Commenter Prateek Sanjay makes a good criticism of central planning in the comment section to this post, and I don't disagree with him. The sorts of price controls and planning he describes are things that the market does very well and that the government does very poorly.
But I see this sort of planning as fundamentally different from the interventionism that Keynesians such as myself and Brad DeLong in his recent Project Syndicate article usually advocate. We need not be reminded about market efficiency. We are well aware of it. Most of us even like Hayek on the uses of knowledge in society. It's excellent stuff. You hear Keynesians complaining about Austrian Business Cycle Theory, but you rarely hear denunciations of his perspective on the uses of knowledge in society. It's because there's no great quarrel (maybe there were a few Hayekian turns of phrase that some Keynesians might have taken issue with - but no fundamental quarrel exists).
The difference between planning as Hayek critiqued it and intervention as Keynesians advocate (I'm not sure what a good word for this is - maybe "management"?) is precisely that Keynesians identify where the market functions Hayek describes aren't really relevant. Some people have taken to calling this "market failure", but I don't really like that phrase much. The market hasn't failed, it simply doesn't have the inputs required for market efficiency. It's silly to blame the market for that!
Several months ago I had a whole series of posts on this issue, which I characterized as "calculation problems vs. incentvie problems". This line of thinking is still what fundamentally informs when I sound like a Hayekian and when I sound like an interventionist, but I realized a lot of people like Prateek probably didn't read or comment here when I was thinking a lot of that through. So in case you're interested in how I approach these questions, my posts with the "calculation vs. incentive" tagline are here. Very closely related are my posts with the "externality" tagline, which are here. I think the concept of an externality is much firmer than the concept of a "market failure". I think my differences with the Austrian school come from two primary places: (1.) the difference in our theory of interest, which drives the difference in the way we think about money and general gluts, and thus the relative emphasis we place on different explanations of depressions, and (2.) our understanding of how the market process works when confronted with externalities - I think Mises, for example, butchers the question which is the source of a lot of subsequent confusion. I discuss Mises's problematic treatment of externalities here.
Anyway - just thought that background was important for people to understand my take on intervention. I'm working on some research right now comparing Calvin Hoover's (an American Keynesian) perspective on this question and one other to Hayek's perspective. Keynes died before he could engage these issues with Hayek, and I'm trying to think about Calvin Hoover as a useful lens through which we can understand how Keynes might have responded - where he would have agreed and disagreed with Hayek.
Hayek's knowledge problem is incomplete if that's all you're taking into consideration. Hayek's discussion on knowledge needs to be taken hand in hand with his beliefs on howthe market coordinations. The latter part is the most important part of the debate, and it is the most which is most often ignored or understood incompletely.
ReplyDeletethink Mises, for example, butchers the question which is the source of a lot of subsequent confusion.
ReplyDeleteIt's not that Mises (and the Austro-libertarian community) disagrees that externalities exist. On the contrary, he talks a bit about when market exchanges benefit more than the actors partaking in it, and when they might injure other actors. Nobody denies this.
We just don't trust the government to solve the issue any more than we trust Joe Blow down the street.
Mattheus - if you look at the passage I link to he actually talks about the market itself solving the problem.
ReplyDeleteI haven't read every post you've written on the "incentive vs. calculation" problem, but I think I've read enough to get a reasonable idea of your view. It's interesting to see how you have gradually managed to partition intervention into the "legitimate" sort (demand or incentive management) and the "illegitimate" sort (straight-up central planning of the old sort). I certainly agree that the latter kind is wholly indefensible. But as you may have already guessed, I think the former kind is also very problematic. I'll state an example you gave:
ReplyDelete"If the problem isn't a calculation problem at all, but an incentive problem, there may be certain areas where a public solution could be quite successful. For example, let's take the case of the negative externality of carbon emissions...........The government doesn't have to know what the right solution is to move society in the direction of the right solution. If the property rights arrangements introduce a negative externality then a moderate correction in the direction of raising the cost of carbon will be an improvement, regardless of whether the government knows the true social cost of carbon. Of course, what constitutes a "moderate correction" is going to be a matter of debate, but if we're confident that what we're dealing with is a negative externality then doing nothing is certainly inferior to a small carbon tax."
I can only characterize this as unimaginative, simple, and myopic; if I were to imagine things in such a way, it is with little doubt that I would be in complete agreement with you. You state that the government doesn't need to know the precise solution in order to push society in the right direction. Why you presume that the government even knows the right direction is beyond me. I'll give a brief example to illustrate what I mean. It's a bit extreme, but only with the intention of illustrating the point.
Suppose that a company is emitting a tremendous amount of carbon. However, suppose that this company is the largest producer of vaccines in the world. A reduction of carbon would reduce the number of vaccines, and hence the positive externalites with it. Which outweighs the other? It's probably something that's not measurable, but it's certainly not clear that a reduction of carbon would move society in the right direction.
The point is that ANY reduction of a negative-externality causing activity will necessarily involve a reduction or increase of a myriad of other inextricably linked positive and negative externalities. The system is super complex. It is NEVER clear what is the right direction.
A second example. If you have a young growing industry, say like China, which emits tremendous amounts of carbon from coal production, there seems to be a rationale for a tax, or permit system, etc. But what if by the implementation of the tax, the industry, and hence technological innovation, is retarded to the extent that it will take an additional ten years to transition into cleaner methods than it would have had regulation not been imposed? In other words, while there may be lower carbon emission per year, the number of years for which that stream of emissions will be emitted is longer, and therefore potentially larger in the absolute. I find this scenario not only possible but very probable.
I could come up with case after case after case (both real and hypothetical) of what superficially seems to be the trivially obvious direction but in fact involves such a massive web of consequences that it can simply not be ascertained whether the outcome would be desired or not. These situations always involve a tremendous amount of complexity and uncertainty. Why are you always so certain that the government knows which direction is the right direction?
Here is another quote that I thought was particularly characteristic of how you think:
ReplyDelete"Because there are no property rights, doing nothing is as much an imposition on human liberty as imposing a carbon tax is."
Really?
There are multiple theoretical metrics for describing whether society is worse off or better off in response to some intervention. The two main ones, Pareto and Kaldor-Hicks, are both completely useless from a practical perspective. And there is no means by which we can sum up utilities across individuals.
All "for the general welfare" arguments that explicitly or implicitly invoke one these justifications are not only sloppy but completely empty. The only reasonable metric is a sort of ordinal one. If an intervention involves substituting a set of decisions which would not be made by cooperating individuals for a set which would be made, then it leads to a "less preferred" situation. This basic binary relationship is not only theoretically consistent but practically applicable. Of course, it sounds dogmatic and "merely contrarion" to the supposed saviors, or "incentive" shapers, but in so far as an intervention involves this substitution, THE BURDEN is shifted on to those who advocate intervention to overwhelmingly show that what they advocate will result in a more preferable situation IN A DIFFERENT SENSE.
OK you may say, so you get that I think that there is no way of providing positive justification for intervention, but if I have no positive justification for "NO intervention" (i.e. the market), how can I say we should abstain from it? First, as was already pointed out, the only tight and consistent metric is the ordinal one described above. The market is consistent with that, so that's one reason. But there's an even more important reason. What makes the market so effective is not the intelligence or business acuity of it's people (which the state must rely on for it's policies to be effective). It is simply that there is an effective selection mechanism in place that rewards good business and punishes bad. You can have relatively stupid businessman but in fact a remarkably intelligent system, so long as there is a selection mechanism in place.
Decisions that emanate from Congress are not subject to such a selection mechanism. Most of the "selection" comes from the very men who administer the programs. In the first place, I will always take an evolved selection mechanism over a cognitive human-generated self appraisal process. People simply aren't that smart. Moreover, the selection mechanism involved in government is more often of the kind that is most undesired. In so far as a bureaucrats desire to remain employed, it is in their interest to maintain a given program. Since general incompetence is not selected against (usually for), it is in fact in the interest of politicians to perform more poorly than they otherwise would.
I also wanted to correct your inaccurate interpretation that "incentive" policies are not included in the problems commonly described by Hayek and Austrians as subject to the obstacles of "knowledge" and "calculation". When Austrians speak of calculation they mean the ability of an entity to calculate whether or not a certain project has been profitable. In so far as there is no price system, there is no means for rational calculation. And as you readily recognize, the government would not be able to rationally allocate resources. So where is this applicable to incentive adjustments? Any such adjustment or program is itself a project. And as such, it's "success" needs to be calculated. But as such projects are not subject to the profit and loss mechanism, they are not conducive to calculation. Now if you don't think it's necessary to justify whether something is successful, then there's not much more that can be said, but I highly doubt that's your position.
ReplyDeleteI am always willing to take an evolving set of decisions informed by a spontaneous and informal selection mechanism over a set of decisions informed by supposedly enlightened, rationally thinking political "scientists". They are only subject to the criticism of other humans. THIS is what Hayek meant by the FATAL CONCEIT. It is the conceit that "demand management", a process which is not subject to a selection mechanism except the judgement of expert economists, mathematicians, and politicians, can never accomplish what those hope it will. It is the conceit that the type of ratiocinative thinking that each and every one of us experience every day is the epitome of rationality.
I also want to address one point which I imagine you will bring up. A lot of what you advocate often involves the use of "idle resources". You strangely seem to think that it bypasses many of the above arguments. In the first place, I do not agree with any of theory that supports this idea, but an explanation as to why would be too long (e.g. you seem to think that we can disentangle "volume" from "allocation"-an idea which I think is completely in error). It really comes back to a certain degree of arrogance about the ability of people to rationally carry out certain objectives. In the first place, you assume we can discern WHICH resources are idle (or at least well enough). In the second place, you assume tha the redirection of "non-idle" resources that will occur as consequence of employing the idle resources will not be so considerable that it will outweigh the benefits. Of course, from my perspective, THE REASON the resources are idle is because they were in places that were not valued. To put them back, or in other ad-hoc places, would only WORSEN welfare, as it would tend draw more "non-idle" resources back, as well as slow the re-adjustment that was taking place. In any case, you presume that all of these complications are merely small expenses for the luxurious outcome of "full-employment". Why you believe you can ascertain the existence of such net-benefits is beyond me (according to above). And last, and most importantly, like I've already said umpteen times, such management is not subject to any selection mechanism except the opinions of "expert" economists and politicians. Why so much faith in their ability?
In order to really know whether government interventionism is necessary or not, you need to know how the market works and where the market really failed. Until this is pinpointed, then I'm afraid you cannot offer a complete defense of an interventionist policy.
ReplyDeleteIn EdP's very long post, I found an argument I have used before.
ReplyDeleteThe burden of proof is not on the one who advocates doing nothing, but on the one who advocates doing something. The latter has to show it will work. "You can't prove a negative et cetera et cetera."
However, the latter can use Karl Popper's reasoning and say something can either be falsified or not falsified. And then say that his ideas are true on the principle of mathematical induction. So the interventionist might say his argument has been strengthened or weakened, but not negated.
And to try to negate something might be suicidal, because it requires you to make a categorical statement like "It must be false!" and not the safer "It could be false."
PS: "Planning vs. Incentive Management"?
Phew, lots that I have to say on this subject! Unfortunately, I've just moved countries and have to go out apartment viewing now, so it may have to wait for a while.
ReplyDeleteJust quickly... EdP, I understand what you were trying to get at with your carbon-producing vaccine firm example, but the fundamental problem remains that NO-ONE is able to evaluate the relative merits of reducing carbon as long as it carries no cost. I disagree that "It is NEVER clear what is the right direction"... That would imply that carbon carries a concomitant and proportional positive externality (to the negative externality), for which there is no reasonable evidence. But you are clearly correct that establishing the "right" level of intervention is at the heart of debate and one that environmental economists are concerning themselves with all the time: Establishing a carbon price. If I recall correctly, I may have made some comments on market mechanisms (cap-and-trade) vs a carbon tax on Daniel's highlighted posts in this regard. E.g.: http://factsandotherstubbornthings.blogspot.com/2010/08/thinking-like-economist-on-climate.html?showComment=1283285812263#c2006774396284240002
PS - If anyone's interested, the 2nd part of this post is also relevant to the topic at hand: http://stickmanscorral.blogspot.com/2010/11/experts-democracy-and-public-opinion.html
Apologies for advertising here Daniel, but as I'm rushed for time I'll just repost another link: http://stickmanscorral.blogspot.com/2010/11/daylight-savings-cigarette-bans-and.html
ReplyDelete(Essentially, just some more thoughts on how markets might not be able to overcome certain problems on their own, whereas intervention easily does the trick.)
Argh - I lost a whole comment when my computer froze.
ReplyDeleteOK - the thoughts are duly noted, but not fully digested yet.
One thing I'm intrigued by is this notion that the burden of proof is on interventionists, which seems to misunderstand the whole argument. The whole point is the intervention is a response to coercive institutions. Intervention is coercive as well - to be sure. But it seems like all sides must justify themselves (and I certainly haven't shirked the role of justification). It's one thing to say "I don't buy this externality logic at all and I think the burden of proof is on you". It makes no sense to say "I buy the externality logic but the burden of proof is on you". If you buy the externality logic then you understand that market institutions are coercive institutions just like the state.
Property rights regimes are coercive insofar as they are incomplete and hereditary. I'm an acolyte of Proudhon in this regard, but if you want to put an "American as apple pie" spin to it, I'm also with Jefferson and Dewey on this point. Writ small this is just the logic of externalities. Writ large, it provides the basis for the classical liberal synthesis of human liberty and human self-government: two pillars of liberalism that have lately been construed to be in conflict with each other. But the whole point is, if this all makes sense to you then there's no reason for you to prefer a coercive status quo and insist that the burden of proof is not on you. The burden of proof is on everyone.
Not acting is human action - I wouldn't think I'd have to point this out to students of catallactics. So Prateek says "The burden of proof is not on the one who advocates doing nothing, but on the one who advocates doing something", but both of us are advocating "doing something" coercive. We both need to justify it.
And in a huge expanse of human activity we strongly agree. We just never talk about those things because there's not much to talk about where we agree.
Stickman is exactly right that the problem lies in knowing how much intervention is ideal. We don't have a clear way of knowing this because we don't have anything like the price mechanism for these problems. But to say "we don't have a mechanism" is very different from saying "so we should just fall back on the price mechanism". The whole reason why we're in this mess is because we know the price mechanism on its own provides the wrong solution! It's a tricky question as to what the right solution is. The Keynesian response and the market-oriented climate intervention response has been "augment the market so that it does its job at full capacity - tweak prices you know the market mechanism goofs up on: the interest rate or the cost of carbon". The socialist response which both Keynesians and Hayekians have rejected is "have the government allocate instead of the price mechanism".
Then there are other harder to categorize responses - things like running government space programs or educational institutions. These aren't typically justified by the socialist case that "the government can do a better job". They're justified more by the argument that "this simply isn't a market activity"... it's sort of a "public goods" argument, I guess - but a less technical one. I'll have to think more about these cases - I think they're somewhat different.