This post is a memo that I just presented at a workshop organized at the EUI by Kate McNamara, Frederic Merand and Catherine Hoeffler. Some of its key ideas were articulated in an informal discussion with Bill Janeway, Margaret Levi, Suresh Naidu, Dani Rodrik and Gabriel Zucman a couple of weeks back. None of them are at all to blame (I’ve benefited greatly from their various comments, suggestions and disagreements but probably not nearly so much as I should have).
Memo
In this brief and very informal memo, I argue that the “knowledge problem” critique of industrial policy has itself become a problem for knowledge. For decades, economists have argued that state policy makers lack the requisite knowledge to intervene appropriately in the economy. Accordingly, decisions over investments and innovation ought be taken by market actors. Now, the “market knows best” paradigm is in disrepair. It isn’t just that “hyperglobalization” has devoured its own preconditions, so that it is increasingly unsustainable. It is also that some goals of modern industrial policy are in principle impossible to solve through purely market mechanisms. To the extent, for example, that economics and national security have become interwoven, investment and innovation decisions involve tradeoffs that market actors are poorly equipped to resolve. There are good reasons why Adam Smith did not want to see defense policy handled through the market’s division of labor.
What we now face is a quite different kind of knowledge problem. We lack the kinds of expertise that we need to achieve key goals of industrial policy, or to evaluate the tradeoffs between them. This lack of knowledge is in large part a perverse by-product of the success of Chicago economists’ rhetoric. Decades of insistence that economic decisions be handed off from the state to markets has resulted in a remarkable lack of understanding among government policy makers about how markets, in fact, work. This has a variety of consequences. Policy mistakes are more likely. Market actors find it easier to manipulate the understanding of government policy makers, e.g. as to the extent and kind of subsidies required in particular sectors or for particular purposes.
One way to remedy this is to rethink the kinds of specialist education that public administrators receive, both to ensure that low and mid-level functionaries are better equipped to take the decisions they need to take, and to signal increased prestige for non-traditional forms of policy knowledge. As the sociological literature suggests, elite US policy schools such as the Harvard Kennedy School, Johns Hopkins School of Advanced International Studies and Georgetown University (to name three entirely random examples) play a key role not simply in directly imparting knowledge through education, but in disseminating norms about the kinds of knowledge that are considered to be appropriate for policy decisions. These schools have by and large converged on a framework derived from a watered down version of neoclassical economics. I argue that new skills, including but not limited to network science, material science and engineering, and use of machine learning would be one useful contribution towards solving the new knowledge problem.
The old knowledge problem
Standard neo-classical accounts tend to emphasize that markets are more efficient mechanisms of allocation than states, since they are far more responsive to supply and demand. This has driven an extensive literature on the supply of public goods (e.g. Coase’s classic article on provision of lighthouses) and on macroeconomic policy setting, which stresses e.g. the inability of government actors with imperfect and belated knowledge to fine tune the economy. If governments have to rely on claims by market actors to guide their policy, they furthermore are vulnerable to certain kinds of capture.
The deeper knowledge based criticisms of industrial policy come not from neo-classical economics, but its Hayekian rival. Friedrich von Hayek, in books and articles, argued that government is by its nature fundamentally incapable of understanding the market economy. Market economies are “spontaneous orders” – self governing systems of coordination that emerge in an unplanned way from the interactions of myriads of individuals. He claims that it is impossible for the government, or indeed for any single actor, to arrive at the “synoptic” view of economic affairs that would be necessary for industrial policy to work. The relevant knowledge is scattered among a wide variety of market actors. Even worse, much of the knowledge is “tacit knowledge,” which cannot readily be articulated or formalized.
In this context, the “price mechanism” serves as a kind of summary statistic that allows coordination between actors without the transmission of untransmittable information. I do not need to know everything that you know about growing tomatoes to buy tomatoes from you, just as you don’t need to know everything about manufacturing fertilizer to buy it. All we need to know are the prices, which summarize a potentially vast array of buying and selling decisions. But government decision makers have no convenient equivalent of the price mechanism to summarize the information they need to undertake e.g. large scale industrial policy. Accordingly, libertarians and economists have suggested that the knowledge problem presents insuperable obstacles to large scale industrial policy, as it does to other large scale interventions. The argument thus, isn’t simply that governments are bad at coordinating economic activities, but that markets are better. Since markets know best, why don’t we leave the key decisions to them.
The consequences of “markets know best”
The Hayekian understanding of markets is a fundamental insight. But even fundamental insights have limits. As other economists have argued at length, the price signal has important limits. It can’t convey nearly as much information as Hayekians seem to think. And the criticism can be radicalized. There are some goods that are going to be very badly provided by market arrangements, including, as Adam Smith forcibly recognized, national security. Libertarian scholars have occasionally argued (albeit somewhat half-heartedly) that markets could provide national defense, and libertarian science fiction authors have more enthusiastically imagined futures in which national defense was effectively privatized. But these arguments have not usually convinced those who were not already true believers.
The argument that markets know best has thrived in many other policy areas. Indeed, it has been the core organizing principle of hyperglobalization, where authority has been handed over from national decision makers to markets and market supporting international institutions, many of which were shaped by Hayekians, who saw them as a kind of global constitutional straitjacket that might constrain errant governments. The result, as Dani Rodrik has compellingly argued, has been a radical shrinking of the space for policy experimentation over the last several decades. Governments became either unwilling (to the extent that their decision makers bought the argument) or incapable (to the extent that they were constrained by international institutions) of enacting policies outside a relatively narrow range.
This applied with particular force to industrial policy. As Kate McNamara has documented, the founding principles of the European Union were interpreted so as to rule out most direct forms of state subsidy to industry. European Commission officials saw it as their life’s work to prevent cunning national bureaucrats (in particular, cunning French bureaucrats) from using policies to build up national champions. Some forms of industrial intervention were acceptable – regional policy, for example, that provided certain kinds of collective goods, or some forms of coordination between governments and business. But the European compromise rested on understandings of competition policy, energy policy and market opening that were aimed at maintaining or extending market competition, rather than directly looking to remedy it.
Other forms of industrial policy were effectively punished by WTO rules. That didn’t mean that governments completely abstained from helping their companies – the WTO, for example, found that Europe illicitly supported Airbus, while the U.S. did the same for Boeing. But it meant that industrial policy, where pursued, was usually pursued stealthily. That, of course has changed in the last couple of years, as policy makers in the U.S. (and to greater or lesser degrees, elsewhere) have explicitly advocated industrial policy, and condemned the policy straitjacket imposed by the previous hyperglobalist dispensation.
The new knowledge problem
These are exciting times to study political economy. A narrow space has opened up dramatically, permitting a wide variety of experimental approaches to shaping the economy. However, the obsession with the old knowledge problem has given rise to a new one. Decades of assuming that government actors don’t know enough to intervene in the marketplace have created a self-fulfilling prophecy in which government actors actually don’t know, because they have never done industrial policy, have never been taught to do industrial policy, and lack the appropriate institutions and information to do it well, even if they abstractly knew how. Parts of the government that used to be directly engaged with economic planning have withered away. Key aspects of the economy, such as subcontracting relationships, are more or less invisible to state decision makers, even relatively well informed ones.
This generates the likelihood of mistakes, of manipulation and of capture. We’re likely to see a lot of stupid and avoidable errors happening over the next few years, as officials figure out what they are supposed to do on the fly. Figuring out how to make sure that this doesn’t discredit the whole enterprise (cf: Solyndra) will require some political astuteness. We’re also likely to see increased efforts, sometimes successful, by industry actors to pull the wool over government’s eyes. They have asymmetric knowledge, not simply because they have the data, but because they have people who know what it means. Anecdotal evidence would suggest that very few bureaucrats have direct knowledge of how stuff gets made and done. Finally, these asymmetries are likely not to lead simply to bad decisions, but to dependence and capture. If government bureaucrats become reliant on industry for the knowledge they need to do their job, then they are hardly likely to make unbiased decisions. Perversely, many of the criticisms made by libertarian economists may come true partly because these economists were so successful in shaping the previous generation of government actions.
Solving this problem will be quite difficult, because some of it is baked into the ways that the world economy works. Globalization has resulted in a massive complication in supply relations, and information and financial flows, so that they are at best only fleetingly comprehensible to national governments. Efforts to gather information by one government are likely to result in pushback from others, as we saw when the US looked to get information on semiconductor supply chains from businesses that were subjected to strong cross-pressures from China.
Yet we need to do everything we can to solve it. It is hard to understand investment decisions, innovation choices and national security implications of industrial policy, even in the most superficial way. Understanding how they intersect with each other is dramatically harder, but is necessary. A decision to maximize the efficiency of semiconductor subcomponent supplies, for example, may have tradeoffs for robustness (efficient supply relations may be more subject to asymmetric shocks), innovation (often not the product of efficiency) and national security (efficient concentrations of production may quickly become vulnerabilities, as TSMC’s position in Taiwan indicates). Figuring out how to even satisfice these tradeoffs will take a lot of change.
Changing public policy education
There are a lot of ways in which this discussion could go – I will highlight one, which is perhaps more amenable to change initiated by scholars than many other possibilities. One lever of change is public policy schools, including, but certainly not limited to schools with specializations in international policy. As the sociologist Elizabeth Popp Berman has documented, the economic “style of reasoning” was not simply a product of Mont Pelerin style intellectual arguments. It was the product of the practical needs of bureaucrats, who desperately needed to handle the complexities of policy in a burgeoning state. Economistic instruments such as cost-benefit analysis appeared to provide useful tools to that purpose. As Herbert Simon noted, decades earlier, cost benefit analysis provided a “conceptual framework” that everyone could agree on, allowing the coordination of complex activities across the compound state.
So the question arises – if we were to try to design a policy curriculum to deal with the current problems confronting policy makers, including especially industrial policy and its consequences for markets, innovation and security, where would we start? Probably, economistic reasoning would still have its benefits, although maybe less as a master logic, than a toolset for developing simple models and understanding how best to apply them, while appreciating their limits. But so too would new approaches, some mathematical, such as network theory, and some technical, such as material design, industrial processes and supply chain management. Integrating these skills would be a tall order – but perhaps not impossible. New conceptual frameworks might arise, which would provide a different understanding of the trade offs and possibilities of industrial policy than the narrow understanding of the last generation.
I conclude here by saying that this is intended to start a conversation rather than starting one – and there are other places one could come from. My perspective here e.g. is notably U.S. centric. But it is one instance of a more general problem. The complex of questions associated with industrial policy forces us to confront the fact that the world has changed, while our theories of it have not, except at the margins, still less our ways of teaching about it. That isn’t sustainable.
Industrial policy and the new knowledge problem by Henry Farrell is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
CC license added because someone wants to republish it. Fine to translate, and to delete all the text before “the “knowledge problem” critique of industrial policy has itself become a problem for knowledge.”
{ 42 comments }
steven t johnson 04.13.23 at 2:29 pm
“Decades of insistence that economic decisions be handed off from the state to markets has resulted in a remarkable lack of understanding among government policy makers about how markets, in fact, work. This has a variety of consequences. Policy mistakes are more likely. Market actors find it easier to manipulate the understanding of government policy makers, e.g. as to the extent and kind of subsidies required in particular sectors or for particular purposes.”
If we must reverence the ghost of von Hayek, even as we timidly dare to talk about the real world, then we must remember that even he believed that businessmen would inevitably make bad investments where tacit knowledge failed them as badly as the information divulged by “prices.” (Scare quotes because it is unclear how interest rates, exchange rates, rents, stock market prices and most of all, profit rates, don’t count, which is confusing given the rhetoric about tacit knowledge seems meant to invoke superior knowledge about concrete material production.) Thus the most important information in the end is provided by the decrees of the bankruptcy courts. As science is alleged to progress one funeral at a time, so too the economy advances one bankruptcy at a time.
I mean, tacit knowledge is why entrepreneurs begin new businesses. But most new businesses fail, as I recall, and their failures seem to have much more to do with insufficient capitalization—which somehow the price signals from the infallible market failed to provide?—rather than ignorance.
The thing here is, the notion that only the market efficiently optimizes is more an assumption that crises are cures. What a John Quiggin would call a market failure requiring a second lesson in economics is a market success, as determined by the only commensurable information that can be counted, and therefore the only information that counts, namely, the prices paid by the consumer.
It’s true a spontaneous order emerges. But this is true for a bag of chips, where the big whole chips are invariably at the top of the bag and the broken pieces are invariably at the bottom. There is a powerful element of mysticism, worship of supposedly natural, organic processes, in the devotion to spontaneous order. The Chinese concept of “li” seems to embody the same feeling. Spontaneous order is not so much an idea as a moral/esthetic touchstone….usually kept in the speaker’s pocket?
Given the tribute to von Hayek, I suppose it is understandable that a dread of malinvestment by “bureaucrats.” as compared especially to the idealized market (not a bankrupt businessman in those!) that waste and inefficiency seem to loom as the great problem. Approaching the issue with von Hayek’s (and von Mises’) presuppositions leads away from the necessity of deciding the goals first. The shorthand condemnation of this is “planners’ preferences,” of course. But that’s why this intervention seems unlikely to bear much fruit.
“Anecdotal evidence would suggest that very few bureaucrats have direct knowledge of how stuff gets made and done.”
There is the implication here that bankers, financiers, arbitrageurs, hedge fund operators, stock market speculators, landlords, administrators of REITs, mortgage brokers, bond salesmen do have direct knowledge. It even more strongly presupposes that higher administrators —who would be called “bureaucrats” save that there very words is tendentious—do have direct knowledge. The notion that government bureaucrats for some reason cannot acquire direct knowledge by nationalizing and administrating firms may be a less obvious implication, but I think it’s there too.
“As the sociologist Elizabeth Popp Berman has documented, the economic ‘style of reasoning’ was not simply a product of Mont Pelerin style intellectual arguments. It was the product of the practical needs of bureaucrats, who desperately needed to handle the complexities of policy in a burgeoning state.”
The complexities of policy appear to have been a generally right-wing program to lower taxes, at least on those who mattered, and keep from wasting money on people who didn’t. This again raises the question: What is the goal of transforming policy education? The references to security may seem odd asides. But one has to wonder if the mission is to train administrators for a war economy?
Peter Dorman 04.13.23 at 5:17 pm
The knowledge problem is an excellent starting point for thinking about IP, but it would also help to open up the notion of what IP is or could be. My perspective on this stems from having spent years working, off and on, with the European Network on Industrial Policy and learning about the variety of national systems, and then later having an opportunity to see close up how Germany in particular does it.
The implicit model Henry is working from is centralized: a government agency or task force promotes specific technologies or firms to achieve collective ends, like national security. But there is a bottom-up alternative in which networks of professional organizations, unions, firms, educational institutions, suppliers of credit and government agencies coordinate to guide and facilitate economic development. Among its other virtues, this model directly confronts the knowledge problem by actually bringing together its bearers. There’s so much to say here, but the common thread is that “knowledge” needs to be unpacked in order to assess what sort of support a bottom-up IP system requires, especially from universities, and to forecast how well it is likely to address different types of social/political/economic problems. I could go on and on, and actually I will in a book I’m currently working on.
Of course, the precondition for bottom-up IP is the existence of a wide array of institutions that don’t exist in a country like the US. Critical problems like the energy transition can’t wait for a slow institution-building process. Nevertheless, I think the time to start thinking about moving to different, better models is always now.
On a side note, perhaps an even more relevant philosopher for this topic than Hayek is Dewey. I briefly mentioned him in an old EconoSpeak post, and I might say more about him in the book, or maybe it’s just an unnecessary tangent.
lathrop 04.13.23 at 5:45 pm
I wanted to comment that the idea “markets know best” is belied by the inability of markets to make much progress towards decarbonization, given the great profitability of the status quo for some, the sunk costs, discounting of the future, veto power of key interested elites, etc.
Then I see Peter Dorman here who could make the point better than I — am reading the book “Alligators in the Arctic” which is the most comprehensive and current tour of the subject I could find. Thanks.
Tim Worstall 04.13.23 at 7:18 pm
As someone who probably would be described as one of the free market extremists (hey, Senior Fellow at the Adam Smith Institute probably counts) a few comments:
“It is also that some goals of modern industrial policy are in principle impossible to solve through purely market mechanisms.”
That strikes me, in part at least, as petitio principii. For it is, I think, misunderstanding the motivations of much “modern industrial policy”. Which is that those who have political power would like to have economic power. Why put up with politics unless you get to tell people what to do? So, and therefore, the arguments about how we must have a new industrial policy are in fact excuses from those who would like to exercise economic power as to why they should be allowed to do so. My prime exemplar here would be Lina Khan but then that’s just me being insulting to an individual. I did once make exactly that critique about Dani. Very clever man looking for some reason why people should do what he suggests.
“We lack the kinds of expertise that we need to achieve key goals of industrial policy, or to evaluate the tradeoffs between them. This lack of knowledge is in large part a perverse by-product of the success of Chicago economists’ rhetoric.”
No, in my specific and detailed area of real world and industrial knowledge (the supply of weird and minor league metals) the problem is not lack of knowledge. It’s that those trying to make policy here are not just ignorant they’re entirely at odds with reality. Fools seem to believe that mineral reserves are an important limitation on long term mineral supplies for example. This greatly predates the neoliberal revolution, it’s the underlying mistake in Limits to Growth for example (also Simon/Ehrlich bet etc). Allied with the idiocy of believing that we have exponential growth in resource usage (nonsense, the US currently uses about the iron and steel – yes, including recycling, imports, exports – of 1906, 1908, fractions of what were used in the 1950s) the entire intellectual zeitgeist on this is just wrong. Not a little out, not missing a few details, not lacking a few folk who have been through a STEM course or two. Actually insanely badly misinformed. New Scientist tried to say, back in 2007, that hafnium would run out by 2017. Not only didn’t that happen it was dribblingly stupid as a surmise in the first place (so too terbium by 2013, just short bus stuff). The Royal Chemistry Society propagates this stuff. Having a few bureaucratic advisors with a geology degree isn’t going to change this level of disinformation. Because it’s the entire establishment which believes this nonsense.
“There are some goods that are going to be very badly provided by market arrangements, “.
Sure, positive externalities (ie, public goods) and negative externalities. One way to deal with them is to inject the incentives into market prices (Pigou). Another is to allow politics to tell everyone what to do. Guess which those who’ve climbed the political greasy pole would prefer? Thus the point at the top. New industrial policy is only new in that it’s an excuse for those with political power to demand, direct, have power. We face the same old problems in the same old way, have the same old solutions available to us.
” A narrow space has opened up dramatically, permitting a wide variety of experimental approaches to shaping the economy.”
Ooooh, cool! what explores the possibility space fastest? Markets! because any damn fool can do their own thing and we see what works. As opposed to two folk over polenta deciding what 70 million people must do in unison.
“We’re likely to see a lot of stupid and avoidable errors ”
In my little corner that describes the entirety of all government action on the subject. Sheesh, there was a Trump era idea of getting rare earths from coal. OK, can be done, expensive, but can be done. But the grant applications insisted that you have to be trying to get them from coal. Instead of fly ash (the stuff collected from chimneys when burnt). Because if REs came from coal, then that would be nice for miners. But if from fly ash (or even bottom clinker) then that would be nice for power station owners. Miners have more votes in WV than power station owners. Even if we were to accept the idea of industrial policy, of seed corn for research, it always falls prey to this sort of political nonsense.
“economistic reasoning would still have its benefits, although maybe less as a master logic, than a toolset for developing simple models and understanding how best to apply them”
But that’s all economics is in the first place.
“So the question arises – if we were to try to design a policy curriculum to deal with the current problems confronting policy makers, including especially industrial policy and its consequences for markets, innovation and security, where would we start?”
Ah, well, there I can help. Opening statement to the new bureaucrats that we’re about to train up to run industrial policy:
“You know fuck all, Matey. You never will grasp the details of anything that you try to plan. Therefore everyone from within that industry will run rings around you. Every decision you make will make the populace poorer. Therefore make very few decisions and only those you really, really, must.”
And no, it’s not because I’m ideologically committed to the ASI and all that. I came to these views after near a decade in the SU and post Soviet Russia. I’ve seen this in full flow. I see it now in that detailed area of my own industrial knowledge.
Please, Lord, save us from industrial planning – except in those very few times and areas that we really, really, need it. Like Spitfires, say, or something of that sort of urgency and difficulty. China making magnets cheaper than we can doesn’t cut it. That’s just a power grab.
LFC 04.13.23 at 7:29 pm
I usually disagree with the majority of what steven t johnson writes, but one remark he makes in his comment @1 resonated: “There is a powerful element of mysticism…in the devotion to spontaneous order.”
Glancing through Slobodian’s account of the “Geneva School” neoliberals’ response to the NIEO in ch.7 of Globalists, one sees that these people seem to have had a quasi-mystical (though Slobodian himself, from what I can tell, doesn’t use the phrase) notion of the world economy as “invisible and beyond representation” (p. 259), a “system” that could not survive even the slightest effort to consciously tamper with it in any kind of redistributionist (whether state-centered or individual-centered) direction.
This is nonsense, and suggests minds so steeped in ideology, in the pejorative sense of that word, that even trying to have a dialogue with them would be close to hopeless.
On another point, steven t johnson seems to think the OP “reverences” Hayek, whereas in fact the OP criticizes him (e.g., “the price signal has important limits. It can’t convey nearly as much information as Hayekians seem to think”).
Tracy Lightcap 04.13.23 at 7:45 pm
This is an aside, but, I think, an important one. In the old Soviet Union there were several journals dedicated to problems with planning. After Stalin, these apparently, from what I’ve read (yes, that includes Red Plenty) bristled with critiques of particular planning problems in particular industries. This is how the limited use of market mechanisms a la Kantorovich got a foothold under Kosygin. Needless to say, these are now slowly wasting away untranslated in libraries throughout what used to be the SU.
It could very well be that the data and analysis in these will prove of limited use; nobody is contemplating centralized planning anymore. Oth, it could also be that there is a world of knowledge touching on planning problems in particular industries that could be invaluable. Of course, getting funding to find out would be dicey these days, but it might be something worth looking at once things get more normal.
J, not that one 04.13.23 at 10:32 pm
The model Peter Dorman describes in 2 seems still more technocratic than what I think the OP is envisioning. (The idea that the problem is unique to the US is interesting but sends us down the wrong path.) The relevant distinction is between technical knowledge, facilitating know-how and means-ends, cost-benefit thinking, and social-moral thinking that’s in line with humanistic culture. But I think the normal way of handling this is to take people who are already educated in a technical field, and later in their life, to educate them about the necessity of something more. Thus politics, as well as high-level decision-making and policy implementation, should always be carried out in the non-technical language and belief system of the ordinary people.
The idea that people who have technical knowledge are hopelessly in thrall to the industries that are built on those technical specialties is one important way of getting at this problem. But I don’t see that there’s a middle ground. This would apply equally to “a policy curriculum to deal with the current problems confronting policy makers, including especially industrial policy and its consequences for markets, innovation and security.” Either it’s one or other.
Alex SL 04.13.23 at 11:17 pm
What concerns me about this piece is that it assumes that public officials are in good faith making mistakes that they would have avoided if they had better information, when in reality pro-market ideology is so dominant and entrenched that there are few public officials who do not actively want to make the bad decisions that are here characterised as “mistakes”.
The right half of the political spectrum believes that everything is better as a market and wants to privatise everything but keep just enough of the state around to be able to funnel tax money to private interests; the left half of the political spectrum believes that everything is better as a market and wants to privatise everything but keep just enough of the state around to make some limited high-level strategic decisions. If somebody seriously makes the argument that maybe a natural monopoly like rail or the power grid, i.e., something that cannot possibly work as a market even in principle, should be re-nationalised, they are painted as the second coming of Pol Pot (e.g., Corbyn in the UK). “Far Left” is today what would have been conservative economic policy of the 1950s-60s.
In other words, a curriculum isn’t going to suffice. Without a new mass political movement including its own powerful media ecosystem this isn’t going to get better but merely continue to be our modern version of what caused ancient empires to fail; then it was powerful nobles or wealthy senators increasingly depriving the state of resources and the ability to act in the common interest until it collapsed in the face of an external crisis, here and now it is large corporations and billionaire entrepreneurs doing the same.
It could be added that the most ardent public proponents of privatisation and free markets have a particularly poor understanding of markets even compared to everybody else. Perhaps the most illustrative example is their frequent misunderstanding that high profits show a market economy working well, when in reality they are evidence of market failure, of monopoly rents and insufficient competition. And it has to be so, because nobody who understands how markets work would be in favour of organising everything from health care to environmental conservation as a free market economy.
(Although even here the question arises if free marketeers do understand that high profits are a sign of inefficiency but are merely dishonest about their true goals, meaning that while they say they are in favour of free markets, they actually consciously work towards a neo-feudalist system of permanent rent extraction.)
marcel proust 04.14.23 at 12:44 am
To the mods (or perhaps the rockers): there is an extraneous character in the link at the bottom of Peter Dorman’s comment that leads to a page which says “Sorry, the page you were looking for in this blog does not exist.”
The correct link (without this character) is https://econospeak.blogspot.com/2007/09/do-we-do-what-deweyd-do.html
Fixed, thanks for alert
Peter Dorman 04.14.23 at 4:35 am
Thanks, MP. I experimented with copy-and-paste for html, probably a bad idea.
steven t johnson 04.14.23 at 12:29 pm
As Tim Worstall’s comment makes clear, the OP doesn’t confront von Hayek and his “knowledge” fetish so much as briefly assume that markets don’t always work but this must be a Hayekian problem of lack of knowledge, to be addressed by a curriculum reform. (Insofar as the OP is about intervening in education for administering a war economy the OP and Tim Worstall are not even in disagreement on principles, that war is a public good that cannot be left to the market. They merely disagree on the imminence of the need, perhaps because TW hasn’t thought about it?)
Alex SL’s observations on the pro-market ideology of officials is committed to the notion of “rents,” which is also very much a part of the pro-market ideology, as far as I can tell. To me, it seems obvious that the very closely related notion of “capture,” which is almost universally held to be the mechanism that extracts “rents,” should either be limited to preferential support for specific firms and enterprises (which seems to me to be very much not the case,) or include the demented notion that good government must focus on limiting taxes/public services, especially on the wrong sorts of people (rich and poor, respectively.) And the latter seems not to be the case at all.
“Market actors find it easier to manipulate the understanding of government policy makers, e.g. as to the extent and kind of subsidies required in particular sectors or for particular purposes.”
“If governments have to rely on claims by market actors to guide their policy, they furthermore are vulnerable to certain kinds of capture.”
This seems to me very much to endorse many of the concerns of von Hayek and his ile. To my mind, the notion that prices are consumer sovereignty and profit rates are metric of happiness is extremely problematic and the OP both concedes too much to the whole approach and avoids confronting von Hayek et al. where it doesn’t. I would say the emphasis on prices often conveys misleading information and market clearing is not maximizing human welfare.
Even worse, the whole knowledge critique tends so far as I can tell to devolve into the invidious comparison of “socialism” with the richest pockets of capitalist society (surreptitiously redefined to exclude Haiti, Bangla Desh, depopulating Latvia, Nepal, too many to name, really,) or even worse, compared to the utopian general equilibrium optimum. So far as I can tell, the OP concedes the essence of the old knowledge problem. This doesn’t matter if the real purpose of the OP is to stimulate a new degree program for war economy administrators. In a way it’s just anticipating market demand? At any rate, if I were Venn diagramming the OP and von Hayek, there would be an extensive overlap, a figure much closer to an ellipsoid than a figure eight.
LFC notes the OP does have a certain disagreement, “doesn’t convey nearly as much information….” Labeling that certain amount of agreement with the noun “reverence” rather than using the grammatically appropriate verb “revere,” was supposed to be mildly humorous, a mock deflation. Bad jokes need to be explained, sorry.
steven t johnson 04.14.23 at 12:32 pm
The paragraph on Alex SL’s comment should be at the end.
Laban 04.14.23 at 2:01 pm
“nobody is contemplating centralized planning anymore”
Not even in Japan/Korea (both halves), China?
Did Japan grab the strategic heights in top-end electronic machinery (OK the Dutch are there too), ultra-pure chemicals (like silicon and gallium arsenide), and carbon fibre just by the decisions of individual Japanese capitalists?
Admittedly the demise of UK and a great chunk of American manufacturing I can well believe is down to individual decisions by capitalists. Boeing, for example, are hollowing themselves out by negotiating cheaper parts from Japanese companies, in exchange for technology transfers aka the priceless production knowhow. Still, the planes will be cheaper to build, and as chance would have it the state-owned Japanese airlines will buy Boeing as well. Executive bonuses all round! The ‘free market’ at work!
Mike Huben 04.14.23 at 3:09 pm
Tm Wrstll @4: Y s “ths wh hv pltcl pwr wld lk t hv cnmc pwr”. Tht’s xctl bckwrds: wht w’v sn fr th pst 40 rs s ths wth cnmc pwr (ld b th Kchs) wntng t hv pltcl pwr. Whch xplns th mdrn Rpblcn Prt nd ts thrll t lgrchs. nd r mplmnt. t s n ccdnt tht lgrchs nd thr cts pw rgnztns hv fndd t lst thr schls f cnmcs t prmt thr qst fr pwr: Chcg, strn, nd Vrgn. Cnsdrng tht cn’t gt ths bsc fct f hstr rght, th rst f wht sd s vr qstnbl s bst f bng pd shll fr nlbrlsm.
Mike Huben 04.14.23 at 3:17 pm
OP (Henry):
What’s missing in your post is that we live in a market of roughly 200 competing nations. The whole neoliberal project is shortsighted. Preventing nations from competing in all dimensions is comparable to regulating competing companies: do you really want to regulate away the strategic and planning functions of companies for example? For Hayekian reasons of not having enough local information? If not, then why would you do that for nations?
CarlD 04.14.23 at 4:35 pm
For some years now I’ve been doing my course and curriculum design on the premise that there’s one almost universal benefit of a higher education, beyond a rapidly expiring vocational training and a patina of liberal culture. That is the ability to recognize and understand wicked problems, and behind them the workings of complex adaptive systems. This is a very heavy lift, given the design and agency biases of common sense. But it’s just not possible to “understand how things work” or make informed and responsible decisions (lots of other kinds of decisions can be made) without this basic scaffolding.
Mike Huben 04.14.23 at 6:19 pm
It looks as if my comment (#14) has been disemvoweled because I said a few obvious things about a guy who describes himself “As someone who probably would be described as one of the free market extremists (hey, Senior Fellow at the Adam Smith Institute probably counts)”.
He also says “those who have political power would like to have economic power”, but the way things work in the real world is exactly the opposite: those with economic power would like to have political power. And they have made it so with the Republican Party and the Supreme Court. This is part of an effort which has also included funding of 3 different pro-business schools of economics: Chicago, Austrian, and Virginia.
There: maybe that gets the gist of my message across without offending against the reasonable Comments Policy.
Lee A. Arnold 04.14.23 at 8:45 pm
We don’t want a centralized economic system any more than we want a market system dominated by a monopoly. The same type of buffoon ends up at the top of both.
The main arguments given in favor of the market system concern 1. Efficiency 2. Knowledge Coordination 3. Freedom. But nonmarket institutions provide very different yet equally essential kinds of 1. Efficiency 2. Knowledge Coordination 3. Freedom. So we need both kinds of organization simultaneously.
The discussion should be less abstract, or else people will tune it out. The questions should always be, what good or service are we concerned about? And, what are its supply and demand characteristics? The answers will determine whether to use the market, or a non-market institution, or a combination of both.
To ask in a different way, Why do you want the industrial policy? What is it meant to address?
It seems to me that a majority of voters want more onshoring (i.e., reversing globalization to some degree), due to national security concerns of who controls the supply chains, and due to the need to get citizens better paying jobs.
It also seems that a majority thinks that global warming is obviously a wild card, and so a policy push on decarbonizing the hesitant market system is prudent and necessary.
In the US, I would also push for universal healthcare because there are lots of people who would rather work but must subsist instead on permanent disability payments because they couldn’t get medical attention when they needed it.
Alex SL 04.15.23 at 2:16 am
Not really sure what to make of Tim Worstall’s contribution. IMO the trade-off between state and market is follows.
When we have the state make a decision, (1) it can be ‘good’ or ‘bad’, the correct decision or a wrong decision, because humans make mistakes (depending on what your view on the given issue is). This means that although, again, a wrong decision could be taken (rich people have more influence, people are stupid, etc), there is at least the possibility that the correct decision can be made, meaning e.g. with the public good, the future, or the interests of poor people also in mind. And if we are talking about a democracy, (2) the decision is democratically legitimated. And even if we are not, nearly every state by design has to at least pretend to be acting in the collective interest lest it lose legitimacy and incur rebellion, whereas a corporation by design acts only in the interest of its owners.
When we have the market make a decision, (1) it will (and this is important to understand), even if things work out exactly the way free market advocates want them to work out, always follow the particular incentive structures of the market. This means that we do not have the choice whether the decision will be ‘good’ or ‘bad’ or correct or a mistake, we know in advance that it will be whatever maximises companies’ profits and satisfies the needs only of those who have enough money to send a noticeable market signal. In a market (note again the important part here) that works exactly as a market is supposed to work, there is no possibility whatsoever of making a decision that serves the public good where that conflicts with individual profit-seeking, no possibility whatsoever of planning for the long-term future where that makes a company noncompetitive in the here and now, and no possibility whatsoever of serving the interests of those who have insufficient money to appear as market participants. To the limited degree that any of that happens is because we compromise or do not have a market. And, (2) the decision is never democratically legitimated by definition.
So, we are currently looking at a world where this trade-off is painfully, obviously resolved nearly entirely in favour of the second option, with no serious action being taking on the whole climate change issue, species being driven to extinction left, right, and centre, and, to also cover a less existential issue, billions being invested in 3D animation for Hollywood movies and video games while public schools and other infrastructure are falling apart. But the real danger is that somebody might do a five year plan fixing the price of hafnium? This is like standing in front of a blazing building and saying that the fire brigade should stay away lest the water stains the carpet.
Finally, I cannot make enough sense of the disemvoweled post by Mike Huben to understand why it was disemvoweled, but it seems to be about another observation that also occurred to me:
“Which is that those who have political power would like to have economic power.”
This statement is self-refuting in the light of the world we live in. It cannot possibly be true, because if it were, there would never be any privatisations or deregulations. The fact that we live in a largely privatised and deregulated economy compared to a few decades ago proves that those who have political power are perfectly fine with handing economic power over to a billionaires and investment funds in exchange for the paid speech circuit or an advisory board position after they have left office. Again one wonders how somebody can look at the burning building right in front of their eyes and not see the fire as the primary issue.
TGGP 04.15.23 at 7:32 pm
Mike Huben #15:
Are nations really analogous to competing corporations? It was brought up that even Tim Worstall agrees on the necessity of state involvement for national defense and technological investments for it, but lots of nations don’t really bother trying to compete with the dominant powers and instead their strategy is to avoid wars (which has actually worked for Sweden & Switzerland for centuries, and become increasingly viable for other countries). The United States is an unusually (overly, in my book) large country made up of lots of states, counties, cities etc. We don’t need to think of all them as competing with each other, and along a great many dimensions they are in fact restricted from doing so. As a radical decentralist I might want more competition (and I recall that Patri Friedman thought the problems of government would be greatly alleviated if there were more dynamic entry into the field), but I just don’t see them all engaging in any kind of viable industrial planning competitively.
It seems to me that even with the government having a public good it wants to pursue, it doesn’t necessarily need to engage in the sort of industrial planning requiring it to have knowledge of how to achieve that good. Prizes granted after the fact can be given to breakthroughs like the measurement of longitude (and currently social impact bonds attempt to use the same retroactive recognition model for charitable purposes), or a prediction market could be subsidized to elicit the distributed knowledge of the populace.
Dallas Weaver Ph.D. 04.15.23 at 8:31 pm
As technology evolves the ability of humans to understand how things actually work becomes more difficult. I will bet that not one of the bureaucrats that made the Solyndra decisions understood enough of the technology to make a rational decision. In particular, they probably had no idea that solar-grade silicon prices were about 10 times the production cost and anyone can make solar-grade silicon anywhere in the world. All you need is Sand, Carbon, and electricity + knowledge + permissions to build a multi-billion dollar facility that is a cross between a major blast furnace and a chemical plant. Germany’s solar subsidy program ran the world price up and the “permission bureaucrats” in the Western countries had almost decade-long delays for any major expansion of capacity.
Meanwhile, China allowed a new green field facility and built a 1.5 billion dollar plant in a little over a year (privately owned), and apparently, it added about 30% to the world’s solar silicon capacity. Apparently, the initial profit margin was so high that the plant was paid for in the first 6 mo of operation. Now they totally dominate the field (like 90%).
Solyndra’s selling point was not using solar silicon. A good technological due diligence would have noted that it was only regulatory bureaucrats’ delays that prevented silicon prices from returning to normal and that would change the market competition. Sand is not rare.
However, unlike a market system where someone makes a poor decision and goes bankrupt, and is out of the game, the bureaucrats who funded Solyndra and the ones who run the regulatory permission system just get promoted with more staff and fatter retirements. The real technological complexity of our world exceeds the knowledge of our government bureaucrats by too large a factor for them to really plan anything rationally and you can’t “solve” the complexity problem. Markets are experimental evolving systems that may not be smarter than bureaucrats, but markets like evolution will win in the face of complexity by trying lots of variations and having a lethal selection system of bankruptcy and death.
Any assumption giving the bureaucrats and planners the vision required would allow them to become the billionaire class. If they are so smart why don’t they own the world?
Phil H 04.16.23 at 3:34 am
In response to Alex SL, comment 19. I think you’re disagreeing with Worstall, and I think some of your criticisms aren’t on point, which I guess means I’m arguing for Worstall’s position? Not sure, but here are a couple of things I noticed:
“When we have the market make a decision…there is no possibility whatsoever of making a decision that serves the public good where that conflicts with individual profit-seeking,”
Every decision that serves the public good must also improve individual profits. That’s what it means for a thing to be good for the public: the individuals who make up the public must benefit from it. So this is true, but doesn’t constitute an argument against anything that Worstall says.
“Political power…economic power…self-refuting…would never be any privatisation…”
This seems odd, because privatizations are one of the primary mechanisms through which people with political power parlay it into economic power. I agree that usually the ones in office don’t end up with the biggest slice of money, but they do get economic benefit from the privatizations, in the ways that you describe below.
When politicians control public assets, their control is highly constrained by law and public scrutiny. It’s not pure power like owning money. They give up that etiolated power in return for a bit of money, indifferent to the gains of billionaires or the losses of the public.
Alex SL 04.16.23 at 5:19 am
Phil H,
“Every decision that serves the public good must also improve individual profits. That’s what it means for a thing to be good for the public: the individuals who make up the public must benefit from it. So this is true, but doesn’t constitute an argument against anything that Worstall says.”
This equivocates on the meaning of “profit”. Amount earned minus amount spent in business operation this fiscal year does not equal benefit in the sense of everybody being housed, well educated, well fed, safe and secure, and future generations still having a livable planet. It also misses the central problem: the way markets are designed as decision mechanisms means that they do not care for people who have too little money to send a market signal, and they don’t plan far ahead. I already wrote that, of course.
It is true that I went beyond strictly “An argument against anything Tim Worstall says”. Then again, such a response could, in fairness, have limited itself to the observation that he seems to be worried about politburo central planners when none are anywhere on the horizon. Nobody anywhere outside of North Korea is doubting that markets are a good heuristic for finding price levels. However, sensible people (as opposed to free market ideologues) realise that that is also all they are good for; they are a tool for finding price levels, end of. And we are living in an age where the dominant ideology is to turn everything into markets and profit centres regardless of the collateral damage to quality of life, safety and security, or the biosphere. There are simply areas of human life where finding the optimal price efficiently shouldn’t even make the top five priorities. If, for example, the optimal price for the labour of millions of people is too low for them to thrive, then there should not be a free labour market. Those are humans, after all, not light bulbs or bananas.
“This seems odd, because privatizations are one of the primary mechanisms through which people with political power parlay it into economic power.”
What is odd is that you subsequently describe the problem that I see in exactly the same way as I see it while thinking that we disagree. The point here is that Tim Worstall painted a picture of every politician wanting nothing more than to install a planned economy so that they can lord it over the business owners, and that the present reality is exactly the other way around, as described by Mike Huben at #17: Our contemporary problem is large corporations and billionaires buying or otherwise influencing politicians in a way that Jane and Joe Average can’t, in a large part because so much of the state has been hollowed out or sold off to those corporations and billionaires, giving them dangerously disproportionate power over what should be collective decisions affecting everybody.
Tim Worstall 04.16.23 at 9:00 am
With Dallas @21. I had come back because I’d not added a point about Solyndra. Dallas has it absolutely correct – to a point. The one Chinese factory wasn’t quite it. It was a new way of making solar silicon that was. I once ended up in the factory that prepared the sand (silicon dioxide) out of which the silicon ingots were made. They said one of the grand difficulties was in lowering the quality of the Si metal made. Solar works better at a lower grade of Si than computer chips do.
But the larger point there. The Solyndra design was, as described, a silicon light one. It focussed light onto small amounts of Si. That made sense when Si ingot prices were $450 a kg and rising. 6 months later, new ingot making process, silicon’s at $40 and Solyndra is dead. Nothing to do with subsidy (ie, the right-wing usual critique) or friends of Obama etc. Also nothing to do with government picking a winner. Si light designs were dead when Si became cheap. End of.
Now, that Si ingot is a manufactured item and that manufactured items do tend to become cheap should have been a clue, but the reason for Solyndra’s failure is as Dallas and I have described. Changes in the price of silicon ingot.
A longer discussion of this from a decade back:
https://www.theregister.com/2013/05/02/gorilla_glass_ipads/
Alex @19
” In a market (note again the important part here) that works exactly as a market is supposed to work, there is no possibility whatsoever of making a decision that serves the public good where that conflicts with individual profit-seeking, no possibility whatsoever of planning for the long-term future where that makes a company noncompetitive in the here and now, and no possibility whatsoever of serving the interests of those who have insufficient money to appear as market participants. To the limited degree that any of that happens is because we compromise or do not have a market. And, (2) the decision is never democratically legitimated by definition.”
I’m not even trying to go that far. We have a very large political current – group of cheerleaders perhaps – who say that an active industrial policy makes us richer by those purely market based standards. Having all the really bright people with the Rolls Royce minds deciding what is to be made, by whom, increases wealth and income by those very measures of market success. It’s not just the left and socialist plans, we get the so called technocrats like Mazzucato insisting it and the ghastly types like Oren Cass from the Buchananite right too.
I’m entirely happy with the idea that if we desire a non-market goal then we can’t use a pure market process to gain it. Or at least I’m willing to listen to justifications and so on. My insistence at present is limited purely to arguing against the idea that we’re going to gain those market goals via non-market means – which is what I take to be the current idea of “industrial planning”.
I do go on to then argue that some to many non-market goals can be best achieved by suitably moderated or incentivised markets. That’s the pro-carbon tax argument after all. But even I’d not argue that all will be best achieved that way. There really are things that only government can do and which also need to be done – therefore we need to get government to do them.
That is, I’m not arguing against the basic logic at all. I’m just saying that the times when it applies are rarer than the current zeitgeist insists. Well, OK, given that it’s me, very much rarer to the point of near invisibility but it’s not a categoric point, it’s a where on the spectrum are we one.
steven t johnson 04.16.23 at 2:32 pm
TGGP@20 So long as nations can go broke, yes, indeed, nations are very much like competing corporations, obviously so. Except that bankruptcy leaves its people free to move on, as best they can. I’m glad I don’t live in Sri Lanka.
Dallas Weaver Ph.D.@21 It’s not clear to me how the “bureaucrats” at Solyndra are any less incapable of making rational decisions than higher-level administrators in government offices. Having a private suite rather than a government office doesn’t seem to genuinely improve the brain, even if the interior design is much nicer. If some of the administrators in a business can learn the details then some of the administrators in a government office can.
Quite aside from the notion that bad businessmen pay with bankruptcy, rather than losing somebody else’s money, the notion that liquidation cures all is cruelty. When I wrote negatively about von Hayek, I didn’t dwell on it, but apparently this isn’t so obvious as it should be. “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”
This cry for mass suffering (and deaths too, since “less competent people” clearly have no right to live,) essentially says that the business cycle is a moral failing of the masses. This is good economics in the sense it is considered as a reasonable proposition, but I for one find it ideological, in the pejorative sense. I can’t make enough sense out of von Hayek’s own theory of business cycles, starting with the problem that his explanation doesn’t explain why it’s cyclical, so far as I can tell. But his fellow Austrian Schumpeter liked to babble about “creative destruction.” But in a panic or depression or whatever the new euphemism is going to be, there’s mostly destruction. It’s like conservatives cutting out the fat but merrily cutting out the meat and bone too.
As for the old question, if you’re so smart, why aren’t you rich? Because I’m not greedy enough to sacrifice everything I need to, to get rich, is one correct answer. But, because I’m not as lucky as that guy, is very, very often a correct answer too. And, because I wasn’t born rich, too.
Phil H@22 Businessmen making profits are not the whole of the public. Public benefits and private profit are not the same thing. So yes, though Alex SL can speak personally, I think the point hits Worstall directly.
“I agree that usually the ones in office don’t end up with the biggest slice of money, but they do get economic benefit from the privatizations, in the ways that you describe below.” And a bad businessman whose expense account includes three martini lunches and call girls and hunting trips benefits in the same way as a “bureaucrat.” Indignation at paying public officials your tax money goes only so far. I don’t think it justifies a double standard. The concession that the office holders don’t really get the big buck (to say the least!) is an enormous concession. In my view, it vitiates most of your argument right there. The “economic power” of the bureaucrat bought cheap is miserably small. A millionaire hasn’t got the power of a billionaire and the notion they are really the same kind of thing merely betrays an inability to grasp scale, I think.
But the real claim, the one that matters, is the claim that it’s government interference that creates the “biggest slices of money” in the first place. This I think is highly dubious. Conquest of foreign land and the redistribution into private hands is probably the clearest and most convincing example. Destroying economic competitors and acquiring forced labor may be as clear though. The thing is, very few people, at least in the academy, would agree that capitalism is reducible to plunder.
Alex SL 04.16.23 at 10:57 pm
Dallas Weaver,
The idea of “a market system where someone makes a poor decision and goes bankrupt, and is out of the game” (just like the market-friendly conclusion drawn from the tragedy of the commons) reflects a largely outdated view of how market economies work. If it were all family-owned businesses and entrepreneurial start-ups, then there would be something to this. But in-real-life market economies are full of CEOs and other high-level managers who, to paraphrase, “just get on to the next CEO position at a larger company and fatter golden handshakes” after blowing up a previous company or at least causing it avoidable problems. There is plenty of incentive to make short-sighted decisions that maximise your bonus payments now but paint the company into a corner five years later, if by then you will be at a different job, or to pursue goals that advance your position in the company while harming the company. And just like “there is a great deal of ruin in a nation”, it also takes a lot of mismanagement to have Apple, Volkswagen, Walmart, Unilever, or ExxonMobil go bankrupt. What is more, should they go bankrupt, they would not just gently disappear from the market but send shock waves of crisis across the entire economy, leaving large numbers of employees, customers, suppliers, investors, and pension holders devastated.
All this is distinct from and in addition to the systematic problems of markets, although a consequence of other market-inherent factors such as that larger and more professionally managed companies have certain competitive advantages over smaller ones managed by non-professionals, such as economies of scale, larger negotiating power, and professionalism*.
One may add a nod towards the very public dismantling of the meritocracy delusion by a certain billionaire struggling with his purchase of a certain social media network, because he also dismantles the idea that a market will just weed out incompetent market participants. It clearly hasn’t, otherwise he would not be able to do what he is doing now. A counter-argument might be to point out that he had previously been shielded from the consequences of his incompetence and serial over-promising through a combination of more competent staff (which is just another way of saying he appropriated the labour surplus of his employees) and government contracts and subsidies.
Okay, but that would mean that to get the utopian ideal of the market that actually punishes incompetence and bad decisions (‘our great idea has never REALLY been tried!’) the regulatory state would have to enforce that no company can ever grow larger and more complex than a medium-sized family business, and that there is no professionalised management class. There is a bit of a tension here between market as in weeds out the incompetent and market as in the government lets the market do what it wants, even if that means that companies emerge from market activities that are quite shielded from failure or even too big to fail*.
Tim Worstall,
You are not a market radical then, like you seemed to characterise yourself as. Which is great, because as I understand, Adam Smith wasn’t one either, despite the way his name is used today. But we will have to disagree about the Zeitgeist. I am currently watching a Labor government promote a “nature repair market” in the hope that there will be a “Green Wall Street”. At the other end of the spectrum, so-called crypto advocates want to turn every activity into tokens that can be bought and sold and speculated with. Everybody from the far right to the supposed centre-left certainly behaves as if they have swallowed what might unkindly be described as the “every aspect of life has to be a market” pill.
And having read e.g. Mazzucato’s Wikipedia article, her research into “the key role that government actors have played in driving radical innovations in their early stages, especially in the US. It outlined a number of case studies across different sectors – including biotech, pharmaceuticals and clean technology – to show that the high-risk investments have been made by the state before the private sector gets involved” sounds rather more like the government supporting a market economy in precisely the areas where pure markets fail than the picture of central planning you try to paint with a phrase like “the Rolls Royce minds deciding what is to be made, by whom”.
Footnote
*) I am aware that market radicals will argue that large corporations only ever come into existence because of the nefarious meddling of the state, and that if there was no such meddling, smaller, newer companies would eat the large, calcified corporations’ lunch. It is fascinating how blind ideology will make some people believe that there are no economies of scale, that every new market entrant will find the necessary capital investment materialise and business relationships form as if by magic, and that larger companies can’t just undercut the new starter because they have a larger war chest. None of this is difficult to figure out in theory or observe in real life. Plus natural monopolies – e.g., it just doesn’t make sense to have twenty incompatible, competing operating systems or twenty parallel power grids.
Mike Huben 04.17.23 at 5:00 pm
Alex SL @ 26: I agree with pretty much everything you wrote, except perhaps your footnote. All large concentrations of wealth are due to “the nefarious meddling of the state”, fundamentally because of the state protecting property. Without the state, concentrations of wealth would be dissipated by schism, theft, embezzlement, etc. unless feudalistic protection of wealth was adopted (in which case you arguable have reinvented the state.)
As good progressives, we should want limits on permitted concentrations of wealth because of the bad side effects.
steven t johnson 04.17.23 at 7:21 pm
To review? The OP asserts that there are market failures but the state administrators are not prepared to address national security issues via war economy measures. Thus the OP proposes some curriculum reforms to address this national security need. The current bad prep of state administrators is the new knowledge problem, as opposed to the old knowledge problem, which is essentially knowing what consumers want without them paying a market price (their cumulative monetary transactions being the only measurable and interpersonally comparable opportunity cost.)
There’s a significant pushback from Tim Worstall, TGGP, Dallas Weaver Ph.D., Phil H on various grounds. In general, they fairly unreservedly advocate market, markets, markets, except for national security (and presumably police and prisons?) The OP doesn’t attempt to show market failures and the marketeers of course don’t accept that.
There’s limited pushback from Alex SL, who believes “monopoly rents” and “insufficient competition” are the cause of market distortions, and Mike Huben who somehow believes all great slices of wealth are due to the state because it defends property which somehow, as in doesn’t limit concentrations of “wealth.” It seems to me Alex SL and Mike Huben are inconsistent, have inadvertently conceded all the main ground to the marketeers and basically present an eclectic common sense, common decency case. The current notion of “rents” amazingly enough does not apply to actual payments for use of land or buildings, but something nefarious done by government. And concentrations of wealth are simultaneously concentrations of capital, such as railroads, power networks, satellite communications systems, fiberoptic networks, steel mills, textile factories and numerous other edifices and institutions and processes. Limiting those is limiting production, but not necessarily in a way that will save the environment.
The problems of course is that eclecticism is rejected on principle by the marketeers. There isn’t necessarily a golden mean, just because someone nice wants there to be one. Also, neither common sense nor common decency are agreed values. In particular, the notion that production for profit, an insatiable want, should drive the economy, makes nonsense of all ethical defenses of capitalism. Yet everyone who counts agrees that capitalism is basically good and central planning is evil.
Alex SL 04.17.23 at 10:45 pm
Mike Huben,
Agreed, in that sense, but I would say that the state, unless run by a kleptocrat, generally protects property arrangements of whatever kind (be they feudal, free enterprise, or publicly owned), and the sometime libertarian claim appears to be that if the state only protected property in this basic way and otherwise let markets freely operate without regulation and subsidies, corporations large enough to be systemically important and have monopsy and/or monopoly power wouldn’t be a thing.
TGGP 04.18.23 at 8:10 pm
steven t johnson:
I also agree with Scott Sumner: A central bank can maintain NGDP to prevent a recession even while the firms that take the biggest risks go bankrupt. The belief that individual firms are “systemically” important is just nonsense promoted by the capitalists who want to be bailed out.
Alex SL:
You seem to be making James Burnham’s point that the economy is dominated by bureacracies run by hired managers rather than owner operators, something Marc Andreessen recently contrasted with Musk:
This reduces the incentive of those agents (in “principal agent” parlance) to do a good job vs if they were just owners rather than salaried, but the prospect of bankruptcy still provides some incentive of the owners to try to hire agents who don’t destroy their company’s value. Principal agent problems still exist, and they will resist things like Robin Hanson’s proposed fire-the-CEO market, but it works well enough that many big firms you mentioned are able to thrive in competitive markets. And a larger, more capitalized (undercapitalization is one of the biggest problems with new small businesses) is better able to survive setbacks, but as long as new entry is possible a badly run large business will lose share over time to ones that are better run.
Alex SL 04.18.23 at 10:57 pm
Really, the whole argument that because humans are information-limited, we should leave decisions to the market is really odd, if we think about it. It is like taking the hands off the steering wheel because of uncertainty which of three roads will be best way to one’s destination. Yes, physics will take over and make decisions for us poor information limited souls, but the outcomes may turn out not be long-term beneficial.
Mike Huben 04.19.23 at 11:37 am
Alex SL @ 29: “I would say that the state, unless run by a kleptocrat, generally protects property arrangements of whatever kind (be they feudal, free enterprise, or publicly owned), and the sometime libertarian claim appears to be that if the state only protected property in this basic way and otherwise let markets freely operate without regulation and subsidies, corporations large enough to be systemically important and have monopsy and/or monopoly power wouldn’t be a thing.”
Yet there are plenty of historical counterexamples to the first claim worldwide, and none for the libertarian second claim.
The US founders were levelers, and happily confiscated and distributed the royal, feudal and other assorted property of those who fled to Canada. They also eliminated primogeniture and other systems of concentrating ownership. Innumerable smaller changes restricting the scope of property rights and increasing land taxation have also helped.
The progressives (I recommend “The Progressive Assault on Laissez Faire”) established different systems of distribution based on taxation.
But the key point, which was made by progressives as much as 150 years ago, is that government construction of markets and property and contract rules determines distribution: there is no “redistribution” from some “natural state” of never existing “free markets”.
Alex SL 04.19.23 at 11:48 pm
Mike Huben,
You are conflating “the government usually protects property rights under its preferred system of property rights” and “a government may expropriate to create its preferred system of property rights, e.g., if it destroys serfdom to create a labour market”. Those are two very different concepts. Probably only the most unhinged free market fanatics would doubt the latter. But surely you cannot seriously doubt the former? Is a government committed to capitalist property rights going to tolerate an armed gang marching into the headquarters of a business and saying, “this is ours now”? Is a slave-holder government going to tolerate a slave rebellion? No. Governments protect property rights. That plus external defense pretty much describes much their core function, historically.
engels 04.20.23 at 11:06 am
the whole argument that because humans are information-limited, we should leave decisions to the market is really odd
It’s also 80 years out of date, which misses a quite a lot of progress in IT.
engels 04.20.23 at 11:20 am
Like your grandad decided in the 40s that we can’t have a centralised distributor of books because how would they take and process the orders and nobody ever thought to review since.
Mike Huben 04.21.23 at 11:40 am
Alex SL @ 33: You don’t seem to understand the basic concept that property rights do not exist in and of themselves. They are creations of governments. Just as government expropriated slaves when it abolished property rights in humans, it is valid to expropriate by changing other definitions and limitations of property. An individual property holder may indeed have less, but the value overall can be increased. For example, if people are assigned ownership over their own personal data, that would be an expropriation from modern tech companies like Google and Facebook, but it would benefit us greatly from the increased privacy. If people were assigned ownership of their viewership so that they could charge for advertisement’s impingements on their attention, we’d see a lot of time and distraction regained from advertisements. But of course the most important point is that taxation is a part of the definition and limitations of property.
Pointing out that governments tend to protect property is a distraction from the fact that governments also protect their power to define property and tax it.
TGGP 04.21.23 at 2:37 pm
AlexSL:
In the steering wheel analogy, wouldn’t it be more like letting lots of people steer their own cars? There’s even the externality of bad driving causing accidents. In the alternative where everyone rides public transit, the government exercises more control.
By coincidence today there was this on creative destruction:
https://twitter.com/mattyglesias/status/1649360809913458688
engels 04.21.23 at 5:24 pm
Respect to Mike Huben, whose anti-libertarian website was one of the first things I saw on the internet in the 90s. One of the great lines I can remember (roughly): “the free market is always best, central planning never works, that’s why, internally, all corporations are structured like little markets with no top-down control”.
Mike Huben 04.21.23 at 8:18 pm
engels @ 38: Thanks! Yes, my site has been around a long time: I think it was one of the first few on the web. Down for the past couple of years, thanks to the boneheads at GoDaddy who changed their system out from under my working wikis. It will rise again in the near future. It can still be found through the internet archive.
MisterMr 04.21.23 at 9:59 pm
My understanding is that the wisdom of the markets consists mostly in the fact that we cannot really know what consumers want, which is the reason we have huge market failures when we can’t trust consumers revealed preferences (e.g. medical drugs, because consumers can’t know what they need, or pollution, because consumers do not bear the costs of it directly).
This is a different argument from the problem of distributional inequality, which is not a market failure in the same sense but rather a natural outcome.
Alex SL 04.21.23 at 10:42 pm
TGGP,
Not really, if the question is, what happens to traffic? In my analogy, the single car was all of society. In your analogy, where ‘traffic’ is all of society, it is well established that everybody steering their own cars the way that would be rational for them individually would lead to some mixture of horrific accidents on an hourly basis and permanent traffic jam, which is why it only works at all if the government puts extremely narrow limits on what people are allowed to do with their cars. Even then, everybody having a car is hugely wasteful and inefficient compared to public transport wherever there is enough density for public transport to be a viable option in the first place.
engels,
That is a great quote and observation by him, thanks for sharing (imagine laughing emoji here).
Ryan Baker 04.25.23 at 11:59 am
I’m inclined toward thinking, that the gap that is most important here is not the tacit knowledge of specific industrial details, but the interest in how those relate as part of one of the world’s most complex systems.
The prevalent way in which economics is mostly engaged with focuses very much on the outputs (inflation, GDP, growth rates) or on ideology (free-market absolutism or capitalism skepticism/hatred). The interest in carefully pulling the threads by which all of this relates to each other is not common.
But that’s what industrial policy demands. Of course one end of those threads is the tacit knowledge, but the other is the activity that would happen without policy.
In that sense, perhaps the most significant contribution one might make is to evoke more of that interest. When interest is animated, individuals often work to solve their own knowledge gaps. Where knowledge gaps persistently remain the cause is often not that the information is not available, it’s either that it is obscured behind a wall of ideology, or not pursued due to lack of interest.
I’m not sure the best way to inspire others, but my first thought is to demonstrate the value and richness of possibility entwined into the inherent complexity of this system. I’d suggest that often economics attempts more to convey a message that this rich complexity is inscrutable, and that interest in it will lead nowhere good. In that world, the experts and their theories are what are important, and the details which lie behind them are not. While the libertarian economists have been greatly complicit in the creation of that view, they are neither alone within the space.
Comments on this entry are closed.