Coordination Problem

François Michelin, RIP

~ Frederic Sautet ~

François Michelin, former CEO-Managing Partner and grandson of the founder of the Michelin tires company passed away yesterday at the age of 88. He was a truly remarkable man and somewhat of an oddity in the French and European business landscape.

First, he was a devout Catholic and always put his faith ahead of the rest. He had a keen sense of the vocation of business leader and what it meant to be responsible of the destiny of a business enterprise. He saw the vocation of business as a daily participation in the divine order, whether one is a boss or a worker. He would say that happiness often results from having accomplished something well. He tirelessly explained how the success of Michelin was the result of the teams of men and women who worked there in communion, but also that love was the principle that helped him see the best in the people that worked with him.

Second, François Michelin was a very successful manager and CEO. He promoted the radial tire technology in the 1950s, 60s and 70s at a time when nobody thought much of it, including in his own company. His vision propelled Michelin to the top. He never rested on his laurels, as he understood that innovation was key to sustained comparative advantage. He cultivated an “esprit d’équipe” and a “climat de liberté” within Michelin that created a culture of innovation. His best management tool was his “ears,” as he liked to say. It was because of his willingness to listen that he learnt from the facts on the ground, where many new ideas come from. Among the ideas now common in business schools and that he put forward we find: current products are the results of past mistakes; and clients have the power to elect our business every day.

Third, and not least, he was a free-marketeer. In the rare interviews he gave, he explains how Parisian centralism and politics have often been detrimental to the free enterprise system. Like Henry Ford, another titan of business, François Michelin did not like unions much, even employers unions that he regarded as having fatally compromised their views after 1968. He justly thought that French labor laws were Marxist-based, as they rest on the notion of class warfare and not on social cooperation. He criticized the political elite for being technocrats without much understanding of the reality of commerce.

Some pundits saw François Michelin as too secretive and patriarchal. Critics said that he compromised his views when the company accepted a loan from the government in 1982, as it was going through severe difficulties. They have a point. But considering how common lobbying is in business, we have all the reasons to celebrate François Michelin’s probity and principles. May he rest in peace.

EWOT Morning Edition --- Israeli Dads, Indian Moms, and Nepal Births

|Peter Boettke|

Economists are often accused of knowing the price of everything and the value of nothing.  This is a weak criticism.  Economists -- well those economists who actually practice price theory -- are not making a value judgement in their analysis, but merely describing the economic forces at work that guide and prod human decision making within specified contexts.  At a very abstract level, individuals are always weighing marginal benefits (MB) with marginal costs (MC) and will continue to engage in an activity as long as the MB>MC, and will avoid engaging in activities where the MC>MB, so we can say that they will strive to equate MB with MC in any endeavor that they pursue.

In pursuing these endeavors -- whether profound or profane doesn't matter --- they sometimes err, but in committing an error they learn and adjust.  Well, they do so IF the institutional environment actually guides them -- otherwise in some technical sense we haven't really understood what the MB and MC of the activity was that the individual decision maker faced.  The institutional environment is established, again in an abstract way, by the property rights regime in effect, the flexibility of prices to freely adjust to changing circumstances, and the accuracy and "hardness" of the budget constraint imposed by profit and loss statements.  Property, prices and profit and loss are all impacted by public policies such as regulation, monetary policy, and fiscal policy.  But given whatever policy decisions have been made, then economic actors will work within the reconfigured system of property rights, array of relative prices, and profit and loss accounting such that MB-MC calculus can proceed.

The Economic Way of Thinking is universally applicable -- it is true as far back as we can reach in ancient history, and will be true for any coherent understanding of our future.  As long as human beings must cope with the reality of scarcity, they will engage in trade-offs, and in order to negotiate those trade-offs they will need guide posts and those guide posts to decisions are provided by institutions, and in the context of market decisions those institutions are property, prices and profit and loss.

With that in mind, listen to this fascinating but also heart wrenching story about Israel evacuating 26 babies from Nepal after the devastating earthquake, while leaving behind the surrogate Moms that gave birth as well as 100 pregnant surrogates.  

Why would Israeli men be going to Nepal to have their biological children in Nepal?  It turns out that Israel has laws limiting surrogacy to couples.  Why are the Moms Indian?  Well, it turns out that Israeli men used to go to India to find surrogates because the price was low, but the quality of health care was reasonably high.  So Indian women were the preferred choice of surrogates.  So why are these babies and Moms in Nepal?  Well it turns out that India recently passed restrictions on surrogacy to couples as well, and Indian women didn't not need extensive papers to cross the border into Nepal.  Policy shaped the MB-MC calculus going on in both sides of this market, but given that each of the decisions is guided by the property rights regime in operation, the relative prices that decision makers confronted, and the profit and loss accounting that was rendered by the transaction.

Nothing in that analysis of the situation passes moral judgement on surrogacy or any of the policy decisions, including the current one by the Israeli government to aid the evacuation of the babies but not the mothers or the mothers to be.  All that economics proper does is render intelligible human behavior in a variety of circumstances and across a great diversity of institutions and human experiences.  In one of the greatest books of economic thinking Wicksteed's Common-Sensehe used examples from Caesar pre-battle oratory to St. Paul selling of tents to explain the universality of the economic calculus involved in human decision making.  And we can add to the infinite list of examples Israeli Dads, Indian Moms, and Nepal births.

As Baltimore Burns ... Economists Have to Think Harder

|Peter Boettke|

Watching the peaceful protests transform into a riot in Baltimore on Monday was horrific, but it should also trigger some serious thinking in the social and behavioral sciences as to the underlying causes and dynamics at works in the legitimation crisis that afflicts so much of the urban ecology today in the US.  Like everyone else I have my pet peeves and pet theories --- public respect for persons and property; drug war, militarization of police, etc.  But as an economist, I also think we should focus like a laser beam on the policies that have limited economic opportunity in these communities, especially for the youth.

Years ago when teaching an Honors Course at NYU (Morris Academic Program it was called then) on Race, Gender and Inequality, I used William Julius Wilson's When Work Disappears (1996).  Of course, Wilson's book is a rich sociological analysis of the problems caused by the elimination of work opportunities in the urban landscape.  As an economist influenced by Thomas Sowell's Markets and Minorities and Walter Williams's The State Against Blacks --- both books that I had studied in depth in my labor economics class in graduate school --- I tended to focus on those aspects of Wilson's analysis that explained how the bottom-rung on the economic ladder was cut off, and how it you cut off the bottom-rung, you truncate the ability of individuals to climb up the ladder, and what the consequences of that are.

Since the time Wilson wrote his book the situation has not improved, but only grown worse.  We have raised the costs of hiring, and the lowered the costs of being unemployed.  This, of course, is the theme of Casey Mulligan's outstanding book, The Redistribution Recession (2012).  The consequences of these policies are far greater than simply the sluggish recovery of the job market after 2008, but go deep into the problems we face in our inner-cities.

We need to recruit some of the best minds in economics to think long and hard about urban issues.  Paul Romer is doing so; as is Ed Glaeser, and this year's Clark Medalist Roland Fryer has been particularly innovative in the way he has brought the economic way of thinking to bear on the difficulty issues of health, education and human welfare in the urban environment throughout the US.  

I hope that Fryer's Clark Medal attracts many young economists to pay attention to these issues, and to think about the fundamental market economic responses that are required to address the situation in the wake of the legacy of failed public policies and corrupt public administration.

 

New Thinking; New Voices in Economics ???

|Peter Boettke|

The Institute for New Economic Thinking will be hosting an event in DC on May 5-6 on the topic of Finance & Society.  The conference agenda features some of the most powerful female economists in the world such as Janet Yellen and Christine Lagarde.  It also will feature a talk by Elizabeth Warren.

I support the effort to get more female voices represented in the economic conversation.  Just the other day I was working with one of our program administrators to look into the number of female PhDs that have graduated through our fellowship program at the Mercatus Center at GMU.  Between 1983-2001 the number was 7, but between 2002-2015 that number has grown to 23.  The economic conversation is enriched by new voices and new thinking.

So I was somewhat surprising to see the featuring of Yellen, Lagarde and Warren at the Institute for "New" Economic Thinking -- the quotes are around "New" for the very reason that there is absolutely nothing new in the message these particular female voices have to offer.  Yellen is a well respected economist who is extremely conventional New Keynesian style of thinker.  Lagarde is a politicized economist of the traditional technocratic and social engineering Keynesianism.  And Warren is not really an economic thinker at all, but a populist economic quack who might be some weird mix between Marx, Veblen and Keynes.  But at least each of those thinkers were coherent and thought seriously about the economic system -- Warren doesn't rise to that standard.

There is no doubt that each of these women are extremely powerful -- perhaps the most powerful women in the world of finance & society today.  But there is no "new" thinking, but merely various levels of sophistication (from very in Yellen to non-existent in Warren) of a set of ideas about economic policy that have dominated discourse in the western democracies since WWII.

I want badly to embrace new thinking and new voices in the economics discipline, unfortunately this platform for the powerful is not that promising on that front.  Too bad that INET seems to have been captured by the desire to be politically relevant and to be another platform in the economic discourse for those who already command center stage as the main powerbrokers in the global financial system.

Babies, Dates, Kidneys .... really??????

|Peter Boettke|

Match.com was launched on April 21, 1995, the idea was to use a matching algorithm to coordinate the search process between potential romantic partners.  A survey conducted in 2013 suggested that 22 percent of the population between the ages of 25-34 utilize an online dating service.

Markets are indeed these amazingly miraculous vehicle for the discovery of previously unrealized opportunities for mutually beneficial exchange.  The logic of market transactions says absolutely nothing about the moral judgement of those transactions.  Economics cannot as a discipline inform you as to whether or not profits are deserved, but economics as a discipline can tell you the consequences of your answer to that question.  And that matters -- consequences matter.

Consider other matching problems --- those in need of life saving organ transplants, or those couples desperately trying to start a family.  One of the first lessons of is the reality of scarcity, and the requirement due to scarcity of rationing.  Some system of rationing of goods, services, and time must be in place -- some system that prioritizes when making the trade-offs -- some system that enables individuals in their decision making to negotiate the trade-offs they must make.  The price system is one such very effective mechanism for doing this, but historically other rationing systems have been employed --- birth right; political position; military accomplishment; beauty; contests or other measures of merit; and waiting are some.  Each of these has costs associated with them that must be weighed in the comparison with the price system.

When I started studying economics in the late 1970s and early 1980s, I often have mentioned the power that Milton and Rose Friedman's Free to Choose and Henry Hazlitt's Economics in One Lesson had on me.  Those books, along with Sennholz's lectures and his own books, changed my life.  But while still an undergraduate and reading the classics from Adam Smith and JB Say to Mises and Hayek, I also was persuaded by the universal applicability of economic reasoning to all walks of life.  This was, I admit, first impressed on me by my reading of Mises -- even more so than my reading of Rothbard.  But after my second year at Grove City College, those two were my go-to on all issues related to economics, politics and history.  But in the mid-1970s 3 books were published that I read with great pleasure and benefit as a student of economics.  Those books were:

Douglass North and Roger LeRoy Miller, Abortion, Baseball and Weed: The Economic Issues of Our Times (1973)

Gordon Tullock and Richard McKenzie, The New World of Economics (1976)

Walter Block, Defending the Undefendable  (1976)

I remember the intellectual excitement I had in reading those books for the first time and seeing how economics could explain everything about the world, and I mean everything.  And that excitement has never left me.  I sincerely believe that economics represents a golden key that unlocks all the mysteries of the universe (as it relates to human action), and that our job as economic teachers and communicators is not to hoard that key but to share it freely with everyone we encounter who is willing to learn about the wonders of economic reasoning.

So it is with great pleasure and pride that I look upon my former students as they become great sharers of the knowledge of the golden key of economics to their students and to the public.  A great example is Dr. Abby Hall -- who will be joining the faculty of the University of Tampa next fall.  But she has already published numerous articles, is writing a book, and is a widely recognized lecturer and communicator to the general public.  In her latest column, she addresses the very real issue of the matching of babies with families and the consequences of not allowing that matching to take place through the market.  It is a clear essay in economic persuasion very much in the tradition of the books I mentioned above.  Freakonomics has nothing on those works in terms of depth, clarity and boldness.  Don't get me wrong, I am huge fan of the "freakonomics" genre, but I also don't consider it a new move in economic communication, it is just the latest in a long history of economists rendering intelligible the "doings of men" in all walks of life; of using that golden key to unlock the mysteries of the universe.  Abby Hall has the golden key and she is using it very wisely. 

How can a man be both free and yet bound by wills not his own?

|Peter Boettke|

If you haven't already done so, rush quickly and listen to the EconTalk episode with Mike Munger on his new book Choosing in Groups.  Mike and Russ always have fun and informative exchanges of ideas, but in this episode Mike explains the project of constitutional political economy better than any other place I have heard.  As he explains to Russ, Buchanan's project was the deeper intellectual one than Tullock's:

Mike: ... It took me 20 years to understand the sort of complexity and depth of Buchanan's later work on constitutions--again, small-c constitutions. I am converted. Now I'm a Buchananite. 

Russ: It's with work with Tullock, also, to be clear, right? You are talking about The Calculus of Consent, 1962. 

Mike: The Calculus of Consent was the optimistic part. The part after that, The Limits of Liberty, Buchanan had several more books by himself, including the book with Congleton, Politics, by Principle, Not Interest was a landmark. And it was Buchanan himself who kind of went off in a different direction. Tullock gives us a lot of the idea of people as rational and problems that you would have. But Buchanan retained a kind of optimism, and this is what in this book I would want to share: Don't throw out the fact that people choosing in groups can make themselves better off than people choosing as individuals. So, the problem was, public choice often seems to boil down to the idea that voters and politicians are just as self-interested as consumers and the CEOs (Chief Executive Officers) of corporations. That's true. But we also need to think of what Buchanan--and this was just Buchanan--called 'politics as exchange.' That we need a separate, different kinds of institutions to cooperate in groups, because bilateral or even corporate contracting doesn't work. We need politics.

But Mike goes farther and links this project to that of Vincent Ostrom, and the very important idea of linking the size of the governmental unit to the size and significance of the problem to be solved.  As he explains:

Russ: That comes back to an argument we're not going to get into, but what's the correct size of the body politic and the advantages of a state system or pushing things down to the local level rather than having them be imposed across all districts. 

Mike: Yeah. 

Russ: And there are a lot of advantages to, just trial and error advantages to just having lots of districts and less national political solutions, for sure. 

Mike: And so, Buchanan was a Federalist for that reason. But since we're not going to get to it, let me just put in a plug for Vincent Ostrom and polycentrism. Where you have this reflective, adaptive set of changes. Where you recognize that the size of the group should correspond with the size of the externality or public good that you are trying to internalize.

Russ: That's what I wanted to say. My long rambling comment of a minute ago. Say that again. And for the listeners who don't know what you mean by 'internalize' is we had a--in the Alex Tabarrok episode he talked about how a private developer can internalize externalities. So, that's a phrase that slips easily off our lips. So, go back and explain the Vincent Ostrom example. 

Mike: Well, what Ostrom argued for was what he called polycentricity. And he thought that states and public organizations are really bad at matching the size of the decision body to the size of the problem that they are trying to deal with. And so the problem might be mosquito abatement, which is relatively local. Or the problem might be national defense. Which is, by definition going to be pretty large-- 

Russ: national, pretty national-- 

Mike: And so the least protection, maybe that's larger fire protection's relatively local. Maybe you can handle that with small volunteer fire departments. What Ostrom was preaching was a sort of Hayekian ignorance. I'm not sure of what the right scope of this should be. So, let's try to match the size of the group that decides with the size--and I'm using air-quotes--the 'size' of the problem. And by size I mean, what's the extent of it? Is it a neighborhood? Well, let the neighborhood work on it. Why would the state dictate to neighborhoods? This is a neighborhood problem. Let's let them choose. So, we're not sure about this match-up. And by 'internalize,' all we mean is a way of solving the problem that the group would be satisfied with. And so we are back to the Buchanan and Tullock distinction, which Vincent Ostrom took and ran with: If the decision group is larger than the size of the problem, you are going to impose, unnecessarily, a uniformity of choice when you could have diversity of choice. This neighborhood wants to do this, this neighborhood wants to do this: why have a one size fits all solution when the different groups in choosing, all of them could be better off because they don't have to accept a single outcome? Which is what states do. That's really all states can do, is say, 'Here's what we think.' And that's just not true. We don't think that.

Let's think seriously about this matching of the size of the decision body to the size of the problem that must be dealt with because that translates to the question of the political externality from the decision that must also be dealt with in the wake of turning to the public sector to resolve the issue.  In a recent paper with Liya Palagashvili, we argue that the task of "Taming Leviathan" is intimately tied to these questions of the scale and scope of government.

Anyway, this is great stuff from Michael Munger.

 

Economic Ethnography as a form of Analytic Narrative -- the empirical side of comparative political economy

|Peter Boettke|

Under the influence of Don Lavoie in the 1980s, some faculty and graduate students (me among them) sought to pursue alternative empirical strategies in economics and political economy from the more conventional econometric approach.  Don demanded this simply for the reason that the questions that economists concerned with processes of adjustment and adaptation; questions of institutional evolution; questions of the emergence of norms; questions of informal enforcement mechanisms; questions of 'evolution toward a solution' were inappropriately handled in the more conventional model and measure research program, and required a different framework of analysis in order to generate acceptable answers. What if, Lavoie asked us all to consider, one could combine the analytical strengths of praxeology (Misesian rational choice theory, market process analysis and spontaneous order theorizing) with the interpretative sociology and anthropology of individuals such as Clifford Geertz or Erving Goffman.  Of course, to the Austrian economists this meant spending sometime with Mises's student and the phenomenological sociologists Alfred Schutz, and his students, such as Peter Berger.  The intellectual possibilities for an empirical research program addressing economic culture and the institutional framework just exploded for the young research economist and political economist.  Field work and case studies substitute for exercises in statistical significance.  But the political economist is also not content with mere "thick descriptions", but of both utilizing an analytical framework to frame the understanding of the human condition under examination, but also illustrating the power of the analytical framework with the detailed case.  N = 1 doesn't necessary mean that every case is its own island -- the general and the particular are weaved together illuminating and illustrating at the same time.

Lavoie's methodological push resulted in work among a new generation of economists that ranged from more traditional case study histories to sociological explorations of culture to anthropological field work to radical ethnographic explorations.  Along the way alternative bank notes, Soviet planning, Soviet black markets, and Soviet transition puzzles, worker cooperatives in the US as well as the system in Yugoslavia, female entrepreneurs and the cultural foundations of development, Mexican art markets and the cultural blending of globalization, paradoxes of reform in failed and weak states, pirates, prison gangs, and communities in the wake of natural disasters were studied in-depth and the results were published in articles and books. 

The work of Vincent and Elinor Ostrom can also not be forgotten here because their work from the very beginning complemented Lavoie's methodological push because it both explicitly tied into the constitutional political economy and public choice of Buchanan and Tullock analytically, but also made reference to Goffman and the comparative case study approach empirically.  The fundamental distinction in the Ostrom's work between rules in form and rules in use, as well as their emphasis on polycentricity permeated all these studies whether explicitly acknowledged or not.  See, e.g., Antoni Kaminski, An Institutional Theory of Communist Regimes: Design, Function, and Breakdown. San Francisco, CA: ICS Press, 1992.

Comparative case studies in political economy as an empirical strategy enable the researcher to access and explore the dynamics of the human condition in a diversity of institutional environments in a way that the conventional tool kit in contemporary economics doesn't permit.  All research methods have intellectual "opportunity costs" -- comparative case studies are expensive and they are less precise than the conventional form of data analysis among economists, but when done right (e.g., see Elinor Ostrom's Governing the Commons) comparative case studies provide much better analysis of the underlying mechanisms that provide the social glue in human interactions.  We can see how individuals and groups engaging in the evolution toward a solution so that situations of dire conflict can be transformed into opportunities for social cooperation.  We can see, in short, how individuals and groups come to adopt rules of social intercourse that enable them to live better together than they ever could have apart, and in so doing and under the right set of rules will enable them to realize peaceful cooperation and productive specialization.  Individuals and groups don't always make that last transition stage from subsistence to the full exchange order, but again the comparative case study approach guided by the analytical framework of praxeology (properly understood) enables the researcher to identify the institutional sticking points along the way that are blocking that transition.  The conventional empirical research strategy of economists and political economists cannot answer these sort of questions -- sometimes because the data is unavailable or unreliable, and thus to force the questions to be only those that you can pursue in that research approach means you abandon the questions that must be asked.

Note something important in the message I am trying to communicate --- I am not saying that all empirical research should be in this Lavoie spirit, that would be as silly as to suggest that all empirical economics should take the form of an econometric study.  Econometrics has its uses in empirical economics -- it is not a tool for "testing" theories (that is a philosophy of science point) and it is not a tool for economic theory either (that is a conceptual point about the nature of what economic theory is).  But econometrics is a very useful tool, but not the only tool in empirical research.  That is all anyone is saying -- so it is actually a fairly modest point -- but unfortunately one that must be stressed because so many economists are trained to think differently and to believe that econometrics is the only tool in empirical research. So sometimes the critic -- especially in their philosophy of science mode, or their conceptual mode, made appear most immodest in making the critique of the standard tool-kit.  Don't let the rhetoric mislead you, the claim that is being made is one that goes all the way back to Aristotle -- and that is choose the methods of analysis that are appropriate for the questions being asked.  There is often great benefit from work done in the conventional economics approach --- what could be termed thin descriptions/clean empirics.  But there is also value to be found in the work done by anthropologists -- what could be seen as thick descriptions/dirty empirics.  Probably not much value added to the sort of misguided efforts of some empirical political scientists and sociologists that try to combine thick description with clean empirics --- this usually leads to really bad statistical analysis and conceptual confusion in the inferences.  But the sort of comparative case studies practiced by the Ostroms, or those that were pursued by those inspired by Lavoie, or by Lavoie's immediate students, can more or less be located in the intellectual space of thin description/dirty empirics -- the analytic narrative approach of comparative historical political economy.

The work that has been done in this tradition have received some significant praise but often without recognizing the methodological point behind it. To a significant extent that is how it should be --- the only question that really matters is whether the work illuminates and illustrates effectively the phenomena under investigation.  But at some point, it is also important to recognize the methodological point because the analytic narrative approach is under appreciated and thus under represented within the fields of economics and political economy.  Methodology matters because it determines what is considered the right questions to ask, but more importantly what is considered appropriate answers.  Challenging the conventional wisdom means you are challenging the questions and the answers.  There is no way to soft peddle that, and change the nature of a discipline to be more accepting -- thus the appearance of immodesty for a very modest claim once again.

But the best first step in this "battle" is to produce very high quality work that is recognized by one's peers across the social and policy sciences.  So I was absolutely elated to see David Skarbek's The Social Order of the Underworld short-listed for the Thinking Allowed Ethnography Awards in association with the British Sociological Association.  Congratulations David and well-deserved.

 

Preparation for Sachs

|Peter Boettke|

Tyler Cowen and Jeff Sachs will have a conversation today at Mercatus about The Future of Development Economics.  These "Conversations with Tyler" are a new featured event at GMU/Mercatus and I think they are going to be just fantastic venues for the exploration of ideas in a relatively high profile setting.  My personal preference for the sharing of ideas is the more intimate setting of a graduate seminar or research colloquium.  In fact, I'd say that some of my most lasting intellectual exchanges have been in the context of Liberty Fund style colloquia (such as one I attended years ago on Banking and Development) or in my teaching capacity in graduate seminars --- two such experiences that stand out in my mind are my class in Constitutional Political Economy where I had Chris Coyne, Pete Leeson, and Ben Powell in the class at the same time pushing and prodding me to challenge my own tacit presuppositions in political economy, and when I recently taught an Advanced Seminar in Economic Theory where we explored all the recent literature on knowledge in economic theory.  Those kinds of conversations (one with others, the other primarily with myself) are best experienced in small and private settings.

But there is no denying that these Conversations with Tyler are potentially the signature intellectual public event for our research and educational community at GMU Econ and the Mercatus Center.  Tyler is a uniquely skilled political economist and social philosopher and he knows how to ask beautiful questions.

Jeff Sachs has been a lightening-rod thinker since a very early stage of his career.  He has by all measures had a brilliant academic career at Harvard, and he is known throughout the world as a champion of economic and political reforms to help less developed and transitioning economies.  He didn't shy away from taking on "big tasks" as an economic reformer, and from the beginning of the transition from communism in the late 1980s to the lingering struggles of the peoples in Africa and Latin America Jeff Sachs has been there to try to ease the path from subsistence to a vibrant and thriving economic system.

I generally disagree with Sachs's recommendations, but it would be foolish to claim that everything he has pushed for was a "bad" idea, or that his efforts at implementation were all flawed.*  This just isn't true.  For example, a lot of the advice he gave to both Poland and Russia was actually not wrong. And neither was his first basic piece of advice to Bolivia about how to control their hyper-inflation.  There is a lot to learn from Sachs, just as there is from Larry Summers --- not because one agrees with them 100%, but because they have been there and done that, and they are not bitter ideological warriors like Paul Krugman, but champions of a sort of consensus policy economics circa 1985-1990 which they have continued to work on and practice in practical affairs of men.  It is a consensus that grants that market economies work better than government central planning, but that market economies require a set of supporting regulatory institutions and activist policy measures in order to operate as best as they can.  This consensus truly is the "augmented Samuelsonian neoclassical synthesis model" of microeconomic market failure theory that requires intervention and regulation and macroeconomic instability theory that requires management and activist fiscal and monetary policy.  It is critical to note here, however, that Samuelson, Summers and Sachs all believe a vibrant market economy is vital to the long run health of an economy.

So when Sachs examines less developed economies he is first looking for reasons why they haven't developed a vibrant market economy.  To him that answer has multiple causes --- institutional, cultural, geographic, etc.  Some of these barriers cannot be overcome "naturally" -- which is why judicious but concerted effort from afar must be utilized if we are going to tackle the big problem of persistent and horrific poverty.  This is why he gets labeled an idealist -- he believes we can, and must, engage in a concerted effort to address the reason why countries who are trapped in the sick and poor "equilibrium" and help them transition to becoming "healthy and wealthy".  The long process of development that produced that in the west need not be repeated, and, in fact, cannot be repeated due to the various natural barriers according to Sachs.  So we need to 'jump start' the process of development, but that doesn't mean that we abandon all market principles along the way.  At least that is how I would reconstruct Sachs's position.  It is also how I would make sense of his ongoing critique of fiscal irresponsibility in the western nations and also the problems with monetary mischief.  Sachs can, at times, sound very much like Hayek, Friedman and Buchanan, but he can also at other times sound very much like Myrdal, Keynes, and Lerner.  Thus, my designation above as the "augmented Samuelsonian" model --- it is not as anti-market in rhetoric as say the earlier synthesis model of the 1950s and 1960s, but it is also not as market oriented as a New Classical, let alone the more market oriented New Institutional approach that combines the insights of property rights economics, law and economics, public choice economics and market process economics.  Sachs may sound at times like Hayek, Friedman and Buchanan, but his analysis is not grounded in the ideas of Mises, Hayek, Alchian, Buchanan, Coase, Demsetz, Kirzner, Manne, North, Olson, Ostrom, and Tullock.  He is, in fact, like Samuelson and Summers a very far way from those ideas of basic economic reasoning and political economy.

The conversation this afternoon should be fascinating and in preparation I suggest listening to his podcast at EconTalk.  I think he did a better job defending himself than Nina Monk did criticizing him in her earlier podcast at EconTalk.  At least that is my opinion.  Also, I recommend reading through his exchanges with Acemoglu and Robinson over the central ideas in their book Why Nations Fail and the discussion of the determinants of economic development. See Sachs's original review, Acemoglu and Robinson's response, and Sachs's rejoinder.

I haver earlier pointed out in a CP post how this line of inquiry in economics and political economy opens up some great opportunities for those inspired by the Austrian school of economics and I highlight the work of Peter Leeson, Chris Coyne, Virgil Storr, Ben Powell and Claudia Williamson (I should have also mentioned Edward Stringham's on the governance of financial markets).  I would of course be too humble if I didn't also mention my own work on Soviet history and transition, such as The Political Economy of Soviet Socialism (1990); Why Perestroika Failed (1993); Socialism and the Market, ed. 9 volumes (2000); Calculation and Coordination (2001), and development economics in general, see The Collapse of Development Planning, ed. (1994) has pursued this line of research for the past 25 years.

The scholars I mentioned above have all continued to explore and contribute to the literature on the factors that trap people in poverty and sickness, and those that enable them to transition into societies that are healthier and wealthier.  They have been joined in this effort by yet a younger generation of scholars in the contemporary Austrian school of economics and classical liberal political economy such as David Skarbek, Diana Thomas, Adam Martin, Alexander Fink, Alex Salter, Shruti Rajagopalan, Jayme Lemke, Vlad Tarko, Abby Hall, and Liya Palagashvili to name but a few of the new generation of economists and political economists contributing to the literature on these questions.  Sachs's non-linear and historically contingent model of economic development opens up opportunities for inquiry that these scholars are filling as they explore the history, politics (and law), culture of the economics of development.

Yes, Virginia, there is a hard-core truth in the economics of development -- the only way to increase real income is to increase real productivity.  But real productivity of a people is a function of human capital, physical capital and the rules under which people interact with each other and with nature.  Nature does come in many different shapes and forms and those shapes and forms matter to some extent in terms of the way developmental processes must evolve to meet the diverse challenges.  Those rules are a function of a variety of factors that must be explored if we want to treat those rules not as exogenously given, but as endogenous to the process of the transition from subsistence to exchange in each unique historical, cultural and geographic setting.  

PT Bauer's work must loom large in all these discussions if we are to make progress in understanding why some nations are rich and others poor, and why some nations that were poor became rich, and why some that were rich became poor, and why some that are poor seem to be stuck being poor.

Anyway, I am very much looking forward to Tyler's conversation with Jeff Sachs this afternoon.  I hope you are too.  Plenty of work for visible, as well as invisible, hands to do to understand and address the horrific problem of poverty that impacts billions of lives every single day throughout the world.  The stakes in this conversation are very large indeed. As Bob Lucas once put it -- once you start thinking about it, it is hard to think about about anything else. That has been true of economists and political economists since Adam Smith penned An Inquiry into the Nature and Causes of the Wealth of Nations.

 

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*In the contemporary literature in economic development I would be most closely aligned with William Easterly.  This, of course, should not come as a surprise.  We will be publishing shortly a symposium on Bill's Tyranny of Experts in the RAE that I think will be of great interest to many of the readers of CP.  I would also argue that McCloskey's Bourgeois trilogy is vital for our understanding of economic development.

Tyler Cowen on Inequality and Mobility, and a Conversation with Jeff Sachs on The Future of Economic Development

|Peter Boettke|

One of the many amazing things of working with Tyler Cowen is that he seems to be everywhere raising provocative questions and pushing those around him to be ever more curious about the world.  In the NYT he is raising important points about income mobility.  Our colleague Richard Wagner likes to make this general theoretical point by way of examining the first still photos of a horse during a race -- mid-gallop the horse has all four hooves off the ground.  Such a picture may give the wrong impression that horses fly. But horses don't fly, they gallop.  If you were viewing a moving picture, then you would never make such an error.  

As Tyler puts it:

To be sure, we need to retain the concept of inequality in our thinking, if only to understand public perceptions of the economy or how pay structures are evolving inside corporations. Still, we should be cautious in using “inequality” as an automatically negative term. A lot of inequality is natural and indeed desirable, because individuals have different talents and tastes and opportunities can never be fully equalized.

The concept of mobility helps us distinguish between “good inequality” and “bad inequality.” Reductions in inequality can follow from a leveling in either direction — by elevating the poor or pushing down the wealthy. It is the plight of the poor that we most need to improve.

As our colleague Gordon Tullock used to stress, if you really care about inequality then you should focus your attention on the less developed world and not those relatively worse off in the developed world.  The gap in living standards between those in Sub-Saharan Africa and Western Europe and North America is clearly staggering.  On Tuesday April 7th, Tyler will have an extended public conversation with Jeff Sachs on The Future of Development.

Pretty amazing stuff going on and around GMU.

Assessing Bohm-Bawerk

|Peter Boettke|

Bohm-Bawerk was one of the most accomplished economists of his era -- and was rightly recognized as such throughout the world.  I have often thought that the Society for the Development of Austrian Economics should have a Bohm-Bawerk Medal for the Best Economist Under 40 to counter the AEA's Clark Medal, but alas I have not yet made this idea materialize.

Anyway, Richard Ebeling in this months Liberty Matters (at Liberty Fund) provides an assessment of Bohm-Bawerk's contributions to economic science and to political economy.