by Henry Farrell on February 29, 2004
I’ve been re-reading James Scott’s “Seeing Like a State: Why Certain Schemes to Improve the Human Condition Have Failed”:http://www.amazon.com/exec/obidos/ASIN/0300078153/henryfarrell-20″. It’s a wonderful book; I especially recommend it to libertarians who find it hard to believe that lefties too can be opposed to big government. I hope to blog more about its relationship to Hernando de Soto’s proposals for property rights reform in the developing world (see “here”:http://www.knowledgeproblem.com/archives/000720.html, “here”:http://kenmacleod.blogspot.com/2004_02_01_kenmacleod_archive.html#107713464265821106 and “here”:http://kenmacleod.blogspot.com/2004_02_01_kenmacleod_archive.html#107806635150466815 ) sometime in the next few weeks. For the moment, I just want to highlight one implication of Scott’s argument; that free markets may be flawed from a Hayekian point of view. Scott doesn’t pay as much attention to markets as he perhaps ought to, but it’s quite clear that he sees the process of state-building as going hand-in-hand with the creation of national and transnational markets. In particular, both states and markets need commonly agreed formal standards (of quality, measurement etc), which allow non-local exchange between people who don’t know each other. The historical evidence is emphatic – creating universal standards is an important part of the state-building process, not only in autocratic regimes, but also in more market-oriented societies (see, for example, John Brewer’s exemplary study of the building of the British state, _The Sinews of Power_).
But here’s the rub. Scott very clearly shows that national, written standards are going to be “thin.” By their very nature, they’re unavoidably going to leave out many of the important forms of tacit knowledge that local, consensual, unwritten standards and rules can incorporate. The Hayekian case for free markets, as I understand it, is based less on the ideal of competition, than the ideal of information exchange; i.e. that markets allow the transmission of tacit knowledge more effectively than formal organizations. But Scott’s argument suggests that Hayek on tacit knowledge contradicts Hayek on free markets.[1] If you want to have non-local exchange (i.e. properly competitive impersonal markets), you have to do so on the basis of universal standards. But these standards fail to live up to the Hayekian ideal. Ergo, you can construct a Hayekian case against the creation of competitive impersonal markets, insofar as these markets involve the destruction of the kinds of tacit knowledge that are embedded in informal local standards. I’m not a Hayek expert, so I’ll throw this out to the people who know Hayek better than I do (Dan for one), but I think that there’s a serious argument here to be fleshed out.
fn1. Cass Sunstein, in his review of Scott’s book, seems to “suggest”:http://home.uchicago.edu/~csunstei/moreisless.html that Scott’s use of Hayek is self-contradictory. I suspect that the contradiction is in Hayek rather than in Scott.
by Henry Farrell on February 25, 2004
bq. Greenspan Urges Congress to Reign in Deficit
Says the “NYT”:http://www.nytimes.com/aponline/business/AP-Greenspan-Budget.html?hp (though I’m sure the typo won’t last long).
by John Q on February 25, 2004
The announcement that Ralph Nader will again run for the Presidency raises the (almost) unaskable question -are there any circumstances under which we should hope for, promote, or even passively assist, the re-election of George W. Bush as against either of the remaining Democrat contenders? I feel nervous even raising this question, but I think it’s worth a hard and dispassionate look.
Regardless of their political persuasion, most people will agree, at least in retrospect, that it would have been better for their own side (defined either in ideological or in party terms) to have lost some of the elections they won. Most obviously, this was the case for the US Republican Party in 1928. Hoover’s victory, and his inability to cope with the Depression, paved the way for four successive victories for FDR and two generations of Democratic and liberal hegemony, which didn’t finally come to an end until the Reagan revolution in 1980. The same was true on the other side of poltiics in Australia and the UK, where Labour governments were elected just before the Depression, split over measures of retrenchment demanded by the maxims of orthodox finance and sat out the 1930s in Opposition, watching their own former leaders implement the disastrous policies they had rejected, but had been unable to counter.
p. So, is 2004 one of those occasions? The case that it is rests primarily on arguments about fiscal policy. Bush’s policies have set the United States on a path to national bankruptcy, a fact that is likely to become apparent some time between now and 2008. Assuming that actual or effective bankruptcy (repudiation of debt or deliberate resort to inflation) is unthinkable, this is going to entail some painful decisions for the next President and Congress, almost certainly involving both increases in taxation and cuts in expenditure. On the expenditure side, this will mean a lot more than the obvious targets of corporate welfare and FDW[1]. Either significant cuts in the big entitlement programs (Social Security and Medicare) or deep cuts in everything else the government does will be needed, even with substantial increases in taxes (to see the nasty arithmetic read these CBO projections, and replace the baseline with the more realistic *Policy Alternatives Not Included in CBO’s Baseline*)
fn1. Fraud, Duplication and Waste
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by John Q on February 24, 2004
I was a bit slow to respond to Kieran’s post on the World City System, but let me say that my views on this system are pretty much a cross between Wired and William Cobbett. In a world where nearly all legitimate work of high-pay and status can be performed electronically and remotely, the most plausible explanation of ‘global cities’ is that they facilitate cronyism and corruption.
Updated with a little more evidence 25/2
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by John Q on February 13, 2004
I thought I’d repost this piece from my old blog, because a multidisciplinary audience is just what it needs. The starting point is as follows:
Data mining’ is an interesting term. It’s used very positively in some academic circles, such as departments of marketing, and very negatively in others, most notably departments of economics. The term refers to the use of clever automated search techniques to discover putatively significant relationships in large data sets, and is widely used in a positive context. For economists, however, the term is invariably used with the implication that the relationships discovered are spurious, or at least that the procedure yields no warrant for believing that they are real. The classic article is Lovell, M. (1983), ‘Data mining’, Review of Economics and Statistics 45(1), 1–12, which long predates the rise to popularity of data mining in many other fields
So my first question is whether the economists are isolated on this, as on so much else? My second question is how such a situation can persist without any apparent awareness or concern on either side of the divide.
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by John Q on February 10, 2004
US Secretary of Defense has received general derision for the following rather convoluted statement
Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know
As I’m giving two papers on this general topic in the next couple of days, I feel I should come to his defense on this. Although the language may be tortured, the basic point is both valid and important.
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by John Q on February 8, 2004
Anyone who’s been following recent discussion of the US economy will be aware that the Bureau of Labor Statistics produces employment statistics from two different surveys, and that the results have diverged radically since 2001. The BLS preferred numbers on employment growth come from a survey of employers (the Establishment Survey) while other numbers, including the unemployment rate are derived from a survey of households (Current Population Survey). As the BLS Commissioner’s latest statement notes (PDF file)
From the trough of the recession in November 2001 through January 2004, payroll employment decreased by 716,000. Over the same period, total employment as measured by the household survey increased by about 2.2 million (after accounting for the changes to that survey‚s population controls).
Not surprisingly supporters of the Administration have been pushing hard to discredit the Employment Survey in favour of the CPS. While noting some reasons for the discrepancy, the BLS seems to be sticking with the payroll survey, noting that there are a lot of problems in estimating employment growth from the CPS, and that the payroll data is consistent with data on new claims for unemployment benefits.
If that’s the case though, the implication appears to be that the CPS results are unreliable, and therefore that the unemployment rate (derived from the CPS) is an underestimate. Allowing for the fact that non-employed people are divided between unemployed and those not in the labour force, the discrepancy could easily be a full percentage point, implying that unemployment is now higher than when the recovery (as measured by output) began. This seems consistent with anecdotal impressions.
by Chris Bertram on February 8, 2004
The deaths of “nineteen Chinese illegal workers”:http://news.bbc.co.uk/1/hi/england/lancashire/3464203.stm who were cockling on the treacherous sands of Morecambe bay has generated much comment in the British press. Much of that comment has focused on their illegality, the exploitation of such workers by gangmasters, the need or otherwise for tighter immigration controls, globalization and so on. Indeed. There was a similar burst of indignation when “some immigrant workers were hit by a train back in July”:https://www.crookedtimber.org/archives/000204.html . But one thing that needs saying is that such tragedies are a normal and predictable consequence of capitalism and not simply the result of coercion and abuse by a few criminals. In his “Development as Freedom”:http://www.amazon.com/exec/obidos/ASIN/0385720270/junius-20 , Amartya Sen discusses two examples where workers, in order to assure basic capablities (such as nutrition and housing) for themselves and their families, have to expose themselves to the risk of injury or death. Jo Wolff and Avner de-Shalit have “a paper on this theme”:http://www.ucl.ac.uk/spp/download/seminars/Wolff_De-Shalit_disadvantage.doc (Word format) that is on the “programme”:http://www.ucl.ac.uk/spp/seminars/seminars_2004.php of the UCL’s School for Policy Studies for this Wednesday, they recount Sen’s examples:
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by Daniel on February 6, 2004
Apologies in advance because this edition of RFHE is not really going to be all that good. It’s a grab bag of things I’ve picked up relevant to personal hobby horses of mine. Lots of people sent me some really good stuff in response to the last one, for which thank yoyu very much. Unfortunately, my chaotic email management habits came through a minor MyDoom infestation about as well as I thought they were going to. I should be able to find all the stuff I had pretty soon; otoh, if any of you were to resend it, that would be just lovely. So, apologies, promises of something better next time, and please regard this inconsistency in quality as charming rather than annoying.
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by Ted on February 5, 2004
The New York Times Magazine had an excellent story this weekend on the fraud that brought the cable company Adelphia to bankruptcy. Most of the blame has to lie with the Rigas family, who managed to borrow three billion dollars, obligated the shareholders in their public company to cover it, and contrived to hide it from investors. They built a company with comically poor corporate governance- over half of the board were family members, and the audit committee may never have met.
Along the way, they had plenty of accomplices among the institutions that were supposed to be independent circuit breakers. Banks had no business lending other people’s money to the Rigases. Deloitte and Touche failed badly in their role as independent auditors. Despite the refusal of Adelphia management to disclose the loans, Deloitte still signed off on their 10-K. Adelphia attorneys did nothing to stop the loans, and most analysts did only a cursory job of inspecting the company’s structure.
In my mind, most of these problems don’t seem to be appropriate targets for public policy. No law can prevent incurious analysts, cowardly auditors, or shortsighted corporate management. (Conflicted auditors are another story, but that doesn’t appear to be a problem here.) I’d imagine that most laws that attempted to address these issues would do more harm than could.
But regarding banks, I’m not so sure. Specifically, I’m not sure about whether it was a good idea to overturn the Glass-Steagall Act, a Depression-era law prevented commercial banks from getting in the investment banking business until it was overturned in 1999 by the Financial Modernization Act. One of the concerns for the original lawmakers was that full-service banks would lower their standards for commercial loans in order to win lucrative underwriting contracts. According to the author, that’s exactly what happened in this case.
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by John Q on February 4, 2004
Kieran’s piece on kids being driven to school reminded me of a post I’ve been planning for a while. One of the issues debated at length on my blog is that of speeding and law-enforcement measures such as speed cameras. I’ve argued against speeding and in favor of rigorous law-enforcement. Not surprisingly, and perhaps reflecting the fact that more than 80 per cent of drivers regard themselves as above-average, this has been very controversial. You can read some instalments in the debate here and here or use the search facility for “speeding”. Unfortunately most of the extensive and interesting comments were lost in a database failure.
In the course of this debate I discovered the fact, surprising to me, that, although the rate of road deaths per person in the United States is nearly twice that in Australia and the United Kingdom, much of this difference can be accounted for by the fact that distances travelled in the United States are a lot higher and are rising (there are problems with the numbers and biases in the measure, but I’ll leave that to one side for now). The differences between US and UK are plausible given differences in population density and well-developed public transport in London at least, but the differences between the US and Australia certainly surprised me. Australia is every bit as car-dependent as the US and has much lower population density.
All of this is a prelude to the fact that, in economic terms, time spent travelling is a really big deal. In their book Time for Life, based on the 1985 US Time Use Study, Robinson and Godbey estimate that the average adult American spends 30 hours a week in paid employment and 10 hours a week travelling (they also, controversially, argue that working time has been falling, not rising). It’s pretty clear that distances and times spent travelling have increased since 1985 in the US (in both the US and Australia, driving is by far the dominant mode of travel).
If, as I’ll argue below, most travel should be regarded as being in the same economic category as working and if, as the stats linked above imply, Americans spend about twice as much time travelling as Australians, then reducing travel times to the Australian level would be equivalent to a productivity improvement of between 12 and 15 per cent. As it happens, combined with the relatively small difference in hours of paid work, adjusting for hours of work and travel would just about eliminate the gap between Australian and US GDP per capita (about 20 per cent on standard PPP estimates).
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by John Q on February 4, 2004
Via Lawrence Solum, I found this interesting post from Professor Bainbridge arguing that corporations should not be compelled to pay reparations for past wrongdoing (in this case, complicity in slavery). He says
Punish the wrongdoers, you say? Sorry, but the corporation’s legal personhood is a mere legal fiction. A corporation is not a moral actor. Edward, First Baron Thurlow, put it best: “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?” The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation – there is nothing there to be punished.
So who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation’s treasury, it reduces the value of the residual claim on the corporation’s assets and earnings. In other words, the shareholders pay. Not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway), but modern shareholders who did nothing wrong.
This seems plausible. On the other hand, the obvious implication (one that was clearly implicit in Thurlow’s original point) is that the principle of limited liability is untenable, at least in relation to civil and criminal penalties for corporate wrongdoing. The wrongdoers are, as Bainbridge says, the officers and shareholders at the time the wrong is committed, and they should be held personally liable. The law has moved a bit in this direction in recent years, but Bainbridge’s argument implies that it should go a long way further, restricting the principle of limited liability to the case of voluntarily contracted debts.
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by Henry Farrell on February 2, 2004
A little belatedly, some thoughts on _After the New Economy._ Other Timberites are still in the throes of writing their posts, so we’ll do a linkage post pulling the various responses together (as well as the responses of non-CT people such as Brad DeLong), when we’ve all reported. First take – this is a very good book indeed. It provides a trenchant response, not only to the New Economy hype, but also to the political project that it implies. Most importantly (and unusually, for a book about the US economy) it’s solidly based in a comparative framework, examining not only the relationship between the US and the world economy, but also showing that the experience from other countries (European social democracies) suggests that large welfare states aren’t necessarily a drag on growth. Brad DeLong notes somewhere or another on his blog that the economic success of the statist Scandinavians is a real puzzle for economic theory; this is something that should give pause to gung-ho US advocates of unfettered free markets, but rarely does. It’s nice to see the lesson being drawn out in a book that isn’t aimed at an academic audience. Furthermore, as Kieran has already “noted”:https://www.crookedtimber.org/archives/001213.html, _After the New Economy_ avoids falling into the trap of bucolic communitarianism; Henwood makes a guarded – but thoughtfully argued – case for the potential benefits of globalization for societies in both the West and the developing world. He’s right on all fronts, I think – but there’s still something missing in the book, which reflects a wider absence in the political debate. Not only is there not much in the way of a pro-globalization left; what there is doesn’t have much in the way of a positive alternative vision to offer. This means that Henwood is able to make a strong case for the prosecution, but doesn’t have very many positive arguments to defend his own vision of globalization.
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by Henry Farrell on January 31, 2004
Quote of the week from “Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2004/01/the_economics_o.html.
bq. I’ve been an economist for so long that I don’t flinch when the paper abstract starts as follows:
bq. “This paper models love-making as a signaling game. In the act of love-making, man and woman send each other possibly deceptive signals about their true state of ecstasy. Each has a prior belief about the other’s state of ecstasy. These prior beliefs are associated with the other’s sexual response capacity…”
by John Q on January 31, 2004
Via David Appell, I came across this marvellous quote from Freeman Dyson
In desperation I asked Fermi whether he was not impressed by the agreement between our calculated numbers and his measured numbers. He replied, “How many arbitrary parameters did you use for your calculations?” I thought for a moment about our cut-off procedures and said, “Four.” He said, “I remember my friend Johnny von Neumann used to say, with four parameters I can fit an elephant, and with five I can make him wiggle his trunk.”
It came to mind when I read this story in the NYT with the introductory claim
What really stimulates economic growth is whether you believe in an afterlife — especially hell.The report is of some estimations done by Rachel M. McCleary and Robert J. Barro (the story notes that the two are married) published in American Sociological Review.
Barro is probably the biggest name in the field of cross-country growth regressions (a field in which I’ve also dabbled), and I’m sure he’s aware that thousands of these regressions have been run and that, with very limited exceptions, results that particular factors are conducive to growth have proved highly fragile. I haven’t read the paper, so for all I know, the results have been checked for robustness in every possible way. But my eyebrows went up when I saw this para
Oddly enough, the research also showed that at a certain point, increases in church, mosque and synagogue attendance tended to depress economic growth. Mr. Barro, a renowned economist, and Ms. McCleary, a lecturer in Harvard’s government department, theorized that larger attendance figures could mean that religious institutions were using up a disproportionate share of resources.
What this means is that at least two parameters have been used in fitting growth to religiosity and that the two have opposite signs – most likely it’s some sort of quadratic. In my experience, there’s always at least one arbitrary choice made in the pretesting of these models (for example once you have a quadratic, the scaling of variables becomes critical). That gives three free parameters, if not more.
I’m no John von Neumann, but with two parameters I can fit a dromedary and with three I can do a Bactrian camel.