Private spaceflight news

1. The FAA is asking for a budget for a prize fund for advances in "space access" associated with commercial space transportation. Prize funds make good sense when you have market failures associated with innovation. Joe Stiglitz has talked a lot about the economics behind them. Prize funds also played a role in American industrialization - they were very popular in a variety of industries in the early republic. This is classic American industrial policy.

2. Southwest Research Institute has announced contracts today to fly a payload of three scientists into sub-orbital space. Apparently this is the first time this sort of thing has been contracted out by a private firm. This is a very important development - the division of labor is limited by the extent of the market. Clearly we're seeing a growth in demand sufficient enough not just for NASA to contract out, but for private companies to as well. That means greater division of labor, greater specialization, and more innovation.

Boettke, Stiglitz, Hayek, and Socialism

Hypothetically, I always thought it would be great to host a dinner party for Joe Stiglitz and Friedrich Hayek and just sit there absorbing their discussion. And I call it a "discussion," rather than a "debate" intentionally - because I think they would both have a lot of very constructive things to talk about, despite their stark differences. Specifically, I've always been intrigued by both of their takes on information and knowledge. Hayek's theory of knowledge emphasizes that knowledge is decentralized, dooming any attempt to centrally solve problems of allocation and production. The price mechanism is a knowledge discovery process that leverages all of society's dispersed, tacit knowledge. Stiglitz makes these points as well, and of course adds a robust literature on information asymmetries and information imperfections. Honestly, the old "socialist calculation problem" never deeply interested me. It always seemed like a rather obvious point, and I think the fact that I was so young when Communism fell makes it less important of a question for me. So in my Hayek-Stiglitz dinner party fantasies, I've always been more curious about how Hayek would discuss information asymmetry problems with Stiglitz, because as far as I know (and that's not very far), those sorts of issues didn't come up as much in his work.

The impetus for this post was an interesting post this morning by Peter Boettke. He writes on what he calls "robust political economy", as well as Stiglitz's Wicksell lectures, titled "Whither Socialism?". This passage in his review is key:

"Whereas Hayek argues that the standard model underestimates the informational role of disequilibrium prices, Stiglitz argues that the standard model overestimates the functional significance of equilibrium prices in ensuring Pareto efficient resource allocation."

My feeling here is the feeling that I often express with respect to Austrian Business Cycle Theories: that each of these narratives is "necessary but not sufficient". I'm of the opinion that both Hayek and Stiglitz are right. Hayek's point is that socialist calculation fails because the planner lacks the knowledge that is coordinated by prices to allocate efficiently. When prices are in disequilibrium, individuals acting on their decentralized knowledge respond in the market, bringing prices back into equilibrium. This fundamental corrective isn't available to the socialist planner. The socialist planner who doesn't realize this therefore underestimates the informational role of prices. But nothing in this basic point (certainly not original to Hayek or Mises) contradicts Stiglitz's work on information imperfections. Hayek's observation of what planners are lacking is not proof of what individuals in the market place do not lack. Stiglitz's point is that individuals in the market often lack information that they need to operate efficiently in the marketplace. Asymmetries in individual information leads to strategic behavior that distorts canonical market efficiency outcomes. There is nothing in these two stories that contradicts the other. I see no reason why Hayek's critique of socialism and Stiglitz's critique of market optimization can't coexist.

This is another Boettke post on Stiglitz.

Another Austrian economist that has had an interest in Stiglitz is Jonathan Finegold Catalán at Economic Thought. You can find a list of his posts on Stiglitz here.

Russ Roberts and Joe Stiglitz on the Crisis

Russ Roberts, an economist at George Mason University, recently finished an essay on the incentive structures that caused the financial crisis, which he's been working on for several months now. While I don't agree with Roberts's policy recommendations, I think he presents a very good and clear way of thinking about financial regulation. It's a typology that I've also heard Joe Stiglitz use (he comes to different conclusions), so I thought it was worth sharing with you. This is my spin on what these two men have said, of course - it's extremely general. Please take it as a policy typology and not a policy position.

We can simplify and think of two possible types of policy for finance: "regulating the upside" and "insuring the downside". Of course many policy options fall into these categories, and it's a lot more complicated - but this is their basic framework. "Regulating the upside" is far dicier an endeavor and a lot more falls under that umbrella. Restrictions on interstate banking, capital requirements, disclosure requirements, distinctions between commercial and investment banking, and regulation of specific products like derivatives all fall under this category. So I want to make clear that just because Stiglitz (and I) advocate "regulating the upside", that doesn't mean that everyone in this camp supports all the same policies. It's just a good way of thinking about our options. "Insuring the downside" is somewhat easier to think about. This includes things like deposit insurance (FDIC), arguably the Fed discount window's "lender of last resort" function, post hoc bailouts (and, as Roberts emphasizes, the presumption of post hoc bailouts), and even the "Greenspan Put". So with these two policy types, we can think of four basic options: (1.) don't regulate or insure, (2.) regulate, but don't insure, (3.) insure but don't regulate, and (4.) regulate and insure.

Both Roberts and Stiglitz have argued that one of the major causes of this crisis was that we insured against losses for financial institutions in a variety of ways, leading them to take dangerous risks. Roberts would have us eliminate these insurance measures so to reduce excess risk taking. Stiglitz would keep the insurance measures but regulate the activities of financial institutions more stringently. They each made their case to the Joint Economic Committee in December, which you can watch here.

What's interesting and nice is that there is such broad agreement that a disproportionate emphasis on insuring losses is dangerous. But there are reasonable critiques of the other options as well. Roberts's solution of removing is rejected by almost all economists, and for good reason. Policies like deposit insurance were put in place in the first place because excessive losses tend to exacerbate crises. Roberts is right that when someone covers your losses you will take more risks than you otherwise would. But he cheerfully ignores or glosses over the fact that when you risk suffering large losses from the mistakes of others or systemic downturns, that dampens investment activity and encourages people to take too few risks.

Stiglitz argues, contra Roberts, that the solution isn't to unlearn all of the lessons about the importance of insuring certain downside risks. His point is that you insure, but then you regulate the excessive behavior that a few will take, knowing that their losses are insured. This avoids the biggest dangers of an erratic credit cycle that Stiglitz suggests (and I agree) would happen with Roberts's plan. The danger, of course, is that there are a lot of regulations of the upside that we could conceive of, and not all of them are good. Government employees and private employees are made of the same stuff, and both make mistakes. Excessive regulation can dampen economic growth.

And of course there's also a lot of common ground. Debt is privileged over equity in the tax code, and I think fixing that would have broad appeal for both camps. "Too big to fail" distorts the idea of loss insurance, substituting ad hoc corporate welfare. Insurance is about covering expected losses - "too big to fail" is about "it's easier to ask forgiveness than permission". Both sides want to take measures to guarantee that the implicit bailout is no longer implicit.

Ultimately, though, Stiglitz and Roberts come to wholly opposite conclusions from roughly the same initial critique of our current regulatory apparatus. The common ground only goes so far, but I think it's interesting that they're working from the same basic typology. The choice between Roberts and Stiglitz ultimately boils down to a question of the volatility of the market vs. the heavy handedness of government. Both are quite real concerns, and we do ourselves a disservice by ignoring either one of them. While I personally fall in Joe Stiglitz's lower-right hand quadrant of the typology I've presented, I definitely have my differences with him, as I certainly do with Roberts as well. Generally speaking, I worry that Roberts doesn't pay adequate attention to the market failures that I described, and Stiglitz doesn't pay adequate attention to the potential government failures.

Before closing, I'd like to provide a link and a disclaimer. First, I want to refer people back to my post on Hyman Minsky (which now has some very insightful comments from F&OST guest, Sebastian). My basic critique of Roberts is that he misses the Minsky insight of financial fragility. Indeed, to the extent he recognizes this sort of fragility, he lauds it as a virtue. In many cases it is a virtue. There is absolutely no doubt that failure is functional - that destruction is creative. The market is successful precisely because firms and individuals fail. That's not where Roberts disagrees with economists like Stiglitz (although Roberts would probably like you to think that's where the disagreement lies!). The point of disagreement isn't the necessity of letting people fail. The point of the disagreement is that Stiglitz sees both functional and unfunctional kinds of failure, whereas Roberts rarely mentions the type of destruction and failure that isn't functional or creative.

My disclaimer is that I haven't read Roberts's new essay yet. However, he's been working on it for a while, and I've read and extensively commented on numerous blog posts from Roberts on the issue and even on this essay while it was in its formative stages. I also did listen to his entire December testimony. So take this more as general thoughts on Russ Roberts's position, rather than on this essay in particular.

Production vs. Prosperity

I want to explore a little bit of Evan's query:

"Do those who provide goods and services contribute to useful cultivation, or do they perpetuate a practice of commoditization, either of ideas, tools, or resources?"

It's a reasonable question. Many have opined that the GDP statistics we collect are a poor measure of the true "wealth" of society precisely because this summation of values doesn't necessarily correspond to the creation of actual value in society. A homeless shelter may purchase paper plates and spaghetti from the store, and those purchases will show up in GDP statistics - but the couple of bucks that they contribute to GDP will far underestimate the "value" of that purchase to society when the spaghetti is served with a friendly face, an open ear, and a safe atmosphere.

But as Christopher Hitchens has recently pointed out: "There’s also the not-inconsiderable question of capitalism’s ability to decide, if not on the value of a commodity, at least on some sort of price for the damn thing." We need not assume that GDP encompasses all value to admit that there is value to the idea of GDP (and the products that it measures).

If we set up a straw man of modern production as some monstrous, commoditizing, corrosive influence then of course we will be able to vanquish that straw man and banish it to oblivion. But that would be a hollow victory, because that straw man doesn't really represent the "modern economy" as an idea.

Something like GDP is useful if we are realistic about what exactly it is: Gross (i.e. - after subtracting off imports) Domestic (a fundamentally political concept) Product (those things which are produced for sale in a particular jurisdiction). "Production" is a much more humble thing than "culture" or "happiness" or "value". Production includes the plows and tractors that make cultivation possible, as well as the proverbial pick up truck, farm windowsill, and apple pie (perhaps the apples are home-grown, but the flour is most likely ground somewhere else and the baking tin is almost certainly made elsewhere). This is what GDP is - production that is brought forth in the context of a market. And a market is nothing if not a social collective, and therefore absolutely relevant to "culture".

But Berry and Evan have a point that is illustrated in my example of the spaghetti and paper plates used in a homeless shelter. These contribute to GDP, but they only contribute prices - i.e., market values - and not social values. A great deal of social value is produced that is totally omitted from the GDP statistic.

Charles Murray (a real conservative's conservative) used the occasion of his March 11th Irving Kristol Lecture to speak on how a civilization's happiness is grounded in it's cultural institutions, rather than in cold economic calculations alone. On the other side of the aisle the Nobel prize winner responsible for attacking the Clinton administration from it's left flank, Joseph Stiglitz, has been tasked along with Amartya Sen by French President Sarkozy with exploring new ways of measuring growth to capture social happiness.

I think Berry's point is not lost even on those who deal with the modern, competitive market every day. The task is to:

1. Understand how markets both complement and conflict with culture and value, and
2. To be more realistic about exactly what GDP is and what markets can accomplish in the first place, and not penalize them for failing to accomplish something that it was never their task to accomplish.