Friday, September 10, 2010

Yglesias on what "counts" as wealth and output

Matt Yglesias hits the nail on the head:

"I think it’s unquestionably true that one strength of the United States vis-a-vis Europe is that our setup is friendly to a certain kind of startup firm and this is why we’re world leaders in much of the high tech industry. But this kind of rhetoric is annoying and inaccurate:

[Google CEO Eric] Schmidt said that in parts of Europe the venture capital industry was being held back. “It takes a very long time to get a proper venture capital industry going. And in Europe there are many countries where the failure of venture capital is in fact seen as criminal, Germany, for example.” [...]

“Jobs are created by the private sector not by the public sector. Wealth is created by the private sector not by the public sector. If you are going to have great companies you have to be willing to support and encourage the creation of real wealth-generating capitalists. That means you have to put up with them.”

You would think the CEO of an Internet firm wouldn’t be totally dismissive of the idea that CERN and DARPA are contributing to wealth creation. And of course education is important to wealth-creation, and much of it is state-financed. And transportation infrastructure—typically state-financed—creates wealth. Of course even if the state completely removed itself from education finance, it’s not like nobody would go to school. Presumably the private sector would step in to fill some of the void. But conversely in places where the state steps beyond what we’d consider appropriate in the United States it still creates wealth. State-owned firms like Areva are generating value.

I raise these points not to make the case for a bigger or smaller public sector (I would say bigger than the US but smaller than France is ideal, but both are clearly workable) but simply to underscore the point that the performance of public agencies matters a lot."

This is the Robert Higgs school of GDP, of course: just don't count the public sector. The reassuring thing is that when they redefine the very definition of words like "wealth" you know they're desperate - the problem is that I think they actually believe this stuff. It's one thing to say that the government in most spheres of economic activity is less efficient at wealth production than the private sector. That is unambiguously true and completely uncontroversial. But in certain fields they are better (that's why there are a few fields where we regularly see governments: evolutionary pressures practically dictate we will see these sorts of efficiencies capitalized on by successful societies). And even where they're not better you don't just pretend they don't exist.

Anyway - this is a pet peeve of mine too. Similarly, it bugs me when people only think of "crowding out" as public activity crowding out private activity. Clearly that is a problem and it exists (again - unambiguous and uncontroversial), but you never hear anyone talk about private activity crowding out public activity. They simply define it out of the discussion. They assume it away. This is what an externality is though, if you think about it: private activity crowding out social activity. That's one way to look at it at least.


  1. Liberals always like to trot out DARPA ... without realizing that DARPA is a very unique government organization that the U.S. has failed to replicate outside of, well, DARPA (it ought to be obvious why - for example, DARPA is a flat organization, whereas government entities thrive on legally specified and rigid hierarchies). One outlier does give me much reason to support the notion that the state is really good at "wealth creation."

  2. I'm quite sure that was a specifically tailored case because the guy was from Google of all places.

    Even less successful cases than DARPA clearly don't produce no wealth though.

  3. Anyway, when people are talking about DARPA what they are really talking about is ARPAnet (which is merely one of many projects that DARPA has been involved in), and it is something exaggeration to claim that ARPAnet invented the internet (a claim which is often buttressed by the myth that the internet was created to as a means to have a communications system which was hardened against a nuclear attack). ARPAnet was as much as anything a duplication of what was already going on in other places.

  4. Why do you assume they're talking about ARPAnet rather than DARPA in general.

    DARPA's done quite a bit more than ARPAnet. I think that's the reason for quoting it to the Google guy, but I think if he only meant ARPAnet he'd only say ARPAnet (and he wouldn't have mentioned CERN in the same sentence).

  5. I think you're just trying to play "gotcha" here. There's a lot more to DARPA than ARPAnet, and I think people are generally aware of that (put it this way - if you know what DARPA is in the first place then you have a very good chance of being aware of that).

  6. Because most of what DARPA does is military related and in my experience that is not what most people are getting at.

    You seem to even fall into this:

    "I'm quite sure that was a specifically tailored case because the guy was from Google of all places."

  7. OT:

    Thought I would pass this along ... The Libertarian Review archives are now online - it is sort of a nice wayback machine and it is from a time when classical liberalism/libertarianism was just re-emerging from its post-war funk:

  8. "You seem to even fall into this"

    Just because ARPAnet is by far and away the best known DARPA project doesn't mean that anyone who thinks of DARPA when they think of the internet is under the impression that that's the only thing that DARPA brings to the table :) Come on now, Xenophon! Should we pretend the Google connection is non-existent? That's dumb.

    Yes - very cool stuff with the Libertarian Review. There's a Bartlett article in there I read yesterday I may post on this weekend - I highly recommend others check this out.

  9. I believe that is what most people are driving at ... "Look, the government invented the internet! More government is awesome!"

  10. I suppose I'm just not sure why that would spring into your mind. Yglesias explicitly said in the post that the point isn't more or less government (in fact he also mentions CERN and specifically says that Europe could use less government).

    What he said was "government production should count just like private production".

    Could you find me some of these people that say "more government is awesome!"?? I'm just curious because I think you interpret people who say "government isn't completely worthless and does have a role in human society" as saying "more government is awesome!"

    And in the absence of any reasonable example of this sentiment (Yglesias certainly isn't one and I'm certainly not one), I feel forced to conclude that you're simply trumping up a very reasonable view.

    Your characterizations of people like this always stay so vague, which is why it's hard for me to really buy into them. You know if anyone actually thought "more government is awesome" in such an unelaborated way I'd be with you criticizing them - I think you know that by now.

    For this discussion though - a discussion about how government production and employment should be counted - it seems a little besides the point.

  11. "I suppose I'm just not sure why that would spring into your mind."

    Because that is how DARPA is most often used in these sorts of conversations. I've had enough experience with them to realize this.

    "What he said was "government production should count just like private production"."

    That's a totally different issue, and it shouldn't be. They really aren't the same things at all.

    "Your characterizations of people like this always stay so vague..."

    This is a well worn meme. I don't feel any need to back it up.

  12. "Because that is how DARPA is most often used in these sorts of conversations. I've had enough experience with them to realize this." and "This is a well worn meme. I don't feel any need to back it up."

    OK - and we disagreed even on that, but that's fine - I suppose what always makes me scratch my head is why you bring vague, unelaborated memes of what other people think to a discussion where it's clearly not what Yglesias or I think. It always seems like kind of an oddity when you veer the discussion off into other corners like that.

  13. Anyway, here is what Yglesias stated:

    "You would think the CEO of an Internet firm wouldn’t be totally dismissive of the idea that CERN and DARPA are contributing to wealth creation."

    You tell me what he meant here.

  14. That's a totally different issue, and it shouldn't be. They really aren't the same things at all.

    THIS VIEW, for example, is one that I disagree with you on and would be much more interested in hearing more of.

  15. Put it this way - I agree they aren't the same things. Fast food and steel production aren't the same things either.

    What makes them so different that a building made by the government should not be counted when we talk about economic output than a building made by the private sector?

  16. Anyway, I don't know Yglesias much (I've commented there a few times), but much of my view of him is colored by this:

  17. That's interesting -
    I have a knee-jerk reaction against carpet-baggers too, but it's not that strange of an idea.

    They do this for school superintendents all the time - bringing them in from other cities.

    Illinois is certainly no stranger to this, with Alan Keyes running against Barack Obama (not that many people would want to point to that as an example).

  18. The price mechanism. The public sector's efforts are a poor substitute for it, and that's why I view them as being quite different. Maybe for some short historical time period that sort of public production is a necessary evil until the private sector can find its way around whatever issues make that necessary evil possible/required, but it remains an evil nonetheless (that isn't true of the private sector). I'm big on the state whithering away.

    Anyway, have a good day.

  19. Just for the record, there is no "Robert Higgs school of GDP." Indeed, to be even more reassuring, I affirm that there is no Robert Higgs school of anything. Which is in no way a bad thing, of course. As Schumpeter said, fish go in schools.

    I have criticized the way government is handled in the national income and product accounts, especially in regard to the so-called wartime prosperity during World War II, but my criticism springs from basic theoretical principles that were debated by such fanatics as Simon Kuznets, Paul Samuelson, Moses Abramovitz, James Tobin, and other obscure economists who analyzed the foundations of national accounting back in the 1940s and 1950s -- before the economics profession threw up its collective hands and capitulated to the arbitrary conventions of the Commerce Department. Because the government component has no grounding in market-choice behavior and the price system, as the private components do, it is simply impossible, with a clear conscience, to treat it in the way it is treated in the national accounts. Much as I would like to take credit for having been the first one to arrive at this conclusion, I cannot do so honestly.

    Those who suppose that the government component of GDP means something might do well to ponder that if government only chooses to pay more for the final goods and services it purchases, it may simply do so, either by creating money itself or by employing its coercive power directly to tax or indirectly to borrow (putting its coercion in the shadow of its promise to repay). The element of sheer arbitrariness in the price and quantity data that result from this process looms very large.

  20. Dr. Higgs -
    Thanks so much for taking the time to provide such a thoughtful response, and welcome to the blog. Needless to say, I was using "Robert Higgs School of GDP" somewhat casually.

    I've just posted a more extended response, as well as your original comment, in a new post.

    Thanks again for taking the time to add some thoughts to the discussion!


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