Cafe Hayek — where orders emerge

Quotation of the Day…

by Don Boudreaux on April 19, 2014

in Crony Capitalism, Hubris and humility, Man of System, Reality Is Not Optional

… is from page 168 of 2006 Nobel laureate Edmund Phelps’s 2013 book, Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge, and Change; in this passage Phelps discusses “corporatist” economic and political notions that dominated continental Europe for much of the 20th century (and that continue to this day to influence policy there; original emphasis):

The corporatist system was idealized as having dispensed with individualism and competition, which were demonized as ugly and inhuman. But the system merely transplanted individualism from the market to the state, where individuals would elbow their way to increased power. The system would end competition among producers for the many buyers in the market. But it replaced that with the insidious competition of producers and professionals for a share of government contracts and a place in government-sponsored enterprises – for a single, all-powerful buyer. The system was idealized as having put an end to the conflict between capital and labor, but in the end the postwar system simply conferred large monopoly power to unions as well as large employers, thus licensing both of them to contract output. The system was portrayed as restoring the balance between materialism and high culture, but the system then undermined most of the great literature and art because they were individualistic. The system was extolled as scientific in contrast to the chaos of the modern system it replaced. But the system would replace uncertainty about what the myriad would-be innovators were up to with uncertainty about the outcome of the state’s attempts at innovation. That might create more uncertainty than before. The corporatist demonized the power the the modern economy conferred on the industrial mogul of financial speculator who became rich, portraying their new system as a servant of society as a whole. But their system concentrated far greater power in the hands of political moguls and their financial backers.

Yep. Regardless of the particular political stance of those who would replace private-property market institutions and processes with government-issued commands, constraints, and subsidies, they all – all of the champions of greater government power – rely upon the “Then a miracle occurs” step in their formula for improving reality. This fact is true even for those champions of greater government power who fancy themselves to be especially scientific and objective. They mistake their blackboard (or computer-generated) descriptions of what is possible as being descriptions of what is plausible or even probable for reality. They seldom bother to use much genuine science to analyze and to better understand the actual role and effects of politics and the nature of government.

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The Pretense of Knowledge and Affection

by Don Boudreaux on April 19, 2014

in Complexity & Emergence, Hayek, Health, Hubris and humility, Seen and Unseen

An excellent test of whether or not someone does or does not grasp the core Hayekian wisdom is supplied by his or her response to this passage found in yesterday’s New York Times:

“We understand that we doctors should be and are stewards of the larger society as well as of the patient in our examination room,” said Dr. Lowell E. Schnipper, the chairman of a task force on value in cancer care at the American Society of Clinical Oncology.

In practical terms, new guidelines being developed by the medical groups could result in doctors choosing one drug over another for cost reasons or even deciding that a particular treatment — at the end of life, for example — is too expensive.

People who truly understand the complexity of reality respond by shaking their heads in disbelief. They are aghast that anyone thinks that an individual doctor could possess enough knowledge to know how to make all the appropriate tradeoffs implied in Dr. Schnipper’s proclamation. They are aghast, too, that anyone supposes that an individual doctor could also possess enough concern for countless faceless strangers to be inspired to reliably make these tradeoffs.

Other people – those who either believe in the miraculous powers of good intentions or who do not understand just how enormously complex our society is – respond with warm glows, applauding humanitarians such as Dr. Schnipper for their ‘social consciousness’ or their intelligent, “Progressive” values.

So here’s a question: why would someone object (often in high moral dudgeon) to the allocation of scarce health-care services by prices and market competition but, at the same time, believe it acceptable for scarce health-care services to be allocated by the decisions of individual doctors, each of whom has some image in his or her head of how health-care resources ‘should’ be allocated? The latter method of allocation is far more arbitrary than the first. And – if for no reason other than that the fact that throttling market forces leads to the production of fewer and lower-quality health-care services – the latter method is also more likely than is the first to deny many deserving patients appropriate amounts of health care.

(HT Alex Tabarrok)

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Some Links

by Don Boudreaux on April 18, 2014

in Environment, Health, Inequality, Myths and Fallacies, Seen and Unseen, Work

Here’s Richard McKenzie explaining, in Investor’s Business Daily, that the minimum-wage’s ill-consequences for low-skilled workers are not limited to these workers’ greater difficulty at finding employment. (HT Mark Perry) Here’s Richard’s conclusion:

Proponents and opponents of minimum-wage hikes do not seem to realize that the tiny employment effects consistently found across numerous studies provide the strongest evidence available that increases in the minimum wage have been largely neutralized by cost savings on fringe benefits and increased work demands and the cost savings from the more obscure and hard-to-measure cuts in nonmoney compensation.

Mark Perry shares some very inconvenient data, just in time for Earth Day.

Allan Meltzer counsels us to cast aside any obsession we might have with income inequality. (HT Steve Pejovich)

Heritage Foundation chief economist Steve Moore weighs in on the wage gap.

Unlike Pres. Obama, Edward Morrissey isn’t impressed with Obamacare’s enrollment numbers.

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Quotations of the Day…

by Don Boudreaux on April 18, 2014

in Data, Science, Seen and Unseen

… are, first, from pages 26-27 of Joel Best’s superb 2001 book, Damned Lies and Statistics:

The lesson should be clear: statistics – even official statistics such as crime rates, unemployment rates, and census counts – are products of social activity. We sometimes talk about statistics as though they are facts that simply exist, like rocks, completely independent of people, and that people gather statistics much as rock collectors pick up stones. This is wrong. All statistics are created through people’s actions: people have to decide what to count and how to count it, people have to do the counting and the other calculations, and people have to interpret the resulting statistics, to decide what the numbers mean. All statistics are social products, the results of people’s efforts.

and, second, from page 58 of Thomas Piketty’s 2014 volume, Capital in the Twenty-First Century (footnote excluded):

One conclusion stands out in this brief history of national accounting: national accounts are a social construct in perpetual evolution. They always reflect the preoccupations of the era when they were conceived.

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Piketty’s Language

by Don Boudreaux on April 17, 2014

in Books, History, Inequality, Myths and Fallacies

I’m now reading Thomas Piketty’s already-heralded new tome Capital in the Twenty-First Century for a review of it that I’ll write for Barron‘s. The book’s a whopper: 655 pages including the substantive footnotes. I’m not yet even half-way through it.

My instinct is to avoid saying anything about the book until I’ve finished reading and reflecting on it. But I here succumb to the temptation to override that instinct. (Whether or not for the best I leave for you, the Cafe patron, to decide.) As I noted in an earlier post, Piketty says much with which I agree. But already it’s obvious to me that Piketty’s vision and understanding of economic reality is quite at odds with my own. Here’s an example – one that touches on what is perhaps the single most substantive difference between Piketty’s understanding of reality and my understanding of reality.

On pages 59-61 (page 60 is devoted entirely to graphs), Piketty writes

In other words, the lead that Europe and America achieved during the Industrial Revolution allowed these two regions to claim a share of global output that was two to three times greater than their share of the world’s population simply because their output per capita was two to three times greater than the global average.

At the risk of me being accused of stealing an effective pedagogical technique from David Henderson, I ask: Do you see what Piketty does here? Do you see in this passage Piketty’s questionable implicit assumption?

Piketty’s writes, first, that Europeans and Americans of 200-odd years ago ‘claimed’ a share of global output. Claimed? The impression conveyed, if only subtly, is that global output is somehow out there and then Europeans and Americans managed by some means to lay their hands on a disproportionately large share of that existing output, leaving people in other parts of the world with a disproportionately smaller share of this output.

Why not write instead – as I am certain is more accurate – “… the lead that Europe and America achieved during the Industrial Revolution allowed these two regions to produce a share of global output that was two to three times greater than the the population-adjusted amount of output produced by people in the rest of the world” ?

Europeans and Americans back then didn’t become wealthier than people elsewhere by seizing some disproportionately large chunk of a pot’o'prosperity that existed independently of these Europeans’ and Americans’ own productive and innovative efforts. Europeans and Americans created and produced the additional ‘disproportionate’ wealth that they then enjoyed.

With the exception of chattel slavery, almost none of this wealth was stolen from others. And even chattel slavery, while a vile institution that inhumanely transferred wealth from slaves to slave-owners, is not (contrary to the beliefs of some severely misinformed folks) remotely responsible for creating the great prosperity of the west. (Slavery hardly promotes dynamic economic growth, and the amount of wealth transferred from slaves to slave-owners is far too small to account for the substantial, widespread, and sustained-to-this-day rise in living standards that began during the industrial revolution – began, do not forget, not only for the relatively few slave-owners and their heirs but also and more importantly for the non-slave-owning masses.)

If you think that I’m nit-picking, read again the passage from Piketty quoted above. Isn’t it strange that he describes Europeans’ and Americans’ share of global output as being two to three times greater than their share of the world’s population “simply because their output per capita was two to three times greater than the global average.” ? Simply because their output per capita was two to three times greater than the global average? This wording suggests that Piketty thinks that there’s not much – or no necessary – connection between the amount of output that an entity produces and the amount of output that that entity then has available for itself to consume or invest.

Surely the reason Europeans’ and Americans’ share of global output was two to three times greater than their share of the world’s population is precisely and only because Europeans’ and Americans’ output per capita was two to three times greater than the global average. This higher output-per-capita – contrary to the impression conveyed by Piketty – isn’t an irrelevant or insignificant fact that is at best only tangentially related (or one that should be only or at most tangentially related) to the fact that Europeans and Americans also “claimed” a disproportionately large share of global output. Rather, Europeans and Americans “claimed” a higher portion of global output only because they produced a higher portion of global output! What these Europeans and Americans “claimed” simply would not have existed had they not produced it.

I emphasize that Piketty admits that Europeans and Americans back then did indeed produce a disproportionately large amount of global output. What’s mysterious is why he suggests that this higher production by Europeans and Americans is not the key to understanding why Europeans and Americans also “claimed” – that is, enjoyed as income – a higher amount of output than did people’s elsewhere on the globe.

Piketty’s world view (at least from what I’ve read so far in his book) seems to be that wealth and dessert are not so closely tied to individual effort, creativity, and innovationism as I believe them to be tied to these things.

…..

Piketty wrote this book in his native French, and the translation into English was done by someone else (Arthur Goldhammer). It’s possible that my complaint above is a complaint more about the translator’s chosen wording than about Piketty’s meaning. But I believe this possibility to be remote, for the entire tenor of the book so far suggests that Piketty does indeed view material wealth as something that exists far more independently of human creativity, risk-taking, and effort than I believe is the case in reality.

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Milton Friedman on Equal-Pay Legislation

by Don Boudreaux on April 17, 2014

in Competition, Myths and Fallacies, Prices, Reality Is Not Optional, Video, Work

In this short video from 1978, Milton Friedman explains some of the many problems with government efforts to mandate “equal” pay for “equal” work. Note especially the connection that Friedman identifies between calls by labor unions in South Africa for “equal pay for equal work” and that nation’s notorious policy of apartheid.

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Some Links

by Don Boudreaux on April 17, 2014

in Complexity & Emergence, Crony Capitalism, Environment, Health, Inequality, Property Rights, Regulation, Taxes, The Profit Motive, Trade, Video

Want to monitor cronyism in various dimensions? Here’s a great tool. (HT my colleague Dan Klein)

Taxes make me feel ~~happy~~ crappy. (HT Frayda Levy)

My friend and former NYU classmate Sandy Ikeda reflects on cities and spontaneous order. A slice:

A planner can’t build an entire city (or neighborhood even) because she can’t begin to design and construct the necessary diversity and social intricacy that happens spontaneously in a living city. And I don’t think she should even try to because it can irreparably damage, even kill, the living flesh of a city. What can government do? In the ordinary course of its activities a government can perhaps at best refrain from doing the things that would thwart the emergence of the invisible social infrastructure that gives rise to that diversity, development, and genuine liveliness.

The Independent Institute brings you a useful app for your smart phone. And it’s free!

Kevin Williamson explains that government bureaucrats are no friends of civil society.

Here’s Abby McCloskey on Kevin Hassett on Thomas Piketty on Capital in the Twenty-First Century. A slice:

Piketty examines pretax, pretransfer incomes over the past several decades, a time during which the US has massively expanded its transfer programs. Indeed, transfers have increased relative to GDP more than the income share of the top, so ignoring them has a significant impact on the results. When assessing incomes in the US on a post-tax, post-transfer basis, income inequality is much less severe than the levels identified by Piketty. When assessing inequality on the basis of consumption, it is even less pronounced. However, Piketty does not examine consumption inequality.

My colleague over in GMU’s School of Public Policy Kenneth Button, writing in Regulation, argues for free trade in airline services.

John Goodman writes about the ongoing calamity that is Obamacare. Here’s his opening sentence:

Paul Krugman has written another one of those columns where almost every single sentence is wrong.

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The True Nature of the State

by Don Boudreaux on April 17, 2014

in Crony Capitalism, Regulation, Video

Sean Malone’s new video discusses occupational-licensing regulations. In the process, Sean helps to reveal the true nature of government: it’s no true friend of ordinary people.

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Quotation of the Day…

by Don Boudreaux on April 17, 2014

in Competition, Complexity & Emergence, Hayek, Hubris and humility

… is from page 37 of F.A. Hayek’s 1960 volume, The Constitution of Liberty:

The argument for liberty is not an argument against organization, which is one of the most powerful means that human reason can employ, but an argument against all exclusive, privileged, monopolistic organization, against the use of coercion to prevent others from trying to do better.

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Tunnel Vision

by Don Boudreaux on April 17, 2014

in Competition, Complexity & Emergence, Curious Task, Hubris and humility, Prices, The Profit Motive

So far, the discussion – sparked by Michael Lewis’s Flash Boys – about the privately planned and financed construction of a tunnel in which a fiber cable is run from Chicago to New Jersey misses some important points. (I reach this assessment without having read everything that’s out there on the matter. It’s possible that I’ve missed some sterling blog posts or magazine essays on the matter.) The object of the tunnel’s builders is to shave a few milliseconds off of the time that it takes traders in New Jersey to get information on asset prices in Chicago.

(Paul Krugman, unsurprisingly, uses this project as yet another opportunity for him to perform as the hero of Upper East Side populistas – a species of populists who, ignorant of basic economics, gripe about the alleged predations of successful business people while on their way, not to NASCAR races, but to Milan for a few nights of opera at La Scala. The venues of the griping are more upscale for the populistas than they are for the populists, and that griping is lubricated with finer beverages, but the economic quality of the griping is the same: horrid.)

So here are some matters about this tunnel to consider.

- The tunnel is an example of privately constructed infrastructure. Even if you believe that this tunnel’s construction and use are socially wasteful, you cannot doubt that the tunnel and its fiber cable are hard evidence against the proposition that only government has the vision, incentive, and wherewithal to construct big and pricey physical pieces of infrastructure.

- One result of the tunnel and its fiber cable is to cause asset prices at point B to reflect more quickly than otherwise information about asset prices at point A. Prices are brought more closely into line with each other more rapidly. The law of one price holds in practice more closely to its theoretical ideal. The consequence is a pattern of prices across space and time that resembles more closely the results of perfect-information models. Curiously, many objections leveled by economists such as Joseph Stiglitz against real-world market processes is that in reality prices and information are not as perfect as they are in these economists’ favorite textbook models. This fiber-cable tunnel – by speeding market information more quickly across space – should be applauded by economists for shaving away from real-world markets some of the ‘imperfections’ that are frequently complained about and used to justify government intervention.

- In fact (as Tuesday’s Quotation of the Day noted) one of the finest features of the real-world market process is that it is an ongoing and decentralized orgy of experimentation (and resulting discovery). Private people spending their own money competing for market share, for profits, for access to consumer goods and services. No one possesses anything remotely close to perfect information. Therefore, the best way we can discover and use much more information than anyone could possibly come to learn through excogitation or isolated individual actions is to employ a system - or an “order” – that encourages countless individuals to act on their own pieces of information and hunches in competition and cooperation with countless other individuals. When each person does so with skin in the game – spending his or her own money (or money voluntarily entrusted to him or her by others) – prudence in acting on these individual pieces of information and hunches is encouraged. People are more prudent in these actions than they are when they are spending other people’s money.

The competitive process over time ‘selects’ and nourishes worthwhile projects as it identifies and starves wasteful projects. At no time is the array of existing projects perfect in any sense. And there’s no reason to believe that projects that are in fact worthwhile today will necessarily continue to be worthwhile tomorrow. So to identify after the fact – after the competitive process has performed one of its feats of discovery – a market action or a project that has failed is not to identify an example of some action or project that is wasteful in a larger sense. It is not to identify an action or project that could possibly have been known ahead of time by any mortal to be an action or project that should not have been allowed to move forward. That failed action or project was part of a competitive discovery process, funded and operated by individuals each with skin in the game.

The fiber-cable tunnel might or might not prove to be socially worthwhile. We simply do not know, and neither do Michael Lewis nor Paul Krugman. Of course it is costly – the resources used in it have alternative, valuable uses. But in our world of scarcity every decision is costly. (Cost is inseparable from choice.) It is a display of economic ignorance to object to the fiber-cable tunnel on the grounds that the resources used in it have other uses, or on the grounds that these resources have other uses that might prove later to have been more valuable than their use in the tunnel.

The best we can say about the fiber-cable tunnel now is that – because it is privately funded, built, and maintained for the purpose of enabling private market participants to enhance their prospects for earning profits in a competitive, largely private market – the resources used in the tunnel are more likely to prove to be productively used (that is, worth their costs) in this tunnel than in any other alternative ways known now to any mortal.

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