Brad DeLong has an interesting post at TPM Cafe (HT: Arnold Kling at EconLog):
My view is that the neoclassical economics toolkit can be very, very
useful–no, stronger than that, is very useful and necessary–for
everybody from the center on left. The methodological individualism of
the toolkit forces you to look at real people and how situations help
or hurt them. The competitive market benchmark assumed by the toolkit
requires you to think carefully and specifically about just where the
externalities are that keep you from relying on markets alone to solve
whatever problem you are looking at. The equilibrium conditions
established by the toolkit force you to check for unanticipated
consequences, for blowback due to changes in incentives and so forth.
The
result is that the neoclassical economics toolkit makes you a smarter,
stronger, more powerful, more effective, more reality-based leftie.By contrast, the neoclassical toolkit can be absolute poison for
people right on center. It functions like a kind of crack, reducing
their arguments to empty slogans: "the market takes care of that";
"acts of capitalism between consenting adults"; "they hired the money,
didn’t they?"; "it’s not the government’s, it’s theirs." People
right-of-center should be exposed to the neoclassical economics toolkit
only after posting a $1M bond to cover collateral damage, and only
under the supervision of trained professionals.
I hope to talk more about DeLong’s argument another time. I think he’s half right and half wrong. But a comment on his post (by one CaptainVideo) is even more informative:
In teaching neoclassical economics, the restrictive conditions under
which the theory of perfect competition applies needs to be repeatedly
emphasized. People learning neoclassical economics need to understand
that externalities, market power, and asymmetric information are the
RULE, not the exception. People need to be taught that therefore real
world economies only have an INVISIBLE PAW, not an INVISIBLE HAND. The
market works and is very powerful, but it works highly imperfectly, so
that governments can do all kinds of things to improve its working, IF
it chooses to do so. Of course, there is no guarantee that governments
will choose to do things that make it work better. As the Bush
administration has demonstrated, governments can also do things that
make things worse. Therefore one has to be very careful who one elects
to run the country.
I think every economist, left, right and libertarian agrees with the general drift of the first part of this argument: governments can, in theory, improve the imperfect choices that individuals make on their own. The study of public choice, how governments actually behave in practice, suggests that it has little to do with who is elected but rather with the constraints facing those who are elected. Believing that who is elected is decisive for whether government helps or hurts people is a belief that is not supported by the evidence. George Stigler called this belief the "Ralph Nader Theory of Regulation." According to Nader’s world view, powerful government is necessary, but dangerous. The key, according to Nader is to elect good people to wield the power instead of the rotten ones who are currently in power.
My view is that powerful government is simply dangerous.
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Now we only need to find a way to ensure that the "good people" we elect "to wield the power" stay good and stay in power. Then we can rest easily.
As a person who escaped communist Russia, this kind of talk always makes my blood run cold. I remember the outcomes of the thinking of these “smart” people armed with “toolkits” all too well. Also, thanks for a reminding me why I don't read Delong's blog.
Delong wants to put himself in the position of deciding what is helpful and what is hurtful. HE seeks to make that qualitative decision for me, I am but a pawn in his game of economic chess. Well, I have a proposition. Brad Delong is enormously fat. This is obviously hurtful to him and hurtful to the wallets of those who happen to be in his healthcare plan. As a benevolent ruler with a nice economic toolkit, I seek to make things better for him by forcing one hour of running on him and limiting his calories and food choices on pain of imprisonment and heavy fines. Surely, that will improve both his health and the wealth of the nation. Let’s call him up and see what he thinks of my little plan.
BTW, I'll let you know when I find a "reality-based leftie". If a leftie thinks that a single entity can know that which is unknowable to it and act on that unknowable information better than the individual who actually possess the information, then I would say that he's fairly detached from reality. I would predict that his next statement is that he has X-ray vision and can leap tall buildings in a single bound. Too bad Brad Delong thinks this is reality-based.
"The study of public choice, how governments actually behave in practice, suggests that it has little to do with who is elected but rather with the constraints facing those who are elected."
What a superb comment! I'll remember it.
Government can make markets competitive? I think Mr. DeLong would be well advised to read some of Gabriel Kolko's economic history of the progressive era. Maybe after reading some of his work, he and others to the left of center may be more inclined to believe that the government only makes an imperfect market process all the more distorted.
The study of public choice, how governments actually behave in practice, suggests that it has little to do with who is elected but rather with the constraints facing those who are elected>
It's even worse than that. What kind of people want to be in positions of power over other people, to be able to dispose of their lives and produce when necessary for the so-called "common good"? And what about their own selfish motivations?
Methinks, you protest just the right amount.
I think Sowell's "A Conflict of Visions" bears mentioning here. The way I see it, neoclassical economics – as a "toolkit" or whatever you want to call it – makes people aware of the inherent limitations we face as a society and as individuals. This assumption, which might even supersede methodological individualism, is what "the left" (which I irresponsibly group together) doesn't usually get.
Looking beyond mere "constraints," I think constraints are only a small part of how we see the world as a whole. While we might call this an outlook or a worldview, Sowell calls this a "vision."
Everyone wants to be important to others, often they are satisfied with the perception of importance.
Politicians are masters at this.
"In teaching neoclassical economics, the restrictive conditions under which the theory of perfect competition applies needs to be repeatedly emphasized."
The first part from the first commenter I have heard so many times. I am frequently explaining to people how wonderful the market works (at least much much better than the goverment) under nearly all conditions NOT just perfect competition.
In fact differences in the market is where entrepreneurialism comes from and how we as a society progress.
That's the point that "needs to be repeatedly emphasized".
THere is one constant in the "liberal" critique of free markets and that is the belief that free markets ignores externalities and public goods. From the left wingers view point free market economist believe that the best government is no government at all. Nothing is further from the truth.
To make a free market system work property rights must be secured. The security of property rights means not only the title and ownership rights of property are established and secure, but also that the property is protected from damage by the actions of others.
Further, any understandnign of economic welfare must also incorporate social benefit, and the realization that in some instances overall welfare is increased by the actions of a group, rather than an individual.
Why so many people keep mixing up the neoclassical framework with perfect competition?
Neoclassical economics is a modelling framework, not an assumption of perfect markets!
The reason why it started off with perfect competition examples was that it was easy to solve at that time. The reason why the perfect competition assumption often survived in the models is that it is often the explanation that is consistent with data.
However, perfect competition is not an axiom in the neoclassical framework. If you want, implement market frictions and test whether they are consistent with data. It's your choice, but be rigorous and consistent.
Mark, the reason we delegate protection of property to the government is because it's cheaper to do so — not because a government is required for the task. Since this is an economic decision, not a political one, people should be free to give up government protection of their property. *SHOULD*.
Russell, I'd point out that *I* can improve upon the imperfect choices *you* make. But that just begs the question of why you would do that, because choosing me out of all the other people who could make those choices is *itself* an imperfect choice.
If you want to claim that markets aren't perfect, then you have to believe that governments aren't perfect either, because it is only through the actions of the first that the second gets its authority.
We should give up the notion that 'perfect' has some objective meaning in human affairs.
We should then give up the ideal of perfection. Market(s) is just shorthand for the complex of intereactions among people.
The idea that we need institutions of extortion to make markets function properly is absurd.
The excuse for government intervention to improve markets is just a cover story for interfering in market functioning for the benefit of some at the expense of others.
We must discard theories of noble/idealistic utilization of political power and just observe the results.
Politicians are great at gesturing, this is part of their sales pitch.
Some people really can think logically :-/
What would you infer from information, that the conditions of the MODEL are not in reality fulfulled? Ok, let's try it: The model says A->B. A=conditions, B=model results. We say that A is not true. Which is correct?
a) B is not true
b) B can be either true or false. The model does not help deciding wheter B is true or false.
If you answer a), take a crash course in logic. The fact, that the conditions of the perfect equilibrum model are not true in real world DOES NOT imply, that "invisible hand" does not work in real world. It implies, that THE MODEL DOES NOT DESCRIBE THE REAL WORLD.
Can the goverment theoretically IMPROVE market? No, in theroy it can't. Because if the government had the information and incentive to do so, the market would have it too. The government can THEORETICALLY perform the same as the market can (in practice it can't). It cannot outperform it.
"The idea that we need institutions of extortion to make markets function properly is absurd.
"The excuse for government intervention to improve markets is just a cover story for interfering in market functioning for the benefit of some at the expense of others.
"We must discard theories of noble/idealistic utilization of political power and just observe the results.
Politicians are great at gesturing, this is part of their sales pitch."
In what way are modern corporations not "institutions of extortion"? In what way do those using the free market not operating "for the benefit of some at the expense of others"?
I'd just like to note that the last paragraph quoted could be easily altered slightly with no loss in truth:
"We must discard theories of noble/idealistic utilization of economic power and just observe the results.
CEOs and corporate boards are great at gesturing, this is part of their sales pitch."
Indeed, just the fact that you felt compelled to say "sales pitch" in condemning politicians is kind of telling in itself, isn't it?