Thursday, May 13, 2010

Cafe Hayek, Sen. Nelson, and Calculation Problems vs. Incentive Problems

In two previous posts I've differentiated between "calculation problems" and "incentive problems", and I've remarked that too often "incentive problems" get identified as being "calculation problems", muddying the waters of rational debate. I submitted that economists by and large agree on the classic socialist calculation problem; the debate between von Mises and Hayek (among others) and Lange and Lerner. The resounding conclusion has been that government cannot make allocation, production, and consumer choice decisions as efficiently as the market.

But that does not mean that institutional arrangements - property rights (or the lack thereof), externalities, asymmetric information, and paradoxical phenomena - can't distort the incentives and information that act as inputs into the otherwise efficient optimization process that is the free market. It also doesn't imply that the government can't improve outcomes by addressing these institutional distortions. They may fail. They may still not have enough information to improve outcomes. But the point is, the information that government is missing in this "incentive problem" is not information that would be available to agents in the market.

At Cafe Hayek, Don Boudreaux asserts that Sen. Bill Nelson (D-FL) is guilty of ignoring the calculation problem (Boudreaux calls it a "knowledge problem") in his claim that we should stop offshore drilling and move towards renewable energy.

I'm still working out whether I agree with Boudreaux or not. I know I at least partially disagree with him, but I'm not sure how much at this point. Given the framework that I've presented and the distinction between "calculation problems" and "incentive problems" (a distinction you may not even consider to be legitimate, granted), what are your thoughts on Sen. Nelson and on Boudreaux's response to Nelson? Is this a "calcualtion problem", and "incentive problem", a mix of the two, or something else entirely?

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