The Pro-Mankiw Movement

by Henry on April 19, 2010

Greg Mankiw suggests that he has identified the Anti-Mankiw Movement. Apparently, it consists of a graduate student who doesn’t like his textbook very much. On the same expansive definition of social movement, I would like to formally announce that I am re-constituting myself as the Pro-Mankiw Movement. Our (or, rather, my) slogan: Let Mankiw Unleash His Inner Mankiw. In particular, building on previous suggestions I would like to advocate in the strongest possible terms that Mankiw rewrite his popular textbook so that the relevant sections cover the intriguing case of N. Gregory Mankiw’s domination of the Harvard introductory economics textbooks market.

Since N. Gregory Mankiw returned to Harvard to teach the College’s introductory economics class, 2,278 students have filled his weekly lectures, many picking up the former Bush advisor’s best-selling textbook, “Principle of Economics” along the way. So, what has professor of economics Mankiw done with those profits? “I don’t talk about personal finances,” Mankiw said, adding that he has never considered giving the proceeds to charity. … Retailing for $175 on Amazon.com … Mankiw asserts that “Principles of Economics” has been the bible of Harvard economics concentrators since before he took over “Economics 10.”

Now this couldn’t possibly be an example of a public spirited regulator wisely choosing the best possible product on the market, and imposing it on his regulatees for their own good. As the N. Gregory Mankiws of this world know, such benign autocrats only exist in the imaginations of fevered left-wingers. So it must be a story of monopolistic rent-seeking and regulatory collusion. And what could be more fitting than that these monopolistic abuses be documented in the very textbook that is their instrument!

I’ve suggested before that if I were N. Gregory Mankiw:

I’d claim that I was teaching my students a valuable practical lesson in economics, by illustrating how regulatory power (the power to assign mandatory textbooks for a required credit class, and to smother secondary markets by frequently printing and requiring new editions) can lead to rent-seeking and the creation of effective monopolies. Indeed, I would use graphs and basic math in both book and classroom to illustrate this, so that students would be left in no doubt whatsoever about what was happening. This would really bring the arguments of public choice home to them in a forceful and direct way, teaching them a lesson that they would remember for a very long time.

But this, in retrospect, seems far too lily-livered approach for the true Mankiw. Why not instead use the class as an experimental setting to see how far the price for the book can be jacked up before profits begin to decline? That would give Harvard econ 10 students a practical grounding in economic theory that they could genuinely claim as unique.

{ 59 comments }

1

Steve LaBonne 04.19.10 at 5:17 pm

There have been times when I haven’t been particularly proud of being a Harvard alum. This is one such time.

2

chrismealy 04.19.10 at 5:40 pm

That $175 is the fine for not knowing what Google and RapidShare are.

3

Substance McGravitas 04.19.10 at 5:47 pm

That $175 is the fine for not knowing what Google and RapidShare are.

A very good point. Perhaps the Economics 10 class has a lesson to teach textbook authors.

4

Ken Houghton 04.19.10 at 5:55 pm

Glad to see Garth showed up in comments at the link; his effort certainly predates that post.

Is it about to become a meme?

5

Barry 04.19.10 at 5:56 pm

I’m of the opinion that the only cure for Harvard and Chicago is fire and sword.

F*ck, if I were at Harvard, I’d scan his frikkin book and post the scans to the web.
I’d be out $175.00, but he’d be out tens of thousands of $$.

6

Scott Martens 04.19.10 at 6:02 pm

Barry, a quick search of the usual suspects reveals that you need not bother. Someone has already done so.

For all the carping about Holywood and the music industry, I am always shocked at how little noise the textbook industry has made about file sharing. They seem to me to be the ones most likely to suffer when a $175 can be downloaded free of charge. I mean, do the gnomes of Harvard econ charge you $175 when you register and issue you a textbook? Otherwise, I have to suspect that some student must be using PDFs and a laptop instead.

7

Stuart 04.19.10 at 6:03 pm

I think plenty of people have already beaten you to the punch, Barry, or at least Google thinks so.

8

dsquared 04.19.10 at 6:15 pm

A lot of the problem is that as well as the noted New Keynesian economist Greg Mankiw, the Harvard economics department also employs a dreadful Republican Party hack, also called Greg Mankiw. It must be terribly embarrassing when Greg Mankiw writes things that are obvious errors and pointed out as such in Greg Mankiw’s textbook, and they get blamed on Greg Mankiw. There’s a sitcom in it.

9

Barry 04.19.10 at 6:37 pm

dsquared, there used to be a blog about it, hosted by ‘the noted New Keynesian economist Greg Mankiw’. IIRC one of the favorite methods used by Joe Random Internet Commenter to make ‘dreadful Republican Party hack, also called Greg Mankiw’ look like a fool or a liar was to quote from that book by ‘the noted New Keynesian economist Greg Mankiw’.

Eventually, the comments were closed; fortunately the economic profession isn’t as rough on their members.

10

JoB 04.19.10 at 7:01 pm

If it is genuinely unique, isn’t it a bad experiment?

11

Tom 04.19.10 at 8:01 pm

What a petard by which to be hoisted.

12

smita 04.19.10 at 8:07 pm

Your ‘expansive’ definition of social movement is not appropriate. There are many of us who would like to be part of an “anti-Mankiw’s textbooks” movement, should one start.

13

Hogan 04.19.10 at 9:03 pm

There’s a sitcom in it.

But they’re macroeconomists!
Identical macroeconomists, and you’ll find
They walk alike, they talk alike, sometimes they even think alike.
You could lose your mind
When macroeconomists are two of a kind!

14

Delicious Pundit 04.19.10 at 9:07 pm

There’s a sitcom in it.

Suggested title: “Charts and Gaffes”.

15

Alice de Tocqueville 04.19.10 at 9:20 pm

I’m sure you’ve seen this:

http://www.standupeconomist.com/videos-public/

Posted by ‘Louise’ over at 3QuarksDaily

16

Harold 04.19.10 at 11:57 pm

Learning about economics? Or piracy?

[The “nobility” of the Rhine] abused their positions by stopping passing merchant ships and demanding tolls . . . Often iron chains were stretched across the river to prevent passage without paying the toll, and strategic towers were built to facilitate this.

Writers of the period referred to these practices as “unjust tolls,” and not only did the robber barons thereby violate the prerogatives of the Holy Roman Emperor, they also went outside of the society’s behavioral norms, since merchants were bound both by law and religious custom to charge a “just price” for their wares. –Wikipedia

17

P O'Neill 04.20.10 at 1:14 am

One of his March posts:

I am looking to hire a Harvard student to work with me as I revise my principles textbook (along with several other less time-consuming tasks). The part-time job requires strong writing/editing skills, the ability to proofread carefully, some facility with data, and an interest in pedagogy. Work would start soon, and it would continue throughout the summer and into the fall term. Because most of the communication can be via email, there is no need to stay on campus during the summer.

This reads as an almost Goldbergian plea for someone else to do the actual work. But he keeps the brand name and the $175/pop.

18

Tom T. 04.20.10 at 1:51 am

Harvard costs what, $100,000 per year? For the students, the marginal cost of a textbook probably just gets lost in the noise.

19

HP 04.20.10 at 1:53 am

@ Hogan # 4

Now Gregory’s been most everywhere
From Watertown, to Harvard Square
But Greg has only seen the sights a guy can see from Cambridge Heights —
What a crazy pair!

20

dsquared 04.20.10 at 6:33 am

The only title I am willing to consider is “Thank You Mr Mankiw”.

Mankiw A: Hey, don’t you think life expectancy is a kind of schlocky way of comparing healthcare systems?

Dean Gelman: MANKIWWWWWWW!

Mankiw B: WHat? whatwhatwhat? I didn’t do nuthin!

Mankiw A: Ain’t I a stinker?

21

Es-tonea-pesta 04.20.10 at 7:46 am

It rhymes with “Thank you”?!? I assumed the W was pronounced as a V.

22

ogmb 04.20.10 at 9:14 am

This reads as an almost Goldbergian plea for someone else to do the actual work. But he keeps the brand name and the $175/pop.

This is, in a nutshell, how academia works.

23

ogmb 04.20.10 at 9:31 am

That $175 is the fine for not knowing what Google and RapidShare are.

Or Amazon.co.uk

24

mds 04.20.10 at 1:55 pm

What a petard by which to be hoisted.

I’m pretty sure not even Harvard lets their professors get away with that. At least not in the classroom.

25

Justin Martyr 04.20.10 at 2:26 pm

Now, I know that smugness is Crooked Timber’s thing, and arguments based on smugness should probably not be judged based on whether they are logical or empirically grounded (oh how theory laden that is!), but its well-established that firms are run as command economies due to transaction costs. It is the transaction between firms that are governed by pure market principles.

26

mw 04.20.10 at 2:32 pm

You know, Mankiw’s rent-seeking–obnoxious as it is–is penny-ante stuff. The real higher-ed rent-seeking outrage is not that students are required to pay $175 for a textbook for a standard intro econ class, but that students and their families (along with taxpayers in the case of state schools) are required to pay many times that in tuition for said course–even though most students with a minimum of motivation and half a brain could readily learn and master the material on their own (with much less time wasted surfing, texting, and sleeping through lectures).

But, of course, the accreditation cartel does not allow credit without first extracting their rents. Higher-ed is built on a foundation of rent-seeking; it could not exist in anything like it current form without it. Grossly overpriced textbooks are the least of it.

27

Steve LaBonne 04.20.10 at 3:01 pm

At least not in the classroom.

Not even for a chemistry demonstration? Chem students love explosions!

28

LFC 04.20.10 at 5:01 pm

Tom T. @18:
Harvard costs what, $100,000 per year? For the students, the marginal cost of a textbook probably just gets lost in the noise.

Harvard tuition is nowhere near 100K per year. More like half that, more or less in line with certain other (expensive) schools, and you have to take into account that roughly 75% of the students, IIRC, are on financial aid (grants not loans), often in very substantial amounts. Therefore the “marginal cost” of a textbook is not going to get “lost in the noise.” The price of this textbook is quite outrageous, as is the cost of many other textbooks, presumably. Although my guess is that the textbook market for intro. econ. is more like an oligopoly than a monopoly. Mankiw may have the top-selling book, but there must be a few competitors in the field.

29

y81 04.20.10 at 5:48 pm

When I was in college, many professors rebated their royalties when they assigned their own books for a course they taught. I’m surprised Mankiw doesn’t do that, but maybe it’s only the fashion at universities further up the pecking order.

30

Harold 04.20.10 at 7:02 pm

Can anyone say “price gouging”?

31

Current 04.20.10 at 11:49 pm

I’m very happy that the left have finally come to embrace public choice and recognize the problems of rent-seeking. I think I speak for all of libertarianism when I say we are very happy about this.

I hope that Jon Quiggin incorporates its insights into this bright new future he’s cooking up.

32

ben w 04.21.10 at 12:03 am

but maybe it’s only the fashion at universities further up the pecking order

than Harvard?

33

LFC 04.21.10 at 1:27 am

@ben w:
“Further up the pecking order” was presumably intended as humor, and I for one found it amusing. (NB: A pecking order, of course, is not necessarily the same as an order of merit or quality.)

34

bza 04.21.10 at 2:05 am

32:

Reflect on what “y81” might mean.

35

Robert 04.21.10 at 6:17 am

I wonder how many propertarians (also known as “libertarians”) who go on about public choice have even heard of Michal Kalecki.

36

ogmb 04.21.10 at 10:38 am

The real higher-ed rent-seeking outrage is not that students are required to pay $175 for a textbook for a standard intro econ class, but that students and their families (along with taxpayers in the case of state schools) are required to pay many times that in tuition for said course—even though most students with a minimum of motivation and half a brain could readily learn and master the material on their own (with much less time wasted surfing, texting, and sleeping through lectures).

It might be very interesting to watch a social experiment where neither parents nor governments are allowed to invest in education because this investment seems to curb the students’ “minimum motivation [to] master the material on their own”, but my personal prediction is that such an experiment would fail miserably. 99.99% of students don’t have the innate drive to master complex material on their own, which is why things like compulsory and state-sponsored education exist. (Ironically, Harvard probably has a higher ratio of self-motivated students than most other universities because they can cherry-pick their student body…) Nevermind that nobody is required to pay Harvard anything at all… If there is a rent-seeking complaint worth considering in this story it is that Mankiw milks the locked-in status of his students for his own gain.

37

ogmb 04.21.10 at 10:40 am

Harvard tuition is nowhere near 100K per year. More like half that, more or less in line with certain other (expensive) schools, and you have to take into account that roughly 75% of the students, IIRC, are on financial aid (grants not loans), often in very substantial amounts

The term for this is first-degree price discrimination, a.k.a. the dream condition for any seller of any product…

38

Tim Wilkinson 04.21.10 at 11:45 am

Never understood why it’s called rent ‘seeking’.

39

ajay 04.21.10 at 11:55 am

Wonder if there are other areas in which the class itself could be used as an example of the phenomenon being taught…

40

Steve LaBonne 04.21.10 at 12:18 pm

I’m very happy that the left have finally come to embrace public choice and recognize the problems of rent-seeking.

We’ve understood it all along. The real friends of rent-seeking are big-business conservatives (who are damned if they’re going to be exposed to the free market as long as they can buy politicians to protect them from its rigors). They ought to be our common enemy, except that you propertarians are so worshipful of anybody with lots of money (honestly gotten or not) that you turn a blind eye to their sins and those of the politicians who abet them.

41

chris 04.21.10 at 1:52 pm

@40: I think he’s just confused by liberals who believe

1) Governments are vulnerable to corruption and rent-seeking

2) Governments are useful/necessary for some purposes

because he thinks it’s some kind of Orwellian doublethink to believe both of those things at once. Pretty much the whole libertarian position is “1, therefore not 2”, which is a glaring non sequitur.

42

chris 04.21.10 at 1:57 pm

To expand on 41: since many libertarians believe 1) and 2) are contradictory, they think that by proving (or sometimes just vociferously insisting) 1), they can win the argument over 2). Thus their puzzlement when liberals consider 1) off-topic to a discussion of 2). Liberals aren’t even trying to refute 1) but they’re still acting like they’re winning the argument over 2). Silly liberals!

This also explains the straw-collectivist: because in the libertarian mind 1) and 2) are incompatible, the collectivist who believes 2) *must* disbelieve 1), which explains his naive faith in bigger government everywhere and always. The fact that this portrait is completely disconnected from actual liberals who exist in the real world is lost on many libertarians.

43

tommaso 04.21.10 at 4:50 pm

I don’t understand this argument. It is his course, he wrote a book about the subject, he’d better use his book!

As to the secondary market argument, there may be some substance to that but not too much. Mankiw tries to keep his materials alive and so to include the current policy issues in his book. That requires some updating. Also the technology that come with the book evolve. As a grad student I used Mankiw’s text when teaching Principles courses: the different versions usually have, over time, better technological interfaces, better accompanying slides, better test banks etc.

Different is the argument that, once a book is written, the marginal cost of producing another identical copy is much lower than the retail price. Mankiw would probably argue that without copyrights and the expectation of profits potential book writers would not write their books. But economists have differing opinions about how much monopoly power publishing houses (music companies etc.) should be granted.

44

Nick 04.21.10 at 6:31 pm

“1) Governments are vulnerable to corruption and rent-seeking

2) Governments are useful/necessary for some purposes”

There are remarkably few libertarians who would disagree with those claims. The dispute is over what those purposes are and how one might avoid rent-seeking. Decentralised institutions (including where possible voluntary transactions) and competitive jurisdictions are the libertarian leaning solutions.

45

chris 04.21.10 at 9:12 pm

Competitive jurisdictions encourage regulatory arbitrage. Decentralization ditto, to some extent (witness the remarkable effects of financial entities being able to select their own regulator, and their own rating agency to evaluate the risk of their financial products).

Many of the purposes of government involve protecting A from the actions of B. B would prefer a government that doesn’t do this so effectively. That’s why “choosing government with your feet” is not a panacea, especially when it is impractical or impossible to prevent interjurisdictional actions, contracts, etc.

But it’s true that once you reach this level of complexity, you are beyond the straw-collectivist (“you just want government to be bigger because you hate freedom!”) and the sort of libertarian who is always bringing him out to bash. It just happens to be my experience that it is the thoughtful sort of libertarians who are “remarkably few”, rather than the other way around.

46

Chris W 04.22.10 at 1:00 am

@23

Ah yes, the joys of Amazon.co.uk! My first experience was trying to buy a book that hadn’t been released in the US yet as a Christmas present. It turned out that even with shipping (3 days, I think) it was cheaper from Amazon UK than the pre-order price from Amazon US. It almost felt like I was cheating.

47

Anon 04.22.10 at 1:09 am

This is where I chime in anonymously and note that Mankiw’s book is largely copied off the collected contributions of Ec-10 TA’s who had put together wonderful explanatory sections and problems which he incorporated into text wholesale. I still use the original notes because they are better than his textbook. Mankiw provided an object lesson in the use of power to privatize a commons resource. The other problem with the book is that it is way below Harvard student level. Its better suited for community colleges.

48

Eli Rabett 04.22.10 at 4:58 am

Mankiw is not unique. Textbooks cost a whole lot less elsewhere because in the US textbooks are specified by the instructor. I can get any chemistry textbook hand delivered complete with slobbering publishers rep the next day at no cost. They will cheerfully pile the supplementary material they carefully designed to kill the used book market up to my ceiling. I exaggerate, but the General Chem program at Really Large State U, can get the slobbering reps and more.

The economics are simple. At RLSU the GChem course might have ~5000 students or more. At $200 for the book (more if the students are offered the “package”) that is ~ 1M$, about 75% of which goes to the publisher and the rest to the bookstore. At our smaller place we are down by an order of magnitude, but the business is steady enough that we can get a decent lunch brought in every couple of years when we consider new texts and all the free copies we want. English and math are the 1000 pound gorillas in the textbook business, but chem ain’t bad.

Mankiw is a piker

49

Current 04.22.10 at 8:20 pm

This post numbering is a great idea.

#35 Robert,

> I wonder how many propertarians (also known as “libertarians”)
> who go on about public choice have even heard of Michal Kalecki.

I have heard of him, but I don’t know what he wrote about rent seeking. Do you have any references?

#38 Tim Wilkinson,

> Never understood why it’s called rent ‘seeking’.

It’s a comparison with “profit seeking”. Conventional entrepreneurship is profit seeking. Political entrepreneurship is rent seeking.

#40 Steve LaBonne,

> We’ve understood it all along.

If that’s true then why have leftist governments set up institutions that are so vulnerable to it? The problems of rent seeking affect every regulator, and especially those that have discretionary powers. But, the left constantly push for more discretionary regulatory powers.

Perhaps you understand rent seeking, but I don’t think that the elected politicians of the left do.

> The real friends of rent-seeking are big-business
> conservatives (who are damned if they’re going to be exposed
> to the free market as long as they can buy politicians to
> protect them from its rigors). They ought to be our common
> enemy, except that you propertarians are so worshipful of
> anybody with lots of money (honestly gotten or not) that
> you turn a blind eye to their sins and those of the
> politicians who abet them.

Well, yes, rent seeking by big-business conservatives is disgraceful, if you read libertarian sources you will often see it condemned.

However, there is nothing fundamental about “big-business”, “conservative” and “rent seeking” occurring together. Farmers groups have often engaged in rent-seeking by campaigning for subsidies. Professional organizations and trade unions have engaged in it by campaigning for licensing laws.

If there were no conservatives at all (or no big business) there would still be rent seeking. The challenge is to reform institutions so that rent seeking is more difficult.

#41 Chris,

> 1) Governments are vulnerable to corruption and
> rent-seeking
>
> 2) Governments are useful/necessary for some purposes
>
> because he thinks it’s some kind of Orwellian
> doublethink to believe both of those things at once.

I’m not arguing here that government isn’t useful or necessary for some purposes. I agree that it is, though it may be possible to create some kind of “competitive government” in the future it still looks pretty much like government to me.

The conventional libertarian argument is rather that the possibility of corrupt and rent seeking should make reformers cautious. At every step the question of what will happen in the future must be asked.

As David Hume said we should analyse government “as though all men are knaves”.

> Pretty much the whole libertarian position is “1,
> therefore not 2″, which is a glaring non sequitur.

No it isn’t. This is just one aspect of a motivation problems, there is much more to libertarian thought than that. Knowledge problems for a start – how is the government supposed to know the best course?

#42 Chris,

> Thus their puzzlement when liberals consider 1)
> off-topic to a discussion of 2).

But, 1) isn’t off topic in discussion of 2). When discussing policy it isn’t sufficient just to have good intentions, what’s important is the effects that policies have. So, any policy proposal must be considered bearing in mind whether it will help interest groups, assist in rent seeking or discourage it.

#45 Chris,

Actually, I agree with you that jurisdiction arbitirage isn’t a panacea.

The best example is a business that bribes a foreign dictator to change the law in the businesses interest. Suppose the people of foreign dictator’s country are free to leave but wouldn’t have the money or perhaps wouldn’t be accepted elsewhere.

(I’m sceptical about the idea that regulatory arbitrage was so significant in the recent crises. I think that the sophisticated investors who were buying financial products knew full well that the choice of ratings agency and location of the business would be choices amenable to the seller. If you see a favourable review on the inside cover of a book don’t you think that the publisher picked the reviews that were most favourable. Investors may claim otherwise now to obtain bailout funds.)

There are benefits to juridiction arbitrage too though.

I think it works when:
* Leaving is cheap.
* Migration to other countries is acceptable.
* Laws deal with what happens within a country so if a business is incoportated elsewhere it doesn’t make much difference.

50

lemuel pitkin 04.22.10 at 8:25 pm

This post numbering is a great idea.

Sure, that’s what you think now. But wait til a post comes out of moderation and moves all the subsequent numbers around, and all your carefully crafted rebuttals end up misdirected.

I consider CT’s failure to resolve this problem an indictment of liberal academia as a whole.

51

Steve LaBonne 04.22.10 at 8:31 pm

This is where I chime in anonymously and note that Mankiw’s book is largely copied off the collected contributions of Ec-10 TA’s who had put together wonderful explanatory sections and problems which he incorporated into text wholesale.

When I took Ec 10 the celebrity lectures were hardly worth attending; the TAs did all the actual teaching. Sounds like not much has changed in all these years.

52

Steve LaBonne 04.22.10 at 8:34 pm

Yeah, what’s with the moderation thing? Every once in a while I have a comment, which doesn’t even mention an economic system in whose name an ED drug is concealed, hang up in moderation for no discernible reason.

53

chris 04.23.10 at 2:41 pm

If that’s true then why have leftist governments set up institutions that are so vulnerable to it?

Because that’s the only kind of institutions humans *can* set up?

The alternative to fallible institutions is no institutions — and not even really that, because institutions of some kind will arise and fill the power vacuum, you just won’t have any say about what they will be.

Meliorating imperfection is the only game in town. Taking your ball and going home *just does not work*.

The problems of rent seeking affect every regulator, and especially those that have discretionary powers. But, the left constantly push for more discretionary regulatory powers.

Funny that you should mention this at the precise time that the (moderate) left is pushing for more *mandatory* regulation of one of the largest industries in the country, and the right is pushing for either the status quo of rampant fraud, or at most, discretionary regulators that can be easily captured and/or arbitraged.

The liberal solution to rent-seeking is public scrutiny. The entire population, by definition, cannot rent seek. (Majorities less than the whole population can, which is why we need an Equal Protection Clause and similar measures.)

In any case, this just goes back to my basic argument: acknowledging the flaws of your tool is no reason to abandon the tool, if you don’t have a better tool or know where you can get one.

As David Hume said we should analyse government “as though all men are knaves”.

If *all* men were knaves, we’d have no business having a democracy in the first place (or, indeed, any sort of society).

Some men are knaves and it’s hard to tell which ones in advance, so we must be prepared for the possibility of knavery from anyone at any moment. But that applies just as much to business as it does to government (and sometimes more so — the opportunities for an ambitious knave are often much greater in the private sector, especially when the government is under heavy public scrutiny; also, limited liability is tremendously useful for many sorts of knavery, since “I didn’t know that was going to happen” is easy to say and difficult to disprove in so many situations).

The current growth sector for knavery is, of course, government contracting, which combines access to the public purse with the industrial secrecy of the private sector and (recently, at least) an almost total lack of accountability for even the most obvious blunders. Liberals are not generally friendly to this trend, preferring to keep most government operations under public control and scrutiny.

P.S. The analogy between rent seeking and profit seeking is an interesting one, because as you may be aware, one of the most common liberal critiques of libertarians is that they seem to have a blind spot for forms of corruption, fraud, and other harmful practices that don’t come with government badges. And there are plenty of ways to profit at the expense of your customers, employees, the public in general… Anything that looks good to the consumer is good enough to survive the competition of the marketplace, including negative amortizing ARMs, payday lending, and CDOs as well as Ford Pintos and E. coli contaminated spinach. The market weeds out *obviously* bad products, but is ineffective against subtly bad ones — that’s what you need the SEC, the FDA, product-liability tort suits, etc., for. The job market is even worse, because some people’s circumstances force them to accept even obviously bad jobs.

54

Current 04.23.10 at 8:13 pm

>> If thats true then why have leftist governments set up
>> institutions that are so vulnerable to it?
>
> Because that’s the only kind of institutions humans can
> set up?

What I wrote was “why have leftist governments set up institutions that are SO vulnerable to it?

Some institutional setups are more subject to corruption and rent seeking than others. Certainly all will suffer to some degree, but it’s a problem that can be ameliorated. As you say “Meliorating imperfection is the only game in town”, I agree with you.

> Funny that you should mention this at the precise time
> that the (moderate) left is pushing for more mandatory
> regulation of one of the largest industries in the
> country, and the right is pushing for either the status
> quo of rampant fraud, or at most, discretionary
> regulators that can be easily captured and/or
> arbitraged.

I’m not an American, I live in Ireland. What industry do you mean? Finance?

> The liberal solution to rent-seeking is public scrutiny.

Public scrutiny certainly helps. But, you must be realistic about it. The electorate can monitor things that they understand, and affect their lives in a clear way. However, in a modern industrial society this doesn’t include many very important aspect of government policy towards business, and towards foreign countries and minority groups. The electorate cannot judge government policies well that only come into fruition many years after they are introduced.

I’m not an opponent of democracy, but I think that democrats must be reasonable in their ambitions. This is one of the knowledge problems I mentioned earlier.

>> As David Hume said we should analyse government “as
>> though all men are knaves”.
>
> If all men were knaves, we’d have no business having a
> democracy in the first place (or, indeed, any sort of
> society).

Hume wrote “AS THOUGH all men are knaves”. He wasn’t suggesting that all men actually are Knaves. His point was that since destruction of social relations and capital is much easier than creation that humans must ensure against it. They must ensure that when the worst happens and the leaders are indeed knaves that they will only be able to cause limited damage.

That is exactly what you mean when you write “Some men are knaves and it’s hard to tell which ones in advance, so we must be prepared for the possibility of knavery from anyone at any moment.” So, I think we really agree about this.

> But that applies just as much to business as it does to
> government

Yes.

> (and sometimes more so—the opportunities for an ambitious
> knave are often much greater in the private sector,
> especially when the government is under heavy public
> scrutiny;

I don’t agree. In the private sector every individual’s actions are under the scrutiny of others. Employees are by their managers. Businesses by their customers, suppliers, shareholders and creditors. Each of these groups has a strong interest in carefully examining the actions of the others. The groups are mostly close to the activities of each other an much more expert in these activities than the general public.

There is nothing similar in the state sector. The voter is a member of the general public. He or she has no idea about most of the activities of the state, the electorate are far away from them. He or she gives her time entirely voluntarily to decide which party it is best to vote for.

> also, limited liability is tremendously useful
> for many sorts of knavery, since “I didn’t know that was
> going to happen” is easy to say and difficult to disprove
> in so many situations).

To some extent yes. But, when someone deals with a limited liability company they are aware that the limitation on liability is in place, it is something that they take into account.

I agree though that this is by no means perfect. The system of prosecuting directors when companies commit crimes is highly unsatisfactory, since shareholders are supposed to be supervising them.

> The current growth sector for knavery is, of course,
> government contracting, which combines access to the
> public purse with the industrial secrecy of the private
> sector and (recently, at least) an almost total lack of
> accountability for even the most obvious blunders.
> Liberals are not generally friendly to this trend,
> preferring to keep most government operations under
> public control and scrutiny.

Think about the issue though. Certainly it would help if the accounting for state projects were more open. But, even if it were the media and the electorate are not experts in the construction projects, they don’t know what prices are reasonable.

Keeping government operations under “public control” is not necessarily any better. The state can, broadly speaking, take two different paths, it can control construction in detail or it can allow the private contractors greater scope to decide on the detail. The latter path opens up the problem of corruption. The former path though requires that the state have knowledge and competency in all of the areas related to the construction project.

> one of the most common liberal critiques of libertarians
> is that they seem to have a blind spot for forms of
> corruption, fraud, and other harmful practices that
> don’t come with government badges. And there are plenty
> of ways to profit at the expense of your customers,
> employees, the public in general… Anything that looks
> good to the consumer is good enough to survive the
> competition of the marketplace, including negative
> amortizing ARMs, payday lending, and CDOs as well as
> Ford Pintos and E. coli contaminated spinach. The market
> weeds out obviously bad products, but is ineffective
> against subtly bad ones—that’s what you need the SEC,
> the FDA, product-liability tort suits, etc., for.

I don’t agree at all. Let’s take your four examples and look at them…

> negative amortizing ARMs

In a rising house market it isn’t a surprise that people took out such products. It was reckless for many of them and reckless of the lenders. But, it was only fraud when the product was misrepresented.

If a home owner made a bad decision and invested unwisely then the rest of society should not be concerned. It was the individual’s decision to make and he or she recieved the consequences. The wealth in question has been redistributed away from that individual towards more sober and sensible individuals.

> payday lending

This demonstrates another problem for the left’s argument. Are you really sure that payday lending is bad for those who use it? If you get into the details of the subject it’s actually not at all clear.

This is another knowledge problem. Many on the left assume that just because they wouldn’t do something that it means that doing it is irrational and must be banned by government. But, people find themselves in very different personal situations. What is appropriate for one person isn’t for others.

> CDOs

This brings up another knowledge problem. Do you really think that CDOs are something to be opposed?

I think that they have simply arrived at the same time as a financial crisis. Look at Britain, Ireland and Iceland. Only 10% of the British mortgage market was packaged into CDOs, and AFAIK none of the Irish. Collapses of financial institutions occurred in all three nations, but they weren’t connected to CDOs. The Icelandic banks lent out money in the conventional manner.

It isn’t at all certain that CDOs are a cause of the financial crisis, or that banning CDOs will provide an social benefits.

> Ford Pintos and E. coli contaminated spinach

If a product is flawed then the customer can make a case against the business supplying it. This has been the case for most of modern history. No regulations are needed to achieve it, it is part of common law.

Where regulations are important is in the differentiation you make later between obviously bad products and subtly bad ones. It is a useful addition to common law to have rules that specify what amount of low-level toxins are in foods. That way the case where someone dies of a build up but no one person who sold him food is responsible can be avoided.

It should be noted that in practice it is commercial considerations that actually induce companies to be careful. My family have being in the vegatable growing and retail business for several generations (in England). The food regulators hardly ever actually test anything, the chances of getting caught are very small. The food grower is cautious in practice because the customers may find the contamination themselves.

Products, services and businesses build up reputations. The contract and regulations governing a product aren’t the only thing that informs the customer. This information from others also helps the customer and disciplines the business. Types of products that are tricky to handle build up a reputation for being so.

(It’s not surprising that both of the examples you give are from state supported industries. Ford aren’t really in the business of selling cars anymore, they’re in the business of selling car-industry jobs to the state in return for subsidies and bailouts. Cars are a bi-product.)

> the SEC, the FDA, product-liability tort suits, etc.

I agree with you about tort suits and to a limited extent about the FDA and SEC. Even Rothbard said that there must be a set of rules about what constitutes a product of a certain type in the absence of a contract specifying it in detail.

But, I think you carry the argument much too far. Legislators and left-wing commentators can’t simply proclaim products or services (such as CDOs) to be dangerous. The law and government can’t protect reckless people against themselves. Thinking that it can is the triumph of hope over experience.

Note that you are expecting the government to do a very detailed job here. You’re expecting the electorate to oversee this very detailed job. Take construction for example. If it’s unreasonable to think that a mortgage buyer can understand an ARM mortgage then why is it reasonable to think that the same person in his capacity as a voter can understand if the construction contract for a nuclear power station issued by the state government was a good deal? Similarly, if a man can’t be expected to understand if his spinach contains too much E-Coli but can be expected to oversee the FDA.

In practice society doesn’t work like that. Things like the FDA work because firstly those who work there are probably reasonably ethical. I would argue the same is true of most businesses and businesspeople. Hume’s dictum is after all, only a worst case. The second reason is because those directing the bureaucracy know that if they don’t perform then after a period of time this will be noticed. In practice institutions like this build up a reputation like companies.

> The job market is even worse, because some people’s
> circumstances force them to accept even obviously bad
> jobs.

I don’t understand how that relates to the issue.

55

Current 04.24.10 at 12:36 pm

56

Alice de Tocqueville 04.24.10 at 4:36 pm

“If a home owner made a bad decision and invested unwisely then the rest of society should not be concerned. It was the individual’s decision to make and he or she recieved the consequences. The wealth in question has been redistributed away from that individual towards more sober and sensible individuals.”
Is every person who may want to take out a property loan expected to be a lawyer? Are you aware that almost half of the subprime mortgages were issued to people who qualified for prime, but who had not enough knowledge to naysay what the banks told them was their status? Surely you are aware that these contracts are unintelligible even to lawyers? There WAS fraud on the part of banks, and lots of it. But far from defending the people, our government is afraid to bite the hand that feeds them, and will not enforce the law.
And as for your “more sober and sensible individuals,” I’m currently owed several thousand dollars by a company that’s been in mortgage banking and real estate for 2 generations, who have several lawyers in their family, and who’ve had great educations. But they drank the greed Koolaid, too, and screwed themselves and their investors and employees, as well. By the way, they complain that they’re being screwed by a big bank.
> payday lending
“This demonstrates another problem for the left’s argument. Are you really sure that payday lending is bad for those who use it? If you get into the details of the subject it’s actually not at all clear.
This is another knowledge problem. Many on the left assume that just because they wouldn’t do something that it means that doing it is irrational and must be banned by government. But, people find themselves in very different personal situations. What is appropriate for one person isn’t for others.”
This sort of writing isn’t really a counter-argument. It’s mostly just rhetoric, and is okay as far as it goes. I don’t mean this in a snarky way, both sides can at times make an imperfect argument. This forum is, after all, largely a rhetoric roundtable. But that doesn’t provide an answer to problems that are real.
I submit that many positions libertarians take are logical, or even idealistic, but the assumption that the marketplace is always more expert or even efficient isn’t borne out by the facts on the ground. For instance, there are millions of dollars owed to people by purveyors and practitioners who can afford whole panels of lawyers, and even bribes. A poor person often has no viable remedy in the courts, and without government inspections, you may not be able to have access to the proof that a business was at fault.
And, well, if you die from shoddy work or products……………I suppose your answer would be that you really have no worries then, or standing to sue.

57

SamB 04.25.10 at 6:48 am

In defense of Prof. Mankiw, the argument against lecturers assigning their own texts in subjects they teach seems not just spurious but perverse.

Perhaps rather than turning to abstract explanations such as “wisely choosing the best possible product on the market” or “monopolistic rent-seeking” one could consider the more basic argument that a textbook authored by Mankiw the author is the one most likely to reflect the viewpoint of Mankiw the teacher … and thus is the one most suitable to the course being taught by the aforementioned Mankiw.

SB

58

Bernard Yomtov 04.25.10 at 5:42 pm

one could consider the more basic argument that a textbook authored by Mankiw the author is the one most likely to reflect the viewpoint of Mankiw the teacher … and thus is the one most suitable to the course being taught by the aforementioned Mankiw.

But then shouldn’t the textbook be included for free? The students are paying a hefty sum for Mankiw’s economic wisdom. Are you saying that only covers a part of it, and they should have to cough up an extra $175 for the rest?

Onn an earlier topic, I suspect the reason there’s not much fuss about the scanning in of some books is that it could be unwise to call attention to textbook pricing issues. Better to tolerate some leakage than to risk the entire system.

59

LP 04.25.10 at 5:54 pm

54, you make the point (and rightly so) that public scrutiny is not a panacea.

>”The electorate can monitor things that they understand, and affect their lives in a >clear way. However, in a modern industrial society this doesn’t include many very >important aspect of government policy towards business, and towards foreign >countries and minority groups. The electorate cannot judge government policies well >that only come into fruition many years after they are introduced.”

However, you miss the same epistemic problem that exists in dealing with private
enterprises. You are outrageously optimistic when you say:

>”In the private sector every individual’s actions are under the scrutiny of others. >Employees are by their managers. Businesses by their customers, suppliers, >shareholders and creditors. Each of these groups has a strong interest in carefully >examining the actions of the others. The groups are mostly close to the activities of >each other an much more expert in these activities than the general public.”

and

>”when someone deals with a limited liability company they are aware that the >limitation on liability is in place, it is something that they take into account.”

I find the idea laughable that a consumer considers the legal structure of the entity when they are deciding whether to engage in a transaction. I just can’t fathom it on 99% of consumer transactions.

Libertarians may find liberals hopelessly utopian about the prospects of success of government action, likewise liberals may view libertarians as hopelessly naive on the inevitability of goodness of private action. Amelioration of rent seeking is an important way to increase prosperity and utility, but the reduction of perverse incentives and market failure are too crucial to prosperity increases. People will justifiably come to different conclusions about the right amount of government to balance the three issues above, but a pure form of libertarianism requires shutting your eyes and humming so that you can neither see nor hear the obvious instances of perverse incentives and market failure.

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