Ending Up In Bedlam: Boettke and Horwitz

Steve Horwitz and Peter Boettke offered two great examples recently of the real paradox that is the blog Coordination Problem. All the bloggers (and most of the commenters) there are very thoughtful people with great insights and a deep appreciation for economics. But sometimes, despite their thoughtfulness, they start from one very odd premise so that everything they build from it seems shoddy to me. This is unfortunate, because often they've got a lot of great ideas in the post itself.

For Peter Boettke, the odd initial premise almost always has to do with an imagined epic battle with Keynesianism and a very dismissive, condescending attitude towards Keynesianism as being out of the "mainline" of economics running from Smith. He takes it as an article of faith, although he doesn't talk about macroeconomics all that much. Lot's of people are dismissive of Keynesianism without engaging it. You can't engage everything in detail. The problem is Peter goes on to write a post like this one that engages some really important questions about why "bad ideas" persist in government, and the relationship between bad ideas, the generation of bad policy, and the staying power of bad policy. It's an important problem to think about - one of the reasons I like American University is that their department has such a strong political economy focus, so I like seeing Peter think about these questions - but the whole post is based on the idea of Keynesianism as the singular "bad idea" of Western democracies in the 20th century and the mystery of why anyone still believes anything like it - in a crude or sophisticated version. When I read something like this, it makes me wonder if the whole discussion is worth anything. It would be like a creationist discussion of political economy that asked why the "bad idea" of evolution persisted in our educational institutions which are allegedly dedicated to pursuing truth. I think the political economy question is very important, and I'm thrilled someone is asking it. But I wonder if the answer is even worth reading.

Steve Horwitz has a similarly paradoxical post (I have a comment there) - probing and thoughtful, but founded on some very bad thinking about economists who talk about market failure and the quality of the counter-arguments that are posed to them. Crediting Don Lavoie, he suggested that "much of Marx's critique of capitalism is like a photographic negative of what he imagines the socialist world will look like. In other words, the reason that exploitation and alienation are problems of capitalism is that Marx can envision a world in which neither one exists. Specifically, if the participatory but still unified planning of all economic activity (and the elimination of exchange/markets/prices/commodity production) is possible, we will eliminate alienation and exploitation." He then analogized this to modern economists: "Now let's fast-forward to the 1950s and 60s. The number of economists who believe in Marxian central planning has become small. However, for most critics of capitalism, the ground has shifted to "market failure" type arguments. But here's the kicker: the rhetorical strategy is exactly the same as Marx's! What are normally considered "market failures" are only "failures" because the economist is standing in the hypothetical perfect world of general competitive equilibrium and seeing how the real world fails to live up to the model."

No, no, no, no, no. Great questions. Great thoughts on how people think. But the empirical material he's working with is a worthless strawman. I've never had "market failures" taught to me like this, and it infuriates me that apparently this is what people are told others think at George Mason or St. Lawrence University. I will say, though, that it's confusion like this that makes me hate the term "market failure" (as regular readers know, I prefer "externality").

As it so happens, my history of economic thought professor talked about modern market failure economics last night after summarizing the history of thought from Aristotle to Keynes. He didn't present it in these terms at all. He presented how it's always been presented to me. He basically said that starting in the 1870s a lot of the market process insights of Smith were formalized by the neoclassicals. Great. We got much more powerful theory. But this was a first approximation, because the theory clearly wasn't how the world actually worked. So since about Arrow and Debreu (who further formalized the formalizers of the 1870s), a lot of economists have spend a lot of effort theorizing and thinking about how the world actually works. We have a first approximation workhorse model to work with: competitive equilibrium. But it wouldn't be very scientific to take that Platonic ideal and pretend it was anything other than a first approximation.

There was no whiff of the idea that market failures signaled a failure of markets because they didn't live up to some perfect market ideal. He said several times that "market failure" economics (I believe he did use that term) was an effort to understand the way the economy worked using neoclassical tools which was more informative and accurate than the first approximation of Walras, Arrow, and Debreu.

My professor last night wasn't alone - this wasn't the first time I've heard this. He was pleasantly explicit and insistent on this point, but this is how "market failures" were taught to me at William and Mary, and this is how "market failures" were taught to me at George Washington University too. I don't think I've hit on the three schools that buck Steve's general rule of how market failure is taught. There's nothing peculiar about the schools I've been too.

I think people predisposed against liberals or the mainstream or what have you have imputed ideas to this sort of economics that is (1.) wrong, (2.) convenient, and (3.) regularly repeated within their own communities.

Positive Externalities Part 1: The Subsidy Solution

In this post on public investments in science, Stravinsky asks how "the government internalizes benefits of funding basic research". I'm not sure saying that the government internalizes the benefits is the best way to phrase it. Remember when we say that costs or benefits are "internal" or "external", these reference internality or externality to the market transaction. You can think of public solutions to externalities as a way of finding another allocation process besides the market which internalizes some of the benefits that were previously external. From the perspective of the person enjoying the benefits or paying the costs, the benefits are always there, after all! The question is - are these people at the table making the allocation decision? In many market transactions they are not. The idea is that in a democratic polity or any other democratic social institution they have a chance to be, so there may be a plausible improvement.

Economists usually talk about three solutions to a positive externality: public subsidy, public provision, and the reassignment of property rights. [UPDATE: So as I'm thinking about it, there's an extremely important fourth solution that I'll go over too - in addition to public provision, there is of course direct public demand. We can think of this as a price response (subsidy), two quantity responses (supply and demand), and an institutional response (property rights allocation)]. I'm going to try to discuss each of these in turn, and I'll start with the subsidy, which is presented here:



Here you have the basic positive externality. Market transactions can be expected to converge towards the point where marginal benefit equals marginal cost (the far lower left yellow circle marks this equilibrium). That's where private net benefits are maximized. The problem is, if there are substantial externalized benefits, that's not where total (i.e. - private plus social) benefits are maximized. I've shaded the deadweight loss region of the graph in gray, and you can think of an externality like a tax imposed by the property rights regime. Now, there are some social benefits enjoyed, of course. I've shaded in green the social surplus and in red the private surplus.

One solution is to subsidize private purchasers of the good in question. I've marked this subsidy with the dashed line. We can think of it as a lump sum ("we'll give you $X to go towards Y") or you can think of it as a percentage ("we'll pay X% of the cost of Y"). Either way, it will shift the quantity demanded and the price charged out to a new equilibrium along the marginal cost curve (if demanders are being subsidized the situation has not changed for the suppliers, so we are still on the MC curve).

One argument against public solutions for externalities that I am always shocked so many smart people are impressed by is this banality that "the government doesn't know where the equilibrium is". Of course it doesn't. Has anyone said it does? I think drawing an optimal subsidy or tax to deal with an externality on paper has given people the false impression that those who support these public investments think the government knows where the marginal social benefit curve meets the marginal cost curve. I've never claimed that, and I cannot recall anyone else claiming that. So to avoid that confusion, I've drawn several potential new equilibria (also in yellow dots), none of which fall on the intersection of the marginal social benefit curve and the marginal cost curve! Four words you have never seen written on this blog are "the government is optimal", and you never will see those four words written.

So the government is not optimal. That is so obvious it doesn't need elaboration. The point is, though, any public solution to the left of the intersection of the marginal social benefit and marginal cost curve is an improvement on market allocation. Allocation is still efficient because we are still using the market to economize on decentralized knowledge about who can produce and use the good most efficiently (i.e. - we are still on the MC curve). And it's also closer to being welfare maximizing. This is an unambiguous improvement.

It becomes more ambiguous if we move to the right of the intersection of the marginal social benefit and marginal cost curves. Past that point marginal cost exceeds total marginal benefit, which means net social benefits are declining. I say this is "ambiguous" rather than bad, because the net social benefits at a point to the right of the intersection of the marginal social benefit and marginal cost curve may still be higher welfare than the market solution. But of course this is not the territory we want to be in. But if clear social benefits are modestly subsidized, there's no good reason to run away from this option. If we think about "robust political economies", both the market alone and the government alone clearly fail to pass the robustness test in the case of positive externalities. Both are incapable of fully dealing with the incompleteness and imperfection of human decision makers. This really shouldn't surprise economists. Anyone who clings to a corner solution should immediately raise red flags - the "economic way of thinking", as it's been called, alerts us to the fact that corner solutions are rarely sensible or robust. Experience shows us this as well. Societies that rely heavily on government allocation repeatedly fail, and societies without a robust government to meet social needs fail to emerge or develop into mixed economies over time (it only took a matter of years to move from the Articles to the Constitution).

Next I'll do public provision, and then I'll do the rearrangement of property rights. Not sure when exactly - I'm going to be out of town a lot of this weekend, and working on the engineering labor supply paper as well.

A couple "temporal autarky" related points

First, stickman has a great post on whether pregnant women should be banned from smoking, using some of the same points that I did in the series of recent "temporal autarky" posts. This problem pervades parent/child issues. A child depends on parents for many things, but can't transact with that parent to make responsible investments at the time they need to be made. Stickman specifically raises the example of a child in the womb, which is certainly an example of a situation where a child and a parent can't come to a voluntary agreement about the treatment of the child.

I respond with trepidation on banning pregnant women from smoking, but I do think there's a viable argument for it, and I do think in particularly bad cases (such as the one stickman mentions) child services would have a viable case for child abuse charges. Having the government provide a service to address these issues (i.e. - offering public school or offering prenatal and maternal health services) is much easier to jump on board with than having the government intervene to change a person's behavior.

*****

In this video, Jeff Greason provides a great discussion of settlement strategies for NASA. Jeff is in the private space sector, but (like me and unlike some commenters here) he doesn't see himself as in competition with, threatened by, or crowded out by NASA and public space exploration. He does a great job at explaining the public choice problems surrounding space exploration. This usually isn't a problem for people to see, because the public choice problems are so prominent. Finally - he differentiates himself from guys like Dr. Zubrin by offering a vision of interplanetary settlement that doesn't rely on one single massive "Mars Direct"-esque undertaking.

*****

I've started to draft my response to DARPA's Request for Information on the financing of a 100 Year Starship. It's due Friday, and it won't be very long (they want no more than five pages). I'll post it afterwards. Essentially I'm summarizing the idea of temporal autarky and its implications for financing investments in the far-future, and I'm suggesting that DARPA reconsider its exclusion of government funding. I'm really benefiting from having a blog on this one - I've pulled sixteen pages of blog text and comments on the subject from posts here going back months. It's a good resource to have to keep a record of thoughts I'm interested in revisiting later. And your comments and critiques are helping me anticipate concerns that DARPA may have.

NASA vs. Ag Subsidies

Previously on here I've promoted a practical and hopefully widely appealing way to address externalities: ditch ag subsidies and double NASA's budget. Food is a product where virtually all the costs and benefits one can think of are internalized - particularly in today's day and age where it doesn't contribute all that much to macroeconomic volatility. Alternatively, there are lots of positive externalities associated with space exploration. The two budgets are roughly comparable, which makes this deficit-neutral budget plan convenient to think about.

Oddly enough, then, this post at the Space Politics blog directly ties NASA to agriculture subsidies!

In a lot of ways, they're absolutely right - and they hit on one of the many interesting externality/collective action questions swirling around NASA. I've talked about the positive externalities (the diffuse benefits and concentrated costs) of space exploration here before. But there are also concentrated benefits and diffuse costs to think about: namely that NASA is a boon to Florida, Texas, and Alabama. That's part of the reason why you have a Tea Party candidate from Florida backing manned space flight.

I think this poses more of a risk in terms of tying NASA to old ways of doing things that are associated with Cape Canaveral, Houston, and Huntsville. It doesn't seem to be presenting a huge risk of over-investment in space exploration.

Still, it's interesting. There are negative externalities wrapped within positive externalities. And the sorts of things NASA spends most of its time talking about in externalityish lingo - their "spin-offs" - aren't really externalities at all!

On to Mars

Elon Musk announces that he will put human beings on Mars in 10 years as a best case scenario, and 15-20 years. This comes shortly after the announcement of SpaceX's Falcon Heavy rocket, which is supposed to be able to lift twice the payload of the shuttle.

I don't know if the details of the mission are available - the one I know in detail is Zubrin's "Mars Direct" plan. The way he tells it, that sort of plan is the only feasible way for doing it. Not being an astrophysicist, I can't evaluate that.

Another Elon Musk project is Tesla Motors - the electric car company. There are substantial externalities that cause us to underinvest in interplanetary exploration, just as there are externalities that make us overinvest in combustion engines and underinvest in cleaner cars. But just as in the case of his Mars plan, Musk seems to be addressing the externalities in the car industry that the government bungles.

In response, I think NASA needs to announce a two tiered prize fund: one for the first party to put a human on the surface of Mars, and one for the first party to put a human on Mars and bring him back safely to Earth. And then NASA should announce its own effort. If NASA achieves either task first, it will distribute the prize between all the competitors.

A fun Mars Youtube video from Symphony of Science:

Troy Camplin on Artists' Externalities

Troy Camplin, who blogs about the relationship between Austrian economics and literature, agrees with me that cultural production is closely associated with positive externalities. He writes:

"Richard Florida repeatedly argues that the presence of "bohemians," which of course includes artists and literary writers, positively correlated with the presence of the creative class that provides the driving force of most economic growth. The interactions among artists/writers and other creative people, ranging from programmers to advertisers, thus create the conditions for creative-based economic growth. Thus, the presence of artists/writers acts as a positive externality.

How might artists and writers gain a return on their contributions? Or are externalities inherently impossible to "cash in" on?"

Any thoughts on the question? My feeling is that (1.) if there was an easy solution to "cash in" there wouldn't be an externality, and (2.) to a large extent this misses the point - some things provide benefits that people don't want to monetize, and that's fine. Patronage and philanthropy of course are a major solution to these sorts of externalities: if a person gets utility from the utility of others that's a sure way to address externalities at least to a limited extent. Altruism internalizes costs and benefits.

Efficiency Problems vs. Externalities

Both Mattheus, in the comments here, and Don Boudreaux have recently talked about the government itself as an externality.

My initial reaction to Mattheus was to agree with him.

The more I think about it, though, I have a hard time talking about the government in these terms – not because there aren’t problems associated with government (I would be the last person to deny that), but because it confuses the definition of “externality” and that’s a very important concept that I’d prefer not to confuse.

An externality exists in a situation where some of the costs and benefits of a decision do not inform the decision making process because no rights adhere to those costs and benefits. The efficiency of that decision making process has no real bearing on whether something is an externality or not. We can imagine inefficient allocation mechanisms for goods with no particular externality (for example, monopolies or markets with considerable information asymmetries), and we can imagine efficient markets for a good that is potentially rife with externalities (such as gasoline).

So what is the situation with government? Well in liberal democracies government internalizes all costs and benefits. Everyone has standing in a liberal democracy and all preferences can legitimately inform the decision making process. If I am not a party to your transaction with the gas station, my disutility from your carbon usage can’t inform that transaction. But if I’m voting anything I am pissed off about or happy about is fair game. The problem with government, it seems to me, is that it’s not nearly as efficient in maximizing those benefits and minimizing those costs as the market is. This is why, of course, we like the market to make allocation decisions in the vast majority of cases. The government has loads of problems with it, but decisions that are systematically uninformed by subjective valuations of costs and benefits is not one of thoase problems.

So why do Mattheus and Don think it’s an externality? The more I think about it I’m not really sure. It seems like cargo cult economics to me. Externalities are all about people bearing costs that don’t seem like they should be bearing; externalities are a good way to get the attention of economists; ergo: let’s call the government a big negative externality!

I’m not so sure about this. Government internalizes all kinds of costs and benefits. That’s the whole point of classical liberal government, and that’s why it’s cited as a potential solution to externalities that pose particularly big problems. Is it inefficient and sometimes even abusive? Sure. But unless we’re talking about a case of substantial disenfranchisement, I’m not sure these problems have their source in externalities.

Culture as an Externality

I mentioned to Prateek in the comment section of this post that I might write some about culture as an externality. I honestly haven't had the time to put much thought into it. But here's the basic idea: culture is a context that you find yourself in and, if you are cultured, that you participate in and engage with. But culture isn't like a loaf of bread or any normal good; the extent to which you benefit from culture depends substantially on the culture that others purchase and experience. The buyers of fine architectural specimens benefit from their purchase themselves, of course, but they also provide a positive externality for everyone else by contributing to the culture of the community. Private pieces of culture - rare or important books, private art, my wine rack, etc. - are somewhat harder to talk about in these terms because they are often kept private, but they (1.) produce more cultured people who go into the world and interact with others in an cultured way, an (2.) create a market for works of culture that would be weaker otherwise.

This relates to the earlier point about Russ Roberts' post insofar as markets themselves are positive externalities. My exchanges support the existence and persistence of producers. All markets, in this sense, are a collective action problem: they require a critical mass of demand to even emerge. This is why I hesitate to be too celebratory about places like Amazon or Wal-Mart. That they can provide goods at a low price is obviously something that I acknowledge and celebrate them for. But there is a real collective action problem associated with culture-producers and preservers like small book-sellers and farmers' markets. I have my own demand for niche books and farmers' market food, and the market will satisfy that demand the way the market always does. But when we think about culture, we realize that our demand doesn't stop there - what we derive utility from doesn't stop at the level of our own individual consumption. I derive utility from the presence of a bustling farmers' market. I derive utility from the existence of a variety of small and used bookstores and I derive utility from hearing about the positive experiences that friends have there. Now, I could pay friends to go to these venues, of course. That would be the market solution. But the very act of payment for that source of utility would destroy it as a source of utility. The point is, we derive utility (and disutility) from interactions that we have no control over, particularly the cultural milieu that we find ourselves in. That is the very definition of an externality, and because it's an externality we can't expect the market to provide for it on its own - other institutions may be more helpful.

Externalities everywhere

Every day I become more and more convinced about how central externalities are to modern human society. It should not be surprising, given the modern turn towards the individual, that social welfare would be less well served by modern institutions than individual welfare. This is not even a bad thing - the growth we've experienced since the individualist turn strongly suggests that there's something substantial to the idea of modern individualism that ought to be maintained vigorously! But that still means that modern institutions might not be well equipped to address the welfare of parties external to the interactions of individuals. I think of human progress as the fulfillment of the difference in welfare from what we are to what we could be in the future. Two social technologies - the market and modern science - are the best tools we have to maximize that progress. But each of these targets specific kinds of welfare improvements, so that modernity is something like a net that catches a lot of opportunities for progress but lets certain opportunities systematically slip through. Externalities are not "exceptions to the rule" - they're a natural and pervasive part of life. And one of the reasons why I hammer thinking about property so hard is that it's precisely our natural embrace of status quo property arrangements that makes us ambivalent towards externalities. If you see human progress as a positive (if ambiguous) thing, that strikes me as an odd position to hold.

I have two points on externalities.

First, Russ Roberts' recent podcast with Dani Rodrik has an interesting discussion of externalities that I've never thought of. On his blog, Russ writes of it:

"Along the way, Rodrik argued, to my surprise, that starting a new venture in a poor country has a positive externality that leads to market failure. He gave the example of a call center–suppose a country has a work force that would be good at working in call centers. An entrepreneur who starts a call center will thereby provide information to other entrepreneurs about the quality of the work force."

Pigou meets Kirzner. It would be a productive meeting, but I'm afraid there would be a lot of resistance, at least from modern proponents of Kirzner. Information asymmetries in hiring are very well understood - the step that I haven't heard anybody take that Rodrik takes here is to point out that because information is welfare-enhancing in labor markets with asymmetric information, entrepreneurs who hire in these markets (providing information on the wage and skill distributions of the population) generate positive externalities for other entrepreneurs.

My other point is to note that I've started writing a short article that I want to submit to a journal called Space Policy on the (mis)use of externalities to justify NASA. NASA's heart has been in the right place in their self-justification to the public. For a very long time they've touted their "spin-offs" - NASA technology that is useful in the private sector. They even have a regular publication dedicated exclusively to featuring these spin-offs, which has covered something like 1,600 spin-offs to date (and they note that this is not exhaustive). The effort is well-intended, but this is not really an externality - or if it is an externality ("information goods" like technology are so strange it's hard to think about them in the same way as non-information goods), it only scratches the surface of the externalities that NASA addresses. I plan on going over three more traditional externalities of public space exploration that NASA does not talk about as much as spin-offs, but should to provide what economists would consider a legitimate justification for public provision of space exploration. The articles in this journal are shorter than in others, so hopefully I'll be able to wrap it up in the next couple weeks (depending on other workloads). And sorry Evan - I know you'll be disappointed to learn its an Elsevier journal.

But for this morning - time to write more about the engineering labor market.

Realism on market failure and government failure

One of the strange things that a lot of public choice theorists like to throw out there is that anyone who ever gets involved with market failure ideas ignores government failure. I've always thought this was odd and a little condescending. When you think about the conditions for market failure - exactly how incentives break down to make the market not work how we traditionally think it does, and open the possibility of collective action solutions, it seems to me you're uniquely in tuned to thinking about incentives and the way they shape economic behavior. In other words, you can't really do public choice theory or explore those sorts of issues unless you take market failure seriously. Incentive structures and their impact on action are very clearly and formally laid out for markets by economists. If you can't understand how incentives enable or disable efficiency and optimality in markets, you're never going to grasp how they work in governments - which is more undertheorized.

I was reminded of this when I was reading Akerlof's "Market for Lemons" paper again recently to help out with a paper on information economics that I'm reviewing. Akerlof writes this at the very beginning, after outlining the basic idea of his model:

"It should be perceived that in these markets social and private returns differ, and therefore, in some cases, government intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increase in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power - with ill consequence of their own - can develop."

A lot of the time, public choice theorist types want to tell you what you think before you start arguing with them, and they want to imply that you don't realize the problems associated with government failure, you don't realize the potential for the emergence of private collective institutions, and you think that government intervention is the response to every market failure. I am increasingly tiring of even engaging with someone that takes this approach to me. I think the origins of this approach are an underlying ideological position that doesn't want to say "OK, both of us agree on the potential for government failure and the prospect of private collective action, so let's think through when the market, private collective institutions, and public collective institutions are best suited for the job." They don't want to have that conversation because they want to be able to pin you as always opposing the first two, and they want to be able to always oppose the third option. I don't like corner solutions, I'm willing to consider some mix of all three, and I am not especially impressed with someone that tries to frame me as seeing it any other way.

Ditch Ag Subsidies - Double NASA's Budget

A little while ago I proposed that we should be able to get decently broad agreement on at least one deficit neutral budget proposal: eliminating all agricultural subsidies and doubling the size of NASA's budget. They're roughly the same size, and the contrast in their justifiability is stark.

Agricultural subsidies make everyone furious. They hurt the developing world. They hurt relations with our developed trade partners. They hurt small farmers. They hurt the environment. Oh, and they're completely insane when it comes to the economics of the question. I'm not aware of a single economist - left, right, or center - that likes agricultural subsidies. But they have concentrated benefits and dispersed costs, which makes the whole mess work out politically.

Space exploration and colonization is exactly the opposite - it has concentrated costs and dispersed benefits. That means it's the sort of thing government should consider doing, which is ultimately why the government is doing space exploration. But it also means it's going to have a very different set of incentives. Government has created concentrated benefits in the space programs with jobs (if you are from Florida, Alabama, or Texas you like NASA no matter what party you're from). But for the most part, the benefits accrue to future generations. Future generations don't vote, nor do they participate in the market. That means we underinvest - both publicly and privately - in space exploration and colonization. It's a market failure and a government failure, if you like to use that terminology.

I put together a few graphs, which I highly encourage people to repost, share, comment on and write their own posts on if you agree with me. The data is from Wikipedia and an agricultural subsidy data resource, which in turn derive it from OMB sources. One day I'd like to get into the original data myself, but for now this will do.

First - you'll see that nominal spending on agricultural subsidies and NASA are roughly on the same order of magnitude. Agricultural subsidies are somewhat more erratic, because they are influenced by price levels.

Sources for NASA here and USDA subsidies here.

What could a doubling of the NASA budget do? All kinds of things. It would be a good down-payment on Mars (even more so if we keep that spending level up). We are seeing a movement towards private space exploration, which is a very important trend. We could establish lots of prize funds with an extra $15 billion or so.

The last time NASA's budget was doubled from its steady state level we did great things. Here is the budget of NASA since 1958 in constant 2007 dollars:

When we made it to the moon in the late sixties, we were essentially doing it from scratch. We have much more groundwork laid today. If we could make this switch from subsidizing activity we have done for thousands of years to subsidizing frontier-expanding activity and maintain that higher level of spending in a deficit neutral way, we wouldn't have an Apollo program spike. We would have year after year of effort approaching what this endeavor deserves.

Eliminate all agricultural subsidies and double NASA's budget - spread the word, people.

Nobody has expressed the logic of overcoming externalities more eloquently than Armstrong: "one small step for man, one giant leap for mankind".

Planning vs. [???? - Management?]

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.

The Supreme Court and Climate Change

Discover's blog notes that the Supreme Court has agreed to hear a public nuisance suit brought against six power companies by eight states for damages caused by greenhouse gas emissions. To a certain extent, this is very good news, because it's a defeat for the use of coercive force on the part of polluters who impose costs with impunity on people who, because of history and practicality, don't have property rights to the air they consume.

I am a little concerned about it, though. While some people see the legal system and tort law as a viable way to arbitrate these things, I'm skeptical. I come at this as an economist - the problem is that a cost-bearer and a benefit-enjoyer can't meet to negotiate the terms of the cost and the benefit imposition (or if they want any cost or benefit imposition in the first place). The crux of the issue is that the cost-bearer has no legal claim on which to base a contract.

A legal solution drawing on public nuisance law at least allows ex post compensation that may or may not be appropriate. That's better than the previous situation, but it still allows benefit-enjoyers to impose the costs of pollution without the agreement of the cost-bearer. In other words, there is no "double-coincidence of wants" that guarantees that we have gains from trade: there is a "single incidence of want" with ad hoc, ex post, legally determined compensation. Even if the courts could adequately assess damages (which nobody who knows anything about the socialist calculation debate should expect), they still can't guarantee welfare maximization because they can only guarantee that cost=benefit, not that marginal cost=marginal benefit. Not only can they only guarantee that cost=benefit for compensated cost-bearers (if that), but that is all they are tasked with doing.

I think the better route would be to say "the air is collectively owned and it oughta be collectively managed", and have the court order the state to fix the problem, much as they did with desegregation. With desegregation, the rights structure that was the status quo was unjust, but rather than telling whites to compensate blacks and letting the rights structure work itself out, the courts ordered the government to rectify the arrangement of rights in public schools and in voting. Ad hoc, ex post compensation is not the price mechanism and we shouldn't expect it to achieve optimal results. State action is not the price mechanism either, but it would be much closer to the price mechanism if we had an institution acting as the agent of the people (who, under the status quo, suffer from an incomplete property rights regime).

Public Goods and the Role of the State

Frances Woolley has a good post in reaction to this Olbion fire department situation reminding us that (1.) fire fighting is not a public good and (2.) actual public goods are very, very rare. I think this is important to highlight and think about because so many people have this automatic reaction that public goods in some sense provide the economic justification for what the state does, and anything that's not a public good is (according to economics) not an appropriate area for state action.

I've never really thought of it that way (although perhaps that's because I've never taken an official "public economics" class). I've always thought about the rivalry/excludability cross-tab more as a pricing strategy typology than a blueprint for a political philosophy. "Club goods" gravitate towards a different pricing strategy than private goods - they introduce innovations on how to price goods. "Common pool goods" usually gravitate towards different rationing or supply strategies than private goods. A good resource for this is of course Elinor Ostrom (her Nobel Prize lecture is a good start).

But you'll notice I don't usually talk about "public goods" when I talk about the government - usually what I'm talking about is an externality. That's not to say I don't think public goods are important when thinking about the government, they simply aren't exhaustive. Externalities introduce a situation where the market has no ability to right itself (contra Jonathan Catalan) because the problem is in the nature of the property rights regime. You could always pay BP not to pollute the ocean, but then you would be paying them not to impose a cost on you when they should be paying you if they want to impose a cost. You could argue that tort law forces BP to take these externalized costs into account, but then BP would still get to decide whether to act or not - it would not be a mutual choice between you and BP - that's coercion. So externalities provide some basis for state action even when we're talking about externalities in non-public goods. But obviously an externality on its own doesn't give the state license to act (see Coase on this point) - it's not sufficient. But large, extremely generalized externalities that can be addressed adequately by the government and inadequately by some other institution provide a strong case.

The other thing that affects the role of the state is humanitarianism and the ability to pay. I'm no welfare economist, and I haven't looked at this in detail (I know others have), but on the face of it the problem with a Walrasian approach to welfare economics is that because a person's income is commensurate with their marginal productivity, their ability to satisfy their utility is going to be constrained by their productivity. Human welfare, in other words, is proportional to human productivity. There's a point where this is unavoidable, of course. We don't see it as a crime that less productive humans a thousand years ago lived in a poorer state than we do. That's just how it goes. But for our contemporaries, does this raise any ethical issues for us? It probably should. A child is born to a poor family, and doesn't get adequate nutrition or education, to say nothing of an inheritance. That child will be less productive and will earn less money. Market capitalism, for all it's allocative efficiency, will by virtue of its dependence on the property rights regime constrain that child's ability to live as well as another child born under better circumstances.

So how do we react to this? First - we don't react in a radical way. The allocative efficiency of market capitalism still provides this child with the opportunity to use whatever productivity it does have to better effect than any other system we have come up with. It also provides the child with the best opportunity to enjoy the fruits of the productivity of others in an efficient way. The only real problem is that it imposes limits or obstacles to the child's fulfillment as a human being because of the same property rights regime that drives all the good things we like so much about markets.

If we have an ethical framework where we think that human beings are essentially equally worthy of living a reasonably comfortable life, this may suggest that we have a social imperative to augment market outcomes. I have a fridge full of healthy food and a roof over my head. I believe people should receive only what they earn, but I also believe that any human being without healthy food and a roof over their head is living an unjustifiably unfulfilled life. Providing them with a basic amount of food and shelter does not change the fact that they should earn their marginal productivity and set those earnings equal to the marginal benefit they get from consumption. So far this is only a justification for charity, but if these ethical standards are sufficiently generalized and agreed upon, private charitable intuitions can naturally evolve into public agreement on basic standards and public provision. This is natural - after all, the state is the ideal way to equally spread the pain of poverty which we think of as being somewhat random and not determined by a person's own life choices. The state is not some alien institution. It's an emergent institution just like any other human institution. Presumably what the state might provide in this case - food, medical care, shelter, etc. - is not a public good at all! Which brings me full circle back to the point that we need to be careful when we talk about "public goods". The concept of a public goods tells us something about viable and unviable pricing strategies, but it doesn't furnish us with a political philosophy.

My view is that political philosophy should be done with the property rights regime in mind. The property rights regime is largely artificial - natural rights are "nonsense on stilts" after all. They are useful and even justifiable and legitimate, though. The fact that they're artificial doesn't mean they're contestable. But we have to have a political philosophy that recognizes the limits of the framework of rights that a given society has evolved: hence my emphasis on externalities and ability to pay, rather than public goods.

Externalities, Health Care, and Socialization

Jonathan Catalan has a very thought-provoking post up on socialization of various degrees in health care, which he connects to the idea of externalities. I think there's some to agree with and some to disagree with here.

1. The current state of health care: Jonathan makes two claims about the nature of health care in the United States. First, he says that consumers face fixed low costs becasue of government subsidization, which leads them to demand more health care than is optimal. I agree this is true to a certain extent - the most important subsidization is the government's tax treatment of employer provider benefits, which are not taxed in the same way that income is. Since we have a progressive tax structure, higher-wage workers get a larger subsidy through the tax system for their health insurance than lower-wage workers. The second form of subsidization is Medicaid, which provides subsidized insurance to the poor. I'm not sure how easy it is to over consume medical care on Medicaid, but they obviously consume more than they would be able to with their own purchasing power. Those two subsidies are important, and I've come out against this special tax treatment for employer benefits in the past for the reasons Jonathan is outlining (I haven't come out against Medicaid for humanitarian reasons and because I have a hard time believing Medicaid is driving our medical cost inflation).

The second thing Jonathan says about the state of health care is more complicated. He writes: "The root of our current medical problem lies in the collectivization of the consequences of an individual’s irresponsible choices. The issue is that the costs of one person’s decisions are spread equally amongst society, to the point where that individual hardly feels the penalties of his value judgments — short of illness and death." I have more of a problem with this claim, at least in its current form. We have another word for the collectivization of the consequences of an individual's responsibility: "insurance". Collectivization in this case is usually considered to be a good thing because medical costs can be so discrete and unexpected - so good, in fact, that (before they were forced to buy it), four-fifths of Americans willingly paid monthly premiums for the service of collectivization of consequences, which was provided by private firms. I want to be careful not to get to the point where collectivization is equated with involuntary behavior of health insurance itself is considered the problem.

But I'm not even sure Jonathan is talking about the same thing I am here. He goes on to write: "The erosion of responsibility, operating with the understanding that the consequences of poor decisions will be mitigated by what is benignly called a “social safety net”, is where the viability of socialized medicine falls apart." What social safety net is he talking about here? Medicaid? But that affects only a small portion of the population. I'm not exactly sure what Jonathan is talking about. The most important, biggest, collectivization of consequences in health care is health insurance. But that's not a "social safety net".

2. The market and externalities: Jonathan then connects the current collectivization of consequences to externalities ("while the system is artificially maintained, the consequences — including corroding standards of living — must be borne by society as a whole"). So this is a little confusing to me - what is the artificial maintenance and what are these consequences? I guess I'll assume he means that the "artificial maintenance" is the tax treatment of employer benefits, and now the insurance mandate. It's clear how "society as a whole" bears some of the cost for that - since society is subsidizing the insurance through the tax system. How does "society as a whole" bear the costs of the mandate, though? That's less clear and Jonathan doesn't explain. I would have thought that only the portion of people who did not want insurance and were forced to buy it would bear the costs above their reservation price for that insurance. I suppose the rest of society would bear the costs through higher premiums (although this is tricky too - premiums for a specific class of insurance are projected to be lower). This was a bit more difficult to swallow: "The only solution is that which is provided by the free market, where the consequences of one individual’s actions are internalized less [sic] he provoke some form of reaction by another individual." Why is the market assumed to internalize costs? It's never explained. It's not that I disagree with the proposal - I've come out on this blog against the tax subsidy for employer benefits and against the mandate. We may have lingering disagreements over Medicaid, but those would not be disagreements over the economics of the program. I'm not aware of major externalities in the health care market - I think the biggest problems are information problems, not externality problems. I guess I just feel uneasy that Jonathan associates markets with internalized costs. That's a blatantly misleading association (although it's probably OK in this specific case)*.

3. Externalities and the government. In the next section, Jonathan makes a leap from health care to socialism and provides what I think is a very interesting analysis of the externalities of socialism. Usually when we think about the economic consequences of socialism, we don't think in terms of marginal costs and marginal benefits. Why? Because there is no market exchange so there's no point in setting MC equal to MB! So you don't usually hear talk about externalities with respect to socialism because it's hard to talk about externalities without talking about marginal costs and benefits. Jonathan's point is essentially that under socialism all benefits and costs are externalized. It's just another way of saying that socialism has no rigorous way of optimizing outcomes. Is this strictly true? Probably not strictly. You still pay for things in socialist states, so a portion of the cost is internalized if for no other reason than inertia nad institutional practice. But without the market process, of course, there's no way to guarantee that goods are priced in the right way. I think this is all a very interesting way of talking about socialism.

Jonathan then jumps back from socialism to health care. This gets confusing again, primarily because I'm not exactly sure what Jonathan means by "socialization/collectivization" in health care. He's making reference to welfare programs again, too - which I think are a different question entirely. As I said above, I agree with him on the tax subsidy and the mandates, but I'm concerned he's acting as if "socialization of risk" is the same "socialization" as the involuntary socialization of socialism. That muddies the waters, I think - I don't think they're the same thing. Jonathan writes, for example: "This is because, given the axiom of purposeful human action, people will economize their use of a particular based on its price. For example, if the price of a short medical check is $35, it might lead to an individual abandoning certain reasons he may have to go if the price was $25." It seems to me, though, that the biggest thing reducing what you pay for a proceedure on the day that you get that proceedure is all the insurance premiums you've paid. That's socialization. That's collectivization. But it's voluntary socialization. I'm not sure if Jonathan is arguing that that's bad. I'm just concerned because some people have argued that that's bad. In the end, Jonathan frames it as a moral issue - is it worth it? - and I think that's the right way to frame it. I don't think there's any ethical justification for universal health care, subsidization of employer plans through the tax system, or mandates. I do think there's ethical justification for ample subsidies for low income families, as well as perhaps an unsubsidized public plan (why not?).

At the end, Jonathan introduces this very bad claim that markets internalize costs. They don't, necessarily - but when costs are internalized markets work very well. But there's no guarantee that costs will always be internalized, and Jonathan shouldn't talk as if there is such a guarantee. This, for example, is as bad as Mises's piece: "Only through the free market can individuals innovate and labor to internalize both benefits and costs, and therefore only through the free market can externalities be resolved." And while we're on untrue statements, this is also poorly reasoned: "To assume that a free market in healthcare would not provide demanded services to potential customers is to assume that the individuals who compose this market operate irrationally."

So I think the discussion of socialism here is excellent. The discussion of health care is good, but it's vagueness made it hard to evaluate in detail - if he's talking about subsidization and mandates alone, I would agree - if he's talking about collectivization in health care in general, I think he's slightly off-base.

*In this section, Jonathan cites Mises on externalities. I wrote about this piece by Mises extensively here, and I encourage people to go back and read it. The sections Jonathan quotes about property are fine, but the rest of the piece was quite bad, in my opinion.

Richard Serlin on the Optimal Size of Government

Richard Serlin has a great post on the optimal size of government (HT Brad DeLong). He talks a lot about the sort of pervasive "market failures" that aren't immediately obvious - he mentions asymmetric information specifically. I've talked here before about what I call "temporal autarky", which distorts any sort of intertemporal calculation. The point isn't to drop the market, of course. The market is still by far the best resource allocator available. But there are major underinvestments that we'd expect to characterize the market, which means that even in a market economy a minimalist state is completely unviable.

Serlin also makes some great points about data insufficiencies that I think Mattheus and Jonathan could appreciate after recent discussions of the adequacy of GDP. I still think our output measures are fine and important - as long as they're used for what they are designed for - treatment as a "national income and product account". But Serlin, quoting Paul Romer, notes that there are a lot of other important things to look at that are a lot harder to measure. Romer sounds a lot like Deirdre McCloskey in the sections that Serlin has quoted. If any of you are familiar with McCloskey's work on statistical significance you'll know exactly what I'm talking about.

In which Mises demonstrates that he does not understand externalities or the arguments of economists who talk about externalities

Commenter Barbarossa asks me for my opinion on this selection from Mises on externalities, as well as examples of cases where I think Mises is vague and confused. Thankfully, I'll be able to kill two birds with one stone.

Mises actually starts off quite well. The whole first half of the piece is fine (with the exception of the first paragraph which offers an odd little romanticist, inverse-Marxist genesis of the state). I was initially thinking my only comment would be to raise a few critiques of the coercion of tort law. Mises leads with a pretty standard explication of externalities, but then it all starts to head south when he lists "two alternatives" facing a market actor considerin a positive externality. This was the tip-off for the degeneration of the piece, and this is precisely where Mises could use some of Tom Sargent's precision. Mises offers two options:

1. The agent enjoys the project in question so much he'll do it anyway even if it means giving away free benefits to the "gullible masses" (Mises's words lower down - not mine), or

2. One person alone can't benefit enough from the project so it's not done unless many people band together.

What could clean this up that math might help with - where to start. Three things come to mind:

a. A little aggregation that recognizes we're never talking about a single investment decision but a family of similar investments

b. A distinction between extensive and intensive margins, perhaps, and

c. Marginalism anyone?!?!?! Menger would be rolling in his grave if he read this selection.

It's not just that there's no math. That's not necessary. I talk about these issues all the time on here without using any math. There's the complete absence of an understanding of any of these concepts in the discussion and it shows as you continue reading.

"A project P is unprofitable when and because consumers prefer the satisfaction expected from the realization of some other projects to the satisfaction expected from the realization of P. The realization of P would withdraw capital and labor from the realization of some other projects for which the demand of the consumers is more urgent. The layman and the pseudoeconomist fail to recognize this fact. They stubbornly refuse to notice the scarcity of the factors of production. As they see it, P could be realized without any cost at all, i.e., without foregoing any other satisfaction. It is merely the wantonness of the profit system that prevents the nation from enjoying gratuitously the pleasures expected from P."

OK, here he has completely abandoned his earlier points about externalized benefits. He says essentially that consumers prefer other projects with higher internalized benefits, and then goes on to blame "the layman and pseudoeconomist" for the alleged crime of ignoring opportunity costs - when the real problem is that Mises himself forgets what he wrote just a few paragraphs earlier about external benefits. He blames other economists (or in his passive-aggressive words, "pseudoeconomists") for something as ridiculous as ignoring opportunity costs (who is guilty of this? of course Mises never says*) when he forgets the problem he identified in the first place with the consumers' choice to forgo projects with externalized benefits. He says the unnamed "laymen and pseudoeconomists" think that the project could be realized "without any cost at all". Excuse me? And you all blame Keynes for erecting strawmen? Who, precisely, thinks this? Can anyone provide an answer? Barbarossa?

He goes on to describe the mainstream response - a little ham-fistedly but more or less accurate, and then continues:

"For every unprofitable project that is realized by the aid of the government there is a corresponding project the realization of which is neglected merely on account of the government's intervention. Yet this nonrealized project would have been profitable, i.e., it would have employed the scarce means of production in accordance with the most urgent needs of the consumers."

Once again, he completely forgets what he himself wrote about externalized benefits at the beginning of this piece! The alternative project is only profitable because of the distortion of the property rights regime. Profit maximizing is not the same thing as welfare maximizing. Profit-maiximizing means that you've made all the tradeoffs necessary to maximize all internalized net benefits. Mises is essentially complaining that "these mainstream economists are wrong when they try to maximize total net benefits because now they're not maximizing internalized net benefits!". Who the hell cares about maximizing internalized benefits? In what universe does that meet any sort of reasonable welfare criteria? It makes zero sense. He goes on:

"The gullible masses, who cannot see beyond the immediate range of their physical eyes, are enraptured by the marvelous accomplishments of their rulers. They fail to see that they themselves foot the bill and must consequently renounce many satisfactions they would have enjoyed if the government had spent less for unprofitable projects. They have not the imagination to think of the possibilities that the government has not allowed to come into existence."

A twofold confusion on Mises's part here. First, he assumes strict crowding out. Of course you can never assume that. But let's say we're at full employment of all factors of production and you can assume that. Again, he's essentially saying "these mainstream economists are wrong when they try to maximize total net benefits because now they're not maximizing internalized net benefits". If he had any rigor in his writing. If he at all applied what he should have learned from Menger, that is how this paragraph would have read. That is what he is saying - and that is absurd on its face. Any undergraduate that pays attention in micro would laugh at that. The concluding three paragraphs just work through the crowding out theme, and doesn't require much treatment. If crowding out is going on and there's no legitimate externality then of course Mises is right - it's elementary.

Mises demonstrates that he (1.) doesn't understand marginalism, (2.) doesn't understand or at least can't apply the concept of externalized costs and benefits, (3.) doesn't understand what other economists argue, and (4.) makes extremely cavalier assumptions about things like crowding out. This is very sloppy economics.

I have read reams of Hayek that I've found quite enlightening. Some Hayek I thought he put the emphasis in the wrong place, and in a few points (mostly methodological, as I've said before) I think he's actually wrong. The same with Rothbard, actually. I've read a lot that I like from him - he most definitely puts the emphasis in the wrong place in many instances and he has Mises's flare of being entirely ignorant of what the opposition thinks (or at least if he's cognizant of what his opposition thinks, he strawmans it for rhetorical purposes - which may be the case). I've never had this feeling with Mises. I've read a couple chapters of Human Action, a chapter or two of Liberalism, and the odd essay of his that gets thrown up on Mises. So as Mattheus regularly points out, I really don't know Mises. But in what I have read I've come across nothing of value yet, which has not been my experience at all with Hayek, with Rothbard, with Garrison, with Ropke, with Lachmann, or with any of the GMU crowd (Don Boudreaux is slim pickings, I must admit though). I sincerely do not understand why Mises has the following that he does.

I have no inclination at all to read one of Mises's books - but please, pass on selections from him and I'm happy to read and review them like this. I like to like people. It would be great to say "hey that's a good point" to something other than his ability to start an essay by correctly defining "externality" or explain something as basic as opportunity cost. This is not a promise to read whatever you suggest - so if you suggest something, give me a good reason why.

And while I did not find much of value in this piece, I do want to express my gratitude to Barbarossa for sharing it with me.

*Mises is not the only Austrian guilty of this bizarre, uncited accusation regarding the opportunity cost of factors of production. A couple weeks back Steve Horwitz at Coordination Problem, asked "Other than EWOT [Economic Way of Thinking, an Austrian textbook], how many intro books derive the supply curve using an approach that emphasizes the rising marginal opportunity cost of alternative uses of the inputs?" My immediate reaction was "how the hell do you get a supply curve without talking about the opportunity cost of alternative uses of inputs?" I couldn't even conceive of what an alternative explanation would be. I promptly found ten textbooks that talked about it. It wasn't hard because... well... every textbook on the market talks about it. Why do Austrians think other people ignore this stuff? Why do Mises and Horwitz accuse others of ignoring it without any evidence that they do? When they spread untruths like this, you get younger Austrians running around spouting complete fabrications about "mainstream economics".

Another Oil Platform Explodes

In the Gulf. Three important questions:

1. Was this a drilling rig? [UPDATE: No, not at the time]
2. Who owns the damn thing?, and [UPDATE: Mariner Energy]
3. How did it explode?

[UPDATE: And apparently no deaths either. Updates are coming in regularly - keep clicking through. This doesn't sound like a large concern, but it will certainly reinvigorate the debate.]

Hopefully we'll get answers to all three shortly.

I swear - if companies don't stop blowing things up in the middle of unappropriatable commons I'm going to have to abandon the macroeconomics of labor and make a career out of the microeconomics of externalities.

"Locavores" and Libertarians, Part 1

In the comment section of this post, Evan inquires about my reference to the sometimes rough relationship between libertarian bloggers and the "buy local" movement. I've seen lots of posts on this over time, particularly on Cafe Hayek, but the recent series of posts started with Stephen Landsburg's post (cleverly interchanging "loca-" with "loco-") suggesting that locavores are wrong because more often than not, locally grown produce is more energy-intensive than non-locally grown produce (this shouldn't be too surprising to people who know about comparative advantage and scale economies and can put the two together for both agriculture and transportation). Don Boudreaux follows up on it here, and Arnold Kling follows up on it here. Their argument rests on the basic point about the information content of market signals. Markets know more than locavores about the costs and benefits of different food production, so when locavores eschew non-local foods they are somehow going against the market. I have two main complaints about this criticism - the first is economic, and the second is more philosophical.

First, the whole problem with the market for carbon is that the market doesn't have reliable informational content, as it doesn't with any product where externalities prevent markets from accurately communicating information. That doesn't make locavores who make the energy efficiency point right - I wouldn't be surprised at all if locally grown food was still more energy-intensive despite the externality problems associated with pricing it. I simply wouldn't go out on a limb to defend the market on accurately pricing anything having to do with fossil fuels. It seems a little odd, though, that Kling and Boudreaux are criticizing locavores for ignoring market signals even as they participate in a market. Clearly they use market signals, and they have different assessments of the value of non-locally grown food than Kling and Boudreaux do, and they act in the market accordingly. Most locavores don't eat entirely locally grown food. I don't even come close. Usually the margin I'm concerned about is price. I'm much more likely to purchase locally grown vegetables than meat because it's a cheaper product in which I can express my localist preferences. Crabs I often buy locally, other meat less often. I buy wine and beer from local producers far more often than I do from non-local producers. I'm taking my subjective value judgements to the market and interacting with market signals in all of these purchases. Nobody is bucking market judgements of the cost of non-locally produced foods. It's just not the only information that people use. The other side of the market process is consumer demand. So the juxtaposition of locavores and market signals was a little odd in that respect.

The second critique I had is actually my primary critique: people who buy locally generally speaking don't do it for energy-intensity reasons, in my experience. Maybe there are some environmentalists that give this justification primacy (although even for them I doubt it's the only reason), but I really don't get the sense this figures very prominently. I certainly don't - I don't get the impression Evan does - I've never heard the friends I mentioned in the previous blog post bring the energy-efficiency point up. In fact, it's precisely the energy intensity of local production that is praised in many circumstances. There's an ethic to the work involved in small-scale, unmechanized farming. There's an ethic to the work involved in gardening. The additional work of craft production is seen as a labor of love - a humanizing toil. It's the "shop class as soulcraft" idea. I could understand why people who live and breath neoclassicism might get confused about how to incorporate this subjective value into a framework where leisure is always considered a "good" and labor is always considered a "bad", but I'm surprised so many self-styled Austrians or Austrian sympathizers are tripping over this point.

Aside from the simple points that (1.) the market may very well be wrong in its pricing of carbon, (2.) just because you have subjective values doesn't mean you ignore the market, and (3.) in some cases energy and work-intensity is considered a feature, not a bug, there seems to be a lot Landsburg, Boudreaux, and Kling don't understand about the motivations for localism. My impression is that the major drive behind the movement is to personalize and diversify production and make local communities and social interactions more robust and fulfilling. One of the things our friends liked about the local cheese cake shop they told us about was that they knew both of the proprietors. I think I'm going to take this community-building point up in a subsequent post, because it's been featured on Cafe Hayek recently as well, and it's really a post in itself.

Space Economics

Excellent short article on the economic payoffs of NASA.

This is why (to my ears at least) when you argue that big externality-ridden, public goods like space exploration shouldn't be done because "if they were worth doing some private actor would have put his money on the line" you sound really, really dumb. This article deals mainly with the technology spin-off benefits which are hard enough to measure for the same reason that the benefits of information and research have always been hard to measure. It doesn't even begin to incorporate the economic benefits of making the human race an inter-planetary species.

And when you don't have costs and benefits markets don't function in the efficient way we apprecaite them functioning.