How Do We Decide Who We Can Trust?

Writing for the AEIR, Art Carden has an excellent article entitled “Government is Not a Wise Steward.” In the article, Art is discussing differing ways to use tax dollars. Art writes:

Given its track record, it’s not at all clear to me that the U.S. government — or my state, county, or local government — would be a wise steward of any money I feel like I don’t need. You know those bumper stickers that say something like “It will be a great day when schools have all the money they need and the army has to hold a bake sale to buy a tank,” or something like that? I’m not sure I want more of my money going to an entity that spends so much on tanks and bombs.

Should they [government] give it [tax dollars] to charity? Maybe. Even then, the decision isn’t quite as clear-cut. There are a lot of nonprofits that seem to exist strictly to raise funds, not to actually solve any problems, as Tyler Cowen points out in his book Big Business: A Love Letter to an American Anti-Hero (which I discuss here). Even if we address the possibility that we end up joining a scam like the Bluth Foundation’s battle against TBA, Yoram Barzel famously argued that it is very difficult to give away money in a way that benefits the people we are trying to help. Even for the devoted humanitarian with resources like GiveWell at her disposal, “Give your money to charity” wouldn’t obviously deliver maximal bang for one’s benevolent buck.

The issue of which charity to give to, whether it be private or public money, is always tricky. The point of charity is to do good, and ideally you want your dollars going to purify water in Africa or protect the Icelandic puffins rather than pay someone’s salary in the US. But how do we get that sort of information? How do we get the knowledge needed to know who we can trust, whether it be to save the whales or sell us our dinner? After all, it is not from the benevolence of the brewer, baker, and butcher that we get our dinner.

Interestingly enough, that knowledge is gained through the competition process. Suppliers do not compete with other suppliers on price alone (same with buyers against other buyers). One of the things that they compete on is trust: You trust that the supermarket will sell you non-contaminated food. You trust the bank will not steal your money. You trust that the burger you get from Five Guys in Colorado will be just as good as the one you get in Maryland. As Hayek wrote in The Meaning on Competition, part of the competitive process is to teach us who will best serve us.

Thus, with government as steward, without a robust competitive process, there is no way to generate that kind of knowledge. And with government, it is hardly competitive. In other words, government is unlikely to be a good steward with funds (opting, say, for health care or education over bombs) because it lacks the very ability to get that form of local knowledge needed to know who the best recipients of funds should be.

Of course, the private sector competition is not perfect. As Art points out, there are a lot of difficulties in determining charities. But we only have the information that some charities are relatively better than others because of that competition.

If government were to be a good steward, it would need certain kinds of information, but that information is only available locally and through competition.

Where's Mine?

Today is Frederic Bastiat’s birthday. He was born in 1801 in Bayonne, France. To celebrate, I am rereading his 1850 tract, written mere months before his death, The Law. I came across this line:

Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.

Last week’s Democratic debate captures Bastiat’s observation quite well. Many of the candidates properly recognized some legal plunder going on in the law by legislators and special interest groups. But not a single one of them proposed stopping that legal plunder. Virtually all of them discussed ways in which they, or the people they supposedly represent, want to share in the legal plunder: whether it be “forgiving” various forms of debt, or taxing more of a certain group of people, or whatever.

A concrete example may help here: student loan debt “forgiveness” or “cancellation.” The idea is simple: people have loan debt, and it is substantial. Therefore, if the government were to, in its misguided philanthropy, forgive that debt, people will be made better off. Many of these people wrongfully took loans without understanding them or without fully being told the consequences of borrowing the money they did. Universities and the debt holders benefit from these loans, and many forms of legislation currently on the books promote this wealth transfer from students to universities and credit holders, not the least of which is the subsidized student loan program of the federal government.

But debt cancellation does not end this legal plunder. In fact, since no one proposed removing that legislation, the schema for legal plunder remains in place (this fact alone should raise questions about the effectiveness of debt cancellation even if the problems we are discussing weren’t here, but no one mentions it). Thus, no one is talking about ending the legal plunder, but ways to participate in it. Debt cancellation is a wealth transfer from one group, taxpayers without college degrees and debt holders and future college students, to another group: current student loan borrowers.

The “where’s mine?” mentality is very powerful. I suspect that in a democracy it will be even more difficult to eliminate legal plunder, with most politicians seeking to curry favor by promising “have yours!” The Democratic debates and the entirety of Trump’s trade policy reflects this point.

Today's Quote of the Day...

…is from page 107 of the 2009 Mises Institute re-issue of FA Hayek’s 1948 book Individualism & Economic Order:

In principle the industrial protectionism and government-supported cartels and the agricultural policies of the conservative groups are not different from the proposals for a more far-reaching direction of economic life sponsored by the socialists. It is an illusion when the more conservative interventionists believe that they will be able to confine these government controls to the particular kinds of which they approve. In a democratic society, at any rate, once the principle is admitted that the government undertakes responsibility for the status and position of particular groups, it is inevitable that this control will be extended to satisfy the aspirations and prejudices of the great masses.

JMM: Hayek first wrote these words in 1947. They remain relevant today. Modern conservatives, in an effort to supposedly constrain socialism, turn to the very policies the socialists advocate. They make the mistake of believing, despite all evidence to the contrary, that their intervention is not the blunt hammer of socialism, but rather a precise scalpel that can just cut out whatever problem they see in society and leave the rest untouched.

But once the cutting begins, especially without an appreciation of how interconnected things are, greater damage is done. And to fix the problems of this one cut, other cuts need to be made, and the problem grows exponentially.

The industrial protectionism of conservatives is just a different flavor of socialism than the left-wing variants.

Trump's Tariff Inconsistency

Trump has long argued that imports harm the importing nation: the represent jobs being sent overseas, they are debts, they represent selling out national sovereignty, they are a hollowing out mechanism, etc. Major aspects of his trade war have been to reduce US imports from China, Europe, and other places while increasing US exports. Trump is a proud mercantilist.

Which makes his behavior towards Iran strange. Trump has imposed a number of sanctions on Iran which prevent Iran from importing. If Trump’s justification for tariffs is true, then the economic sanctions levied on Iran will only serve to strengthen them and weaken US and allied economies by limiting exports. Conversely, if he believes the sanctions will harm Iran, then they must equally harm the US when imposed on us by the government.

If Trump’s trade logic were to be taken literally, he should try to flood Iran with US-made goods, thus “destroying” their country, manufacturing, and economy. Any attempt at preventing this would only serve to “make Iran great again.”

Since I made this observation last night, several Trump supporters have tried to square the circle. No explanation was satisfactory (they all were some variation on “you just don’t understand negotiating. Just read Art of the Deal!”), I am open to any attempt to square this circle.

Trump’s only consistency is his inconsistency.'

See also Mark Perry on this.

Today's Quote of the Day...

…is from F.A. Hayek’s 1946 Princeton University Lecture “The Meaning of Competition,” reprinted as Chapter 5 in Individualism and Economic Order. The following appears on page 97:

In actual life the fact that our inadequate knowledge of the available commodities or services is made up for by our experience with the persons or firms supplying them-that competition is in a large measure competition for reputation or good will-is one of the most important facts which enables us to solve our daily problems. The function of competition is here precisely to teach us who will serve us well: which grocer or travel agency, which department store or hotel, which doctor or solicitor, we can expect to provide the most satisfactory solution for whatever particular personal problem we may have to face.

Why Let the State Define Morality?

Over at EconLog, Dave Henderson has a short, but excellent, post on liberty and morality. Henderson discusses the desirability to have non-coercive means of discouraging undesirable behavior. He uses the example of Youtube using their power to de-platform a popular but controversial individual and the subsequent conservative backlash. Henderson does not believe that the government should have the power to censor, but that a private organization may choose who or who not to host. What follows below is an edited and elaborated version of what I commented at EconLog.

I think this is a good example to distinguish between (how I understand) jurisprudence and ethics.

Jurisprudence is rules for how a sovereign should behave, which inherently means what things should be illegal (ie, punished through a coercive state behavior).

Ethics, on the other hand, are the rules for the good life.

Jurisprudence rules are typically precise and accurate (like the rules of grammar). They are often designed and arbitrariness is typically seen as a bad thing for jurisprudence.

Ethical rules, on the other hand, tend to be more loose. “How to live the good life” can have many answers. Some may live the good life by being generous with their resources (and what does this mean?). Some may live the good life by trying to be kind (whatever that means). There are many ways and various combinations of ways to answer the question. It’s worth mentioning that, while these rules are loose, it is not imply they are arbitrary or moral relativism wins the day. For example, what makes a movie good may be relative to a certain degree, but there do appear to be certain barriers that cannot be crossed before a movie is considered “bad.” Things like : clear focus of camera, comprehensible plot, proper sound, etc.

Libertarians tend to conflate jurisprudence with ethics, and as such they tend to make the state the arbiter of morality (despite their frequent objection to such).  An example of this is some of these disgusting behaviors; some libertarians will argue that any behavior that discourages these actions, even when done by private individuals, is bad.  The logic is since these actions do not violate jurisprudence rules, then they must be tolerated. This, then, leaves the distinction of morality solely in the power of the state; so long as the state determines it is legal, it must consequently be moral since it cannot be punished in other ways. Consider segregation: many libertarians will argue (justly or unjustly, I’ll leave to the reader) that the state has no right either in enforcing segregation or enforcing integration. “Of course a person has the right to segregate! Of course they have the right to discriminate who they do business with!” But then they will resist shaming attempts at those same people who are discriminating (they’ll tend to support not shopping there or not inviting them to parties or something, but not other forms of shaming).

But I do think we need to make a distinction here, that we can frown on something for ethical reasons, want to discourage it, but also not think coercion is the proper way to do so. Allowing non-coercive forms of behavior acts as a means of transmitting morality as well. When the state ends up defining morality, it can very well lead to faction and violence.

Operationalization of Theory is Never Straightforward

Over at EconLog, Pierre Lemieux points us to a recent op-ed by Trump economic advisor Peter Navarro. Pierre writes:

The keystone of his claims in this op-ed is the distinction between “pure free trader” and “fair, reciprocal and balanced trader.” The latter concept is at best underdetermined and at worst absurd. There have been as many definitions of “fair” as there have been political theorists and moral philosophers. Is it “fair trade” that American producers have a big advantage as they master the language of international trade better than their German or Vietnamese competitors? Isn’t that the sort of “trade barrier” that Navarro said should be compensated by a tariff in order for trade to be “reciprocal”? Reciprocity is usually a mere excuse for protectionism.

This is a point I routinely make in my classes when I lecture on supposed exceptions to free trade and operationalizing these exceptions.  In theory, it is easy to design a policy where some “unfair advantage” is corrected.  In reality, identifying these barriers is difficult.

My favorite example is rule of law.  The US, compared to many countries, is very non-corrupt.  We have a good judicial system that is relatively unbiased and even-handed.  Contracts are reasonably enforced.  Bribes aren’t really required to do business.  All this reduces the cost of doing business in the US compared to other countries, which is why many firms do business here.

Since the judicial system is run by the government, one can argue it counts as a “subsidy” to reduce costs for businesses.  Thus, an analyst could use rule of law in the US to justify tariffs against US products.

Is that also what Navarro means when he demands reciprocity?  What about our relatively educated workforce (also subsidized, BTW)?  Or our relatively good infrastructure?  All of these would justify, in theory, subsidies on American products by foreign nations given the loose, vague, and indeterminate language of Navarro.  The theory gives no guidance about what is counted and what is not, which means it is left up to the analyst.  Thus, talking about “fair trade” is not as precise as Navarro, or theory, makes it seem.

Once we begin moving away from theory and into interventionist policy making in the real world, the operationalization of the theory gets very loose very quickly. How things are defined is not straightforward and precise. Calculating “optimal” tariffs will depend crucially on the assumptions and definitions of the analyst. What Peter Navarro considers “reciprocity” may not be considered so by Donald Trump, or by you and I. Indeed, for certain definitions of reciprocity (each as theoretically legitimate as the one Navarro uses), one can argue that any Chinese trade barriers on US goods are “fair and balanced” and the actions of the Trump Administration are unfair trade!

At Cafe Hayek, Don Boudreaux highlights a similar theme put forth by our colleague Bryan Caplan and his co-author Zach Weinersmith:

The right question to ask is never “Will it be perfect?” But “Will it be better than the alternative?”

The problem with perfection is not only that men are not angels and fallible. Were it only that, then it would simply be a matter of creating an algorithm for a machine to optimize and then just internalize any externalities. The problem with perfection includes actually defining perfection. A blackboard model of equilibrium is only “perfect” in the eyes of the analyst. Assumptions we have to make to get there are enormous and context-dependent (for more on this point, see Hayek’s 1937 paper “Economics and Knowledge.” Also valuable is James Buchanan’s discussion in Chapter 1 of LSE Essays on Cost). Thus, even determining what policy should be will depend heavily on the assumptions of the analyst (note this lesson holds over from my blog post “Does Economics Imply Liberalism?”. This is all the more reason why it is important to focus on obtainable alternatives as opposed to idealized outcomes.

None of this implies radical anarchism or that policymakers should be paralyzed with fear (although I am sure people will use the arguments here to justify those stances). Rather, what this is to say is that discussions of ideal economic policy are not straightforward, that there is, as Ronald Coase wrote paraphrasing Frank Knight: “[P]roblems of welfare economics must ultimately dissolve into a study of aesthetics and morals.”

Does Economics Imply Liberalism?

Economics as a field of thought as we understand it today began with the Enlightenment period.* As such, the initial study of economics was done through a liberal lens. The economic policy recommendations that came out of this study, popularly known as laissez-faire certainly has a liberal feel to it. Indeed, Smith christened his system developed in The Theory of Moral Sentiments and The Wealth of Nations as “the liberal system.”

But does this foundation imply that economics is inherently liberal? I posit it is not necessarily the case. One can understand economics very well and be illiberal.

Let’s take, for example, a simple supply and demand model. This model serves as the foundation of much of economics (indeed, we can derive pretty much all of economics from one simple fact; resources are scarce. This fact leads us to opportunity cost, which leads us to demand curves, with leads us to supply curves, which gives us the foundation of modern economics). Liberals will often point to the supply and demand model, rightfully so, to show the unintended consequences of illiberal policies; according to the model, minimum wage will lead to unemployment (especially among the marginally employable) or price controls will lead to shortages. These outcomes of the model are cited by liberals.

But those outcomes were also initially cited by illiberals in support of those same policies. The fact that minimum wage kept marginally employable people out of work was a benefit to many initial proponents of the minimum wage (see the Congressional debates on the Davis-Bacon Act). It has been used recently for justification for minimum wage to keep immigrants out of jobs.

But there are other implications of the model. As A.C. Pigou showed, if there are costs that fall on other people, the model suggests that a tax can be imposed to correct for these costs. Ronald Coase showed this logic holds if there are transaction costs to negotiating. Paul Samuelson showed that one of the implications of the model is, given certain assumptions, international trade without barriers can actually harm a domestic nation’s overall economic welfare. More recently, some behavioral economics like Richard Thaler have shown now, again as implied by the model, that certain “nudges” can be applied to correct market failures. All of these are implied by the model and are illiberal in nature.

Liberals can, and do, object to some of the items discussed in the previous paragraph. They cite public choice concerns, or calculation and knowledge problem issues. They cite the self-interest of politicians or the problems of bureaucracy. All of these are important (and also implied by the model as well).

As we can see, the model itself (which we are using here as a segment of economic knowledge) does not imply in and of itself any liberal or illiberal bias. It is, in that sense, apolitical. How the model is applied, what exceptions or policies are proscribed, do not depend, thus, on the economic science but rather on the subjective and estimated probabilities of the individual using the model. For example, let’s say we have two people using the supply and demand model to recommend policy dealing with pollution. An analyst who puts relatively low probability on government’s ability to correctly set a Pigouvian tax would recommend no explicit policy (or, perhaps, something akin to cap-and-trade). Meanwhile, an analyst who has a relatively high probability of the government’s ability to correctly set a Pigouvian tax may recommend such a tax. Both these analysts are guided by the same model, but their recommendations and predictions based of the model are different. They’re not different because one is more ignorant than the other. The objective data being used is the same. What is different is the subjective data each analyst uses.

Economic knowledge does not imply a liberal outlook. Just like any science, it can be interpreted and applied in different ways.

*I am hesitant to give it an exact starting point, such as highlighting Adam Smith as many people do. Smith may have been the first systematic treatment of economics in English, but there were many other authors who were considering the problems of economics before him: David Hume, Francis Hutcheson, Gershom Carmichael, the French Physiocrats (who influenced Smith), and the Salamanca School, just to name a few.

Today's Quote of the Day...

is from page 66 of the Liberty Fund’s 1999 edition of James Buchanan’s Cost and Choice:

In order to estimate the size of the corrective tax [to correct an externality], however, some objective measurement must be placed on these external costs. But the analyst has no benchmark from which plausible estimates can be made. Since the persons who bear these “costs” - whose who are externally affected - do not participate in the choice that generates the “costs,” there is simply no means of determining, even indirectly, the value that they place on the utility loss that might be avoided. In the classic example, how much would the housewife whose laundry is fouled give to have the smoke removed from the air? Until and unless she is actually confronted with this choice, any estimate must remain almost wholly arbitrary.

JMM: The fact that the cost to the external party is almost wholly arbitrary unless they are actually confronted with the choice does not imply that the estimation of the cost is irrelevant. What it does imply, however, is that welfare economics is not as precise and accurate as the blackboard models would have you believe. We should be wary of any scheme that relies on some “optimal” tax, tariff, or price in order to operate. The result of that model is wholly dependent on the analyst’s assumptions about what people would do if actually faced with a given choice.

Why It's Important to Know Reality, Not Just Models

In economic theory, one can calculate who bears the burden of a tax by examining the elasticity of demand and supply for the product the tax is placed on. “Elasticity” is a concept that refers to how responsive consumers and producers are to changes in price. Demand/Supply is relatively inelastic when the consumer/producer changes the quantity demanded/supplied relatively little given a change in price. Demand/Supply is relatively elastic when the consumer/producer changes the quantity demanded/supplied greatly in response to a price change. When a good is relatively inelastic, the producer can pass a large portion of a tax onto the consumer since the consumer is relatively insensitive to price changes. When a good is relatively elastic, the producer must pay some of the tax himself since the consumer is relatively sensitive to price changes.

Price elasticity is applied to the concept of international trade as a way of potentially increasing net national welfare from a tariff. If a home government passes a sufficiently small tariff and there is some elasticity to the good, then some of the tax can be passed on to foreign producers in the form of lower prices received. The net national welfare rises as those losses to the foreign manufacturers are not counted, but there is an increase in tax revenue.

That is what the model says. And it is a variation of this model that commentator “Doctor” Joe B* applies at Mark Perry’s blog Carpe Diem:

A tariff is paid by the seller and the buyer, and how much each pays depends on elasticity of demand.

So far the evidence is that China is eating the tariffs, through price cuts and cheaper yuan.

But Mr. B errs in his assumptions. The assumption of the model is there are no middlemen between the producer and the consumer. If there are, the tax burden would be spread out among all of them depending on their various elasticities.

In real life, few people buy directly from Chinese producers. There are all kinds of middlemen involved: shippers, importers, wholesalers, retailers. When we take into all the middlemen, we see that none of the tax is actually being passed onto Chinese producers. It’s being absorbed entirely by Americans.

Knowing the reality of what your studying will enhance the model. Ignoring the reality leads to faulty conclusions.

*I but “Doctor” in quotation marks because I know for a fact this man holds no PhD.

Today's Quote of the Day...

…is from page 20 of Douglas Rasmussen and Douglas Den Uyl’s 2005 book Norms of Liberty: A Perfectionist Basis for Non-Perfectionist Politics (note that when the author’s say “liberal,” they mean in the classical sense):

Liberals are tempted by the argument that the effects of liberal politics speak for themselves, but this gives the entire moral enterprise over to nonliberals. The effect of this is what we find today: widespread material success due to liberal policies coupled with equally widespread cynicism about or hostility to the moral dimensions of those same policies.

JMM: Yup. Truer now than when those words were written, liberalism seems to lack a moral compass at times. I began reading this book at the insistence of Aeon Skoble when I complained to him of this problem. Many classical liberals focus too much just on economics or the other social sciences, or are interested in classical liberalism as a way of “owning the Left/Right.” But, without a moral foundation, we have no leg to stand on and we cede the argument to our critics.

Today's Quote of the Day...

…is from G. F. Thirlby’s 1946 paper in Economica, quoted on page 30 in the 1999 Liberty Fund edition of Jame’s Buchanan’s Cost and Choice (original emphasis:

The cost is not the things-e.g. money-which will flow along certain channels as a result of the decision; it is the loss, prospective or realized, to the person making the decision, of the opportunity of using those things in the alternative courses of action. A fortiori, this cost cannot be discovered by another person who eventually watches and records the flow of those things along those channels. Cost is not something which is objectively discoverable in this manner; it is something which existed in the mind of the decision-maker before the flow began, and something which may quite likely have been but vaguely apprehended…

Cost is ephemeral. The cost involved in a particular decision loses its significance with the making of a decision because the decision displaces the alternative course of action.

JMM: A concept oft-misunderstood in the study of economics is cost and its relation to choice. Costs, probably understood, are subjective. They are what alternatives face an individual when making a choice. They are not the monetary outlay, but rather the foregone opportunities at that point in time.

Of Baseball and Justice

Yesterday, Albert Pujols, outfielder for the Los Angeles Angels of Anaheim, hit a long home run in Detroit to notch his 2,000th RBI. 2,000 career RBIs is an amazing feat and the ball that Pujols hit would likely have been heading to Cooperstown in normal situations. But the situation is not normal. The fan who caught the ball, Ely Hydes, refused to give the ball back to Pujols. On Facebook, Ball State economist Steve Horwitz (friend of the blog) wrote of Ely:

And today's Asshole of the Day award goes to...

It's his right, but that don't make it right.

David Henderson (also friend of the blog) responded:

You really think he's an asshole for not transferring wealth from himself, who's probably not wealthy, to a very wealthy guy? Why?

Henderson expanded his point at EconLog.

Henderson and Horwitz are two dear people to me and I owe massive professional and personal debts to both. Whenever I find myself disagreeing with one or the other, I do so hesitantly. But I think, in this case, Henderson misses the point of Horwitz’s comment. And Adam Smith can help us see why.

In The Theory of Moral Sentiments, Adam Smith discusses the virtue of justice. Smith finds there are really three versions of justice: 1) Commutative Justice (simply put, not messing with other people’s stuff), 2) Distributive Justice (that is, properly deploying one’s resources), and 3) an unnamed justice which I will call by the term coined by my teacher Daniel Klein Estimative Justice. Estimative Justice is the proper estimating of an object (all this can be found on pages 269-270 of the Liberty Fund edition). The three justices are interrelated, but are different. And we can use this framework to consider the difference in opinion between Horwitz and Henderson.

Both Horwitz and Henderson acknowledge the property right of Mr. Hydes. The ball was hit out of the field of play. Mr. Hydes caught the ball. By normal property rights convention, Hydes owned the ball, not Pujols or Major League Baseball. Indeed, we can see this property right in action given that MLB had to ask that Mr. Hydes give the ball back. When Mr. Hydes refused to give the ball to MLB officials, he was well within his rights (as acknowledged by all parties involved and the commentators). In the terminology above, Hydes was being commutatively just. He was not messing with other people’s stuff.

But commutative justice is not the end of the story. We now ask whether or not his behavior was distributatively just. The ball was his property. What would constitute a “becoming use of his own [property]?” It would seem, again appealing to convention, that the becoming use of Mr. Hydes’ own would be to give the ball back to Pujols. It is common practice among sports fans to return historic or important-event balls to the players (such as a 1st career home run). Mr. Hydes’ behavior would seem to violate that norm. Thus, we can say his behavior, while commutatively just is distributively unjust. This is what Horwtiz means when he says “It’s his right [to not give up the ball], but that doesn’t make it right.” Mr. Hydes’ behavior, while well within the bounds of rules, would not be pleasing to an impartial spectator such as Horwitz.

But now we have Henderson who comes along, and he is also an impartial spectator, and see’s Horwtiz’s estimation of the action. Henderson is estimating Horwtiz’s estimation and finds it lacking. In our terminology, Henderson is saying Horwtiz is being estimatively unjust. Horwitz is failing to properly estimate the object/action in question. However, I, also an impartial spectator, judged Horwitz estimation to be just.

Why is there this disagreement? Neither Horwitz nor Henderson are dummies or unenlightened buffoons. They are both genuine people. I imagine they would agree largely with what I have written here, both as a description of events and they layout of Adam Smith’s discussion on justice. Why do they disagree?

They disagree because, unlike the rules of commutative justice, which are precise and accurate, the rules of distributive justice are loose, vague, and indeterminate. We cannot readily appeal to some guidebook of human behavior to determine whether something is distributively just or not. It will depend on a lot of things. Does the fact that Mr. Hydes is a law student with a child on the way matter for our DJ estimation? Does the fact that Mr. Pujols is wealthy, and thus could buy the ball from Hydes, matter? To what extent do they? If Horwtiz is more of a baseball fan than Henderson, would he have a different insight? These are not precise and the difference in opinion comes from Horwitz’s and Henderson’s different interpretations of these imprecise rules.

In closing, I do want to note that this process of estimating is a recursive process. Horwitz can estimate his earlier estimation in light of new knowledge and interpretation. Or Henderson can estimate his earlier estimation. Or another party can come in, etc etc. It is through this recursive nature that we better come to understand what truly are pleasing arrangements.

Have Coase - Will Travel

In 1960, Ronald Coase published what would become one of the most cited articles in economics and contribute to his receipt of a Nobel Prize. Coase’s point was both simple and revolutionary.

These are the opening lines to my latest article at the Online Library of Economics and Liberty, Have Coase - Will Travel, coauthored with John Schuler (also a GMU economics PhD candidate).

Another slice:

Coase’s paper “The Problem of Social Cost” appeared in the October 1960 volume of the Journal of Law and Economics. This brings us, for reasons that we will explain, to the television show Have Gun – Will Travel, which aired from 1957 to 1963. A particular 1958 episode, called “Bitter Wine,” is likely the most Coasean episode of television ever made. Every element of the “Problem of Social Cost” makes an appearance in the episode: the reciprocal nature of externalities, how the initial allocation of property rights matters in a world with transaction costs, and how the legal system can overcome transaction costs to allow for an efficient allocation of rights.

Upset about Donations to Notre Dame? Then Praise the Commercial Society

Last week, after Paris’ Notre Dame Cathedral burned, there was an outpouring of emotion and funds to restore the centuries-old building.  However, not everyone has been thrilled by this outcome:

“So when wealthy Frenchmen quickly pledged massive donations, some associated with the movement balked. “If they can give tens of millions to rebuild Notre Dame, then they should stop telling us there is no money to help with the social emergency,” The Washington Post quotes Philippe Martinez, head of the CGT trade union.”

This is a reason for us to celebrate the rise of the commercial society in our world.  As Adam Smith discusses in The Theory of Moral Sentiments, we tend to sympathize much more with those people and things closest to ourselves.  We sympathize with our family very much, our friends to a lesser degree, and beyond that our acquaintances, neighborhoods, towns, country, etc.  A small misfortune to our brother or child is certainly going to trouble us much more than a larger misfortune to someone far removed from us.

Of course, it would be best if we all could engage in that universal benevolence and knew, without question, where our resources could be best spent to best help people.  But that would require far more knowledge, information, and compassion we have or can possibly have.  That sort of universal benevolence, Smith argues, is best left to some deity above us.  Rather, we have it within ourselves to devote to those most local to us are benevolence and beyond that mere justice and virtuous behavior can carry the day.

Notre Dame is a symbol for many people.  It is a symbol of Christianity, of Western Civilization, of French Pride, of many other things.  As such, many people feel close to Notre Dame and thus their benevolence is directed toward that cause.

But it is not by benevolence alone that the world becomes a better place.  Indeed, little else is required but honesty, justice, and prudence.  And that is where the commercial society comes into play.  The commercial society tends to promote these mundane virtues (to borrow a phrase from J.R. Clark and Dwight Lee).  The pursuit of honest dollar can foster growth around us by requiring us to help one another to help ourselves.  We must appeal to the self-interest of the brewer, baker, or butcher for our dinner; we must offer them money (or something else they want).  In turn, they help us by providing us our dinner.  And the same is true across the world.  In my lifetime, billions of people have risen out of object poverty.  It is not because the worlds has suddenly gotten much more charitable or because those charities have gotten better at helping people.  It is because companies, wanting more profit, expanded operations into these poor areas and gave them jobs, and food, and clothing, etc.  It is because the human mind is infinitely creative, and people have found new and better ways to help and serve one another. 

If we were to rely solely on the benevolence of the wealthy (and this includes forced benevolence, such as re-distributive taxation) to solve the world’s problems, we will be unsuccessful.  Compassion is a scarce resource, after all.

Today's Quote of the Day...

…is from this EconLog post by David Henderson (emphasis added):

If you think that the government should provide truly public goods, that is, goods that are non-excludable and non-rival in consumption, then you should think that government should provide the public good of preventing an asteroid from hinting earth. Here’s the problem: The U.S. government, which has access to more resources than any other government on earth, is almost certainly underinvesting in the technology to deflect or destroy asteroids. Just as private actors don’t have much of an incentive to produce truly public goods, neither do government actors.

JMM: In standard economic treatment of market failures, governments are treated as something of a deus ex machina. They can just come in costlessly and effortlessly to solve any problem by applying just the right remedy. On paper, it’s a simple enough story. But what incentives do governments face to provide such solutions (assuming away knowledge problems)? It’s unlikely they face incentives from voters. Market failures tend to be characterized by free-rider problems, and free-riders do not suddenly want to start paying, even if they benefit. Furthermore, the problems are often dispersed, making them hard to observe. Perhaps they are motivated by “doing the right thing,” and that’s all fine and dandy, but are we ready to assume all judges, bureaucrats, and politicians are purely motivated by the Greater Good?

On top of the difficulties of identifying a true market failure, we need to keep in mind the incentives people face.

Are Public Goods Necessarily Undersupplied?

In economics, public goods are goods which are non-rival (a person’s use of the good does not reduce the ability of another person to use the same good, eg listening to the radio) and non-excludable (people who do not pay cannot easily be prevented from using the good, eg when a burglar is arrested, everyone in a neighborhood benefits, not just those who paid for the security service). Because of this definition of public goods, we tend to teach undergrads that public goods will therefore necessarily be undersupplied, that in a free market the amount of the good produced is less than the socially optimal level of production. As such, government may be able to step in and, though use of taxation, correct this underproduction (see, for example, Page 369 of Modern Principles of Economics by Tyler Cowen and Alex Tabarrok).

But is it necessarily the case that public goods are necessarily undersupplied in a free market? It does not seem clear to me that it is.

The first question we need to ask is “as compared to what?” What is the free market outcome undersupplied compared to? It is compared to what would be the socially optimal level where everyone who benefits pays the cost (the intuition here is this: if an individual can earn more producing something, they will produce more of it, all else held equal. Supply curves slope upward).

Now we need to ask: is this an attainable alternative? In a free market setting, it does not appear to be so. After all, as we argued above, given the characteristics of a public good, they will tend to be undersupplied. Getting people to pay for their use is difficult. A more technical way of saying this is the transaction costs are high. The marginal benefit of receiving the payments exceeds the marginal cost of obtaining those payments. In a zero-transaction cost world, the socially optimal level would be easily obtained. There is some bargain that could be reached where those who enjoy the benefit without paying the cost (free rider problem) could be incentivized to pay the cost and production would increase. This is just an application of the Coase Theorem.

If, however, as posited by the public goods problem, the transaction costs of solving the free rider problem are too high, then the socially optimal level is not necessarily an attainable alternative. It’s a fantasy alternative. Thus, it is an irrelevant comparison. It’d like saying “I’d be better off with a fairy godmother who grants wishes than needing to work for my well-being.” Sure, but given faeries don’t exist, that’s a meaningless choice. The choice is between working and living well or not working and living poorly.

If the socially optimal outcome of the model is not a real alternative, then the situation is already at an optimal outcome. There is no undersupply. Thus, public goods are not necessarily undersupplied.

A note of caution: none of what I just wrote should be taken to mean that the free market outcome is necessarily the best outcome. There may be better alternatives. Government (or some other non-market force) may be able to achieve an alternative arrangement that is superior to the free market outcome. For example, better defining property rights can lead to less undersupply of public goods. But in movement from one alternative to the other, we need to consider the transaction costs. Do the benefits of moving from the market alternative to the non-market alternative outweigh the costs?

With this article, I reiterate a point made by Ronald Coase, Carl Dahlman, Harold Demsetz, and many others before me: transaction costs matter. We need to compare attainable alternatives and consider how institutions actually work as opposed to an idealized version of them. Comparing a market outcome to an idealized, but unobtainable, alternative does not provide any guidance to our thought.

The Economist as an Impartial Spectator

This upcoming Tuesday I will be giving a talk at the GMU Econ Society entitled “The Economist as an Impartial Spectator: Re-examining Welfare Economics.” The talk will be from 5:30-7:30 (as part of their general meeting) in Hub Meeting Room 2. If you are in the area, come by and say hi!

Jon Murphy
Today's Quote of the Day...

…is from this 1997 Reason Magazine interview with Ronald Coase:

Reason: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

Coase: This is a very interesting question because one can't give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies--perhaps all the studies--suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn't mean that if we reduce the size of government considerably, we wouldn't find then that there were some activities it did well. Until we reduce the size of government, we won't know what they are.

JMM: Ronald Coase’s careful study of the data through the lens of theory is important for us to observe. Coase was unwilling to move to the conclusion that, just because the majority (if not all) the government regulation led to undesirable outcomes, it must therefore be true that all government regulation is necessarily harmful. He points out another answer that is contained within the very models used in the analyses: negative marginal returns.

Data cannot “speak for themselves.” Data without theory have no context and thus mislead. The man who looks only at data and ignores theory is not practicing science, but rather scientism.