Monday, May 31, 2010

Sunday, May 30, 2010

Ability to Pay and the Efficiency of the Market

Mattheus von Gutenberg has put a lot of time and effort into exchanging thoughts with me on subjective valuation, prices, and the profit motive in recent posts. We agree broadly on subjective valuation and on the efficiency of the price mechanism. I think it's fairest to say that we disagree on the extent to which there are exceptions to the efficiency of the price mechanism, rather than on the question of the efficiency of the mechanism itself. I see markets as succeeding at specific goals under specific circumstances, with these goals and circumstances holding close enough to true to in most circumstances to make markets applicable to a huge range of human action.

But there are limits and issues to be considered. In my series of posts on calculation vs. incentive problems, I highlight the importance of incomplete property rights regimes for considerations of when state action may be more efficient than market action. Contrary to the imputations of some commenters, I'm thinking of instances where the state can augment market investment and allocation, rather than substitute for it. I've also alluded to times where we think a prioritarian ethic might take precedence over a strict utilitarian ethic. Markets cannot satisfy prioritarian goals, because the price mechanism doesn't distinguish between the utilities of different persons.

I have been too busy to respond to detail to his most recent posts, but I wanted to highlight one thought I had in relation to this point that Mattheus makes:

"Certain types of allocation? The price system is the only tool EVER designed to allocate resources to any modicum of efficiency. It is a procedure that has unbelievably obvious success in meeting needs. If you are going to make a product or service to meet the needs of some people, and you do not use the price mechanism - what other recourse do you have? How can you possibly do it efficiently?"

As a side note, I would disagree with the Mattheus that the price mechanism is "designed", but that's another matter entirely. This point reminds me of a long-standing concern about markets that I've had, which I've never had the time to think through carefully. My question is simply: what about needs and demands that are correlated with a person's ability to pay?

We use examples about the relative demand for apples and oranges, and the way that the price mechanism coordinates the needs and demands of millions of people for apples and oranges, but we leave the question of income curiously vague. We act as if one person who subjectively values an apple more than another person will offer to pay more for that apple, but this of course isn't necessarily true at all. The prices we offer for goods is not only a function of our subjective valuation of that good. It's also a function of the income we have available to spend on that good. Writ large, this of course is an insight straight out of Keynes. But it also has important microeconomic consequences.

My family makes a fairly healthy income, and I feel no uncertainty at all that our standard of living will only improve over time. What I will be willing to pay for things is going to be informed by this. It's entirely plausible that I would be willing to pay twice as much for the same orange as a lower-income family standing next to me in the grocery store, despite the fact that I actually prefer apples to oranges (I'm getting a variety of produce), and in fact that other family values oranges more highly than I do. I haven't been able to think through the implications, but this would seem to throw a monkey-wrench into the efficiency of the price mechanism. How can the market communicate information about subjective valuation if those subjective valuations are mediated through a person's ability to pay? Prices are at the very least communicating information about both subjective valuation and ability to pay. Maximizing total subjective valuation is what we always like so much about the market - but what are the implications if we're actually maximizing a combination of subjective valuation and ability to pay?

From a general equilibrium perspective, of course, ability of pay is closely related to a worker's marginal productivity (how much they earn in the labor market). In that sense, it's not entirely disconcerting that the price mechanism in the product market is going to reach a general equilibrium with the price mechanism in the labor market (which is ultimately a major determinant of ability to pay). But it's not that simple. Ability to pay is also largely determined by the circumstances of birth, genetics, and the willingness of parents to make investments in their children.

Regardless, the importance of the ability to pay in mediating the willingness to pay is something that I don't think has been sufficiently considered by economists. The ultimate effect is that people who have a higher ability to pay will be treated by the price mechanism as if they have a higher subjective valuation of goods and services by virtue of their higher willingness to pay.

Madison the Flip-flopper

Commenter Xenophon shares some great material on the varying perspectives on internal improvements in the early republic in the comment section of an earlier post.

He first reminds us of the 1815 address to Congress by Madison, where he praises state and private internal improvements and suggests that "the general government is the more urged to similar undertakings, requiring a national jurisdiction, and national means, by the prospect of thus systematically completing so inestimable a work," confident that "any defect of constitutional authority which may be encountered, can be supplied in a mode which the Constitution itself has providently pointed out."

Madison's position on federal support for improvements of course quickly soured, so that by 1817 he delivered an altogether different message to Congress:
"I am not unaware of the great importance of roads and canals, and the improved navigation of water-courses; and that a power in the national legislature to provide for them might be exercised with signal advantage to the general prosperity. But seeing that such a power is not expressly given by the constitution; and believing that it cannot be deduced from any part of it without an inadmissible latitude of construction, and a reliance on insufficient precedents; believing also that the permanent success of the constitution depends on a definite partition of powers between the general and the State government, and that no adequate land-marks would be left by the constructive extension of the powers of Congress, as proposed in the bill, I have no option but to withhold my signature from it; and to cherishing the hope that its beneficial objects may be attained by a resort for the necessary powers, to the same wisdom and virtue in the nation which established the constitution in its actual form, and providently marked out, in the instrument itself, a safe and practicable mode of improving it, as experience might suggest."
Madison even brushed aside the relatively minor concerns that Jefferson had proposed to Gallatin about a decade earlier, that the states should grand permission for federal involvement in their own infrastructure projects. Madison, in 1817, was of the opinion that:
"If a general power to construct roads and canals, and to improve the navigation of water-courses, with the train of powers incident thereto, be not possessed by Congress, the assent of the States in the mode provided in the bill cannot confer the power. The only cases in which the consent and cession of particular States can extend the power of Congress, are those specified and provided for in the constitution."
This transition is well known and well understood. It would be as foolish to pretend that Madison always harbored his 1817 opposition to federal support for internal improvement as it would be to suggest that he never did. Of course we here at Facts and Other Stubborn Things were not the first to notice the discrepancy. Andrew Jackson did as well. Andrew Jackson had the advantage of being a contemporary of Mr. Madison, and he used this opportunity to ask his vice President, Martin van Buren, to write to Madison in 1830, asking him to clarify the position he staked out in 1817. He of course begins with the requisite deference, expressing the president's "regret that he has misconceived your intentions in regard to the veto of the Bill for internal improvements in 1817". Madison begins his response by discussing the general problem of guaranteeing that provisions for the general welfare remain genuinely "general," and then gets into internal improvements specifically. He writes to van Buren:
"In defraying the expence of internal improvements, strict justice would require that a part only and not the whole should be borne by the nation. Take for examples, the Harbours of N. York and New Orleans. However important in a commercial view they may be to the other portions of the Union, the States to which they belong, must derive a peculiar as well as a common advantage from improvements made in them, and could afford therefore to combine with grants from the common Treasury, proportional contributions from their own. On this principle it is, that the practice has prevailed in the States, (as it has done with Congress) of dividing the expence of certain improvements, between the funds of the State, and the contributions of those locally interested in them. [emphasis mine]"
Madison's thoughts are full of the logic of externalities, as I had pointed out with the Dorfman piece on internal improvements earlier. However, Madison's constitutional concerns remain:

"I have, as you know, never considered the powers claimed for Congress over Roads & Canals, as within the grants of the Constitution. But such improvements being justly ranked among the greatest advantages and best evidences of good Govt., & having moreover, with us, the peculiar recommendation of binding the several parts of the Union more firmly together, I have always thought the power ought to be possessed by the Common Govt., which commands the least unpopular & most productive sources of revenue, and can alone select improvements with an eye to the national good. The States are restricted in their pecuniary resources, and Roads & Canals most important in a national view, might not be important to the State or States possessing the domain & the soil; or might even be deemed disadvantageous, and, on the most favourable supposition might require a concert of means & regulations among several States not easily effected, nor unlikely to be altogether omitted

These considerations have pleaded with me in favor of the policy of vesting in Congress an authority over internal improvements. I am sensible, at the same time, of the magnitude of the trust, as well as of the difficulty of executing it properly, & the greater difficulty of executing it satisfactorily."

So how to reconcile his constitutional concerns with the "justice" he sees in a portion of internal improvements being paid for by the federal government? Madison offers a surprisingly modern solution, anticipating federal highway funding:

"On the supposition of a due establishment of the power in Congress, one of the modes of using it might be, to apportion a reasonable share of the disposable revenue of the U. States among the States to be applied by them to cases of State concern; with a reserved discretion in Congress to effectuate improvements of general concern, which the States might not be able or not disposed to provide for."

This proposal mirrors the initial point about the best way to guarantee that the general welfare is truly general. Madison, acknowledging some risks to the strategy, had suggested simply distributing the money among the states. This whole response to van Buren to me still sounds more like the Madison of 1817 than the Madison of 1811 or 1815, but there is at least some sort of effort to take a step back from his 1817 position. How did vice president van Buren respond? Well, his only veto as president was of a bill to appropriate money to help distribute copies of James Madison's papers. I'll allow readers to interpret that as they choose.

Saturday, May 29, 2010

Madison on Canal Improvements, 1811

On the 23rd of December, 1811, perhaps early on a crisp but clear winter morning (as they tend to be in this area), James Madison quickly penned this letter to the Congress and enclosed it with the message he had recently received from several distinguished New Yorkers, including Gouvernuer Morris, De Witt Clinton, Robert Livingston, and Robert Fulton. The men had written the president indicating that they "crave... the credence and favorable notice" of Congress on the matter of a canal project underway in New York. Madison, as he had always been, was enthusiastic about the prospect of such internal improvements which had gained so much attention after Secretary Gallatin had published his report on the subject in the waning years of Jefferson's administration. The president's communication to Congress reflected this enthusiasm, but hurriedly, perhaps because Madison himself would soon be traveling in the direction of his famous predecessor in office. He wanted to make it to Montpelier before Christmas, and given the uncertain condition of the roads, travel could at times be dubious. Madison may very well have expected to see his friend Jefferson over the holiday season, and would have been excited to share the plans for the proposed New York canal with him. A canal in upstate New York would provide the elusive Potomac canal with stiff competition for Western trade, something that all scions of the Old Dominion feared. But the boon to the Union would be undeniable, and the revived interest in canal building held out hope for the old Potomac project spearheaded by Washington himself so many years ago.

Madison, looking forward to seeing his estate and his old friend again, sat down and wrote on that crisp winter morning so that he could pass on the New York peititon to Congress and begin his journey west:

Washington, December 23, 1811

To the Senate and the House of Representatives of the United States:

I communicate to Congress copies of an act of the Legislature of New York, relating to a canal from the Great lakes to the Hudson river. In making the communication I consult the respect due to that State in whose behalf the commissioners appointed by the act have placed it in my hands for the purpose.

The utility of canal navigation is universally admitted. It is not less certain that scarcely any country offers more extensive opportunities for that branch of improvements than the United States; and none, perhaps, inducements equally persuasive, to make the most of them. The particular undertaking contemplated by the State of New York, which marks an honorable spirit of enterprise, and comprises objects of national, as well as more limited importance, will recall the attention of Congress to the signal advantages to be derived to the United States from a general system of internal communication and conveyance, and suggest to their consideration whatever steps may be proper, on their part, towards its introduction and accomplishment. As some of those advantages have an intimate connexion with arrangements and exertions for the general security, it is at a period calling for these, that the merits of such a system will be seen in the strongest light.

James Madison

Friday, May 28, 2010

Anonymity is for losers.

Daniel and I prefer to operate in a relatively easy-going manner about comment policies; we're not into moderation or any sort of censorship.  Folks can pretty much say anything around here and they're not going to offend us enough to reap any sort of administrative action.  One thing that does get unwieldy, though, is when there are tons and tons of anonymous posters.

While I think that posting under one's own name is usually best because of the restraint it puts upon a person to own up to their words, I know that sometimes this personal attention is troublesome, risky, or even dangerous.  So I get the reasons why people post anonymously (although our conversations have never struck me as heated enough to really worry about such protections).  But when we have long threads of conversation in the comment section, or regular return visitors offering their thoughts on a variety of topics, it can be incredibly confusing when half of them have the same non-name.

I'd encourage readers of this blog to post with their real name, at least their first name, unless there's a genuine reason not to do so.  By approaching blogging in this way, a real conversation is better fostered.  Even a pseudonym, if you aren't comfortable with a real first name, would make things a lot more straightforward.  This isn't going to be a rule or anything, but I thought it would be worth making the plea to people.  Perhaps in the future I will shamelessly conflate the arguments of multiple anonymities in a comment section.  As I see it, you're asking for that sort of misreading when you post namelessly.

Clean-up/Cover-up... the BP oil disaster.

Mac McClelland has an article in Mother Jones about clean-up efforts following the BP oil disaster of a month ago.  The extent to which BP is manipulating the local government and the press is worth noting and passing on for others to read.  More to consider as they try to plug the damn hole... I suppose we are beginning to see some media trickle about what "do everything possible" really means for Big Oil Execs.

In BP's defense, we need to remember that this is a complex process.

Scott Kuhagen is blogging

I wanted to alert everyone to a new blog by an old classmate of mine, Scott Kuhagen. I went to high school and college with Scott, and have always been impressed with the guy's brain. He is an LSE alum and currently a law student (Temple), and it looks like he'll be blogging about law for the most part. He spends a lot of time thinking about immigration issues, but his posts so far look quite broad.

And speaking of blogs, I'm ditching the classical liberalism blog I started. It's not that I don't think it's an important project, it's just that (1.) I was running it as a link farm and there's actually not a lot of good regular blogging on the nature and composition of the classical liberal tradition - or at least I haven't turned it up with my searches to any extent that's going to allow thematic posting on a regulat basis, and (2.) the readership here is interested enough in these questions that if I ever have thoughts on the parameters of classical liberalism I can always talk about it here. I knew it might end up being a dud - turns out it is.

Who needs the 17th amendment, anyway?

Marc Ambinder skeptically describes one of the pet projects of the Tea Party movement: the repeal of the 17th amendment, initially passed in 1913, which required the popular election of U.S. Senators. Before the 17th amendment, Senators were elected by state legislatures. The argument goes that repealing the 17th amendment would restore states with the power to protect their interests from federal encroachment. I don't think very highly of the Tea Party movement for the most part, but this is actually something that I have always been quite supportive of. It's hardly at the top of my "to do" list, and I don't feel particularly oppressed by a popularly elected Senate, but I do think this change would remedy not only some of the dysfunctions of the federal government, but some of the dysfunctions of state governments as well.

One of the things that I think is important to keep in mind is that this probably won't change the ideological makeup of the Senate very much. There are very liberal state legislatures out there and very conservative state legislatures. If the 17th amendment were ever actually repealed, you can be confident that voters would pay even closer attention to state-level elections, making the electorate voting in the state legislature fairly comparable to the electorate that used to vote in Senators. What it will do is produce a Senate that is more cognizant of the relationship between the federal government and the state, regardless of ideology. In 1996 it was innovative and unusual to give the states such free reign over welfare policy. Unfortunately, the same sort of federalism was not apparent in the recent health reform. A Senate composed of representatives of the state legislatures would be expected to guard the freedom of the states to differentiate themselves on issues of domestic policy on a more regular basis.

With these new found responsibilities and freedoms, hopefully we would start to see states better equip themselves to solve the problems of their citizenry. We would hopefully see less of the non-sensical disconnect between revenue and spending policy apparent in states like California. Fewer states would constrain themselves with dysfunctional balanced budget requirements if they were on the front lines of policy, rather than the faceless provincial administrators that they largely are today. Stronger federalism, such as that which would likely result from repealing the 17th amendment, means a more robust American political economy, decision making that is closer to the citizenry, and a flexibility in policy making that isn't available when the federal government dominates every decision.

Of course, while bringing more decision making closer to the people, this reform would also reduce popular control over the federal government. Is that trade-off worth it? It's hard to say for certain. I'd guess a Senate appointed by state legislatures would probably be less likely to sabotage the popular will with (excessive) filibusters and (obstructive) parliamentary procedure. In that sense, an appointed Senate may actually improve the representativeness of Senate decision making, which today is more often than not held hostage by party leaders.

It's hard to predict exactly how this would go. It's a radical change, to be sure, but I don't think it's as ill-conceived as a lot of people suggest.

Subjective Value and Allocation

In the comment section of another post, Mattheus von Guttenberg writes:

"As far as the subjective decisions made in government, the word you're looking for is arbitrary, not subjective. Government projects do not rely on profit and loss so they have no way to really KNOW which project is profitable and which isn't (which is just another way of saying they have no way to know what the consumers want). They always operate in the dark and so any decision they make is an arbitrary stab."


"if you were forced into buying oranges, even after weighing the incremental gain you achieve from buying apples, then the group that is using force is expressly declaring that "Your purchase of oranges meets some higher standard than your purchase of apples, thus my use of force is justified." This is what I mean by objective value. This group assumes that the purchase of oranges meets a higher, more enlightened (or more necessary, etc.) value because it is for whatever purpose they ascribe to it. No longer are you allowed to resort to the subjective decision making process that so well fulfilled you in the earlier episode. The coercive group arrives at the arbitrary (meaning not guided by profit and loss) decision to enforce the purchase of oranges on everybody. It assumes everyone values oranges higher than apples. They are declared objectively more valuable."
I think where Mattheus is confused is in conflating three very different things here: (1.) the information that is used as an input to some allocative decision making process, (2.) the allocative decision making process itself, and (3.) the goal of a decision making entity. He talks as if profit maximization and the price mechanism are the same thing, and then later talks about a "subjective decision making process" as if subjective valuation and the price mechanism are the same thing. He muddies everything up, and while this post is going to be somewhat esoteric I wanted to straighten the discussion out a little.

First and foremost, the way that we as modern human beings interact with the material world is through subjective valuation of objects. Our preferences and the utility that we derive from objects determine their value to us. This is the information that we bring to the table whenever we make decisions about allocating objects. If you think about it, though, this is information that we use in a variety of settings outside the market setting. Think of all the material objects that are allocated throughout your life. Now ignore two types of allocation: (1.) market allocation, and (2.) allocation by the state. So for now, ignore buying food from the store, but think about allocation of who prepares food in your household, who eats it, how much food you give away. Ignore for a moment buying a book from a bookstore, but think about choices you make about what book to read tonight, what book to lend to a friend, what book to donate, or what book to give as a gift. Ignore the Social Security checks that your grandmother gets, but think about the money she gives in a card on Christmas or the poker game that you bet that cash in.

Mattheus speaks as if the market process and the price mechanism are somehow definitive of subjective valuation, or that if you don't use the market process you don't use subjective valuation. But if you go through this thought experiment, momentarily become a doctrinaire materialist that sees nothing but material objects and their allocation, and ignore all the market and government processes, there's still a lot of allocation going on. In Mattheus's world we'd be lost without prices and the market, but somehow we seem to manage, don't we? And everyone knows that their subjective valuation informs these decisions too. My wife and I are moving to a new apartment soon, so we're donating a few things to downsize our stuff, and we're packing other things up. What I do and don't donate depends on how I subjectively value what I own. How carefully I pack things up is a function of both how durable the object is and how much I subjectively value the integrity of that object. These are all allocative decisions I'm making quite successfully without the market.

So what is the market? What's great about the market and prices is that they provide a mechanism for coordinating lots of people's subjective valuations. When you consider how to spend your "marginal" dollar - your next dollar - you consider the subjective value of all the potential marginal purchases you could make. A rational agent is expected to purchase whatever object has the highest marginal value (as long as your marginal valuation of the money itself doesn't exceed the marginal value of that object). If the marginal value of that object continues to be higher than the marginal value of your money, you're going to keep purchasing the object in greater quantity until it isn't anymore. Prices will adjust with supply and demand - so where the price finally reaches equilibrium we know that everybody that purchases that object places the same subjective marginal valuation on it, and that they have had the opportunity to purchase their highest subjectively valued material object that they can afford (that's available for sale at least). This ensures that objects are efficiently allocated, and that is the primary advantage of the price mechanism. We know that no one who places a higher marginal subjective value on an object is left unsatisfied, and we assume that whoever doesn't end up having the object allocated to them assigns a lower marginal subjective valuation to it. That's a good thing, because presumably maximizing total subjective valuation is something we like to have happen.

So the price mechanism is one process that uses the information provided by billions of individual subjective valuations, and it uses that information efficiently. But we know from earlier that it's not the only way to use subjective valuation information. Subjective valuation is not a decision making process, as Mattheus asserts. It is the informational input to several different decision making processes.

What about government? Does government use something different? Of course not. All valuation is subjective valuation. In the modern world at least, it doesn't make sense to go around thinking of things as having intrinsic, objective value. Nobody thinks something like "this chair is objectively worth twice as much as this desk". We may say "I find this chair to be twice as valuable as this desk", but the previous, objective valuation doesn't make sense and even governments that make value judgements don't assume any objective or intrinsic qualities about their value claims, do they? The government uses subjective valuation like every other person or institution. The difference is that it doesn't use the price mechanism to process that subjective valuation information and make these decisions. It uses a combination of electoral, political, and bureaucratic decision making mechanisms instead. Instead of the price, the government uses the median voter, or the majority or super-majority in a representative legislature, or the discretion of a bureaucrat to make allocative decisions. All of these mechanisms still use subjective value, of course. In a bad government that subjective value is the value of the leaders themselves. In a bad government electoral decision making doesn't mean much (if there are elections at all), political decision making is about rent seeking and personal gain, and bureaucratic decision making is also about rent seeking and personal gain. In a good government, the subjective valuation of the citizenry is informing each of these processes. In a good government, bureaucracies do careful studies and cost-benefit analyses of different options (or they contract the work out to organizations like the Urban Institute!). The reality of courses is going to be a mix of the two: bad and good governance practices. What actually happens in this allocative decision making process is the subject of Public Choice Theory in economics.

What are the consequences of the government not using the price mechanism? Well, it ultimately depends on what choices they're making. If they're deciding on how much steel should be produced and who should use it, eschewing the price mechanism can seriously impair decision making. We know that the price mechanism efficiently allocates resources to those who value it most. Anything other than the price mechanism is going to make mistakes. This is the old socialist calculation debate and economists are virtually unanimous on that debate. What if we're talking about a different decision - say, taking care of abused children or feeding the homeless? It's not clear how the price mechanism is going to efficiently handle these allocation decisions, right? The homeless probably place a higher marginal subjective valuation on food than I do, but their mental health condition, their ability to pay, etc. is going to be an obstacle to relying on the market to supply that food. We could rely on altruists to use the price mechanism to feed the homeless, but why would the subjective valuation of the altruist be expected to match up the subjective valuations of the homeless? A good rule of thumb is that if outside of government the market is not allocating a particular good, but some other institution like a church or a community organization is, then the government is probably not disadvantaged relative to the market in making that allocative decision. If the market were especially efficient at it, you would see more of those decisions made by the market.

The important take away point for Mattheus is that how we value things and what we do to use that valuation in decision making are two very different things.

Finally, what about profits? Profit maximization is simply a goal of firms, just like utility maximization is a goal for individuals. It's the impetus for action, in a way. Profit is just the excess of revenue over costs. You can be a state owned enterprise in a communist country and still be a profit maximizer. No one says those costs or that revenue has to be determined by market prices. You could also not care about profits at all - you could be a non-profit - and it has nothing at all to do with your participation in the price mechanism and the market economy. Non-profit organizations use the price mechanism when they purchase labor and equipment and when they sell things as well. They just don't care about profits! The Urban Institute pays me a competitive wage to keep me there, it buys paper and computers and rents the building. And we sell our services to the government and private foundations. Everything is the same as it would be for a for-profit contractor, except that all we care about is staying solvent! And we have for forty years now, and our product is in high demand in the market. Mattheus writes that since the government doesn't seek profits it doesn't know what projects are profitable. But this confuses goals. I think it's an open question whether simply being a profit seeker gives you any insight into what is profitable. But what Mattheus leaves unclear is what's so great about profits. My family doesn't seek profits. We don't try to maximize our income less our costs. What we try to maximize is our utility. There's nothing special about profit seeking. Government doesn't maximize profit either - it tries to maximize some sort of social utility, probably with a few prioritarian concerns mixed in. So?

Once again, Mattheus is conflating (1.) goals (like profits) with (2.) information (like subjective valuations), and with (3.) decision making processes (like prices or elections). These three aren't the same thing. We all basically use the same information - subjective valuation. But we use that information to pursue different goals with different allocative strategies.

We've been managing to allocate material objects for millenia - sometimes with the price mechanism, sometimes without. I think the price mechanism has a distinct advantage over all other allocative processes when it comes to certain kinds of decisions, but that doesn't mean the price mechanism is the only game in town.

So where does this leave us with the state, which was in a lot of ways the subject of the discussion in the comment section. It leaves the state, as with most non-market allocative mechanisms, somewhat ill-defined. This makes sense of course - economics provides the most detailed theories of the market - it hasn't focused as much of its time on the state. I was reading some of William J. Baumol's book Welfare Economics and the Theory of the State last night, and he had a great phrase for this unfortunate condition of our theorizing about the state. His epilogue was a question about the nature of the state: "The Wreck of Welfare Economics?". A lot of times it seems that way - that the state becomes possible where the market economy wrecks and breaks down. Advocates that don't think hard enough and critics who are more interested in pot-shots than critical analysis assume that means that whenever there is an externality or market failure, we're arguing that state action is always the right solution (for an example of this, see Anonymous's comments in the last internal improvements post and the weird ideas that he inexplicably ascribes to me). Of course barely anyone is making that argument, but that won't stop lazy scholars from characterizing the situation in that way. But it's still somewhat unsatisfactory isn't it? As it stands, the theory of the state largely consists of the wreck of and the inconsistencies that turn up in "normal" economics.

Thursday, May 27, 2010

Internal Improvements and Externalities in Dorfman

Joseph Dorfman (Murray Rothbard's dissertation advisor) wrote a seminal three volume history of The Economic Mind in American Civilization, covering the period from 1606-1919. I've been reviewing Dorfman's treatment of internal improvements recently, and found a good expression of the case for public works made in the early republic from an externalities perspective. He writes:
"Clay [Henry Clay], in amplifying this position of government aid, took to task the critics for following the visionary 'let alone' principle of the political economists and asserting that when the condition of society is ripe for internal improvements - that is, when capital can be invested in them with a prospect of adequate renumeration, associations of individuals will execute them without government aid. But this general maxim, Clay insisted, holds without exception only for old countries possessing a great accumulation of surplus capital. Greatest of the gainers from government aid for internal improvements would be the farmers, in cheaper transportation for their produce to market.
Lowndes [William Lowndes] accepted the general principle that the private direction of industry and capital would generally conform to the public good, but he did not admit that all public improvements must be supported exclusively by private subscription: Canals and roads are in every civilized country the object of government. Roads are usually supported by taxes. The policies flow from the general position that a public improvement would be profitable to the public, though not sufficiently profitable to private parties unless they receive government aid. The profits of a turnpike road are distributed among the stockholder, landlords, travelers; and, though a company constructing it might make only 5 per cent, the country might gain 10 percent."
Not surprisingly, the logic of externalities long pre-dates Pigou and formed the bedrock of early American support for public works and internal improvements. Dorfman goes on:
"The general measure was passed by Congress both in 1817 and 1818, but it was successively vetoed by two Virginia Presidents, Madison and Monroe, who now read the Constitution a little differently and more strictly than they had on previous occasions. They both expressed great sympathy for internal improvements but thought that Congress would have the power only through a constitutional amendment. Calhoun, on the other hand, said that he 'was no advocate for refined arguments on the Constitution. The instrument was not intended as a thesis for the logician' on which to exercise his ingenuity. It ought to be 'construed with plain good sense,' and he found accordingly that the power to raise money is not limited to the enumerated powers but to the achievement of the general welfare."
The last sentence stands out as a little odd, since the power to raise money for the achievement of the general welfare is the first of the enumerated powers (regardless of how you interpret the term "general welfare", there's no contesting the fact that the power to appropriate money for it appears as an enumerated power). This covers the territory discussed earlier on this blog about Madison's changing view of the Constitution with respect to public works.
Elsewhere, Dorfman considers Jefferson and Washington's advocacy of improvements of the Potomac River. Again, the argument is made on the basis of externalities - that the project will not just benefit shareholders, but that it will benefit all Marylanders and Virginians who will share in the Ohio trade. Indeed, it would benefit the Union itself, which would form a closer connection between East and West. Jefferson and Washington were both visionary men who found it reasonable to pursue the interests of the broader public and future generations. The point is, those interests aren't usually represented in the context of a market.
I think this question of the Constitutional amendment is worth exploring more. I'm personally still a little hazy on precisely what Madison and Monroe thought needed to be amended. What Jefferson thought needed amendment was quite clear: he was only concerned about state-level approval of federal public works. Jefferson's view was that the federal government did not have the authority to build in a state without the state's approval, not that it did not have the authority to appropriate money for approved public works. Is this all Madison and Monroe required? Or did they think (did they think in 1817 and 1818, that is) that the Constitution required even greater adjustment than that to accommodate federal public works?
And what is the practical difference between a clear majority that thinks the Constitution already provides authority to implement public works and a minority that wants the Constitution to provide that authority but doesn't think that it currently does? If the generations of Supreme Courts that have upheld public works projects and the preponderance of public understanding isn't enough on its own, isn't it reasonable to assume that if the skeptics like Madison and Monroe had been successful in proposing an amendment, it would have passed overwhelmingly? In other words - it seems to me the only reason why a more specific amendment isn't there is that so few considered it necessary, and those who did consider it necessary agreed in practice with those who didn't on the value and legitimacy of federal public works projects. Had more people considered the amendment necessary, is there any doubt that the amendment would have passed? So why should we be tyrannized by a very narrowly accepted interpretation of the Constitution which would have been amended into irrelevance if it had a been any less narrowly accepted?

Crozet's Map of the Internal Improvements of Virginia

"Plug the Damn Hole"

A little while back I considered responding to this post on Economic Thought, which argued: "Had BP been liable for all the damages done, I am sure that they would do everything possible to avoid similar accidents in the future."

The thrust of the post was great - Jonathan Catalán argued that limiting the liability of oil companies makes them less careful than they would otherwise have been. It's a point that co-blogger Mattheus von Guttenberg made more recently as well. That is all well and good, and it's an insight that broad swaths of economists agree on. But is it accurate to say that "they would do everything possible to avoid similar accidents in the future"?
I don't think so. One of the merits of markets is that they rarely converge on what economists call a "corner solution" - they never put all their eggs in one basket. Life is full of trade-offs, and a robust set of trade-offs usually means that the optimal choice involves a mix of different goods. BP's goal is to maximize profits. That is achieved by minimizing costs and maximizing revenue. You can't maximize profits without taking some risk that you're going to have another accident or spill, otherwise you'd be spending all your money on safety measures and none of it on exploration and production. Markets are great things but we can't ascribe things to them that they won't provide - and one thing they cannot provide is a single-minded pursuit of a particular end.
Of course, the government can provide this single-minded pursuit (or at least can come closer to it than a private company). Usually this isn't such a good thing! We like the market because it's so good at arbitrating tradeoffs between millions of different options. We don't like corner solutions... usually. But to quote President Obama, sometimes you just need to "plug the damn hole". Catalán argues that the spill is costing BP dearly, that they have an interest in fixing it. Fine, but that interest is still going to be mediated through a cost-benefit analysis that is going to trade-off the very high costs of fixing the spill against the benefits of getting the spill fixed. There is no guarantee of what Catalán proposes - that BP "would do everything possible to avoid similar accidents in the future". In fact, based on what we know about the market, we can almost certainly expect that they will not do "everything possible". They will do less than what is possible because they will not find the corner solution of extreme caution to be profit-maximizing. This isn't an indictment of BP at all of course - it's just a statement of fact. There is no guarantee that the government will fix this problem or prevent future problems too, but the government has an incentive structure that frees it to express and act on sentiments like "plug the damn hole" in a way that an oil executive never could.
As I said, usually corner solutions are not the ideal outcome. But on the occassions that they may be, we need to adjust the way we think about the state and the market, precisely because of how both are equipped to respond to corner solutions. More generally, whenever we think that a prioritarian ethics is appropriate or applicable, we have to question the implications of market outcomes. Even those who don't personally claim to be utilitarians have to recognize that the market operates on a utilitarian basis, where the utility of no agent is prioritized over another. All agents operate on the basis of their own subjective valuations. Usually this is fine, but when legitimate priorities do exist, the market is inevitably going to be limited in its response.
UPDATE: The Onion says it better than I can: "BP Pledges to Continue Being Huge Profitable Corporation" - as well they should be, all jokes aside. Let's just not pretend they can pledge much beyond that. Profit maximizers maximize profits... that's all we should expect or ask of them.

Wednesday, May 26, 2010

Assault of Thoughts - 5/26/2010 - Special "Time" Edition

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- The David Brooks column I shared this morning contrasted Burke with Paine, and highlighted Paine's advocacy for wiping the legislative slate clean every thirty years so that the past could not tyrannize over the future. That seems to be a reference Paine's Agrarian Justice. This, of course, is very similar to Jefferson's speculation on that sort of plan, which I talk about in more detail in this blog post.

- Andrew Sullivan shares research about the way we experience time as we age. This research finds that contrary to the canonical understanding of aging and time, people may not actually feel time move faster as they age.

- This New York Times article about elderly black farmers who are dying before they can receive benefits from court victory over discrimination in argicultural credit raises some important questions about the implications of time and mortality for reliance on tort law. Mr. Boyd, a Virginia farmer, remarks that "They deserve the money before they leave God’s earth".

- Legal Theory Blog writes about what it calls the temporal imperialism of the Supreme Court

- Triablogue on time, responsibility, and God.

Public Spending and Crowding Out - a very cool test

Megan McArdle links to what sounds like a fascinating study of the impact of federal expenditures. What is most intriguing to me about it is the identification strategy they use.

Studies of the impact of fiscal policy are notoriously difficult because of endogeneity concerns. If we're thinking strictly of stimulus-type spending, this spending goes on precisely when the economy is bad. What you want to know is the effect of the spending relative to a counter-factual of what would have happened if the spending hadn't been there. But you don't generally have that. You often can't even compare to other recessions where fiscal stimulus wasn't used, because its very likely that it wasn't used because the recession wasn't quite as bad. People who ignore this counter-factual problem and pronounce fiscal stimulus D.O.A. confuse correlation with causation.

So you need some exogenous change in fiscal policy to test the effect. In the past, Robert Barro has used defense spending. The study McArdle links uses changes in committee appointments. When a Congressman wins a chairmanship, federal spending in his or her district goes up dramatically. This increase should be unrelated to the economic conditions of the state, so it should be useful for identifying fiscal impacts.

And they find that private corporate spending and employment goes down when government spending goes up. McArdle provides lots of thoughts. Here are some of mine:

1. First and foremost, this should not be a surprising result for anyone. In normal times, under normal conditions, crowding out is an important problem and the fiscal multiplier should be very small. So I have the same critique of running with this finding that I have always had with Robert Barro's work: it's important research as far as it goes, but be careful not to apply the results "out of sample". Don't take a coefficient from a growth period and apply it to depression conditions. Robert Barro is very sloppy about this consideration when he promotes his findings.

2. Corporate spending and employment goes down, but I'm curious what total output does. In other words, is this a net gain, but with a transfer away from the private sector? That wouldn't justify massive government spending even if it were true, but if it is true it would make us less uneasy about spending on valuable things.

3. These sorts of impacts are likely tied to the scale of the spending. In other words, as in so many things, there may be diminishing returns to federal spending. If you're judicious and pick a few very important projects federal spending may very well improve private economic performance. Of course if you dump cash on a community much of it will be wasted and distortionary. In econometrics lingo, this is a "local average treatment effect" - it's an impact estimate associated with very high spending levels, and it may not translate to lower spending levels.

So there are some caveats and questions, but it's a very interesting identification strategy. I think it's also promising because unlike Barro's defense spending, there is probably more variation in chairmanship turnover during downturns. This could help us differentiate between multipliers during downturns and multipliers during normal times. Of course, it still doesn't provide too much help comparing liquidity trap periods to non-liquidity trap periods, which is perhaps the most important thing to test when it comes to fiscal policy.

UPDATE: This sentence stood out for me: "The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending. "... there might still be some endogeneity. I'm not quite sure what being the "target of the spending" means, but if this is a matter of helping dying industries, we might have the same counter-factual (or for Austrians - "seen and unseen") problem that biases fiscal multipliers downward.

The Danger of Libertarian Social Engineering

David Brooks had a great column up yesterday contrasting the French Enlightenment with the Scottish Enlightenment, and cautioning against people who rely unduly on rationalism to impose massive change on society.

Don Boudreaux completely missed the point - that Brooks was calling out conservative and libertarian social engineers and radicals as well as liberal ones. Boudreaux regularly advocates these huge imposed changes, derived from deduction from simple principles rather than real testing in the real world - precisely the sort of change that Burke and the Scottish Enlightenment were disposed against.

Greg Mankiw gets Brooks's point, and has this great anecdote:

"A couple years ago, I participated in a panel discussion on libertarianism in Mike Sandel's Justice class, along with my friend and colleague Jeff Miron. Jeff is a true libertarian, and he defended that position with gusto. By comparison to Jeff, I seemed lacking in conviction. I described myself as a "libertarian at the margin." By that, I meant that given our starting point today, I believe more reliance on individual liberty and less on governmental solutions is usually a step in the right direction, but I often recoil at more radical libertarian positions.

David Brooks's column yesterday offers a good explanation of skepticism about big radical ideas, such as pure libertarianism. It made me feel better about my watered-down variety."
I regularly say I'm sympathetic to Austrians and libertarians here. I think I'm clear on how I'm sympathetic. I highlight their ideas that I agree with all the time, despite the fact that I also critique. Sure - I praise Hayek and Boettke and Garrison more than I praise Mises and Salerno and Rothbard, but I'm allowed to have preferences. Anyway - my sympathy is of the Mankiw variety, and I think he and Brooks nail it. Boudreaux, as usual, completely misses the point.

Beware of libertarian social engineers, and any radical social engineers that have a massive mega-project they want to impose on society based on a huge system they've built up from some first principles. John Dewey cautions against this and highlights the point about rationalism in The Quest for Certainty:

"From the side of the object those who put forward the claims of reason have placed the universal higher than the individual; those who have held to perception have reversed the order. From the side of mind, one school has emphasized the synthetic action of conceptions. The other school has dwelt upon the fact that in sensation the mind does not interfere with action of objects in writing their own report. The opposition has extended to problems of conduct and society. On one hand, there is emphasis upon the necessity of control by rational standards; on the other hand, the dynamic quality of wants has been insisted upon together with the intimately personal character of their satisfaction as against the pure remoteness of pure thought. On the political side, there is a like division between the adherents of order and organization, those who feel that reason alone gives security, and those interested in freedom, innovation and progress, those who have used the claims of the individual and his desires as a philosophical basis."
I'm not sure the distinction is quite so sharp (and Rothbard offers an entirely opposite thesis here), but Dewey makes the right point. When you think you can just think up the best way for society to be organized, you'll countenance radical changes and impositions of a new social order on society far more easily. Movements like Communism were at least explicit about this. I think one of the biggest dangers of libertarianism is that since it is ostensibly a doctrine of individual liberty, the fact that an entirely new, theoretical order is imposed on society is obscured. Try telling a libertarian they're imposing a grand plan for a new social order and watch the steam come out of their ears either because (1.) they're furious, or (2.) they can't process the accusation - it makes no sense to them. In fact I'm sure I'll hear a little of both in the comment section (which I probably won't be able to attend to today).

Remember, for all they belly-ache about their claims to classical liberalism, libertarianism largely emerged out of French liberalism and the French Enlightenment - not the British. I'm not saying even that the French Enlightenment is a bad thing (and I don't think Brooks is saying that either). Everyone makes their own unique errors - but it's important to be cognizant about what those errors are and what the implications are, even for fellow liberals.
UPDATE: So when people write, they don't fact check every single word - we write on the basis of the wealth of knowledge that we've collected and stored over the years. Every once in a while, though, it's good to double-check some things. After publishing this I decided to double check my claim about the roots of libertarianism in French liberalism. I found enough to conclude that as a general statement it's a fine statement for me to make - I'm not claiming that there were no other influences after all, and the French vein seems to be substantial, consequential, and freely acknowledged by libertarians. While double-checking this, though, I stumbled across an interesting (admittedly, from Wikipedia) point about the origins of libertarianism. When the word first emerged in France, it was in a critique of Proudhon. The accusation was that he was "liberal, but not libertarian"... so in other words, in the early days libertarianism was not "classical liberalism" - it was explicitly opposed and quite distinct. For those libertarians, classical liberalism just wasn't good enough.
UPDATE 2: Jonathan Catalán shares his thoughts on Mankiw's post here, and seems to think that libertarian sympathies aren't compatable with "strict adherence" to Keynesianism.

Tuesday, May 25, 2010

Assault of Thoughts - 5/25/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- Paul Krugman has a good post up on inflation, deflation, and the impact of monetary policy. He goes over evidence from Japan. I wish he'd be more precise about the impact of the liquidity trap. His definition has centered on the zero lower bound, but a lot of people (justifiably) have a problem with that.

- James Madison, in 1815, on internal improvements:

"Among the means of advancing the public interest the occasion is a proper one for recalling the attention of Congress to the great importance of establishing throughout our country the roads and canals which can best be executed under the national authority. No objects within the circle of political economy so richly repay the expense bestowed on them; there are none the utility of which is more universally ascertained and acknowledged; none that do more honor to the governments whose wise and enlarged patriotism duly appreciates them. Nor is there any country which presents a field where nature invites more the art of man to complete her own work for his accommodation and benefit. These considerations are strengthened, moreover, by the political effect of these facilities for intercommunication in bringing and binding more closely together the various parts of our extended confederacy. Whilst the States individually, with a laudable enterprise and emulation, avail themselves of their local advantages by new roads, by navigable canals, and by improving the streams susceptible of navigation, the General Government is the more urged to similar undertakings, requiring a national jurisdiction and national means, by the prospect of thus systematically completing so inestimable a work; and it is a happy reflection that any defect of constitutional authority which may be encountered can be supplied in a mode which the Constitution itself has providently pointed out."
Don't make too much of this one statement. As he has done with just about everything, Madison has expressed different views on this issue at different times in his life. I highlight this only because unlike his famous flip flop on centralized government, people don't usually know about both sides of the Madisonian coin on internal improvements.

- The National Bureau of Economic Research has draft chapters available of a forthcoming volume on American economic policy in the 1790s. I'm not sure when it's supposed to come out, but it looks fantastic. Doug Irwin and Richard Sylla are editing. Irwin is a well known trade economist - I don't know Sylla.

- Larry Summers shares an old joke about how the questions on economics exams never change, but the answers do. This is a reference to the changing fortunes of different schools of thought, of course, but Summers points out that it's also what it feels like making fiscal policy. The "right" policy in normal times, suggests Summers, are the wrong policies now. I liked this discussion from Summers - it rings true with respect to the point I'm trying to drive home in my draft paper on the 1920-21 downturn, namely, that (1.) not all recessions are created equal, so that (2.) you can't assume that the performance of a policy in one recession is going to predict the performance of that policy in all other recessions. All downturns are different - the most important difference is perhaps the difference between an aggregate demand driven recession and an aggregate supply driven recession. Treating them like they're the same thing can be akin to pouring water on an electrical fire vs. a wood fire.

Shifts in policy for shifts in scientific discovery

Scott Jaschik of Insider Higher Ed notes research demonstrating how scientists are making their breakthrough discoveries both later in life and in larger teams, as opposed to individual ventures.  The important question raised is whether funding structures should shift to reflect current practices in the scientific fields.  Worth a read.

Jefferson, Gallatin, and Internal Improvements

My advice to commenter Anonymous, commenting on an earlier post, is not to believe everything you read on Wikipedia, particularly about a man as commonly distorted, misunderstood, and forced into modern conceptions and ideologies as Thomas Jefferson. This is from the fifth volume of Dumas Malone's masterful biography of the sage of Monticello:

"The congressional session was nearing its end when the President transmitted to the Senate (April 6, 1808) a report on roads and canals, drafted by the Secretary of the Treasury, which comprised the most comprehensive and constructive domestic program that emanated from this administration. If this could have been put into effect it would have constituted a memorable contribution to the physical development of the country, and it could have been expected to contribute greatly to national unity. Circumstances were distinctly unfavorable to its serious consideration at this time, but the report suggests what might have been done if the acceleration of the European war had not created a crisis in foreign relations and if the government had been in a position to initiate a long-range program for internal improvements.

As the term came into general use it referred to improvements in transportation and communication, but Jefferson's own hopes went further. In his second inaugural, anticipating an eventual surplus beyond what was annually set aside to retire the debt, he said that in time of peace this could be applied to "rivers, canals, roads, arts, manufactures, education, and other great objects within each state." He believed that, even in time of war, necessary expenses could be met without burdening future generations with debt and that the return of peace would be a "return to the progress of improvements." A few weeks later, after he had received from Gallatin the pleasing news that receipts were exceeding expectations, he said that this hastened the moment when they could begin on "canals, roads, college, &c." He did not refer to these objectives in his next annual message, and at the opening of the congressional session of 1805-06 his first concern was to secure an appropriation for the purchase of West Florida. Toward the end of that session, however, Congress authorized the beginning of an interstate road across the mountains - from Cumberland, Maryland, to the Ohio River. This enterprise had its genesis in a provision of the Ohio enabling act of four years earlier, following the suggestion of Gallatin, that a portion of the proceeds from the sale of public lands in the new state be applied to such a purpose. But for this financial prospect and this commitment to Ohio a Congress that was representative of local constituencies and responsive to them might have been undisposed to support such an undertaking. Jefferson was soon to become painfully aware of the conflict of local interests that beset it, but he was sufficiently encouraged to devote considerable attention to the subject of internal improvements in his next annual message to Congress. At the time his mind was by no means untroubled. He had recently been apprised of the dangerous doings of Aaron Burr and had issued a proclamation against that mysterious adventurer without as yet charging him with conspiracy by name. But from the Secretary of the Treasury he had learned that before long a surplus was to be expected and he addressed himself to the question of what should be done with it...

...Looking beyond his own term of office, Jefferson suggested that the surplus expected if peace continued should be applied to great purposes of public improvement. In listing these he now placed education first, thereby differing with Gallatin, on grounds of practicality at least. The Secretary of the Treasury believed that provision for roads would be popular and one for a university unpopular. On his advice Jefferson suggested that a national educational establishment might be endowed by a donation of public lands, which in fact would have been relatively painless. Since the objects he recommended were not among those enumerated in the Constitution, the President supposed that a constitutional amendment would be necessary. He stated elsewhere that several years would be required to secure one, and he wanted to get things started now for just that reason. As a rule, Gallatin was more of a loose constructionist, but he believed that even the broadest possible interpretation of the words "general welfare" would not give the federal government the authority to open roads and canals through the several states without their permission. Therefore, he conceded that a constitutional amendment was needed.
"By these operations," said Jefferson, "new channels of communication will be opened between the States; the lines of separation will disappear, their interests will be identified, and their union cemented by new and indissoluble ties." He was lumping the various improvements together, but, judging from what happened, greatest public interest was manifested in roads and canals, just as Gallatin had expected. At the end of the congressional session the Senate adopted by overwhelming vote the resolution which led to Gallatin's report a year later. By-passing the constitutional problem, the resolution directed the Secretary of the Treasury to prepare a plan for the application, to the opening of canals and the building of roads, of which means as were "within the powers of Congress." He was to state what undertakings were required and deserved governmental aid, and also to provide information about works in progress. Thus he was authorized to make a genuinely comprehensive report, and by the same token he needed a long time to prepare it. Meanwhile, he and Jefferson were involved in certain problems and difficulties connected with the Cumberland Road.

Since the cost of the proposed road was soon estimated at $6,000 per mile, exclusive of major bridges, little beyond surveying and planning could be done under the original appropriation of $30,000, which was actually the only one made in Jefferson's administration. According to the terms of the Act on March 29, 1806, he appointed three commissioners to lay out the road, subject to his approval. Meanwhile, he was to get the consent of the states through which it would pass. He had no difficulty with Maryland and Virginia, but when he submitted the first report of the commissioners the legislature of Pennsylvania still had the matter under advisement. The commissioners recommended a route from Cumberland to Brownsville in a direct line to a point below Wheeling on the Ohio River. The act whereby the Pennsylvania legislature gave its consent a few weeks later included a resolution that the route be altered so as to pass through Uniontown and Washington if, in the President's judgement, this could be done consistently with the act of Congress, but that, if not, the road could pass over whatever grounds in the state he should deem most advantageous. On the advice of Gallatin, who believed that because of the conflict of local interest and the opposition of Philadelphia nothing better could be expected, Jefferson agreed to a slight deflection of the road to Uniontown, where Gallatin had formerly lived. This was en route to Brownsville, and the President would not commit himself beyond this later point."

The chapter goes on, specifically addressing Gallatin and Jefferson's views of the Constitutional amendment referred to earlier. I encourage people to read it. It is important to read the Gallatin report in light of the Cumberland Road. Jefferson's concern was with the primacy of the federal government in making these improvements. He did consider the federal government constitutionally empowered to make such improvements, he simply felt that he could not impose upon the states. These were not just state interests, but local interests, were very important at the time. Philadelphia commonly opposed projects that could help western Pennsylvania if the route was directed from Virginia or Marlyand, rather than from Philadelphia. These sorts of provincial disputes stretched back to the French and Indian War in the 1750s, when General Braddock had to squabble with leaders in Pennsylvania, Maryland, and Virginia to determine which route he would cut through the forest to reach the French. Jefferson was unequivocally of one mind with Gallatin on internal improvements, and on the authority to appropriate money for internal improvements. There were lingering Constitutional questions about what he could do without the permission of state governments, but these are hardly libertarian quibbles about public works that modern day libertarians would like to have Jefferson aligned with them on. He wasn't. In the early republic, the nuances of intergovernmental relations weren't entirely ironed out yet - that was the full extent of the constitutional question. Internal improvements are as American as baseball and apple pie, and they are as constitutional as letters of marque and the regulation of the land and naval forces.

Monday, May 24, 2010

If you want an interesting read...

...the post-apocalyptic post-Keynesian genre is sparse, but always entertaining.

I've kinda sorta been following this blog by some post-Keynesians out in Kansas. I've always considered them a bit weird, but this takes the cake.

A few good Austrian links

- Cobb Dug Less has another response up to my series on calculation vs. incentive problems that is definitely worth a read. A couple things stood out for me in this post. First, Tom extensively cites Mises, and the Mises citation really demolishes the Hans Hoppe article I posted earlier arguing that Mises and Hayek held fundamentally different positions on the calculation problem. Hoppe contended that Mises did not rely on a knowledge problem as Hayek did - instead, his was a property-based argument. Its true that Mises did talk about the relevance of property to tihs question, but Cobb Dug Less's citation makes it quite clear he had a Hayekian knowledge problem view too. I was also struck by this statement by Tom:

"I remember getting chills reading how a single price can communicate the mileage; the age of the tractor; the condition both overall and any particular attributes; the need for tractors in the location in which it is being sold; the value of the tractor to the owner and the buyer, simultaneously; and so on."

Chilling indeed if it is true, but is it? I don't think so. Let's assume that humans do have the calculating abilities to form a reservation price that is some sort of linear combination of all of these attributes (I don't think they do). The parameters on this price determination function would be different for every person. Some people will value aesthetics over utility, etc. How does the one price that results from the coordination of all these reservation prices communicate anything about any of the attributes? I don't think it does. Sure sounds poetic, though, doesn't it? I'm sure there's some version of Arrow's impossibility theorem that applies here too. A very good post all in all - worth a read.

- At Economic Thought Mattheus von Guttenberg has a post up on empiricism and logic. In the past I've been frustrated by Economic Thought's posting on this issue, but this one is actually quite good. I posted two responses - I'll repost them here:

"You say that empiricism provides “no certain knowledge”, but what you’ve really explained in your paragraph on empiricism is that the certainty of the knowledge it provides is contingent on assumptions which may or may not be true. Couldn’t the same be said of a priori knowledge? Deductions are tautological with certainty, but we can only be certain of the deductions themselves, contingent on the truth of their axioms – precisely as empiricism is contingent on its attending assumptions. I find it strange that you feel the need to question something like gravity but not Mises’s axioms, when both bodies of knowledge are contingent on each of these sets of respective assumptions (because what is an axiom if not an assumption?).

At least we can agree that gravity operates today, so I can say “contingent on the continued operation of gravity, the sun will rise”. Can we even agree on all of praxeologies axioms right now (obviously not everyone can or more people would be Austrian economists)?

The other problem I always come back to with rationalism is a practical one. If an axiom sounds reasonable, it is easy to convince a lot of people of it. If a deductive step seems reasonable, it is easy to convince a lot of people it is valid. It’s a lot harder to coordinate mass deception when it comes to observational evidence. People all over the world are collecting and comparing and corroborating economic data. That’s a very robust process for generating knowledge. I don’t see this sort of robustness in rationality. You mention nothing in your post about the possibility that (1.) Mises chose inaccurate axioms, or even more likely (2.) Mises took an invalid deductive step. If Austrian economics had the rigor of mathematical formalism, their deductions might be easier to swallow – but they don’t, and the practical prospect of mistakes in this chain of logic is something that deserves to be center stage when arbitrating between epistemologies."

- Coordination Problem keeps coming up with good posts on great sociologists. Peter Boettke talks about Mark Granovetter here. I studied Granovetter's work with Dierdre Royster, who wrote a great book on black youth in the labor market based on this idea of the strength of weak ties, called Race and the Invisible Hand. I recommend it.

Sunday, May 23, 2010

New Posts on "Classy-cal Liberalism"

This is from yesterday - looking at blogging on classical liberalism

This is from today - looking at blogging on Rand Paul and race

Still trying to figure out the feel I want for this blog - it will probably end up closer to yesterday's post than today's.

Classical Liberalism

Recently, I critiqued some thoughts that Bryan Caplan shared on liberalism and libertarianism. The post really got me thinking, and it highlighted what I think are a lot of the problems with the way that libertarianism thinks and works. Sometimes I feel like my affinity for and sympathy with libertarianism gets obscured by these frustrations, but the frustrations still stand. Anyway, I've decided to start a new blog called Classy-cal Liberalism. Since "classical liberalism" is staked out and regularly purged, I figured I'd highlight how classy I think my approach to the issue is and give the blog a catchy new name. I don't intend the blog to be too intensive - I basically see it as being a link farm where I aggregate other liberal blogging, particularly introspective liberal blogging that really engages what liberalism is ("liberal" constructed as it was in my critique of Caplan). I might also highlight instances where liberals try to purge their co-liberals (a la Caplan), as well as instances where liberals stray a little and either reject basic liberal tenets or add a few non-liberal (or even illiberal tenets). We'll see how it goes - it might be a dud. I'll probably be renovating it a lot over the next couple weeks - adding literature, links, etc. But the day to day blogging I want to keep simple and straightforward.

That's Classy-cal Liberalism. I also wanted to touch on a few of Sebastian's responses to my Caplan post. Sebastian starts with:

"One of the dangers of ascribing such a "broad definition" to liberalism/liberal is that it is in danger of ending up like terms such as "fascist" or "democratic" - in that it means whatever you want it to mean."
First, I suppose I disagree that "fascist" or "democratic" mean whatever we want them to mean. Democracy especially is quite broad - but just because it's broad doesn't mean it's indeterminate. When I hear "democracy" used formally (of course it does take on other meanings in casual speech), I think it means rule by the people - a plebiscite in its ideal type, but not necessarily. I don't usually think of democracy as assuming anything explicit about any other rights other than electoral rights. It can come with other rights, but it doesn't have to. In this sense, it makes perfect sense to think about "democratic socialism", although no socialism the world has seen has ever really lived up to this. Where is the ambiguity here? I don't see it. As for "fascism", I always think of "fascism" as non-dynastic autocracy.

"By the same token, this is on a much smaller scale than what modern American welfare statists, or modern progressive "liberals", propose. Not to engage in Jonah Goldberg-style polemicism, but it is excruciating that people whose political agenda contains many of the aspects of classical fascism can use such a word with such positive connotations (liberal) to describe themselves."

I do think its clear that welfare statists take as tenets of their views things that are not explicitly liberal tenets. I guess I would say, though, that they are not necessarily illiberal just because they're not the bedrock of liberalism. Liberals support representative government to improve society in a transparent way that is consistent with liberal principles. Some individuals may decide that welfare programs are one such improvement. Welfare programs as such are not a requisite part of the liberal program, but they are consistent with it. I tentatively view "negative rights" the same way. I don't personally buy into negative rights, and I would never argue that they are a "liberal" idea. But they can coexist with liberalism, depending on their implementation.

I'd also caution Sebastian against what in an earlier post I've refered to as the "presumption of ideological orthogonality". It would be illogical for Sebastian to say that because fascists believe X and welfare statists believe X too, then welfare statists are somehow fascists. Sebastian doesn't come out and say this, but he skims the edge of that sort of thinking. Even if that were a logically consistent deduction (which it is not), ideologies are not perfectly orthogonal. They do share common elements. I support the existence of a central bank and so do Communists. So? You all probably support provision for the national defense, and so do fascists. So? We share some common elements. Simply pointing that out proves nothing. The question is, are those common elements the essential elements of our ideologies, or do we differ on the essential elements of our ideologies? Lazy thinking and the presumption of ideological orthogonality leads to statements like "Lincoln was a fascist" or "Roosevelt was a fascist", or for that matter "there's no difference between Communism and national socialism". Sebastian goes on:

"This [4. secular, representative government] is the weak link. You seem to belittle libertarians on this one, yet it would seem bleedingly obvious that it is the one that produces results that clash so much with the other tenets."
Bleedingly obvious to a libertarian perhaps. But that's precisely why someone would be a libertarian - if that is the one that stands out, you're naturally going to gravitate towards libertarianism. Actually, I think private property rights also clash quite frequently. Private property can exercise coercive power, which is what progressives and left-leaning liberals highlight. Private property can perpetuate discrimination and caste systems in society, thus clashing with tolerance and pluralism. Imperfectly implemented private property can impose on freedom from coercion, and negative rights, and externalities make a mockery of the idea of individual responsibility. We could think about "clashes" that occur in any of these. Freedom and tolerance/pluralism clash all the time. Take a time machine back to the American South fifty years ago for an acute example, but it's not that hard to find modern examples either. I have to reject this assertion by Sebastian. Representative government certainly clashes with these other tenets. I'm not denying that. But the idea that it is at all distinguished in this regard is silly. Indeed, its one of the best mechanisms for righting and arbitrating other clashes. That's why a representative government was so important to the classical liberals.

"You obviously recognise such a clash. Yet you seem to view those with libertarian attitudes as childish or naive."

Sometimes naive, but never childish. And they're no more naive than any other liberal. They're just naive about different things. What may distinguish libertarians is their attempt to purge or disown other liberals - something you don't see many other liberals doing. Part of the reason for this, of course, is that most other liberals aren't thinking about this broader intellectual tradition on a regular basis - so it's not even on their radar as a tradition to actively maintain. At one point, a commenter asked why I criticize libertarians but not "democratic fundamentalists" (the commenter might even have been Sebastian - I forget). The reason is that libertarians are worth arguing with. They've thought through their ideas (usually). There are very few democratic fundamentalists left, for good reason. The ones that are left rely more on sentiment then clear thought. That's not worth engaging.

"At some point you basically have to get your priorities straight, stand for something and put your foot down, or else you end up with dissatisfying consensus politics and the gradual erosion of individual rights in the pursuit of some vague, illiberal "greater good"."

I was with you at the beginning of this sentence and lost you by the end. You seem to be assuming that an embrace of representative government and consensus is inconsistent with the maintenance of individual rights. You know what strikes me as "vague illiberalism"? This suspicion of "consensus"! A tradition that emphasizes free individuals can't simply dismiss the concerns and insights and perspectives of those free individuals. Consensus politics is central to liberalism.

"You might also want to explain how the current arrangement (by which I mean the progressive centralisation of political power, which you don't appear to oppose) is actually in any way representative. You criticised the Tea Partiers in an earlier post for ignoring the last part of "no taxation without representation". Yet how can they ever truly be represented by a distant central government? Is it representative if taxes collected in a conservative state are used to fund, say, an abortion clinic in a "liberal" state?"
I've opposed the centralization of political power many times on this blog. Part of the reason for the persistence and strength of liberalism in America is our decentralization of power - our federalism. During the health reform debate, I used this blog to oppose the creation of a national policy. There were a few things related to the tax treatment of employer benefits and Medicare that I thought could be done at the national level, but I advocated a 1996 Welfare Reform style health reform: broad experimentation at the state level. I've criticized restraints on state budgets that hamper state and local responses to problems, leading the federal government to step in. Granted, as time goes on more problems become legitimately national problems. I'm not instinctively opposed to things being done at the national level. But I don't think I've been a cheerleader for it either. As for its representativeness, we're seeing the Tea Party beign represented in primaries across the country. Congress is still elected, as is the president. If anything, Americans pay more attention to what the federal government is doing than what their state and local governments are doing, forcing the federal government to be more cognizant of the public's will.

I don't think my responses to Sebastian are in anyway the "liberal" response. Sebastian's views are just as consistent with liberalism as mine are. Some liberals are more suspicious of representative government, others are more suspicious of property rights, others are more suspicious of negative rights. These tensions make liberalism dynamic.