Coordination Problem

A Lecture in Texas on Economics and Entrepreneurship

|Peter Boettke|

Israel Kirzner made the trip to Lubbock, Texas last week and gave this public talk on "Economics and Entrepreneurship".  Ben Powell continues to develop the The Free Market Institute at a great pace and bring high quality economic educational experiences to the campus and the community.  Outstanding work all around.

 

William Easterly at the LSE on The Tyranny of Experts (December 2014)

|Peter Boettke|

 

Mind Change and Sociability

|Peter Boettke|

My colleague Tyler Cowen is a champion of cognitive diversity and how the modern information economy is allowing a more extensive division of labor which enables the gains from trade that are to be found as a consequence of this diversity.  Tyler emphasizes the benefits side, but as we all know there are always trade-offs that must be negotiated.

On my way into campus this morning I listened to a fascinating interview with Susan Greenfield, a neuroscientist at Oxford and the author of Mind Change: How Digital Technologies Are Leaving Their Mark On Our Brains (Random House, 2015).  She reported on a ton of research which argues that digital technologies have the impact of stifling the development of the social skills required to read social situations correctly, including the appropriate assessment of risk.  As a result, the culture is shifting to one that is perhaps more informed, but in possession of less knowledge; coarser conversational language; rude behavior; desensitized to violence and angry outbursts; and shorted time horizon.  In short, the generation growing up with digital technology has been acculturated to behave as a 3 year old would, and they continue with when they are 13, and when they are 23.

Least you dismiss her, it is important to realize that Greenfield is no luddite.  She knows full well the benefits of our smart phones and the internet.  What she is stressing, however, is the social glue that is found in the evolution of manners and body language that has enabled cooperation among diverse individuals throughout the history of humanity.  She also makes a strong point about the necessity of learning through free play about the real consequences of failure due to bad decisions, poor preparation, or simply bad luck.  Failure in the virtual world of games doesn't have the same 'sting' that falling out of tree does on the brain of a 10 year old.

Based on her interview I have now ordered her book.  As a student of Hayek, I have always been fascinated by the rules of conduct that guide us in our social interactions.  And as a student of Hayek, I understand that many of these rules are part of our tacit understanding, and in fact, that we cannot even rationally justify them in isolation.  We don't have rules because of our reason, but as Hayek argues, we have reason because we followed rules.  What happens when adults and children are no longer learning and practicing the rules of just conduct?

One of the great points Greenfield did make, however, was how adaptable our brains our and how quickly we can adjust to shifts in our environment. So we can make changes on the margin that will enable social learning of the rules of conduct that are appropriate for a society of free and responsible individuals who seek to realize the gains from social cooperation under the division of labor, and live in caring communities.  Its not too late for us.  Stop staring at a screen, and pushing buttons -- including blog posts! as it turns out that according to many studies the mere tactile sensation associated with the reading of a book results in a greater retention of the substantive content than in reading on a screen.

Quiet But Steady Progress in the Field of Economics

|Peter Boettke|

Methodological straightjackets usually kill creative thought.  Scholars need to be able to look at the world through different windows to bring new perspectives to bear on pressing problems.  As McCloskey has taught for over a generation, if you shine your flashlight over there to illuminate, you necessarily leave in the dark the reality over there away from the beam of light.  Your eyes will only be directed at what is illuminated, but what if the answer to your questions lies over there which is still in the dark?

Elinor Ostrom was one of the great champions of what she called "multiple-methods methodology".  She insisted that you had to master a disciplinary method first, but then you needed to have an open attitude and seek out gains from intellectual exchange. Her attitude was so refreshing because in modern economics that standard rhetoric was one of accepting only a very narrow set of tools and approaches as scientific.*  To use a phrase from McCloskey again, the intellectual range seemed to be restricted from M-to-N.  When we get close and look at it, it appears to be very diverse, but if we step back just 1 step, we will see that the discipline doesn't deal with the range of ideas and methods from Alchian-Buchanan-Coase all the way to Ostrom-V. Smith-Tullock-Yeager-Williamson.

But perhaps that is changing; and we are witnessing a change for the better, not motivated by philosophical musings about the nature of science, but instead just by the natural curiosity of scholars to understand human action in all aspects of life.  Andrei Shleifer provides an outstanding survey to honor Matthew Gentzkow's 2014 J B Clark Medal.  After walking his readers through the various contributions of Gentzkow's and his colleagues work on a variety of topics, Shelfier concludes with this sentiment about the future of economic research:

After rereading Matt’s papers, and reading some for the first time, I am struck by his openness to different ways of doing economics. He has an uncanny ability to rely on different approaches, depending on what the problem he is considering calls for. Sometimes he uses quasi-experimental evidence to identify the effects he is interested in; other times he estimates full structural models. Some papers deal with small data sets; others rely on frontier big data techniques. Several of the papers contain practical econometric advances that have become useful to subsequent researchers. Sometimes Matt uses the simplest models that only summarize the verbal ideas; other papers, such as the work on persuasion, contain significant contributions to economic theory. Much of his work is extremely neoclassical, but some is behavioral as well. Some papers deal with abstract conceptual issues; others are solidly grounded in practical concerns, including regulatory ones.

This range is admirable not just for its own sake. My sense is that when areas of economics conclude that there is only one correct way of analyzing a problem, they stagnate. Our discipline is not far enough along to settle down in this way. Openness to new ways of doing things is essential for making progress. I would go further and conjecture that such openness is the hallmark of 21st century economics. The fact that Matthew Gentzkow along with his remarkable collaborators and several other recent winners of the John Bates Clark Medal embrace such openness is both a testimony to their talents and very good news for our field. (emphasis added)

Note in Shlefier's reading, it is not just topic choice, but method of analysis that varies.  It is my sincere hope that he is right and that the discipline will be more pluralistic methodologically, analytically and ideologically over the next 25 years of my career than it has in the first 25 years.

 

----------

*One of the many great strengths of George Mason University has been the educational exposure from the founding of its PhD program to "multiple-methods" of scientific economics.  As Bob Tollison once told a rather obnoxious detractor at a public lecture in the mid 1980s -- 'At George Mason, we have at least 2 strong scientific traditions and your comment to the contrary is not acceptable here.'  Tollison the quintessential applied neoclassical economists and political economists understood and respected the Austrian-subjectivism and the property-rights institutionalism as well as the constitutional political economy and liberal social philosophy that was evident in the various scholars at GMU at that time who worked at the Center for the Study of Market Processes and the Center for Study of Public Choice.  Years later, Vernon Smith would move the Interdisciplinary Center for Economic Science to GMU and he too would embrace the methodological diversity of GMU with its Austrian economists, its institutionalist economists, its public choice economists, its philosophical economists, its historical economists, and its intellectual history economists.  There are still detractors who don't know what they speak about because they choose to focus only on 1 or 2 of the traditions that students are exposed to at GMU and think that is all they know.  But our students are exposed to standard theory, standard applied techniques, they also can pursue agent based modeling, they can specialize in experimental economics, as well as Austrian economics, public choice economics, and law and economics.  In fact, some of the most productive work is done at the intersection of all these traditions and approaches.  On the margin that matters most for the sort of intellectual creativity that Shleifer is talking about, GMU has been a trail blazer since the 1980s when the program was founded.  Buchanan's call to "Dare to Be Different" was right along these lines, and we have --- and continue to be -- bold enough to dare to be different.  If others are moving in that direction, and away from the production of those "Kelly-Green Golf Shoes" that McCloskey identified as the Samuelsonian, then so much the better for our discipline and for our understanding of the world around us.

Intergenerational Accounting Is a Tricky, But Necessary, Business

|Peter Boettke|

With Greece attempting to negotiate terms with the EU and threatening to leave the EU unless more favorable terms are agreed to for a bailout, it makes sense to think about public debt issues.  Greece is certainly not alone with respect to its fiscal irresponsibility.

Take a look at Laurence Kotlikoff's latest op-ed "What's the most fiscally responsible country in the developed world?"

As he puts it:

It’s a strange word in which a totally bankrupt country — the U.S. — can borrow at extremely low cost while printing money at astronomical rates. It’s a strange world in which policymakers can’t distinguish economic from linguistic measures of fiscal sustainability. And it’s a strange world in which Italy, the developed world’s most fiscally responsible country, has to be lectured on fiscal prudence by countries in far worse fiscal shape.

What do you think?

Intentions Do Not Equal Results: How an Economist Can Go Astray

|Peter Boettke|

Óscar Arnulfo Romero was shot while giving mass by a military official on March 24, 1980.  He was an outspoken critic of the injustice and crimes against humanity committed by the military establishment in El Salvador at the time.  Pope Francis has declared Romero a Martyr.  Now there should be absolutely no doubt that Romero was correct in his outrage over the military repression and the injustice perpetrated by the ruling regime.  And for being an outspoken critic he paid with his life.  He was a man of great conviction and courage.  He should be admired.

But whenever we study systemic repression and injustice, the analytical demands on us should be greater than merely an assessment of the intentions of the wrong-doers, and certainly more than the intentions of those who hope to do good.  Unless we think systematically we will end up in a situation where we are Doing Bad By Doing Good.  Social science emerges precisely because intentions do not equal results in the complex phenomena of society.  If all we needed to focus on was intentions, then the formula would be simple --- good people = good things; bad people = bad things, lets make sure we get good people to be in charge and keep bad people out of being in charge.  The focus shifts from not safeguarding the apparatus of government from abuse, but from ensuring that the selection process only puts good people in charge of an unconstrained apparatus of government.  Social science is really about the other possibilities --- the path to hell is paved with good intentions; or the private vices resulting in public virtues.  Here it is not actor intentions, but the institutional filters within which those intentions are played out against constraints imposed by scarcity, the situation, and the preferences of others.  The institutional environment determines the outcome, not merely the intentions of the actors.

But this narrative is both more complicated and less passionate than the story about evil intentions.  And let me be clear, sometimes there are evil people in the world doing evil things.  But I believe it is still important to ask how were they able to bring their evil intentions into reality -- and that answer is because of flaws in the institutional regime that did not check-mate the abuse of power.  So again the analytical focus should be on the systemic effects of the institutional regime governing social interactions.

Since 2008, there has been a common narrative that evil greedy men of finance have bankrupt our society and corrupted our political system and that something must be done.  I would not deny my own outrage at the reality of the political economy of the financial industry, but I would not put the blame analytically on the motivations of those in the industry.  The blame in dealing with the rent-seeking reality of the financial industrial complex (just as with the military industrial complex) should be on the institutions that fail to safeguard against this abuse and create instead what Milton Friedman termed the "iron-triangle" that provides the basis of the tyranny of the status quo.

When economists stop thinking in terms of systemic/institutional and instead in terms of behavioral/intentions explanations they can go astray quickly.  One of my favorite thinkers in my cohort of comparative systems economists when I was starting out in my career was Simon Johnson.  He wrote several brilliant and insightful papers on the problems of privatization and the difficulties of transition in the 1990s.  In the 2000s he became outraged and this reached a boiling point in the wake of the global financial crisis in 2008.  I have a lot of sympathy for what he says.  Like Russ Roberts I consider it very bad that a system was established that encouraged some to gamble with other people's money. And like Luigi Zingales, I too worry about both industry and political capture of economic science --- though more about political capture.  And finally, I do think like Joe Stiglitz does that gross inequality that results from the granting of political privilege to special interests is an injustice that must be addressed.

But note something important, it is not the intentions of the actors, but the institutional regime within which they operate, that determines whether we realize desirable or undesirable results as an economic and political system.

Simon is outraged by the special interest privileges, so he wants to penalize the special interests directly for their bad intentions.  He puts the economists in the position of the Pope to judge the soul of the actors for their intentions, when he should be sticking to his guns as an economist and focusing on the institutional questions as to what makes this iron triangle in the financial industry arise.  Instead, he argues in a recent op-ed that we need to have a leader who has the moral indictment of the special interest groups on Wall Street -- e.g., Elizabeth Warren.  He even refers to her approach as moderate.  She does give a good sermon about greed, selfishness, and injustice. She has her own examples of martyrs for the faith.  But the approach is all about intentions in my reading, and not the institutions within which they intentions play out against nature and others.  I fear that Simon's moral outrage will be met with the tragedy of unintended consequences unless the institutional regime not only in finance, but in politics, is addressed head on.  The financial industrial complex is real, the iron-triangle is real, the tyranny of the status quo is real, and the churning or rent-seeking state is real.  Now how do we challenge that?  Well, it isn't going to be found in moralizing about intentions, but in thinking seriously about institutional change along the lines that James Buchanan and Gordon Tullock taught.  So lets take that radical intellectual turn as economists.

 

Breaking Down the Invisible Wall To Progress With the Doing Business Index?

|Peter Boettke|

Hernando De Soto discussing the invisible walls to progress and the red-tape analysis that makes those walls transparent for all to see in the struggling country and beyond.

Inequality, Mobility, and Being Poor in America

Steven Horwitz

That's the title of a recent paper of mine that is now forthcoming in Social Philosophy and Policy, as part of a conference and symposium coordinated by Mark LeBar. I have put a draft version up at SSRN for those who would like to take a look at it.  I will try to link the final version if possible.  Here's the abstract:

Abstract:      

The conventional narrative that the last generation has seen the rich get richer and the poor get poorer while the middle class gets hollowed out has serious flaws. First, the claims of growing inequality overlook data on income mobility. It is not the same households who are rich and poor each year, and many poor households become richer over time. Second, the claim of middle class stagnation is largely a statistical deception based on an incomplete interpretation of median household income. The middle class has shrunk but so has the percentage of poor households as the percentage of rich households has grown significantly in the last few decades. Third, looking at consumption rather than income enables us to see both the absolute gains of poor US households and the narrowing of the gap with the wealthy. Poor US households are more likely to have basic appliances than the average household of the 1970s, and those appliances are of much higher quality. Together these three points offer a much more optimistic view of the degree of inequality and the ability of the poor to become rich. The picture is not all rosy and a final section discusses the relevance of housing, health care, and education costs to this argument.