property rights. It improves property protection by destroying part of sacrificing communities' wealth, which depresses the expected payoff of plundering them. Human sacrifice is a highly effective vehicle for destroying wealth to protect property rights because it's an excellent public meter of wealth destruction. Human sacrifice is spectacular, publicly communicating a sacrificer's destruction far and wide. And immolating a live person is nearly impossible to fake, verifying the amount of wealth a sacrificer has destroyed. To incentivize community members to contribute wealth for destruction, human sacrifice is presented as a religious obligation. To test my theory I investigate human sacrifice as practiced by the most significant and well-known society of ritual immolators in the modern era: the Konds of Orissa, India. Evidence from the Konds supports my theory's predictions.

Enjoy.

 

Is Corruption Bad for Growth?

|Peter Boettke|

It is common-place for folks to claim that the reason why poor countries are poor is because they are plagued with corrpution.  And there should be no doubt that predatory practice by private and public actors is detrimental to growth.  But the evidence is not quite so clear that all acts of corruption should be considered predatory in this sense.

Chris Blattman argues that many development experts overstate the case against corruption.  He argues that: "Most of us fail to imagine that corruption can also grease the wheels of prosperity. Yet in places where bureaucracies and organizations are inefficient (meaning entrepreneurs and big firms struggle to transport or export or comply with regulation), corruption could improve efficiency and growth. Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting."  This is an important argument to consider.

Back in 2003, Professor Enrico Colombatto made similar argument in a paper "Why Is Corruption Tolerated?" that was published in the Review of Austrian Economics 16 (4), 363-79.  This paper should be read more and incorporated into the contemporary discussions of corruption and development.  

John Wallis's (2006) thorough examination of corrpution in US history is another example of someone who understand the points raised by Blattman about (a) the greasing of the wheels of prosperity, and (b) that corruption is not the cause, but the symptom, and as such is an indication of a deeper instituitonal issue that must be addressed if prosperity is to be achieved and poverty is to be avoided.

 

 

The Review of Austrian Economics - Vol 25, Iss 4

The latest issue of The Review of Austrian Economics has just been published.  The issue includes Richard Wagner's SDAE Presidential Address, Lynne Kiesling on neuroscience and Adam Smith's concept of sympathy, Ben Powell and Ed Stringham on the contributions of Murray Rothbard, and an exchange between Alain Marciano and Pete Leeson on Austrian Law and Economics.

You can sign up for email alerts regarding the RAE here (right hand vertical bar about half way down).

You can subscribe to the journal by joining the SDAE here.

I Pencil, the Movie

Steven Horwitz

I do not have words for how beautiful and inspiring and perfect this is.  Directed by Nick Tucker, this  could not have been done better. I start every Intro class on the first day with "I, Pencil," and from now on I show this. Nick and CEI did it.  They brought "I, Pencil" to life on screen.

"This is the modern world. It's miraculous, it's intricate, and it gets better every day so long as people are free to interact with each other. If we can leave the creative energy of humankind uninhibited, there's no limit to what we can accomplish."

Words to live by and words to build a better future by.  Congratulations to all involved.

Austrians and Lazear & Speltzer on Structural Unemployment

Steven Horwitz

I had reason today to re-read this post of Peter Lewin's from September on the Lazear and Speltzer stuff denying that we have a structural unemployment problem.  Peter seemed somewhat befuddled by their argument and I think he's groping toward an Austrian response.  In re-reading it, I think I perhaps have a better one.  This is off the top of my head, but I share it below for reaction.  This was taken from an email I sent to a non-Austrian, which explains some of the rhetoric.

 

I think the language of “structural” unemployment is often unhelpful when Austrian types are in the conversation.  The idea of skills not matching needs presumes that we know what those needs are and know that workers don’t have the skills to meet them.  For Austrians, the problem is deeper.  We had an artificial boom for the better part of a decade (longer perhaps) that created all kinds of distortions in the capital structure, and those in turn made certain kinds of labor more valuable, and that, in turn, led to a (long run) distorted pattern of investments in human capital. 

The problem now is that we don’t know where that capital and labor should be allocated and only market discovery processes can figure it out.  As we continue, during the recovery, to make it difficult to engage in that reallocation (or “recalculation” as Arnold Kling has termed it), we may or may not be “getting it right.”  The fact that labor is coming back to the very industries that it was engaged in during the boom is, to the Austrians, not a sign of a lack of a “structural” problem, but rather evidence that such a problem is continuing. 

In other words, as Austrians insist, the long-run structural problem is created in the boom itself.  Those are the errors, but they are masked over for a while by the excess of credit, which allows them to persist.  When the boom ends, the errors are clear and it takes time to clean them out and figure out what we should do next.  The only way out of this is to let markets work to sort it all out and discover where labor and capital should be.  It’s highly unlikely that pattern would look like the distorted structure of the boom.

The problem is that we can’t know what the “needs” are and to assume they are the same as during the boom is to take the boom period as “correct,” which is exactly what the Austrians deny.

We Will Not Fall Off the Fiscal Cliff, But Perhaps We Should!

|Peter Boettke|

The probability that tough fiscal decisions will be made this time around is very low.  Instead, politics as the art of compromise will prevail and the "fiscal granade" will simply be kicked down the road.

Facing up to our fiscal situation is not an ideological issue, and it is not really an issue subject to various economic interpretations.  It is a question of numbers and intergenerational accounting.  Neither the numbers nor the demographics make for pleasant arithmetic.  If you have any doubt about this, just browse for a few minutes the work of economist Laurence Kotlikoff.  I don't follow his solutions to our problems, but his intergenerational accounting of our fiscal gap is spot on.  The only way to face up to the consequences of 60 years of profligate government spending is massive tax increases that will destroy the incentive to work and produce, massive spending cuts that will have every interest group in the US lined up to fight to their dying breath, and (a) a unexpected positive demographic shock to the US thru (1) climb in the birth rate, and/or (2) open immigration, and (b) explicit repudiation of existing debt obligations.

When the economics doesn't add up, when the numbers don't add up, and when the demographics don't line up, it is time to face the reality of "democracy in deficit".  But the talk in DC is always tempered by the politicians insistence that they reach across party lines, and forge a compromise that will enable business as usual to continue.  The reason we are in our current situation is due to the fact that "business as usual" has reigned for so long and independent of who or what political party is in power.  The past 60 years has been a period of politics by interests, not principles.  We need a reawakening of principles -- a change not in the people in power, but a change in the rules of the political game -- if we want to see effective action taken on the economic problems we face.  This isn't new to us, Adam Smith argued that all governments -- ancient as well as modern -- endlessly engage in the juggling trick of deficits, debt and debasement unless bound by effective rules.  We get fleeting contract technologies that bind government, but as again been pointed out for over a millenium a government that is strong enough to bind itself it strong enough to break those ties anytime.  Not letting the fox guard the chicken coup is just a southern US colloquialism of the ancient question of "who guards the guardians?"

So absent constituitonal restraints on the political game, and politics as usual will rule.  And within a democratic system this means both short-sightedness and concentrated benefits bias.  The logic of democratic politics is to concentrate benefits on the well-organized and well-informed interest groups in the short run, and disperse the costs on the ill-informed and unorganized mass of citizens.  This means that political decision makers will tend to choose short-term relief over long-term economic growth whenever a critical decision is required.  Hayek in Law, Legislation and Liberty discusses not the electoral incentive rationale for this, but the intellectual reasons why expediency tends to win out over principle when it comes to economic policy questions.  To me our job is to fit the incentive based public choice analysis with the epistemic based Austrian analysis to form a modern political economy critique of economic policy decision making within contemporary democratic societies.

But we shouldn't forget that we cannot persistently trade-off long term economic growth for short term relief and not reduce our well-being significantly.  Again, this isn't an issue of political ideology or of different schools of economic thought, the trade-off is real and binding.  Wishing it to be different because it is inconvient isn't going to make it so.  Tough fiscal decisions need to be made.

Tyler Cowen has a good post on the "fiscal cliff" over at Marginal Revolution. Tyler is more nuanced than I am, but I would argue that his two questions are in the same spirit as what I am saying and as he says the questions that must be contiually raised as we think about the political machinations to avoid the fiscal cliff:

1. If we don’t take “tough fiscal action” this time around, how much more will those special fiscal privileges (I’m not sure there is a single appropriate neutral term for the whole of them) become entrenched and difficult to dislodge, even when later macroeconomic conditions call for such?

2. What is the underlying rate of growth in the U.S. economy today, and how much higher (lower?) is that rate likely to rise (fall) over the next ten or so years? In other words, how much better (worse) an environment will we have for fiscal consolidation in the medium-term future? And at higher rates of growth, if we get them, how much harder is it to dislodge special fiscal privileges?

 

 

Reason’s Bastiat Prize for Journalism Winners

The Reason Foundation recently announced the winners of the 2012 Bastiat Prize for Journalism. You can read more about the winners here. Co-blogger Steve was selected as one of the honorable mentions. Here is a sample of Steve's "best" popular writing:

1. The Parable of the Traffic Lights:  http://www.cityam.com/forum/the-parable-the-broken-traffic-lights-when-good-signals-go-bad

2. Create Value, Not Jobs (Minneapolis Star-Tribune version):   http://www.startribune.com/opinion/commentaries/153296245.html  (more traditional op-ed, good market reach)

 3. Steve's Schechters piece:  http://www.thefreemanonline.org/features/thats-not-kosher-how-four-jewish-butchers-brought-down-the-first-new-deal/

 Congratulations to Steve for taking Bastiat's warning seriously:

“The worst thing that can happen to a good cause is not to be skillfully attacked, but to be ineptly defended.”