Saturday, February 26, 2011

Public choice and the budget

Boyes pinpoints the obstacle to meaningful reform - whether fiscal, regulatory or scope/scale of government. The tenacles of public sector has spread throughout much of society.

Reason points to the recent appearance on Letterman by Rand Paul. This interview is indicative of two major components that will certainly block meaningful change (reduction) in the scale and scope of government in our life. First is the rent seeking behavior that is explicated in public choice thinking, the second the evolution in informal institutions that tend to support statist thinking.

As to rent seeking - a rational process that is facilitated in a participatory demoncracy by log rolling:

Anyway, here is the map of the vote (blue is a vote opposing ethanol, red a vote favoring ethanol), followed by a USDA map showing corn production and ethanol plants:

Back to the current Reason - Brian Doherty cites Tom Woods:

Rand explains, again correctly, that spending more money on education has not improved educational outcomes. Letterman's response? Well, education is important, so we've got to try something -- how about spending more money? But by the time of George W. Bush's term, per-pupil spending, adjusted for inflation, had already doubled since LBJ....

Letterman wonders why we can't just loot the "rich" some more. Well, if we'd like to make still more firms leave the U.S., that'd be a good start. Want to strangle the growth on which everyone's welfare depends? By all means pursue this strategy....

Rand points out, correctly, that the compensation package for Wisconsin teachers is extremely attractive, amounting to over $80K annually. Letterman, to general applause, says that figure should be doubled. Isn't education important? This is the level of reasoning people appear comfortable with.

Click here to view the Paul/Letterman exchange - illustrative of the challenge of confronting unexamined but deeply held belief with analysis and data.

Budgetary Issues

The scene in Wisconsin is truly troubling. Adults in Amerca, the wealthiest nation in history, acting like destitute people in the Mideast struggling for freedom, for what? They are entitled to more pay and better benefits by working for government than they would get in the private sector. Teachers are entitled to their salaries and generous benefits and pensions even though they have not improved edcuation one whit. I wonder if when Social Security and Medicare are cut, if seniors will be manning the lines with signs about Hitler. I hope not, but this is an entitled world. The government has created a society that is less independent, less innovative, less free by providing virtually everthing the public wants. Thomas Jefferson said, "A government big enough to give you everything you want is strong enough to take everything you have."

I was discussing the university situation with a senior administrator last week. I was asking why the university does not simply cut programs that are not worthwhile or have insufficient student demand. I suggested the first to go should be the Education School. It produces poorly educated graduates who know little more than how to prepare lesson plans. I was immediately told that that school will never be cut because it brings in lots of grant money. That made me wonder how much the federal government provides universities in terms of grants. A quick Google search suggested that the federal government, through the NSF, NIH, Dept of Energy, Dept of Agriculture, and on and on, provide anywhere from 50% to 80% of university grants. The budget is not going to be an easy thing to cut substantially. Every federal bureaucracy has extended its reach to many many constituents. I had one environmental economist tell me that the EPA is his full employment act. He raises millions of dollars in grants to work on public goods and externalities. He wouldn't be supportive of a reduction in EPA funding. The educators are not going to support reductions in the Department of Education.

Stay Tuned

Friday, February 25, 2011

The American System

Bob Higgs reiterates a key observation regarding economic growth. Explicating the weakness of aggregation and the C + I + G + Xn method of attempting to understand and measure economic activity, Higgs does a great job of making clear the "engine" of economic growth and the "anchor" that tends to slow or retard growth.

The local paper this am had a brief article on point.

The reporter writes:

State officials tout Arizona's new Commerce Authority, a public-private partnership designed to woo companies and new jobs to the state, as the lynchpin that will help usher in a new era of economic development.

But public-policy groups and legislators are criticizing similar entities elsewhere in the country for not being open about their business dealings, inflating their job-creation numbers and doling out taxpayer dollars to unproven companies or businesses that have financial ties to government officials and board members.

What is interesting is, in the face of unintended and often perverse outcomes from state involvement or intervention in society, there is a significant level of support for this involvement. I wonder how much of this support is based upon rent seeking and how much support stems from the belief systems of individuals in our society. Public choice theory helps us to understand the former, it is the later that is, I think, more pervasive and powerful. Boyes and I have previously blogged on the topic of public discourse and the role played by elites or intellectuals in shaping public opinion and, over time, morality. Both Sowell and Hayek have analyzed the role played by both the intellensia and the media and supporting institutions. (Note: this is an excellent podcast by Hayek discussing this issue)

A point raised in today's Arizona Republic article caught my attention:

Traditional commerce departments are run by the state and answer to the governor, but the new setup blends public dollars and private-sector business leaders, meaning the board that controls the money doesn't automatically have to follow the same rules that govern state agencies.

The reporter calls this a "grey" area and I thought of Adam Smith's observation about the impact of merchants adovcating monopoly from the state. This process of achieving "special" status and ongoing operation does tend to take place in a grey area. This lack of transparency obfuscates the ability of individuals to see both the process of rent seeking and the outcomes of this rent seeking. The uproar in Wisconsin over efforts to bring public employee compensation into line with . . . come level of fiscal rationality I think reflects on the veil of ignorance that surrounds the fog of rent seeking.

I am teaching my US Economic History Class the "American System" of Hamilton and Clay. It seems to be that a valid discussion can be made pro and con about the efficacy of public or public/private infrastructure. The American System is one with deep roots in mercantilism and I think and exploration of a protectionist system is appropriate today - the combination of formal and informal institutional support for government involvement certainly predates the 20th century. The contrasting views of Gordon and diLorenzo as they look at the American advocate for strong government intervention would be the basis for a fruitful examination of the evolution of interventionist or statist thinking today.

Higgs work is also valuable in attempting to understand the belief system and set of norms that support and encourage deepening state involvement in society - the emergence of a welfare and warfare state rests to a large extent on these beliefs and conventions. Given the emergent and strong nature of moral codes it is, I think, important for those who advocate liberty and responsibility to recognize the power of alternative belief systems.

19th century United States economic activity was characterized by volatility, change and economic growth and improving economic welfare over this 100 years. This era was also one of the emergence and evolution of the American System of tariffs, central banking (first and second Bank of the United States), federal and state support for infrastructure as well as support for industry. A nice overview can be viewed here.

I am not satisfied with a response that economic growth and improving welfare in 19th century American took place in spite of intervention by the state. Like Douglass North, I would think that the process of economic change is so complex that we cannot begin to fully understand the deep interplay between individuals, institutions (both formal and informal) and change. That said, it is clear that the accelerating American System of the 20th and 21st century reflects a powerful and continuing set of informal institutions in our country.

It is times like today - Arizona consideration of Public/Private agency support for economic change, Wisconsin's fiery debate over unions, Chris Christie's work in New Jersey as examples, provide a forum for a civil and thoughtful debate over the American System.

Higgs' thoughtful critique of the American System:
Private Business Net Investment Remains in a Deep Ditch

Tuesday, February 15, 2011

The Political Economy of Morality: Political Pretense vs. Market Performance | Library of Economics and Liberty

The continuing saga of my conversations at lunch. I would like to underscore that the discussions I have will colleagues at my institution tend to be civil, although I have a sense that the effort my colleagues invest in attempting to set aside preceptions to consider a liberal and responsible approach based upon individuality as an alternative to state action is rather limited.

A recent lunch conversation dealt with the cutbacks by the state to funding for education. The lamentations ran the expected range - this is a cost to the poor, the future of our country is at stake, the mean spirited actions of the dominant party in Arizona (I wondered if the dominant party in DC was also mean spirited). And can a party be mean spirited? I would think only individuals could evidence these characteristics . . . but I digress.

A fellow economist proposed a question for our interventionist colleagues - he wondered is part of a higher education a consumption good? That is, could education include both consumption and investment characteristics.

I image that the phds in the room were able to digest this, as there was silence . . . for a moment. And the chorus returned, in spite of a small consumption component, the state must fund education and cutting this support is tantamount to an attack on: fill in the blank.

It was interesting to see members of the left embrace the same war language as members of the right.

So, back to the question of morality and economics.

Dwight Lee makes a great point:

There is a large gap between the performance of markets and the public's approval of markets. Despite the clear superiority of free markets over other economic arrangements at protecting liberty, promoting social cooperation and creating general prosperity, they have always been subject to pervasive doubts and, often, outright hostility. Of course, many people are also skeptical about government. Yet when problems arise that can even remotely be blamed on markets, the strong tendency is to "correct" the "market failures" by substituting more government control for market incentives. Recent evidence of this bias is healthcare reform, which, instead of freeing up healthcare markets to correct the distortions created by government subsidies and mandates, made the distortions worse by expanding the subsidies and mandates.

Dwight R. Lee, The Political Economy of Morality: Political Pretense vs. Market Performance | Library of Economics and Liberty

Monday, February 14, 2011

HSR: Joe Biden Channels The Simpsons

Our discussion this month emphasizes, I think, the perspective that institutions matter. Institutions generate the incentive system that influences individuals in society in fairly predictable ways.

The public sector as a non for profit organization embeds a set of rules and values that incentives behavior that, in general, will lead to outcomes that do not meet criteria of efficiency. The tops down, statist process for decision making leads individuals within a state institution to act in predictable ways. I am thinking now of Milton Friedman's observation on the ways to allocation resources (spend money).

The clickable chart below shows the combinations of these options. The key insight, for me, is the role played by incentives.

If I believe I can do good for society, I might well overlook or be blinded to the moral implications of imposing my individual plan or view on others. So, by taking an active role in the state, so this train of thinking goes, I can accomplish an increase in societal welfare. Clearly an institutional analysis would highlight the costs of this type of approach and, for most activities, the costs of state action lead to consequences that outweigh any present or future benefits.

And . . . if one finds a path dependent view of emergent evolution convincing, once agents in society begin to go down the path of using someone else's money to "help" someone else the path becomes self reinforcing.

Can this evolutionary path change? Well, clearly Boyes and I are hopeful, otherwise why would we engage in what I hope is a civil discourse on our blog.

But it behoves those who are argue for liberty and responsibility to try to understand the beliefs and faith that support the path of statism. This informal institutions are far more powerful than are the formal rules of the game.

I have used this illustration on this blog before. 2 years ago on my campus a debate was hosted by the philosophy department - Is Wal Mart Exploitative? (Don't you love the framing of the topic?) The debate between a philosophy faculty and business faculty was well attended. I sat with a colleague - a bright phd in anthropology who is well trained in her field, a good teacher and excellent colleague. She is also, as are the vast majority of higher ed faculty a small l liberal. At the end of the debate as we walked out she said, the business professor clearly won the debate - his arguments and data were far superior to the contra. And, she said, I still belief that Wal Mart exploits society!

To me this is compelling evidence of the power of informal institutions, Douglass North was correct, these informal institutions shape the formal institutions and incentives that form the path of evolutionary change. He also points out that, while change is ubiquitous it is very, very, very slow. So the events in Egypt and Tunisia are notable for their rarity. Further, North argues that change is not always wealth or welfare enhancing and, in the long view of history, is most often not. I suspect we will find this the case in both Tunisia and Egypt.

The real questions is what about the US? Our society has evolved a number of formal institutions that enhance and support stability and work to examine and test the evolving informal institutional beliefs that shapte change. This is clearly a positive as belief systems that are formed base upon utopian or unconstrained views of the world are filtered through a set of formal institutions.

That all said, we can use both the Simpsons and Joe Biden as vehicles for a sense of comic relief.
HSR: Joe Biden Channels <i>The Simpsons</i>

Sunday, February 13, 2011

More - are we better off today?

Click link to view full size images.

Mark Perry writes:

What's most impressive though is the comparison of the living standards of households living below the poverty line in 2005 to all U.S. households in 1971. By almost every measure of appliance ownership, poor American households in 2005 had much better living conditions than the average American household in 1971, since poor households in 2005 had much higher ownership rates for basic appliances like clothes dryers, dishwashers, color TVs, and air conditioners than all households did in 1971.

As Steve Horwitz concludes "Life for the average American is better today than 35 years ago, life for poor Americans is much better than it was 35 years ago, and poor Americans today largely live better than the average American did 35 years ago. Hard to square with a narrative of economic stagnation or decline."

Saturday, February 12, 2011


Pratt is correct in my view. Think what JFK's sentence means. You are to serve your country not the other way around. Natural rights are not yours, they are the state's to distribute as the state desires. Following JFK's speech the US entered into the space race, a collectivist endeavor that continues today. Just think what privatization would yield -- wouldn't it be much like the internet? The state created the internet (was it Al Gore?) and then the private sector took over.

While nationalism is often misdirected, I think in light of recent speeches by Sarkozy, Cameron, and Merkel of Europe, on the dangers of multiculturalism, it is worthwhile to recognize the brilliance of the mottos of the United States, e pluribus unum. From many, one. This is the opposite of multiculturalism and the opposite of what the left wants for the U.S. today.

Where is the revolution in the middle east, Egypt in particular, going? Recent polls indicate that 85% want Sharia law but also that about 80% want freedom and democracy. This is confusing as the two would seem to be polar opposites.

Pratt is correct that he and I work for public institutions. Mine is becoming less and less public rapidly, but it is doing that by inducing faculty to retire early with a carrot and stick as well as increasing numbers of student in each class. What it should be doing is acting like a private entity -- offering programs customers want, offering teachers customers want, reducing administrative costs, offering Saturday classes, and many other steps. It is somewhat like the Republicans who agree to cut $68 billion from the budget when Rand Paul's plan of cutting $500 billion would make more sense. It is time to reduce the size of government.

Are we better off today?

As I have previously blogged like Boyes I work for a publically funded institution of "higher learning". As Dan Klein and others have observed the vast majority of employees of these publically funded institutions are interventionists, statists, and those confident of the state's ability to improve the conditions of life.

A frequently voiced concern of these folks is the deteriorating income level of the poor and middle class and the expansion of income and wealth of the rich.

This debate has been informed by Tyler Cowen's book and, in a recent post, Steve Horowitz reminds us that income levels tell only a part of the tale, if we are legitimately interested in the level of progress and advance in society. While my interventionist friends are indeed concerned with progress and understanding the state of society, for reasons that Boyes and I have previously articulated, they tend to look only at part of the picture, then jump to the preconceived conclusion that to "solve" the "problem" that they see, the state must intervene.

Given their belief system this unfortunate preconceived conclusion is perfectly understandable. With a given belief system that is held by these interventionists as an article of faith, any alternative perspective (whether data driven or not) is viewed with hostility. With the breakdown of a civil discourse in the public, rather than a discussion that might lead to synthesis, an ideological rhetoric is predictably and immediately employed, most often using the direct and indirect language of war.

We are told by the elite that we need to mobilize for a war on poverty, a war on stagnation, that we need to fight for the poor. The pre game show for the Super Bowl was a wonderfully troubling example of this use of media to enflame the public toward a collectivist solution. Images of nationalism and symbols of war were presented to move society further toward collectivism and we have heard repeatedly over this nascent year the very, very unfortunate phrase from JFK's inaugual address - ask not what your country can do for you, instead ask what you can do for your country.

This phrase is the perfect example of the power of the intelligensia to employ Orwellian rhetoric and use language as a weapon to both deceive and then move the masses toward collectivism.

So, back to the question - are we (and by we I mean all 309+ folks residing in the USA) better off today than we were 30, 50, or 100 years ago?

The answer is obvious.

In any case, the debate over whether or not and to what degree we are better off now than in the past rages on, with Bryan Caplan and David Henderson doing great work in demonstrating why things have never been better.

I think that the case is even stronger than perhaps they are making it. The discussion does seem to be heading in the right direction by making these comparisons in terms of the ultimate scarce resource: our time. Whatever one says about various aggregates, it seems to me that the key measure of how well off we are is how valuable our time is in terms of what it can purchase us. In David's last post, the point of comparison is weeks of median income needed to buy a car. This is not a bad way to go, but why not go to hours?

Thursday, February 10, 2011

Debt, Money and Prices

I enjoy crusing the net and discovering data I had not looked at for awhile or new sources of data. Here is a picture of the growth of the monetary base -- extraordinary.

Notice what the Fed has been doing with the money it prints (digitizes). Purchasing U.S. debt -- monetizing the debt. Didn't Bernanke say he wouldn't monetize the debt

Notice the amount of debt the U.S. has created -- and has been monetized. Extraordinary.?

Although most economists are saying that this monetary base is no problem -- for instance, Bernanke says he is 100 percent certain he will stop inflation if it should arise -- notice what has occurred to the price level in the U.S. since the Fed has been in control.

Open Border Cost


Open Border Cost

Wednesday, February 9, 2011

The Cost of Meth Prohibition - The Atlantic

Must reading - another illustration of the costs of intervention by the state. Just like other wars fought by the state, the War on Drugs has provided a myriad of examples that confirm that, in the area of choice over consumer goods (pharmacuticals being a key consumer product) the costs of government intervention far outweight the benefits and this state action makes society worse off by any metric one would use to evaluate economic welfare.

The persistence of state action in this arena also confirms Ronald Reagan's observation that the closest thing to immortality is a government program.

I fear our great grandchildren will confront this same issue - with a far smaller and inferior set of pharmacuticals.

McArdle's example:

My husband is suffering from a pretty nasty cold. Last night he had to duck out before dinner with my family to purchase some Sudafed, because he was miserably congested. Alas, not being aware of the difference, he decided it wasn't worth waiting in line to buy cold medicine from behind the counter, and instead bought the stuff on the shelf. He took some, and then suffered through dinner until we could get home to my box of 24-hour Sudafed. This morning he came down and said, "It's amazing how much better you feel when you take medicine that actually does something." Then after a pause, he said, "So why do they sell you cold medicine that doesn't do anything?"

If you've been following drug laws at all, you'll know that you can no longer buy cold medicine with pseudoephedrine without getting a clerk to get it for you from behind the counter, and signing for it. That's because pseudoephedrine is an ingredient in the most popular amateur syntheses of methamphetamine. By making it hard to get, authorities hoped that they could fatally damage the meth trade.

The Cost of Meth Prohibition - The Atlantic

Tuesday, February 8, 2011

Freedom Is Not Compatible with Government’s Initiation of Force against Innocent People

A further examination of the underlying and I think legitimate debate and disagreement of a moral society. In this case, Higgs pushes for an extreme and consistent commitment to freedom, he argues:

Perhaps it is unseemly for someone such as I to make a recommendation to a Harvard professor, yet I cannot resist the urge to suggest that Glaeser read, say, Murray Rothbard’s Power and Market. Expositions of that sort would help him to gain a clearer vision of the distinction between individual freedom and state domination in economic affairs. Glaeser quotes Milton Friedman to good effect in his article, but Friedman’s writings ought to be the beginning

Higg's full analysis, as always, is provocative and worth a read and a consideration.

Freedom Is Not Compatible with Government’s Initiation of Force against Innocent People

Is the World Crazy

We have Obama "investing" to the tune of bankruptcy for the U.S. We have Congress refusing to touch entitlements when it is they that will topple the U.S. fiscal house of cards. We have the U.S. giving about $50 billion a year to Egypt not to lead to private property rights and economic freedom but to prop up a dictator. We have Paul Krugman arguing that the situation in Egypt is due to global warming (see here). What are the objectives of each of these groups/individuals? What did the US expect to get out of propping up a dictator who makes no progress in enhancing economic freedom and private property rights in 30 years? Surely an explosion or popping of the bubble had to be expected. Why is the US still dependent on middle east oil when the US has supplies of oil, coal, and natural gas that could make the country self sufficient for hundreds of years? Is the answer that environmental religion is as fanatic as fanatical Islam? The Muslim Brotherhood claims that using babies as bombs is Allah's will as long as Muslim lands are occupied. I am getting old; I just can not seem to make sense of all this.

Monday, February 7, 2011

Higgs, Regime Uncertainty, A prediction

Higgs makes the following prediction that, to me, seems both reasonable and likely:

If heightened government intervention in the economy continues to discourage America's entrepreneurs and investors from acting vigorously, six years from now the United States may have no more people working than were employed in November 2007. Such stagnation would be a national tragedy.

The government's biggest challenge today is to restore lost confidence. Until economic prospects become clearer and brighter, the labor market will, at best, only continue the slight, sluggish improvement we saw in 2010.

Saturday, February 5, 2011

The Locavore's Dilemma: Why Pineapples Shouldn't Be Grown in North Dakota | Library of Economics and Liberty

An outstanding example of the application of the economic way of thinking to what, regretably, many view as a moral imperative.

This excellent application shows, why for me, the discipline of economics and the application of the economic way of thinking is a moral pursuit. That is, an examination and understanding of the process of liberty, responsibility and choice is moral in and of itself.

Further, behaving in a liberal and responsibile manner when making choices is also moral.

Coercing others choices, as Boyes points out, is immoral.

Lusk et al write:

The decision to buy local foods is a shopping decision, not a moral one. If you can find tasty local food at a price you are willing to pay, then go for it. But it doesn't make sense to cajole others into making the same choice you do, and it especially doesn't make sense to force others to do so. There is a romanticism about buying local food, but the reality is that local-food policies destroy wealth and institutionalize prejudices for one human over another based on such arbitrary criteria as the location of their farm. Local-food advocates imagine the movement providing a host of non-economic benefits, promoting a sense of community and "belonging." But buying local food limits one's community to only those we can physically see and imparts trust to only those whom we personally know. However, a shopper involved in the global food chain is part of a much larger community—one that requires a great deal more trust than one is required to muster at the farmers' market. If we want to foster the civic virtues of trust, trustworthiness, and community, the local-food movement is a move in the wrong direction—it is little more than nativism.
Jayson L. Lusk, F. Bailey Norwood, The Locavore's Dilemma: Why Pineapples Shouldn't Be Grown in North Dakota | Library of Economics and Liberty

Friday, February 4, 2011

Morality and Markets

Pratt notes the moral argument in economics. I continue to wonder why it isn't obvious that economics is based on morality. The free market system founded on private property rights and non agression captures the kernel of what all ethical systems advocate.

The mixed economy, where actions occur because of coercion from government, is immoral. Under free market capitalism, the initiation of physical force is barred from human relationships. Citizens may voluntarily delegate the use of retaliatory force to an organization or government, but that government may use force only in retaliation and only against those who initiate its use.

Government regulation, by contrast, coerces behavior. It subordinates the businessman's judgment to the decrees of government officials, who impose their will by physical force.

So why teach business ethics as if morality were anything other than free market capitalism? Just teach what is required for free markets and capitalism to exist and endure and you have taught a moral system and ethical behavior. Wait a moment, however. What if consumers or workers do not demand the morally proper thing. For example, consumers might prefer a cheaper car without air bags,”… even though doing so places their own lives and the lives of their passengers at greater risk, which is morally irresponsible. Similarly, workers may forego demands of privacy at work if they are compensated with high enough wages. In short, not every moral business practice will simply emerge from the profit.”

This argument presumes to define which of the consumer’s expenditures is moral and which is immoral. This argument is immoral because it gives someone control over someone else’s choices.

Choices are moral as long as the principles of private property rights and non aggression apply. If I choose to purchase a less safe car, it is my choice. If passengers know the car is less safe, their decision to ride in it is their choice. If consumers demand lower quality autos at lower prices this must mean they believe the lower quality autos make them better off than the higher quality because they can use the saved money in other ways. Perhaps they will save more lives purchasing something other than the high quality car. We may not like some people’s decisions, some may use their freedom to act in self-destructive ways, and we may define some actions to be illegal. But, as long as they do not violate the rights of others, they are moral. They may not be legal, but are moral.

Thursday, February 3, 2011

The Moral Heart of Economics

Edward Glaeser argues for a moral foundation to the study of economies.

An important book by Dan Klein agrees and as I blogged earlier, exhorts participants in a free and liberal society to act upon the fundamental moral responsibility.

As Smith said, “To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.”

Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom.

So the foundational assumption that freedom is the ultimate value and the analysis of the costs and benefits of freedom make economics a moral endeavor. We know that Adam Smith held the chair in moral philosophy at Glasgow when he wrote both The Theory of Moral Sentiments and The Wealth of Nations. His project was to understand human behavior and emergent organizations through the moral, economic and judicial lenses of a moral philosophier.

His philosophy of justice, beneficience, prudence and self command informs the economics project and, as Dan Klein reminds those of use in the profession of economic education - we have an obligation to clearly present this moral code, the costs and benefits of this code and provide students with the tools of economic analysis to that they can evaluate this moral project.


Wednesday, February 2, 2011

Nourini on the Global Economy

New York University economics Prof. Nouriel Roubini foresees risks ahead as the economies of developing nations surge, while the U.S. and the West remain stuck in the slow-growth lane. He talks with WSJ’s Simon Constable.

Tuesday, February 1, 2011


It would seem that inequality is one of the issues that separates and inflames interventionsts/statists and those who advocate for a free and responsible society.

Inequality, whether expresses in income or wealth terms, is both a consequence of emergent economic evolution and a cause of the path that such evolution may take.

A recent set of posts provide both food for thought as well as a perspective that might afford statists some basis for reevaluation of redistribution polices.

Becker and Posner make an interesting distinction between good and bad inequality. Becker uses antecote as a means (in my view very convincingly) to illustrate the incentive dimensions to linking outcomes with performance. By linking outcomes (income and wealth) to performance there will inevitably be differences and most economists would argue that these differentials provide a clear signal and incentive to individuals. It is through the rewards that are implicit in higher incomes that effort can be drawn from society. Adam Smith was dead on when he observed that it is not from the benevolence of the butcher that we receive our meat - rather it is from efforts on the part of the butcher to improve his lot in life. And, in this type of society (one based upon market mechanisms) the butcher who provides the best meat at the best price will prosper and the butcher who is unresponsive to customers by serving poor quality meat will earn a lower income.

Becker is far more eloquent and writes:

On my first trip to China in 1981 I visited several factories in the Beijing area. All the employees in each factory received more or less the same pay, and they could hardly ever be fired for bad work or absenteeism. This was an extreme eqalitarian approach to compensation, and the result was that no one worked hard, even though Chinese workers have traditionally been known for their diligence and energy. The picture was more or less the same in all of the factories I visited, and there was also little difference in pay between factories. Urban China was then highly eqalitarian, but it was also extremely poor because of very low productivity. China’s economic miracle has been in good measure based on allowing much greater inequality in pay and incomes to motivate greater productivity in both urban and rural areas.

As these individual choices emerge and evolve over time, societies will have radically different looks in terms of income and wealth distribution. This is important. These distributions are a result, in free societies, of individual choices that have accumulated over many generations. That is, this inequality is both a result of a long emergent process and has thus become deeply embedded into the institutional framework of the society.

Efforts by central planners to adjust or overturn this process via interventionist redistribution schemes are bound to be highly disruptive to the society and, as we have seen again and again, have unintended consequences. Since these consequences are unforeseen they may well lead to negative reverberations through society that are so disruptive as to be destructive of liberty and freedom.

Over at Marginal Revolution we see nice graphic that illustrates Becker's point about good inequality and shows a comparison that should generate reflection on the part of those who advocate redistribution in the name of egalitarianism.

The graph shows that the bottom 5% of Brazilians are among the poorest people in the world but the top 5% are among the richest. Thus the vertical range of the curve tells us about within-country inequality.

Comparing between countries we see that the poorest 5% of Americans are among the richest people in the world (richer than nearly 70% of other people in the world). The poorest 5% of Americans, for example, are richer than the richest 5% of Indians.


I love this approach to the complexity of institutions and information from Beottke:

Three Ps

Three Is

The 3 Ps are: Property, Price and Profits

The 3 Is are: Information, Incentives and Innovation