You Had Me at “Swedish-American Economist Ronald Coase”

You might want to identify which Duncan Black you’re referring to. Kids these days, you know.

More wisdom from the review:

” Eschewing the classic economic models that focused on production, public choice theory’s foundational idea was the utility-maximizing consumer. ”

According to the author, “public choice” and game theory were born when the marginalist revolution displaced classical production theories of value — and all this was essentially the offspring of American military think tanks in the late 1940s.

“If Marxism is to inspire millions of people once again, […] it needs to fight for the commanding heights of intellectual life”

And what a way to start the fight!

I may have to rewatch The Treasure of the Sierra Madre, because according to this fine article, I missed the main point.

I thank whatever powers there be that whoever wrote that was not teaching in my graduate program…we’d have died laughing…

Ha the author’s been doing it for years.

From his website, in a Financial Times article dated 10/15/05:

The Paradox of Choice strikes at the heart of the “hard” social sciences. It aims its daggers at the foundation stone that draws together the disciplines of modern economics and political science, the idea of the “utility-maximising consumer”. This utility- maximising consumer . . . forged the beginnings of a new type of political economy – the so-called game theory, rational choice theory or public choice theory.

At least he’s separated rational choice theory from the lump in the past eight years, that’s progress of a sort.

Game theory is a famous example: it was founded by (mostly social democratic) public choice theorists who broke from George Mason University in Santa Monica in the 1950s, forming co-authorships of twenty to forty people with their rent-seeking models in each other’s military think tanks.

“In the last 50 years, [prisoner’s dilemma] has troubled the best mathematicians”

If you look at the winners of the Fields Medal or the Abel Prize this looks dubious. The Prisoner’s Dilemma has troubled some significant thinkers, but I would have said more in computer science (broadly construed) than in mathematics.

This is also very odd:

“But Adam Smith forgot about something. In a state of nature without rules or government, taking your goods to market is only one of the available options. If both Bill and Bertha would be better off trading with each other, each would be even better off if they stole each other’s stuff and kept it for themselves. Given that each doesn’t know the intentions of the other, and assuming that both are rational and sensible people, it will always be in their best interest to steal from each other rather than to trade — a strategy which has the effect of leaving both worse off. Aware of the dilemma, they could sign up to a voluntary agreement not to steal from each other. The collective action problem, however, says that any such pact is bound to come unstuck, since each trader will conclude that the best thing to do is to back out of the agreement at the last minute and cheat his/her opponent. Once again, the gains from trade envisaged by Adam Smith disappear through a trapdoor of selfishness and the pursuit of strategic interest.

How can we go about solving this anomaly? The answer, it turns out, is not a complex mathematical formula cooked up by cunning social scientists but an agreement between the traders themselves. Precisely because each trader knows that it will always be in his or her trading partner’s best interest to steal, each agrees to give some of their bread and sausages to a third party, one whose job from then on will be to police the agreement not to steal. The existence of this policeman has the effect of changing the incentives of both traders who hired him. Since both no longer wish to be punished for falling foul of the law, each now comes around to the view that it would be better off to trade rather than steal. Thus — abracadabra — do we arrive at a simple logical explanation for the development of a modern state whose job it was, at least initially, to watch over and protect the gains from trade.”

As with those software/strategy competitions about how to “win” in the prisoners’ dilemma. The correct answers are different for one time playing and multiple iterations. And human interactions like bread and sausages are multiple iteration games. And the ultimatum game shows how much we’ll all quite naturally, without the state, attempt to police such interactions.

Might well be better that the state regulates, but it’s not actually essential in the sense that Harkin is proposing.

There’s a much stronger case for state intervention in single iteration games: like, say, buying a pension or a mortgage, something we do once or a couple of times in a lifetime. It may well be that only such regulation can remove that temptation to cheat. But trading hot dog buns for hot dog rolls as the necessary foundation of the State?

“… harmful effects could be resolved by means of a simple logical bargain between its immediate perpetrator and victim and without the intervention of the state or anyone else…”

Has anyone ever truly believed this? I mean, beyond the first year of college. Lots of theories of the world can be devised and held to so long as those “unnecessary” protections are in place and the student in question has not yet gotten out much. The use of the word “victim” is interesting, since it seems to undercut the whole idea that the victim and perp can sit down and work out a solution like sensible grown-ups.

In truth, these sorts of negotiations are a very rare exception, the sort of thing so rare it only shows up in Reader’s Digest and Chicken Soup books as heartwarming fairy tales. Hell, even in very well policed societies, the pressure is always there for the perp to get his way as sneakily or baldly daring a way as possible. Examples are published formally every day, in distinguished journals called “newspapers.”

Sheesh.

ronan: I bought it following a warmish endorsement from dsquared, but I didn’t manage to extract a great deal of value myself. It is quite fun to read in places, but not all that reliable was my impression.

Ronan—here’s my initial reaction from (!?!) 2002.

But game theory and public choice theory don’t just have different origins, they’re different frameworks altogether. Obviously you can borrow between them, various scientific fields do this all the time, but that doesn’t imply any sort of dependence between the two. Game-theoretic approaches are mostly orthogonal to public choice theory, and just because PC can use game theory doesn’t mean that it is game theory. It’s a whole other beast.

If there was a Kickstarter project for a movie with that premise, I would donate.

Chris Mealy, my half-remembered econ undergrad got me all but the ‘history of ideas’ thing in #2.
The Gary Becker one was particularly blatant, because game theory explanations of how family members bargain were developed as a direct response to his altruistic decision maker model.

This is intro-level stuff even sociology and philosophy majors are taught as part of their econ requirement, even if they only take the “economics of social justice” course departments offers to foist them off on whichever prof draws the short straw…

I much enjoyed this discussion in no small part because I was — being now an old man — a party to many of the “intellectual” developments and debates considered in this article. My concern, however, is that this article is of a type now becoming very common. Example is this growing tsunami about the dominance of neoliberalism and how Milton Friedman took over the world.
Couple of points. I was at RAND in the period considered. Don’t remember VonNeumann being there. There was a project on developing game theory. The principle was one Tom Schelling. He produced a truly great book entitled Strategy of Conflict but the government (and, therefore, RAND) refused to publish it or be associated with it. It simply did not generate arguments desired. And I would not put Tom on the right-wing of politics.
Strange to me that the search for the ecomist-devils who brought us here does not seem to have given any attention to several of the most important economists on the past 60 years. One is obvioulsy Samuelsonwho seems to be teflon even for the most aggressive Marxists. Another is Lucas — who deserves more than little criticism but I don’t think the critics can begin to understand him. Ken Arrow is another. Yet, I would ague that these three are the most significant theorists — tight or wrong — of the period.
If you all could help me decipher this ever more popular work by Harvey on neoloberalism I would be so appreciative.

Jim

Sebastian

Your comment seems to me to again get to the point of “whose idea belongs to what school?” The notion of regulatory capture was not Buchanan but an even older idea of Stigler I believe. The notion of “concentrated benefits and diffuse costs” is again NOT Buchanan but Mancur Olson.

The good guys versus bad guys assessment of economists seems to me so limiting.

Thanks Chris & Kieran

No, roger, Larkin’s article was riddled with MAJOR – in fact laughable – inaccuracies that discredits whatever general thesis he is trying to present. Henry is ideologically sympathetic to Larkin and keen to see the LARB do well, and that is precisely why he is so upset about it.

But Henry, I do not see how you can now refuse the LARB editor’s request to provide an article which does it right.

re: Sebastian @33 and James Foster @34:

My (admittedly limited) understanding of this topic is that Stigler, Buchanan, et al. basically stuck fancy names on ideas that had been floating around in the US since the Progressive Era. Buchanan and his ilk broke with liberal public administration scholars concerned with, e.g., farm subsidies, by rejecting the idea that regulatory capture (and related problems) could ever be solved in a majority rule political system. The only solutions, in their view, were explicitly counter-majoritarian constitutional provisions and/or privatization.

This was a wonderful discussion and if the outcome is someone will write the history of how or current “economics” came about — I want to read it. It needs to be written. BTW Alex you are dead right.

I could not resist offering this recent comment from Dani Rodrik about the current state of “economics”:

Dani Rodrik asks what use are economists. “There is one other thing that the public should know about economists: It is cleverness, not wisdom, that advances academic economists’ careers. Professors at the top universities distinguish themselves today not by being right about the real world, but by devising imaginative theoretical twists or developing novel evidence. If these skills also render them perceptive observers of real societies and provide them with sound judgment, it is hardly by design.”

Kindred

Great post. My reaction to your reminding me of the great theoretical gestations of the late 1950s through the early 1970s is that you have left out the “schools” and people who really had some influence on policy then or later.

There was the Neustadt/May/Huntington/Schelling/Allison et al crowd at Harvard. They didn’t have a theory so much as a bunch of “models.” Their basic approach was to “get a bunch of smart guys together and make history.” And, oh by the way, lets call it the Kennedy School.

Probably more important — especially for economic policy — was the Samuelson/Solow/ Tobin/Okun (and Heller) crowd from MIT and Yale. They did have a theory — kind of — but the policy practice was one of pragmatic “engineering” of fiscal policy and “tinkering with effective demand.” They were far from sure “how much of what would work,” but they were damn sure they could figure it out.

If the issue is “where did the ideas come from,” then intellectual history is fun. If the issue is who and what ideas truly impacted policy, then the focus is different. I was an insignificant fly on the wall of policy from the 1960s through the early 1980s. I never saw Riker, or Buchanan or any of the others mentioned in this thread in policy circles at that time. I surely saw all the people I have mentioned, and they mattered.

My main point is that “grand theory” or even not-so-grand theory has had little to do with the impact of academics — and of economists especially– in actual policymaking. Greenspan may have had a grand theory but his policies are extremely hard to explain in terms of a consistent set of theoretical principles.

Kissinger was the only grand theorists that operated at serious policy levels that I ever knew — and look at what he brought us.

Quick reply to one thing that Kindred says above:

In re: (1), what I said was “Not only is the preponderance of classic public choice theory decidedly non-game theoretic, but many public choice theorists are actively suspicious of game theory.” Both of these are true, as best as I can see. This potted history by Buchanan is useful in showing how public choice really began as applications of social choice theory, and how the classic work in the field applies arguments from Arrow, Black etc. This said, certainly, many public choice people moved towards applied game theory over time – but I didn’t say that game theoretic applications weren’t public choice – just that (a) the classic articles of public choice are mostly non game theoretic, and (b) that a lot of public choice theorists don’t like game theory, because it potentially muddies the story. That is not, of course to say that one cannot have game theoretic models representing public choice political arguments. The positive political economy perspective that Kindred mentions in passing is one example. Exercise 1 for Chapter 1 of Ordeshook’s game theoretic A Political Theory Primer is about how “Senator Billie Bob” proposes a regulation to stifle free competition and allow duopolistic collusion. It is followed by other examples for students to work through including defense department bureaucrats burying cost-overruns, and subsidy bills introduced by “Congressman Pork.”

On the “Marxist public choice” question, I think that there is some clear potential overlap. That said, if one wants to be crude and reductionistic, both lefties and libertarians can agree that the nexus between the market and politics is a very problematic one. However, libertarians who take this perspective tend (with some exceptions) to see this as the result of politics corrupting markets, while lefties (not all Marxists) see it as the result of markets corrupting politics. Charles Lindblom’s work on the latter is long overdue a revival.

Finally, if you want to see a really clearheaded account of the relationship between game theory and leftist ideas, from someone who doesn’t have any relevant academic qualifications, but has a deep understanding of the issues, I can only recommend Tom Slee’s work yet again.

The subject article seems like something out of an alternative universe, playing Rumour with our own reality. But, maybe, that’s not a bad analogy for the effect of Public Choice economics or political theory on the public discourse and active politics: a great sound made at the mountaintop echoes in the valley below as propaganda and cliché, with misunderstanding more powerful than understanding.

You can talk about libertarian underpinnings, and stuff like that, as Kindred has ably done, but it doesn’t give a sense of the unrelenting ideological rhetoric or the cafeteria consensus of resentful scorn, in which the positive political theory, such as it may be, submerges.

Folks like Mancur Olson or James Buchanan, seemed to me to be perversely prescriptive, providing engineering diagrams for precisely the kind of political economy they purport to prophesy against.

Maybe Henry’s looking at this the wrong way. Shouldn’t the left have its own Megan McArdle?

I don’t disagree with the gist or main thrust of what Henry wrote at 48, but I want to clarify a few points. Yes, public choice came after social choice and was in some ways a response to it. But that doesn’t mean it was “about” social choice. From Buchanan’s history to which Henry links (p. 3):

“It was at this point that I entered the discussion with a generalized critique of the whole corpus of analysis generated by the Arrow–Black approach (Buchanan 1954a, 1954b) … My concern, then and later, was always with means of preventing discrimination against members of minorities rather than ensuring that, somehow, majority rule produced stable sets of political outcomes.”

In this context “minorities”, of course, mostly means capital. Remember that the top marginal income tax rate at the time was 90%, the economy was heavily regulated, and public debt was very high. Buchanan thought this would eventually lead the collapse of the system, and set out try to dismantle the intellectual consensus which underpinned it. That meant critiquing social choice theory and punching a hole in the postwar Keynesian project.

As to whether he used game theory, we need to remember that the game theory of the 1950s and early 1960s is very different from the game theory of today. It was not very mathematical but it did employ deductive logic and methodological individualism: describe the nature of some strategic interaction, lay out some assumptions about the players and rules of the game, and try to find a solution (usually defined according to Pareto criteria). Thus, Buchanan and Tullock’s 1962 book is “game theory” — in that history he refers to the “game of politics” (p 4, bottom) and the “formalization” of the Madisonian constitutional project — but it’s first-generation game theory of the sort which is hardly recognizable now. If you look at the table of contents of Calculus of Consent — the most classic of the classic public choice tracts — you will see that the whole of Part III of the book concerns game theory. Chapters 11 and 12 even have “Theory of Games” or “Game Theory” in the title. So it’s not quite accurate to say that it wasn’t game theory, just that it was a very different sort of game theory than we typically encounter today.

This is largely due to Riker, who took game theory and ran with it. The Dept of Political Science at Rochester has been a haven for advanced (and highly mathematical) game theory since. Much of what we think of as modern day game theory, at least in public choice and political science, came from Riker’s project. And it’s true that Buchanan was somewhat skeptical of this, for two reasons: he felt that excessive formalization diluted the project, and Riker was more optimistic about the ability to find Pareto-improving solutions to social problems than Buchanan was. (Riker remained a democrat.)

On the Marxist game theory point briefly, Marx demanded revolution rather than working through Gotha-like incremental reforms for more or less public choice reasons involving the capture of the political system by capital. As such, Buchanan writes in the history Henry linked to that there was a natural affinity between public choice and Marxism. So public choicers, or at least the sophisticated ones, never really bothered critiquing Marxism (as opposed to welfare state social democracy) for this reason: there was no conception of politics to criticize. Their target was the Keynesian center-left technocratic consensus that they perceived to be pushing “socialism”, and they argued that attempts to fix market failures led both to cronyism via regulatory capture and to inefficient distribution of society’s resources. They had good grounds on which to make this critique, since Keynesian/Samuelsonian economics relies on the proverbial Benevolent Social Planner and is thus apolitical. Buchanan’s most famous quote is that he wanted “politics without romance”: there is no Benevolent Social Planner, so why pretend that there is? It’s hard to dispute that he had a point, whether one supports his particular project or not.

This remains the biggest challenge for the left. I think this is what Harkin was really trying to get at in the LARB essay, albeit in a very unsatisfactory way.

Henry,

Great work! Ill recommend your post to my students (some of which are almost as confused as the author in larb, though probably more willing to learn)