The Soul of an Academic

Here is a profound quote from The Sisters by Vikenty V. Veresaev, that I think gets to the core of an idealistic academic:

We were going to work together, but somehow neither of us were inclined to. We decided to have a drink. Nurka brought a bottle of port wine. We drank it, and lay down on the bed. I began to "preach" to her. I said there is no such thing as love. There are only sexual needs. She looked at me sadly with her innocent blue eyes; it hurt her to listen to me. She dreams of a "pure" love. I laughed at her and said: "Rubbish! Can a Komsomolka be such an idealist?"

I suddenly remembered and struck my forehead:

"The synopsis! I'd forgotten all about it!"

I sat down at the table and wrote out the synopsis for the lecture.

The next evening came. ... My speech poured out, vivid and unhesitating. I laid down the economic basis, passed to materialism, and so on and so on. ... The young folk were impressed; they're thirsting to be shown the path to the new life. And this is what I longed to say in the concluding words: "Listen all of you! I haven't been speaking seriously, I was making fun of you, I wrote out the synopsis of my speech when I was drunk. It was very easy because there was nothing of mine in it. I have only repeated what others have written before. I have no ideas of my own any more than you have. Tear up your notes and lets begin from the beginning; lets find the way to the new life with our own brains."

I wanted to go home alone, but I had to go with some of the others, and we argued on the way. I got heated trying to prove something, and when I reached home my heart was very heavy and I even cried into my pillow when everyone else in the room was asleep. It appears that, in order to be a charlatan, you must have a great sadness in your soul.

That about sums everything about academia up that I know.

Ideology and Rationality

In an article in the Review of Political Economy on Marx and Schumpeter, there is an interesting mention of Schumpeter's idea of why rational arguments do not dissuade people from socialism.

It reads:

Political attack cannot be met by reason. Reasoned argument may tear the rational garb of attack but it cannot reach the extra-rational impulse that drives it. In any case, in political matters, the masses are generally incapable of seeing where their true interest lies. They see only monopolistic practices, high profits and social inequality. To see the case for capitalism, they would need to see further than the short run, and that requires powers of analysis that are quite beyond them.

In a footnote, the author explains that Schumpeter believes that the rational thinking of most people extends only to everyday concerns and not to broader social and political issues (public choice literature would say that this is because their vote doesn't count anyway, and Bryan Caplan would add that they get comfort at little to no cost believing what they do.)

I think there is some truth to all of this, but why is there such a strong political contingent for socialism, despite so much evidence that it reduces freedom for all and makes every income level in society worse off economically? There is a simple answer.

Consider the following. Imagine that a certain person, lets call him Daniel, is faced with irrefutable logic showing that the socialist society produces an economy in which the income curve is strictly lower than the income curve in a free market society (and one can imagine the same for the 'freedom curve' too). So, the poorest person in the free market society is still richer than the poorest person in the socialist society. The two curves may not differ in relative income either, and in the socialist society, there may even be some at zero income (famine levels).



Faced with this rational argument that free markets are better for everyone, one might think that the rational response to this would be "then they must be better for me, so I should be for free markets!" Perhaps this would be the rational response if he were behind a veil, but he is not. It would also perhaps be a rational response if the way to become wealthy in the two societies was the same--but it is not. In a socialist economy, one gets ahead through politics, schmoozing with the elites, and getting handouts for people in exchange for bribes and power. In a free market economy, one gets ahead by producing things for the customer.

Daniel knows his own talents, so for Daniel what matters is not the absolute level of income in the society over the whole income curve, but where on the curve in each society he personally will land.



So, if Daniel expects to be at position A in the socialist economy, but position B in the free market economy, he will always prefer socialism. Daniel would expect this if he is good at political maneuvering and not so good at creative solutions to fill the demands and desires of his fellow countrymen. This, in a nutshell, is why there will always be a contingent in favor of socialism: its a tragedy of the commons.

The best we can hope for is that most people will take account of the rational argument, and perhaps spread the values and foster the talents of creative entrepreneurship, over the values and talents of politics and schmoozing. Unfortunately, once the rent-seeking begins, it builds upon itself and rewards those values, making it difficult to reverse the trend.

Back To The Basics

(Cross-posted at Heritage)

In the New York Times today, David Brooks has a column in which he describes two theories about the financial crisis: “greed” and “stupidity.” The “greed” theory is not what you might be thinking—it is not the simplistic notion that Wall Street is just full of greedy capitalists that swindle the people out of their money. It is a little bit more sophisticated than that, because it involves the government bailing out the banks. They do this, of course, because politicians earn handsome rewards for it. This theory has some merit.

The second theory, “stupidity” is also more sophisticated than it sounds. Wall Street did not know that it was engaged in such risky behavior. The theory as presented blames the complex financial instruments, but one could as easily blame monetary policy, subsidies, bailouts, or policy uncertainty, for creating this ignorance.

Government certainly had a hand in creating this crisis, yet now these same leaders are attempting to blame free markets, and resurrect socialism. Right before our eyes we are seeing the pattern: even as government spending backfires, we cede more control to it, and the love and faith in politicians grows. Even free market economists forget the basics.

Now more than ever, we need to return to the fundamentals. We need to relearn our Adam Smith, our Frederic Bastiat, the roots of liberalism and the morality of freedom. Only if the people understand these basic principles do we have a chance. Then we can see through the politicians, and not let them take our freedom and control our lives.

Changing Places: Europeanization as a Good Word

(Cross-posted at Heritage)

The financial crisis has exposed a trend that has been in the works for some time. Since the fall of communism, some of the more socialist countries have learned lessons from the Soviet collapse: free markets work, and government planning does not. Meanwhile, the capitalist countries have slept through these lessons, and have been slowly becoming more socialist.

The financial crisis has made this crystal clear. For example, US car companies, and now auto parts dealers, have received bailout money. Sweden, every liberal’s favorite social-democratic country, has let their signature car company, Saab, fail.

While the US Federal Reserve has been finding creative ways to print our way out of this financial mess, the European Central Bank has resisted this doomed inflationary policy. The European Union is actually concerned about high taxes, inflation, and excessive spending.

From the formerly communist Czech President of the European Union, we have a warning that Obama’s spending frenzy is a “road to hell,” but from the formerly free market United Kingdom, we have the Prime Minister calling for a Global New Deal.

It seems that, in the 21st century, “European style economy” might come to mean “free market” and “American style capitalism” might be a new term for “socialism.”

Learning and Bureaucracy

The market is an evolutionary process, in which selection forces actors to learn, and price conveys the information necessary for that learning. The pressure on the individual to innovate (or face losses) is not a pressure applied strictly to firm owners and managers- it is also applied to workers and job-seekers.

The Iraqi band Acrassicauda recently acquired refugee status and settled into a nice New Jersey metal band lifestyle. One of them explained their prior training and conditioning:

“We’re good at process,” said Mr. Riyadh, 24, who has previously used the name Marwan Hussain. “Going to the U.N.H.C.R.,” he said, referring to the United Nations High Commissioner for Refugees, “standing in a queue for three or four hours. We’re good at that. But musically, we need to practice.”

This reminded me of what Irina Pantaeva said of her training in Soviet Russia:

Neither of us knew how the fashion business worked in the West. That models carry thick books full of glossy pictures, and that they made appointments and worked with agents. We knew only what we had learned in Russia: if you want something, go to where it is and be prepared to wait.

In a bureaucratic country or system, there is no pressure applied that can force the individual to work, learn, innovate, or generally train themselves. Instead, they learn to wait on lines, fill out paperwork, and ask others for handouts. Expect a lot more of this kind of learning as government continues to rapidly grow, and a lot less innovation and new technology.

The Golden Age of Political Entrepreneurship is Here

(Cross-posted at Heritage)

As Joel Kotkin detailed in the Washington Post this weekend, the Wall Street Bailout and Trillion Dollar Deficit Plan being pushed through Congress this month mark the transfer of power from commercial cities like Chicago, New York, and San Francisco, to Washington DC.

In the business world, campaign contributions and lobbying efforts have replaced cost cutting as the way to maximize profit. Going to Washington with hands outstretched can prevent bankruptcy, and can provide a stimulus to the bottom line. Competing without such government aid is becoming more and more difficult, and rebels who shun such tactics are a dying breed.

This “political entrepreneurship,” or use of political power in place of competition, is not new. In fact, as far back as the “robber baron” age, some businesses preferred to use the power and purse of Congress, rather than have to do the hard work of cost cutting and innovation necessary to be a successful market entrepreneur. The true “robber barons” were not businessmen competing freely in the market, but those businessmen who gained monopoly advantage by lobbying Congress and buying market power.

Today, we still have some “robber barons,” protected by government and producing shoddy products, but we also have endless more miles of red tape on regular business, an incomprehensible tax code with favors for special interests, and subsidies and “pork” for every conceivable interest group request. It. Yet with all this spending and protection, we’re told we need more “stimulus,” and we need to “protect” more jobs.

In the academic world, two developments are driving the movement from economics to politics. The all-round analysis of economics, which can take into account all interactions and effects of various policies, has been abandoned for narrow subtopics and mathematical abstractions. Meanwhile the economists themselves have taken political views and ignored economics in their policy recommendations (for example, Paul Krugman).

But, the movement away from rational and realistic economics – the realization that there are limited resources and limited time, and that we cannot at once waste time digging holes and filling them up again, and also be productive and create prosperity – and toward politics – the art of deception, favoritism and trading favors – will necessarily bankrupt the country.

What Socialists Mean by Capitalism

I'm currently reading Le Grand and Estrin's book Market Socialism.

I have often complained that socialists misunderstand the market. Sometimes they do. Sometimes they understand it better than most conventional economists. Sometimes the most hard core Marxist will come so close to understanding the libertarian view - like Bukharin for instance.

Le Grand and Estrin did seem to understand markets in the introduction - at least as well as many "mainstream" economists.

Then an amazing passage occurred.

In this passage, these proponents of Market Socialism revealed that they distinguished "capitalism" from "liberalism" -- their use of "capitalism" was not synonymous with markets, but was distinguished from laissez-faire free market libertarianism. They still preferred market socialism to liberalism, but the complaints against capitalism are not complaints against free markets per se, but against a certain form of market system, which they call capitalism, but which arguably is really corporatism or crony capitalism.

Capitalism places the economic power in the hands of capital and its owners. Traditional socialism gives power exclusively to labour: the dictatorship of the proletariat, preferably exercised through a centralized authority. And the "New Right"--actually better characterized as traditional liberalism-- claims to locate power in the hands of the individual--particularly the individual citizen and consumer.

This is very interesting. Of course, I have argued this and heard whiff of this in socialist literature before, when they argue that the "ideal" of free markets is not possible, that concentration is delivering power into a few hands (a la Bukharin & Lenin, based on Marx), and so on, implying that it would be different if free markets did exist. Similarly, Lange's market socialist model was based on the use of state power to create a perfect market-- implying that if markets were less monopolized then they would be OK. But this is still a unique passage. Given this characterization,

In the following, replace "capitalism" with "corporatism" in your mind. It continues a bit below:

Full blooded capitalism is unattractive because it exploits labour through its monopoly of employment and because it exploits consumers through monopolizing goods markets. Traditional socialism expropriates capital and subordinates the interests of consumers to the interests of the workers. Indeed, with its penchant for centralization, it is far from clear that even the workers are properly taken care of. Liberalism puts people's livelihoods and their savings at the mercy of consumer taste and fashion; its emphasis on the narrow rights of individuals jeopardizes the collective activities of the community and hence the community itself.

What is needed is a model of society where power is more evenly distributed between these groups; where the interests of owners of capital, of workers, and of consumers are all taken into account with none taking automatic priority.

This struck me as fascinating. Now, I don't personally see how the group which liberalism represents - everyone - needs to be supplemented with the groups favored in corporatism and in socialism, which are partial. Nor that the interests of some "community" of individuals must be represented. In a free market (liberalism) such a group can form and defend itself, since all the individuals are protected by the system. But, the authors seem to believe that protection of each person, without protection of groups, leads to a loss of community-ness. Perhaps.

The fact that socialists have directed their main fight against corporatism this whole time and not against the free market is a critical point that we would do well to remember - and to make clear the distinction as often as possible. We have hardly tasted true liberalism, and socialists have tended not to start with models. In general, they, being people sympathetic to socialism and hence a softer sort of person, saw injustices in the world and began there. Seeing injustices, and seeing the market used by those with power and money, they blamed capitalists and they blamed the market. They did analyze different kinds of market societies, but they threaded them together in a dialectical historical account.

Market socialists are able to distinguish corporatism from liberalism. Starting there, the arguments are much easier to defeat. As above, sometimes it just boils down to "with liberalism, you lose the sense of community." There are some good books on how that isn't the case - that the opposite is true. When the state encroaches, as through welfare programs, it replaces community. In fact, the authors themselves cite "protection from the family" as a key feature of the welfare state (p. 21).

I'll post more on this book, maybe later today even.

update: I forgot to mention: Marxists describe the "crises" of centralizing capitalism, the movement from more to less competition, and consolidation into fewer hands. If capitalism is seen as rent-seeking driven corporatism, this makes sense. As rent-seeking drives policy, it necessarily does concentrate power into fewer hands, and also creates recurring crises (business cycles). As an example, consider how fixhousingfirst.com is calling for new increased low-income housing policies for its constituency, despite the fact that it was likely these policies which drove the housing bubble and caused the current crisis.

Update 2: I will also post more on this another time-- I would like to consider Marx and Bukharin's arguments in particular against "capitalism" as they may be estimated from a public choice perspective, as against corporatism (or mercantilism). It is possible that some Austrians have already done this - as it seems many Austrians see that Marx was really arguing against crony capitalism and not free markets - but probably not enough.

Then this can be tied together with the later market socialism literature and analysis. Marx was wrong with his labor theory of value, but perhaps right with his concentration, crises and ultimate end in planning (if he was studying the rent-seeking society); market socialists like Lange were wrong with their perfect competition models, but right in some of their understandings of the benefit of prices and competition. Very recent market socialists (like those above, and like Stiglitz) have greater understanding of many of the Austrian points than conventional economists. Perhaps bringing together all the good understandings of these various socialists could be useful in contributing to new, better models, and to a greater understanding of interventionism.

A Taste of the Control Inherent in Planning

Hayek said "Economic control is not merely control of a sector of human life which can be separated from the rest; it is the control of the means for all our ends."

This is very true, and key to understanding why the experiments with socialism have inevitably led to totalitarian dictatorships. It is also critical to remember when we little by little feed government power, the power to control our economic lives, and hence our lives in toto.

A fascinating reminder of what economic control truly means comes from the excellent - truly golden - book The Soviet Economic System: A Legal Analysis. Especially those of you who enjoy law and economics both, and "libertarian theory" on Leviathan and freedom, should check it out.

So, here Ioffe and Maggs here are discussing ownership in the Soviet Union, and describing the rights of the state firms, who possess "operative administration" rights, but are not owners. The state is the legal owner, and they investigate whether it can also be considered the de facto owner. They also consider what it means that "the state" is the owner -- of course, it turns out to mean that the Politburo and Secretary are the real owners. In any case, here they are describing the actual rights of the firm. It turns out that some of the restrictions on "possession, use and disposition" which apply to those holding only "operative administration" include strict limitations to use the property for planned purposes only and not to "sell postcards if you are a pharmacy," and that all money must reside in "funds" to be used for specific activities - investment, purchases, wages, depreciation, etc. The state bank which holds the funds ensures that the seller and buyer in any exchange both have the appropriate rights and use the appropriate funds, etc. And then here is the golden paragraph:

An examination of the legal provisions established for goods produced, goods which are the result of production rather than a fund for production, is useful for a full comprehension of the operative administration exercised by a producing entity. In this case, the rightholder has the rights of possession and disposition, but not the right of use. To use its own product, the economic entity must transfer the requisite portion of it from goods produced to production or other funds. If the goods produced are subject to planned distribution, then, in order to acquire its own product, the producer must be included in the plan of distribution issued by the planning agencies. Violations of this rule lead to legal sanctions. If the goods produced are excluded from planned distribution, then, in order to acquire its own product, the producer must have adequate resources in a monetary fund that may be employed for such an acquisition, and when part of the entity's product becomes a part of its fund of physical goods, the price of the product thus obtained must be deducted from the appropriate monetary fund and added to the amount of gain resulting from the sale of the product.

Yes. If you want to use some of the paper that your paper factory makes, you must be part of the planned distribution. Even if the distribution of paper is not being planned out - miraculously - this year, then you must sell the paper to yourself within the guidelines of the use of your monetary funds and adjust your balance sheet to reflect that you fulfilled output and simply sold to yourself some amount of the paper, which you were able to pay for out of your budget for purchases.

Now, I suppose that many firms do this kind of accounting anyway - to ensure that they are not being wasteful. However, the key thing to note here is who is in charge of all of this: the state. And "violations are subject to legal sanctions." This is entirely another kind of "accounting" when this is taken to heart.

It Will Never Be Enough

(Cross-posted at Heritage)

A Christian Science Monitor article this morning argues that Roosevelt didn’t spend enough to jolt economy into recovery. Only when spending skyrocketed for World War Two did the economy recover (unemployment finally dropped, of course this was because everyone was mobilized either as soldier or to support the war effort – creating things which were then destroyed in fighting the war). The Article claims that “One big reason is that President Roosevelt didn’t spend enough to really boost the economy, historians say.”

Notice, that it isn’t economists that argued that the programs should have been bigger in order to boost the economy, but historians. This is like getting a philosopher’s opinion on astrophysics. It’s nice, but it shouldn’t be taken as expert.

The article goes on to point out that many economists do think that government spending can stimulate an economy. So, let’s examine this argument a little more closely. After 1929 and before World War Two, federal expenditures tripled as a percent of Gross Domestic Product. If we tripled federal expenditures as a percentage of GDP today, that would mean an additional 8.2 trillion dollars in government spending each year. That is because federal expenditures are already 20 percent of GDP.

Perhaps we don’t have to also triple the government’s role to have the same “stimulus” as Roosevelt. One might argue it is the amount of spending as a percentage of the economy that matters. Roosevelt added about seven percentage points overall of additional annual federal spending (bringing spending from about 3 percent of GDP to about 10 percent).

An additional seven percentage points of GDP today constitutes an additional $1 trillion per year. This is a lot less than 8.2 trillion, but it is still nothing to sneeze at. Yet, are we not already pouring in this much to the financial bailouts? This is the same amount of additional government spending already – hence the need for journalists to argue that FDR’s additional spending wasn’t enough.

The problem is that government spending will never be enough to stimulate the economy. Just think about it this way. We have GDP of about $42,000 per capita. The federal government spends about 20% of GDP. In England, government spends about 45 percent of GDP and GDP per capita is about $33,000. In Sweden, the government spends about 50 percent of GDP and GDP is only $32,000 per capita. In France, it is 53% and $30,000. As we all know, in countries where government spends approximately 100 percent of GDP hardly any output or value is created. This insight formed the basis for such respected indices as the Index of Economic Freedom.

So, the idea that injecting a jolt into the economy by having government spend more as a percent of GDP is highly suspect. If what Roosevelt spent was not enough – despite tripling the government expenditures at the time – we should wonder whether any amount will ever be enough.

Using the Lessons from Socialism

As part of something I recently wrote, I made the following argument about the potential uses for studying comparative economic systems. I wonder how many readers will agree:

I am particularly drawn to the study of more extreme and pure systems. I believe these offer the best chance to draw out universal laws. Careful study of systems which avoid mixing of different incentive structures may present the best opportunity to view a single behavioral or systemic result, as if isolating it in a laboratory. Some of the results of this kind of analysis confirm basic economic laws and theory, such as the importance of the profit motive for keeping costs low and quality high. Even analysis illuminating such well known theory can be an effective learning tool, highlighting economic insights important for theoretical models.

Often economists begin with the simplest form of a model, and then begin to add to the model the complexities of reality. Similarly, the model which is the pure economic structure may be such an extreme example as to simplify the lesson. Yet, the economist can then adjust the simple lesson with the modifications seen in less extreme examples of the policy. The advantage of the pure economic system is that its implementation of the policy is the pure form and may represent the noise-free truth underlying other implementations.

One example is the socialist policy of eliminating unemployment which parallels less extreme policies undertaken in market economies. The lessons from the Soviet attempt to eliminate unemployment are interesting. Planning labor entirely was too difficult; for most periods most labor was free. Working was mandatory and extreme measures were taken to keep all workers employed, including forcing the manager to personally find a new job for each worker laid off. Yet, unemployment remained at about the “natural rate” for the duration of the Soviet socialist experiment. The negative effects of the labor policy included incredible labor inefficiency, underemployment, and a rigidity across the whole economy as firms could not adjust to changes introduced because they could not attract the necessary specialized skilled labor.

Similar lessons can be found with regard to investment and interest rates, monetary policy, and the need for marketing and middlemen among other areas. In the pure socialist economy, the extreme results can be seen across the whole economy, and are easy to study. The lessons can then help to inform or confirm theoretical models, or be combined with them in order to better describe potential policy consequences.

My original argument was going to make a slightly different case, which I ended up not feeling able to defend well. I originally argued not just that a lesson could be extracted, but that a pure isolated truth could be extracted and put into a model, which then could be modified to reflect the differences seen in less extreme policy manifestations. I believe that, but I am not sure I can defend it as of yet. Then again, it isn't really much different than what I say above - it is just that I reduced the claim to "lesson" instead of "model". I am curious what others think about this: are we not learning enough from economic systems such as socialism, which in many cases offer the most pure version of policies which we also pass in market countries?

A Collective Delusion

Pete Boettke, over at AE, posted about the Keynesian legacy. I have some thoughts on that, in particular, I agree that belief in those models represent the economists' collective delusion. I question why we have fallen for them - for private joy or public purse - and I fear that our policies are still colored by them.

I fear that economists have a herding mentality that grasps onto popular figures and then economists cling to the models of these "brilliant" chosen ones. But those who are chosen are not brilliant, they are only popular -- they generally have, like Keynes or Marx, gotten the ear of government. They come up with simplistic models that are easily used to churn numbers or explain phenomena, even though a child could see right through them.

When I took intermediate macro we used Mankiw's book. It was filled with Solow, Keynesian AS/AD, phillips curve, and on and on. I could barely believe that it was for real. None of it made any sense, none of it had any microfoundations (read: basis in reality).

I spent class time with a horrified gawking stare frozen on my face, wondering about the future of mankind if these were our leading economists, and asking the most basic of questions ("If savings is what drives growth according to the Solow model, then wouldn't communism work just as well or better than capitalism? Where are policies and institutions in this model?") and get answers such as "Well, this is just to simplify and explain the basics. Those details can be added later."

And I would be left wondering, about Solow and Keynes: who decided that the aggregate level of saving is more important than whether an individual, or a collective or government owns that savings? Who decided that aggregate investment is more important than whether it is private investment or investment by government in make-work programs? Doesn't it matter if the economy is split 90/10 private or 50/50 private or 10/90? When these models were being made economies spanned that whole spectrum, and yet these guys did not seem to think it mattered who was consuming resources - government or private consumer - who was investing or saving, just so long as the aggregate totals fit into the equations and made them balance nicely.

There were other problems - contradictions about what was better, savings or consumption? and so on - but the idea that private and public spending could be considered equal after the experiment with socialism and the interventionist state was well under way was just crazy. How could anyone think these models were useful at all? These seemed like child's play, fantasy, mind candy maybe. But not important, not something economists or policymakers should be using.

Why would economists fall for these models? And perhaps even worse: why do so many economists still cherish them, and hold them in esteem? What is this collective delusion? Is it that they love the "logic game" of it? Or is it the political clout they love? If they feed politicians with what they want to hear, they will be famous and win a Nobel -- isn't that better than being a no-name who sticks to reality? Isn't it more fun to make convoluted logic games, and be out in the public square?

Clearly for personal gain it is better for economists to engage the delusion. But this kind of absurd modeling still finds voice, and still drives our policies: "President-elect Obama's economic team is counting on investment in America's wind energy infrastructure to create thousands of jobs in a wide range of industries and help preserve existing jobs in other areas, particularly manufacturing."

Our government officials must "create jobs" by subsidizing or publicly providing work in specific targeted sectors. This will spur consumption (aggregate demand) and prevent collapse. This is all based on aggregate factors, and entirely devoid of microeconomic factors. We're also planning on propping up sectors despite their paying 3x normal salaries, by taxing regular workers, without concern over the need for the industry or the company to fail if it isn't profitable. We prevent jobs from "going overseas" as if trade is a bad thing.

Have we learned nothing about the failure of these models? Is this all political, is it useless to appeal to common sense?

The Efficient Muffin Hypothesis

During this financial "crisis" and subsequent bailout, some Austrian economists have surprised me with their optimism. Essentially, they argued that the market will pull through. Even if stupidity got us into the mess, and stupidity was going to compound the mess, so long as the market is allowed to chug along we will always ultimately "grow our way out." In the end, these Austrians argued, we would end up better off after the crisis and bailouts are all over (say, a few years hence) than we were before the whole thing started. We might have been even better off had we not passed some of the stupid policies, but we would only lose growth, we would not shrink in real terms.

Austrians also talk a lot about inflationary policy, or other kinds of foolish policies that governments engage in for a short term fix, despite having bad longer term consequences, as being like a drinking binge. They then argue that you can't cure a hangover with more drinking.

Now, if original hedonistic policy is like the binge drinking of a wild night, then the morning is the time for recovery. And if, in fact, if a semblance of protection for private property rights is all it takes to "grow our way out" then we can pretty much use whatever hangover cure we want, and be alright.

We can call this the "efficient muffin hypothesis," because the muffin we eat for breakfast manages, as it breaks down, to metabolize away the worst of the negative effects of our night of drinking. This theory says that we will make it through the hangover and to complete recovery fairly quickly. We can even have a mimosa with the muffin to take the edge off.

The inefficient muffin hypothesis, then, would state that in fact any old hangover cure may not work, the effects of these policies may compound each other, and we may never recover. In this scenario, the muffin cannot purge the poison, nor can time alone, and permanent damage may have been done.

Now, if the efficient muffin hypothesis is true this has significant implications. If, so long as the market is not completely banned, the wee market left can always "grow us out" of any idiocy of government policy, then we might have to take a second look at whether these policies are so bad. A night of drinking ain't a bad thing, sometimes.

Seminar Topic - What Has Economic Science Learned From Socialism?

This is a recurring theme for me, but one which I maintain is very key. I ran into a note I had written up last spring on this topic, and then a post at The Austrian Economists seemed a good place to promote the idea. However, it didn't catch any traction there. I will post in here, so it is not entirely forgotten.

The socialist calculation debate brought to light many fundamental economic issues, and problems of the classical and neo-classical modeling. While classical economists believed strongly in markets, their models could not explain exactly why socialism would not work. But, while the calculation problem provided a lot of insight and generated a lot of profound and interesting investigations, it did not resolve the issue. In fact, Lange's concept of market socialism for some time was considered a refutation of the arguments against socialism. A new set of economic theory rose from the ashes of that debate, focused on beneficial government interventions.

Comparative political economists continued to ask which system worked best, and market failure theorists worked out how government could solve the problems of the market. But then the "other" system fell, and upon cracking open revealed a rotting interior. In fact, the critics appeared to be correct after all. All of the problems they pointed out turned out to be true.

Now what? How has this revelation begun to change the face of economic theory? Is some of the faith in the ability of government to solve market failure on the way out? Do we now consider government failure as often as market failure? Do we now focus on the institutions that make markets possible- what of the old institutions of socialism, can we learn from why they failed? Can we still learn from the calculation debate, by considering why the socialists were wrong and what was wrong with their models and by looking again at the arguments of the opponents of socialism?

If the old models could not prove the problems of socialism, do we now have new models which can? Many of the core problems with the old models concerned their static nature and dependence upon equilibrium. Are we finally moving away from those kind of models, to a more dynamic approach? Should we look to the Austrians, the most adamant critics of socialism, for a better starting point and methodology? How has the science benefited so far, and what more can we learn?

The idea is that economists of all stripes should come together and review the old debates and the models that underlie them, between those who favored socialism and those who were critical, determine what failed in those models that so many fewer economists today would argue for socialism in those same terms, and explore whether we have rid ourselves of those assumptions in the models we use today. Some great work was done right around the collapse which touched on these issues - for example Stiglitz who I posted about a few days ago. But, I am not sure that something like this seminar has occurred, and even if it has perhaps we need more of them.

For example, have we rid ourselves entirely of misuses of equilibrium theory? Static models similar to the perfect competition model? Probably as important as the flaws in the static models are the flaws in aggregation - from Keynes to Solow to DGE models, some of the most highly respected theory and modeling has used fantastic aggregation that would seem ridiculous to a child, and which cannot adequately address institutional structures or behavioral responses to them. Are we still too dependent on aggregation without microfoundations?

Assuming for the moment we have indeed learned our lessons and rid ourselves of these fallacies, it would still be very useful to go over this bit of history, cleanse ourselves of our past and explore the way that these lessons have been incorporated into our current models. It seems to me that any science which believed a falsehood for a long period needs this kind of cleansing, needs to face its own past and take some time to explicitly re-think its models.

Really grasping the mistakes of the past is the best way to ensure they are not repeated. Understanding the way in which the flaws in past models fooled past economists into thinking that socialism could triumph will prevent those today who want to simplify from making the same errors in simplification in new forms. We may think we know the obvious: institutions, institutions, institutions. But what of static models - when can they be used safely? What of aggregation, still used so much in dynamic modeling today, when can it backfire badly? What other lessons can we extract from this long period of darkness in economic science?

Stiglitz on Socialism

I'm flipping through Stiglitz's Whither Socialism, which I've not read before, and finding many interesting thoughts to chew on.

Many of these are of course old news by 1989 when he wrote this, (but not conceded by all economists!), and some are not correct but still interesting. He seems to be a thought provoking guy with some very insightful arguments and connections. He also packs a lot into a short space, and keeps it very readable.

1. Futures Markets: the perfect competition model, which Stiglitz admits is too flawed to inform the choice between markets and socialism, assumes a complete set of markets including the ability for markets to allocate investment efficiently.

But investment into the future requires futures markets, which many sectors don't have. "These futures markets are essential for making the correct investments allocations." He goes on to argue that they must extend infinitely -- of course this would only be in order to be as efficient as a planner with complete and perfect knowledge, so it seems to be a weak argument. p. 16

2. On Austrian methodology:

My concerns are two-fold: First, because Hayek (and his followers) failed to develop formal models of the market process, it is not possible to assess claims concerning the efficiency of that process, and second (and relatedly), in the absence of such modeling, it is not possible to address the central issue of concern here, the mix and design of public and private activities, including alternative forms of regulations (alternative "rules of the game" that the government might establish) and the advantages of alternative policies toward decentralization-centralization.

p. 25

3. Stiglitz does as well as Hayek showing the paradox of perfect competition assumptions, such as complete markets and perfect information (or "informed" markets), see e.g. p. 38

4. Stiglitz points to the incentive/calculation problem of using targets which specify output not according to profit, but according to a single measurement that so plagued socialist economies, calling it the problem of not fully specifying commodity prices. p. 85

He points to this later as a way in which planning failed in precisely the way that the neoclassical model failed, when he invokes the planners inability to specify commodities as creating "an incomplete set of markets" and concludes that it is "one of the reasons that the neoclassical model fails" and "Exactly the same set of factors are at work in explaining why socialism fails." p. 198-99

5. The theory of contests as a replacement for perfect competition-- isn't this very similar to the Austrian concept of competition as a driving force (Kirzner) or a market process (Mises)? Although he finds some areas in which he believes competition can be destructive, he indicates that the active role of the competitive driving force of competition is crucial to its ability to induce innovation, cost minimization, and improving quality. Hence he finds "not only that the ordinary usage of the term competition is not well reflected in the traditional economic paradigm of 'perfect competition' but that the traditional perfect competition model may give us only limited insights into the roles that competition plays." p. 115

And so much more!!

As a side note, he also speaks on such interesting topics as short term incentives when firm managers care about short run stock market valuation (p. 96); rent-seeking to get around patents (p. 129), and lots else not so directly related to comparative systems.

Austrians should look to Stiglitz for good insight, especially, I think, when he looks at socialism.

Mandatory Service and The Road To Serfdom

(Cross-posted at Heritage)

There has been a small uproar around Obama’s call for a “civilian national security force” especially one “that's just as powerful, just as strong, just as well-funded” as the military. But many have said that these words were taken out of context. If you read the whole speech, they argue, it is clear that he just wants to expand the Peace Corp a little bit*.

Similarly, there was a mild uproar about his call for mandatory service from students, but many said that the programs were never intended to be mandatory. The college program was optional community service in exchange for a larger education credit, and the high-school one was no different from adding an art class or something to the public high-school curriculum. Obama initially called both mandatory on his change.gov website, but after the buzz began he changed the wording and removed several sections of the site.

But now there is new evidence that the critics are right. He does favor mandatory service and it might be worse than we thought. He has chosen Rahm Emanuel as his chief of staff. Rahm Emanuel wrote a book called The Plan in 2006. On page 60-65 of the book Rahm calls for universal conscription of 18-24 year olds for civilian service in order to prepare for a potential terrorist attack.

“All Americans between the ages of eighteen and twenty-five will be asked to serve their country by going through three months of basic training, civil defense preparation and community service.”

In a 2006 radio interview Rahm explains more about the program. He speaks about the dangers of a chemical attack and about the wonderful common experience that all Americans could have by being drafted for 3 months into a civilian national security force training program. He seems to be using the fear of attack to justify drafting all youth into a militaristic civilian security force – something more reminiscent of a dictatorship than a democracy. And all of his calls to unity and common experience only confirm his preference for nationalism or collectivism over individualism and freedom.

That Obama has chosen this man as his chief of staff should give anyone pause. This man has a “Plan” for the country that involves training our youth like soldiers, and calls upon “a new patriotism that brings us together again in a common mission” for his plan which will “unite us in a higher national purpose.”

If this is Obama’s vision, then there is great reason for concern. We are treading very near the Road to Serfdom.

* …and create a Classroom Corps and Health Corps and Energy Corps and Veterans Corp, and a Homeland Security Corp – as one blogger wrote “Here a Corp, there a Corp, everywhere a Corp Corp.”.

America Serves

(cross-posted at Heritage)

President-elect Barack Obama has quietly changed the meaning of the American Dream and introduced a proposal for American Serfdom. In America, what it means to serve one’s country is very clear. It is voluntary and for the purpose of defending the country during a time of war, or for the purpose of upholding the constitution by serving, for example, as a judge or on a jury.

Obama has reinterpreted the American Dream of “life, liberty and the pursuit of happiness,” as a collectivist ideology. He believes it is a dream about the collective happiness. He connects the notion of “service” to the American Dream, as he interprets it:

When you choose to serve -- whether it's your nation, your community or simply your neighborhood -- you are connected to that fundamental American ideal that we want life, liberty and the pursuit of happiness not just for ourselves, but for all Americans. That's why it's called the American dream.

Obama is wrong. It is called the American Dream because in America the individual is secured rights and liberty, and with those rights protected and liberty ensured anything is possible. The American Dream is an individual dream. It is the dream of each of us, not the dream of a collective hive, or a collective outcome. This is not to say that private charity in un-American. Private charity and civil society are very much part of the American spirit. But this is because they are private and voluntary.

But then Obama goes on to describe what it means to him to serve. He has a list of new “corps” to add to his expansion of the Peace Corps. Then he lists “a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year.” That is, 500 hours of mandatory community service.

Obama says that it is when “you choose to serve” that you are connected to the American Dream. But this quote is used to bolster support for a program which includes mandatory community service for every American child and college student. So, now mandatory community service is the American Dream. Now, it is not an independent pursuit of a better life but performing manual labor for the state that constitutes the American Dream.

Now to serve one’s country in America will have the taste of being a servant to the state, a serf, rather than the proud voluntary service of a free man.

Planning Insights from a Non-Austrian

An interesting article in the QJE from 1964 offers some nice non-Austrian insights into the problems of central planning, by looking at problems of large organizations , be they large firms or governments, and their bureaucracy.

The first insight is in this nice paragraph, imagine yourself standing in a central statistical bureau of the government - or maybe the Fed - trying to work out how to save an ailing economy:

Statistics at the center must lose cognizance of individual psychologies, attitudes, and tendencies that are too detailed, amorphous or untactful to put into summary reports, but that can be thoroughly useful in decisions. The central staff live in the midst of aggregates, trends, averages, and over-all generalizations. They are remote from the individual reality behind the words and figures that flow and jumble over their desks. They are dealing with symbols: their input is items on paper, and their output is items on paper. The individual is expendible-- both to the American Telephone and Telegraph and to the Soviet Union.

(my emphasis)

Of course, if AT&T deals with you that way, you, hopefully, can find another phone company (so long as government hasn't given them a monopoly). The point about aggregates goes deeper than is made clear here. In particular, aggregates cannot tell you the micro-level reasons for problems with coordination and growth, and macro-level targets cannot aid individuals in the coordination necessary for growth, to reach those targets.

Another good paragraph is this one. Think of Obama's community service projects and call to the spirit of "public service". Hopefully the insight is well known, if often forgotten:

Conventional wisdom in most communities of the world approves of harnessing the "highest motives," rather than the strongest motives, to achieve social goals. Down-grading the profit motive (discussed above) is only one example. Public exhortation and praise are focused on community service, mutual help traditions, and cooperate ventures. Looking after oneself, and one's own family, earns no special applause. But economic efficiency and progress mainly depend, as Alfred Marshall advises us, on making effective use of the strongest, and not necessarily the highest, motives of mankind.

He then cites Khrushchev who tried to invoke Lenin, when he realized the need for profit motive, and stressed to the people "the exceptional importance of the Leninist principle of material incentives," explaining that "It is completely erroneous to oppose material stimuli to moral ones, material incentives to ideological-education work..." -- Indeed, Adam Smith couldn't have said it better.

The two points come together when the author then goes on to discuss corruption. The author makes the important point that planners can only make decrees, they cannot set up institutions that allow the actors to fulfill the goals by following their own strongest motives. If they did the latter, they would not be planning, but providing an environment for free choice -- a market. Instead the planner must use command, which cannot ensure the target is met, but just direct the actions of the individuals. If the actions won't produce the desired ends of the individual, he may break the law, making the results unreliable. If he follows the law from fear, but knowing it won't achieve the ends, the plan won't be fulfilled.

To the extent a central authority relies on incentives-- income, status, etc-- to get work done, it is trying to make the public interest and private interest coincide. To the extent it relies on regulations or laws -- backed in the case of government by police, courts, and army -- it is forcing people to do, in the purported general interest, what they would otherwise not do. That is, giving incentive to avoidance, evasion and corruption.

On the point of corruption, the author also wins my heart with this footnote about how the more laws imposed, the more are broken, creating a social acceptance of violation of law:

It seems plausible to estimate that the average respectable citizen in the United States breaks at least one law a day (for example, did he come to a complete stop at the last stop sign?), whereas in 1800 it is doubtful whether his predecessor broke one law a year (did he murder or steal last year?).

Thank you-- still respectable even if I get fined for California stopping.

Bailouts Making the Crisis Worse?

Economic policies often have unintended consequences. While the decentralized actions of individuals in the market can effectively coordinate the supply of goods – Adam Smith’s invisible hand – centralized government actions cannot. So, when market crises come about, it is important to ask certain questions before looking to government to correct the failure.

First, was it a failure of decentralized actors? Was a market failure, or irrational speculation, at the root of the problem, or was it government intervention that caused it? The financial markets have not been free of regulation, and they have been bailed out before. Those companies most regulated were the ones that led the crisis. Similarly, in countries with even more regulated and state owned financial sectors, the crisis has taken down those nationalized firms.

If it was intervention that caused the problem, then there may be no need to tie the hands of the market to prevent future crises. Instead we could roll back the interventionist policies we’ve been using, potentially allowing firms more flexibility to solve market failures on their own. Even the most benign regulation might prevent the market from innovating, adapting and spurring growth. Literally throwing money at the problem, and then seizing companies at will, cannot solve the underlying problems.

Second, it is important to ask both what would happen without bailouts and what is likely to happen with them. Many commentators simply consider the first, and have a doomsday scenario, but they have not considered carefully how the bailing out itself might cause both short term, and of course long term, damage. In the short term some say that the bailouts “are actually making it harder for financial firms to raise the money they need to muddle through the credit crunch.”

Further intervention is likely to make it worse if intervention caused the crisis in the first place. In the long run you have serious moral hazard problems – this is well known. Trying to dodge some of these problems, the Fed is being inconsistent in its bail out policy. Playing favorites is a well loved perk of discretionary policy making because it allows for rent-seeking by firms and politicians. With bail outs and subsidies, bad firms and bad investments are propped up like petty dictators, serving themselves but not the people. All this waste is laid at the foot of the tax-payer.

Finally, if we create a crisis through use of intervention and then respond to the crisis with more intervention, which in turn makes the crisis worse, and then respond to that crisis with yet more intervention – when will it ever stop?

As CNN reports, “This is the federal government's most far-reaching intervention in the financial markets since the Great Depression of the 1930s.” It will cost hundreds of billions now, and much more later, if it causes more crises down the road. So, it is critical that we ask: do we need these bail outs, and what are we setting ourselves up for?

Mortgage Socialization

Cross-posted at Heritage.

Fannie Mae and Freddie Mac were created during the New Deal by the Roosevelt administration in order increase home ownership. With government backing and price controls, the supply of housing was artificially increased, with the funds coming from the taxpayer.

Even when Fannie and Freddie were made into government sponsored enterprises (GSEs) in the 1960s, they were still provided the financial support of the Federal Government. Because of their implicit government guarantees, these policy-based suppliers came to dominate the housing market.

As GSEs, Fannie and Freddie purchased 44% of subprime mortgage securities and were the biggest buyer of Countrywide loans. They became an industry duopoly, owning or guaranteeing about half the $12 trillion mortgage market. Risk was socialized, spread across all taxpayers through government guarantee, while profit was concentrated and private. This is a prototype case of government thriving on “concentrated benefits and dispersed costs.”

The ability to do this is what drives government expansion, taking from the masses and channeling the money to a minority – or special – interest. With these special interests, campaigns were launched, politicians entrenched and bureaucracy expanded. Hence Fannie and Freddie represent a massive rent seeking operation, to funnel money into the hands of officials at the expense of the taxpayer.

And yet none of this was sustainable, because it wasn’t profitable. Inevitably there would be collapse. Fannie and Freddie engaged in Enron-style accounting, and mafia-like corporatist tactics. It was their privileged status that led to the corruption, and that distorted the housing market and helped to inflate the housing bubble (also made possible by loose monetary policy).

The government takeover only makes all of these things worse. In the short run there is relief that a market collapse won’t occur imminently, but like the Soviet Union during perestroika, the fear of pain during reform can only lead to the delay of collapse and a more painful landing. Further concentration can only cause further waste, as competition, profit guidance and valuable price signals give way to bureaucracy, rent-seeking, inflation and misdirected investment.

As nationalized firms, Fannie and Freddie are government agencies, relying entirely on public funding. They have no reason to keep costs low, and every reason to allow short-term political objectives to guide their choices instead. Indeed, the Treasury has made it very clear that they will specifically move away from profit guidance. Treasury secretary Paulson said on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

Paulson has promised that the fees they charge banks for loan securitization services will be examined “with an eye toward mortgage affordability,” even as they are neck deep in bankruptcy. This reminds me, again, of the logic of perestroika – instead of freeing prices up and allowing some market adjustment, so that the economy could finally get on track, a compromise was made. Prices would be “based on social costs,” companies were allowed to “take into consideration cost-effectiveness” but “speculative price increases aimed at excessive profit” were forbidden.

The logic of the expanding U.S. government is becoming just as warped. The socialization of risk caused the housing crisis, and the response is to nationalize. Risky lending driven by policy not profit caused the collapse and the “reforms” will reduce fees and shun profitability. If we keep moving in this direction, we’ll pass through our own reverse perestroika, and end up a socialist state.

Understanding Monopoly Socialism

Lenin (1917), in complete agreement with Marx, and with the true meaning of socialism, lays out the economic and organizational identity between state-capitalism and socialism. The only difference - which isn't one - is the "class" of the leaders of the system. But, of course, as leaders running the system, either one belongs to the "class" called bureaucrat. Hence, Lenin laid out the answer to Bukharin's Leviathan problem (see below).

Everybody talks about imperialism. But imperialism is merely monopoly capitalism.

...And what is the state? It is an organisation of the ruling class ...

For if a huge capitalist undertaking becomes a monopoly, it means that it serves the whole nation. If it has become a state monopoly, it means that the state (i.e., the armed organisation of the population, the workers and peasants above all, provided there is revolutionary democracy) directs the whole undertaking. In whose interest?

Either in the interest of the landowners and capitalists, in which case we have not a revolutionary-democratic, but a reactionary-bureaucratic state, an imperialist republic.

Or in the interest of revolutionary democracy—and then it is a step towards socialism.

For socialism is merely the next step forward from state-capitalist monopoly. Or, in other words, socialism is merely state-capitalist monopoly which is made to serve the interests of the whole people and has to that extent ceased to be capitalist monopoly.

Bukharin, of course, expressed disgust that state-capitalism was the most evil administrative totalitarianism to crawl the wretched Earth. In Imperialism and the World Economy (1915) he wrote:

Thus arises the final type of the contemporary imperialist robber state, an iron organization which envelops the living body of society in its tenacious, grasping paws. It is a New Leviathan, before which the fantasy of Thomas Hobbes seems child's play. And even more “non est potestas super terram quae compateur ei” (“there is no power on earth that can compare with it”).

Bukharin was, of course, right.

Bukharin did consider that a planned a totalitarian society could exist which was not socialism (as conceived by Marx), he pondered a possible "third system"; but he could not see that in fact it was socialism - that the only difference between central planning as socialism, and central planning as this "third system", was a change in human nature which would allow the people to enjoy this slavery.

He described this "third system" in the same 1915 book:

We would have an entirely new economic form. This would be capitalism no more, for the production of commodities would have disappeared; still less would it be socialism, for the power of one class over the other would have remained (and even grown stronger). Such an economic structure would, most of all, resemble a slaveowning economy where the slave market is absent. (italics in original)

However, the flaw in Bukharin's reasoning is that he is considering a non-economic effect (the domination of one class over another) as part of the definition of an economic system. Instead, an economic analysis must consider just the economic organization of the system - its institutions and their effects - and from there determine the expected outcome: whether it will resemble a slaveowning economy without a slave market.

From this standpoint, there is no basis on which to distinguish the "third system" from socialism. Indeed, it has no commodities - no trade, no market, no prices - so it isn't capitalism. Instead, it has central planning. This is the same as socialism. The only differences from socialism which Bukharin observes are that (1) one class may still dominate another and (2) that this class may not serve the needs of the people. But these two are potential results of the economic structure, not part of the structure itself.

The steps that socialists believed would prevent the outcome described above include a change in human nature on the part of the people, and the motives of the working class, who were to take the reigns of their new society. But their new society, they knew, would need to help change the nature of the people, and the structure must also allow the working class to achieve their good intentions. As any good economist knows, intention is not result.

If the economic structure is identical, why would this "third system" not also produce the desired change in human nature? The distinction is only in the "class" which has the reigns. But, this implies that the intention of the class will be accomplished through this structure. It must then be proven that this economic structure will indeed allow the working class to accomplish its goals and that these goals not only exist at the start but also remain, even as they take on the "class" of bureaucrat.

Socialists asserted that the economic structure - planning - would create a society of abundance. But this assertion was tied in to the "socialist" nature of their system - that the working class ruled it. Hence, Bukharin could not show that planning itself would produce enough plenty to allow the working class to accomplish their goals. In fact, Marxists relied primarily on their argument of inevitability to show this result. But the economic organization itself can only promise the need to direct the actions of the people, the result of abundance does not directly follow from the collective ownership of the means of production, and the "rationality" of the planned system.

If it could be shown that (a) the planned system will lead to higher output and that (b) the requirements for planning efficiently still allow for the egalitarian distribution required for the fulfillment of the socialist ideal, then it would only remain to show that the desire of the planners would remain benevolent, and the nature of the citizens would be such that the planned system would not feel oppressive (or that the system would allow for democracy, a much harder case). But Marxists proved none of these.

Bukharin also broached the subject as late as 1928 - just before Stalin helped to bring a fully socialist planned economy to the Soviet Union (and Bukharin at this point was losing his hold on the reigns of the system). He explained how it might look:

Here a planned economy exists, organized distribution not only in relation to the links and interrelationship between the various branches of production, but also in relation to consumption. The slave in this society receives his share of provisions, of goods constituting the product of the general labor. He may receive very little, but all the same there will be no crises.

The crises referred to are, of course, the crises Bukharin believed to be inevitable under capitalism. Again, he sees that economically the organization is identical. He is one step away from seeing that this is in fact the system he has been advocating and putting into place in Russia. What is he missing?

He is missing the fact that this economic system does not allow for any other outcome. The "very little" product that the "slave" receives is, of course, all there will be. The bureaucrats in power not only will not, but cannot, give the people any more. Despite the best of intentions which they may or may not have, they can do no more than act as slave masters. They are forced to direct the actions of individuals. They cannot change human nature. They cannot wave a magic wand and effect the higher output, the perfect order, or the master plan which they may desire.

The planned economy - the institutional organization of the economy - determines the outcome. The best intentions of the best people in the highest leadership positions cannot turn a slave economy into a socialist paradise, just because they wish it so.

Universal versus Quantitative

Economic Laws are universal. As Mises explained, contra Caplan, because supply and demand laws - marginal utility, preferring more at a lower price - are universal, it isn't a quantitative matter but a qualitative matter that maximizing output is better achieved with a free market solution. For the given ends (maximizing output), the best means are to allow the free market to work rather than intervene.

However, while this means that markets are better than socialism, does this mean all interventions are bad? Clearly the qualitative result - the end is better achieved with markets than socialism - is true. But how much better? That is the quantitative question. The answer is clear at the system level: a lot better. But, at the intervention level, one must weigh the objectives.

If the objective of a given intervention is only to maximize output, one need not ask the quantitative question: the market will better serve. But, if one has multiple ends: (1) raise the wages of the poorest worker (2) without reducing total output by very much, then the quantitative question surfaces. For, even if the only end is to increase the wages of the poorest worker, there is a time component, and total output will ultimately lead to lower wages in the long run for the poorest worker (if higher output over time leads to higher real wages of the poorest worker, over time).

This is where the Krugmans and Card & Kreugers (and Galbraiths, who dispute the condition) like to fight. Maybe the quantitative aspect isn't large enough to offset the first round effect of the command benefit. When they argue this line, some turn to "natural rights" arguments: it isn't right to command benefits. But an economist must look at the quantitative aspect of the universal truth, and weigh the losses against the benefits. How does total output respond? How does the universal rule of competitive wage setting and profit maximization induce the employer to respond to command wage hikes? How will the benefit accrue - will it at all? To whom will it go?

And hence economics becomes difficult, and dynamic, quantitative and empirical analysis is required. Hat tips to Mises, Caplan and the struggling economists on both sides.