Coordination Problem

Public Policy and Refractory Reality

|Peter Boettke|

It seems to be important to stress in the contemporary policy discussions that intentions do not always equal results.  Seems strange to have to point out this basic point, but our current intellectual climate seems to encourage a counterproductive two-step -- to assume one side is good and the other evil, and that it is the evil side that is preventing the good side from achieving all that they promise for a better world if only you followed their policy prescriptions.  This "knaves, fools, and me" mentality is a block to genuine discourse in a democratic society, not really a part of it --- as it asserts a privileged position for the self-anoited expert in that discourse.  It is a conversation stopper, and a demand that one party be the granted to position of speaker and the other that of only listener.  No discourse required.

But an open discourse is fundamentally what is required at this juncture in our society with so many critical issues at stake in the democratic decision-making process concerning climate, race, gender, community, education, work, and commerce.  We would be wise as a society to think about the fundamental issues concerning democratic discourse raised in works such as Frank Knight's Intelligence and Democratic Action and Vincent Ostrom's The Intellectual Crisis in American Public Administration.  And we would do well to remember the fundamental lesson of basic economics.

Policy makers may very well intend to do good, but the policies they choose may be inconsistent with that goal due to incentive incompatibilities and insurmountable knowledge problems.  The best intentioned policy makers and the most motivated policy makers may still not be able to know what the best course of action is in any given circumstance let alone how to learn through experience about to accurately adjust given an initial frustration in plans.  There truly is problem with the best laid plans of mice and men going astray.

So the #1 rule of economic policy should be "wishing it so doesn't make it so".  Political philosophy might be aspirational, but economic analysis cannot be.  We live in a world of scarcity, scarcity implies trade-offs, those trade-offs must be negotiated, in order to negotate the trade-offs individually and collectively there must be an alignment of incentives, a flow of information, and feedback mechanisms that aid in the correction of the inevitable errors that result from the fact that we are dealing with fallible but capable human actors.  In other words, as analysts we have to (a) recognize that reality is not optional, and (b) that we must examining the coping mechanisms that imperfect beings utilize in an imperfect world to stumble their way through in a way to improvement in the human condition rather than worsen the situation.

Perhaps if we could rely on pixie dust, politicians would be much happier and their acts of promisory politics would not have unintended and undesirable consequences.  It sure would be nice if we were all smarter, friendlier, healthier, and wealthier.  But our ability to achieve these desired ends as a society is a function of public policies not pixie dust, and those public policies must be grounded in a recognition of the refractory reality within which human beings exist.  Both sides of the aisle prefer pixie dust policy to serious economic analysis of public policies and that is our problem.  "Wishing," from the right or from the left, "doesn't make it so."

It doesn't matter whether we are talking about discrimination, income inequality, or the wealth and poverty of nations, what matters for public policy discussions should be incentive compatibility and knowledge processes. The intellectual strategy of the analyst must be to critically examine the effectiveness of chosen policy means to achieve stated ends sought and do so through an examination of the systemic incentives, informational requirements, and feedback processes that would guide adjustment.  The strategy of the reformer must be to first and foremost identify incentive compatible policy shifts, and then device incentive compatible strategies for implementation.  In both cases, it is the recognition of the refractory reality that grounds the analyst and the reformer from engaging in free floating abstractions.

 

Phil Magness on Piketty

Steven Horwitz

If you are not following the historian, and friend of us here at CP, Phil Magness's posts on the data in Piketty's book, you are missing some really careful scholarship that's revealing all kinds of, for lack of a better word, shenanigans in the book.  Each one alone isn't much, but when all of PIketty's questionable statistical moves work in favor of his thesis, one eventually has to wonder exactly what's going on.

PIketty seems not so much a master of the data, but a torturer of it.

Phil's blog his here, and the top three posts are all on Piketty.

Khrushchev and Kitchens

|Peter Boettke|

Following up on my previous link about the Soviet effort to abolish private kitchens in homes and the establishment of communal kitchens, NPR discussed the next chapter in everday Soviet life -- which was the return of the private kitchen after Stalin's death.  A part of the "thaw generation" was the return of private space, and thus private life -- where conversation was free and the discussions ranged from politics, to literature, to music and art.  Dissident culture in many ways founds its way in Soviet kitchens.

When I was a visiting scholar at the Russian Academy of Science in 1993, one of my best memories is drinking vodka, and eating brown bread with pickles and sausage from mid-afternoon till past midnight in the apartment of a Soviet dissident economists and his friends who ranged from academics to publishers to policy makers.  I actually drank too much vodka, but subriety came suddenly when upon leaving for the walk home I was confronted with the cold air of January in Moscow.

One of my most cherished comments I ever received for my work on Soviet and post-Soviet economy was when a Russian economists in Moscow sent me a congratulatory note about my book, Why Perestroika Failed, and told me that my book described the reality of Soviet economic life, including late-stage Soviet economic life under Gorbachev, accurately, and it was the world that they discussed at the kitchen table, rather than the world too often discussed in textbooks and on blackboards.  In the context of this story about Soviet kitchens, which I understood then and now, that comment was very high praise for someone fixated as I was (am) on capturing the political economy of everyday life rather than the idealizations of economic and political life.

The Piketty Controversy

Steve Horwitz

Some general thoughts on the controversy over Piketty and his data.

1. We have no evidence he intentionally falsified data. There are problems and anomalies and questions about cherry-picking and the like, so he definitely has some 'splainin' to do.  However, this is not about fraud. It's not Bellesiles. Yet. 

2. Economists make adjustments to data all the time, especially when dealing with old, incomplete, and inconsistent data sets. The question is whether they are justified or just done to make the data consistent with your priors. Piketty has a potential problem here and we need to see what his response is.  His first round reply in the Financial Times was a whole bunch of nothing.

3. If there are real data problems (and they aren't about intentional falsification), then we need to consider how fatal those are to his argument. With Reinhart and Rogoff, the data errors didn't change the overall argument, but did toss out the 90% threshold which wasn't the central point anyway. So let's see how this plays out.

The revelations of the last few days are yet more reasons (along with other errors of theory and history) to treat the book skeptically, but they are not indications of academic fraud, nor is it clear how fatal they are to his argument. Yet. Those juries are still out, but the preponderance of the evidence is starting to mount.

(Cross-posted at Bleeding Heart Libertarians)

Why Did the Soviets Want to Abolish Kitchens?

|Peter Boettke|

Kitchens are just so bourgeois.

Listen to this fascinating story on the effort to abolition kitchens and the revolutionary idea of communal cafetaria and the reality of communal kitchens in Soviet apartments.

What If John Rawls Read Milton Friedman Seriously and Empirically?

|Peter Boettke|

John Rawls was an extremely brilliant man, and I have no doubt that he could say with a straight face that he knew well the arguments made by F. A. Hayek, Milton Friedman and James Buchanan.  There is no doubt about that.  But I am not sure he read these figures seriously, nor thought through the revisionist empirical accounts of the conventional wisdom circa 1970s that their work compelled one to do with respect to the socialist experiment, the Great Depression, and the rise of (and effectiveness of) the regulatory and welfare state in the 1950s-1970s.

Our empirical understanding of the record of the free market to be self-correcting in the face of potential frictions and social tensions, as well as the ability of the free market to generate generalized prosperity throughout the world has shifted radically since Rawls wrote The Theory of Justice, and established his two principles.  But what if our understanding of the empirical record was one that placed emphasis on how the market economy is the means through which the world's poor climb out of poverty and integrate into the international division of labor, what would that do to Rawlsian positions with respect to the justice of capitalism such as that held by Thomas Pogge?

Pogge is a pasionate man, but his passion I believe prevents him from looking at the empirical record dispassionately and thus his analysis of the causes and consequences of economic development is comprimised.  I "debated" these ideas with Pogge once at a conference at UVA, I say "debated" because there was no real engagement between us, just 2 "fighters" forced to stand in their respective corners after a few exchanges of jabs and hooks.  I regret we didn't have a more engaging conversation.

I wrote to Pogge recently to invite him to be part of a symposium I am organizing for the RAE on William Easterly's The Tyranny of Experts, where unfortunately he has failed to respond to my inquiry.  His passion for the topic of the world's poor makes him an intriguing figure to me, but his unwillingness to learn anything from basic economic reasoning other than aspects of the economic literature that confirm his biases frustrates me perhaps more than any other current social thinker I wish to engage.  I am not really interested in "fighting", but instead in figuring thing out, and coming to a mutual understanding on the issue of how best to address the problem of poverty.  But historical evidence as presented by figures such as Deirdre McCloskey as well as more contemporary empirical data analysis by figures such as David Dollar on whether economic growth is good for the poor, simply fails to penetrate Pogge's understanding of the economic record and leads to the opposite judgement than the one he has.  Can he please look at what has happened to those living under $2 per day over the past 20 years because of the opening up previously closed economies to the global market economy?!

His empirical understanding fuels an outrage of the injustice that the current world distribution of income represents.  The passion over poverty is intriguing, but the intellectual blindness to basic economic reasoning is frustrating.  Witness this interview with him where he compares those supporting the current international economic system and thus standing by as the world's poor suffer as the equivalent position to the German's who remained silent during the Nazi ottrocities against the Jewish people. (HT: Michael Wiebe)  He could have a point, if as with Easterly's work he saw how experts from afar often undermine democratic reforms and systems in the countries that the foreign aid is supposed to help.  But that is not what he is stressing. Pogge believes horrific poverty is a crime against humanity committed by the capitalist economic system.

When my PhD students inevitably come to their final defense I often ask 2 very vague and broad questions of them just to make sure they are on their toes: (1) what was the biggest surprise you had in your research for your dissertation?, and (2) what argument or evidence would have persuaded you to the opposite of your present position?  They better have had some surprises, otherwise we wouldn't call it research (btw, pleasant surprises are still surprises!). And they better know what would have pushed them off this position otherwise they are merely engaged in lawerly rhetoric at best and confirmation bias at worst.

I wonder how Thomas Pogge would answer those questions if asked concerning his work on capitalism, justice and the plight of the poor.

 

Teaching Economic Transitions

|Peter Boettke|

For the first decade of my career, all of my applied work related to the Soviet economy, and in particular the problems of transitional political economy.  At the most basic level, my perspective was influenced greatly by Murray Rothbard's discussion in America's Great Depression about how to recover from the "bust" without generating a new cycle of "boom/bust".  That Rothbardian recommendation was then augmented in my work with a discussion of institutional design and evolution in a post-communist world.  Cannot have free pricing without private property rights, and cannot have private property rights without the broader institutional ecology (formal and informal) that supports the clarification and enforcement of those property rights, etc., etc.  How exactly do we engage in institutional design in a world defined by its history and culture?  How can we establish credible institutions in a world where the past 70 years was defined by dysfunction and distrust?

Over that first decade of my career (lets say 1990-2000), I wrote 3 books: The Political Economy of Soviet Socialism (1990); Why Perestroika Failed (1993); and Calculation and Coordination (2000).  I also edited The Collapse of Development Planning (1994) and Socialism and the Market (2000).  But as the 90s turned to the 2000s, covering post-Soviet affairs seemed more like journalism than academic research, so my attention drifted elsewhere --- to development economics, to disaster economics, and to crisis economics.  But if you look beneath the specific country context, the questions are still the same --- how can you engage in institutional design in a world where the previous institutional environment while dysfunctional and distrusted neverheless has an impact.  As James Buchanan always stressed to us in his classes --- we must begin with the here and now, and not an imaginary start state that would make our task simplier.  How do you negotiate away from the here and now to establish a new institutional regime?  How do you examine in (to borrow a title from my brilliant colleague Richard Wagner) "the romance and realism in the politics of economic reform"?

As I get ready to teach economic transitions to undergraduates starting next week, I am reminded of the PBS series 'The Commanding Heights'.  There are tons of hidden treasures at the website that are not highlighted in the actually show.  I was actually interviewed for over 5 hours during the filming of the show (at the Masonic Temple in Alexandria, VA), but I ended up on the editing room floor (I was given a free copy of the DVD set for my troubles).  But I would like to point to an interview from the show with Anatoly Chubais.  In the late 1980s, while I was teaching at Oakland University in Michigan and was using a version of e-mail for the first time, Chubais is actually someone I corresponded with about the Soviet economy -- its history and the treadmill of reforms.  Chubais went on to hold a signficant positions of power during the transition period after the collapse of the Soviet system in the early 1990s.  Anyway, during this interview he mentions Vitaly Naishul.  Naishul was one of the Russian economists who I learned a great deal from, and his work on spontaneous privatization was very important.

Bottom line: I will encourage my students this summer to dig around The Commanding Heights website and read the interviews rather than just watch the main story-line.  

What lessons have we learned in the 25+ years since the collapse of communism?  

Quiz for the Austrian Economists Among Us

|Peter Boettke|

I recently finished a draft of a review essay on J. Daniel Hammond, Steve Medema and John Singleton, eds, Chicago Price Theory, 3 volumes that I entitled "Price Theory as Prophylactic Against Popular Fallacies." That title comes directly from Henry Simons and in particular Simons' Syllabus from his Econ 200 class that students for years took to prepare for Econ 300 sequence.  When I was a graduate student at GMU in the early 1980s, Gordon Tullock published Simons' Syllabus through the Center for Study of Public Choice and made copies available for free at the Center.  I still have my copy.

In my review essay, I distinguish between the Knight/Viner/Simons tradition of Chicago Price Theory from the Friedman/Stigler/Becker version.  There really isn't anything novel in making that suggestion, though most try to emphasize a continuity through the years of the Chicago approach to price theory.  However, I further argue that there is a possible path of the Knight/Viner/Simons tradition that is best embodied in the work of Alchian/Buchanan/Coase.  With that in mind, consider the following quote from Simons:

Traditional price theory consists primarily in analysis of the pricing process under a free-enterprise economy -- under a system characterized by private property, free contract, and free exchange. Assuming given underlying conditions (given conditions, broadly, as to tastes, technology, resources, and ownership), it attempts to show how consumption and production are controlled through the pricing process and, above all, to describe (a) the arrangements under which the system will be in equilibrium and (b) how departure from the equilibrium arrangements will set in motion forces operating to restore equilibrium. The central conception of price theory is that of an equilibrium adjustment with respect to relative prices and relative production.

… The method implies a conception of two kinds of economic change, distinguished for purposes of separate study: (1) change in the form of adjustment to present conditions; and (2) change in the underlying conditions which are treated in price theory as fixed.

    -- Henry Simons, Simons’ Syllabus, p. 6.

What is the intellectual agenda that follows from the position that "The central conception of price theory is that of an equilibrium adjustment with respect to relative prices and relative production" ? (emphasis added)

So here is my quiz to economists in the Austrian tradition --- explain how your understanding of price theory would differ from Simons.  In doing so, consider these two quotes from Mises.

What distinguishes the Austrian School and will lend it immortal fame is precisely the fact that it created a theory of economic action and not of economic equilibrium or non-action. … The Austrian School endeavors to explain prices that are really paid in the market, and not just prices that would be paid under certain, never realizable conditions.

   -- Mises, Notes and Recollections, p. 36.

And from Human Action, p. 232 a discussion of the essential relationship that students of the market economy must explore.

Ever since people have been eager for a systemic study of economics or political economy, all have agreed that it is the task of this branch of knowledge to investigate the market phenomena, that is, the determination of the mutual exchange ratios of the goods and services negotiated on markets, their origin in human action and their effects upon later action.

Kirzner has asked the question slightly different and focused our analytical attention on the relationship between the underlying variables of the market (tastes, technology and resource availability) and the induced variables of the market (prices and profit/loss statements).  But nowhere does Kirzner ever deny the equi-marginal conditions that must hold when the induced variables dovetail with the underlying variables and we realize the perfect coordination of plans.

What is the relevance of this subtle differences in price theory for the status of the theory as a prophylactic against popular fallacies? 

Chris Coyne on Doing Bad By Doing Good (March 2014)

|Peter Boettke|

This should have been posted earlier, but here is Chris giving a talk at Lindenwood University.

Summer Teaching 2014 ... Been A Long Time But Hopefully Will Be Rewarding Experience for All

|Peter Boettke|

Starting on Monday -- May 19th -- I will be teaching an undergraduate course in comparative economic systems.  I haven't taught undergraduates for 2 years and I haven't taught a summer class since the late 1980s.  It is my sincere hope that it will be a rewarding experience for both my students and myself.  Many years ago Robert Nozick told me the secret to never getting bored teaching was to never teach the same class twice --- and you can accomplish that either by teaching different topics, or teaching the same topic differently everytime around.  Since my course topics are roughly the same, I mainly shift by varying the way I teach the course and thus I have to write new preparations each time I teach.  Not the cost minimizing way to teach, but perhaps a low cost way to stay in constant learning mode.

Here is the course description:

Political economists stress the technical economic principles that one must understand in order to assess alternative arrangements for promoting peaceful cooperation and productive specialization among free men. Yet political economists go further and frankly try to bring out into the open the philosophical issues that necessarily underlie all discussions of the appropriate functions of government and all proposed economic policy measures. -- James M. Buchanan

Throughout the 20th century the “Big” political and economic debate was between capitalism and socialism. The intellectual challenge to capitalism dates much further back in time, and the specific socialist challenge to the capitalist system dates to the 19th century and was most developed in the works of Karl Marx. But in the 20th century, those ideas were translated into public policy in one form or another – from the Fabians in the UK and the Progressives in the US to the Bolsheviks in Russia and the Maoists in China. At one point ¾ of the world population existed under communist and socialist rule. But these socialist political and economic systems began to fall apart in the 1970s-1980s and most collapsed in the late 1980s, and early 1990s.

Since that time, comparative analysis of political-economic systems has moved from the debate between socialism and capitalism to an examination of the political economy of transitioning societies from forms of socialism to new forms of capitalism. Along the way, the transitions have had many ups and downs. We now are focused on studying not only the former socialist economies, but the failed and weak states of Africa, Middle East, and Latin America, as well as the newly emerging economies of East Asia, and the newly opened economies of India and China.

Since 2008, we must now also deal with the causes and consequences of the global financial crisis. The current generation of economic commentators is now also addressing the political, economic and social consequences of inequality. During the course of this class, it my hope to give you an analytical framework for assessing economic systems and these pressing issues of public policy, as well as provide some historical context to the debates, and some basic empirical results that cannot be ignored if progress is going to made our understanding of the political and economic reality of our time.

Economics as a scientific discipline strives to provide objective knowledge about human decision making and the organization of human activities. Based on the core teachings of economics we will branch out to more nuanced discussions of alternative institutional arrangements, and eventually to the underlying philosophical positions in discussing peaceful cooperation and productive specialization among free individuals. It is my goal as a teacher during this condensed class to limit the material to the essentials and to demonstrate to you not only the vital importance of the material but the sheer pleasure involved in ‘finding things out’.