The Economist on Irrational Voters

Michael C. Moynihan | June 18, 2007

This week's edition of The Economist gives substantial space to Bryan Caplan's terrific new book, The Myth of the Rational Voter. There might be wisdom—and madness—in crowds, but when it comes to economic policy, Caplan says, trust the experts. 'Lexington' explains:

Mr Caplan gives a sense of how strong these biases are by comparing the general public's views on economic questions with those of economists and with those of highly educated non-economists. For example, asked why petrol prices have risen, the public mostly blames the greed of oil firms. Economists nearly all blame the law of supply and demand. Experts are sometimes wrong, notes Mr Caplan, but in this case the public's view makes no sense. If petrol prices rise because oil firms want higher profits, how come they sometimes fall? Surveys suggest that, the more educated you are, the more likely you are to share the economists' view on this and other economic issues. But since everyone's vote counts equally, politicians merrily denounce ExxonMobil and pass laws against “price-gouging”.

The public's anti-foreign bias is equally pronounced. Most Americans think the economy is seriously damaged by companies sending jobs overseas. Few economists do. People understand that the local hardware store will sell them a better, cheaper hammer than they can make for themselves. Yet they are squeamish about trade with foreigners, and even more so about foreigners who enter their country to do jobs they spurn. Hence the reluctance of Democratic presidential candidates to defend free trade, even when they know it will make most voters better off, and the reluctance of their Republican counterparts to defend George Bush's liberal line on immigration.

And doubtless Lou Dobbs' plague predictions aren't helping matters much.

Cato excerpts The Myth of the Rational Voter here.

Comments

|6.18.07 @ 12:08PM|#

"Yet they are squeamish about trade with foreigners, and even more so about foreigners who enter their country to do jobs they spurn."

People are squeamish about trade with foreigners, that must be why so few people buy Honda or Toyota cars or Italian shoes or Japanese hi fi systems. Perhaps the people at the Economist ought to get out more rather than just dismissing everyone who disagrees with them as zenophobic rubes. What a bunch assholes.

|6.18.07 @ 12:14PM|#

Trust the experts when it comes to economic policy, huh?

So, does this mean we need a Central Planning Committee? Or are the unwashed masses rational when acting as a Market, just not when acting as Voters?

|6.18.07 @ 12:18PM|#

"Or are the unwashed masses rational when acting as a Market, just not when acting as Voters?"

Um. Yes that is exactly right. 100 points if you can locate the salient argument.

Bee|6.18.07 @ 12:19PM|#

So, widespread macroeconomic illiteracy might be viewed indulgently by some in government as a *good* thing? Shocking.

|6.18.07 @ 12:26PM|#

Jason, you beat me to the punch. Kudos.;

|6.18.07 @ 12:26PM|#

"Most Americans think the economy is seriously damaged by companies sending jobs overseas. Few economists do"

There are so many logical holes in that sentence. It does nothing but beg the question of whether "most Americans" and a "few economists" are in fact write. Yes, a few economists do look at off shoring of jobs as a bad thing. They are in the minority, but they are not cranks. Any economist worth his salt will admit that the science of economics such as it is is not set in stone and no one fully understands how economies work or what the ideal economic policy should be. It may be that 100 years from now we may look back on the "few economists" as being exactly right, just like we look back now to the 1950s and the "few economists" who questioned Keynes as being right. The truth is we don't know. The writer of this article is so arrogant and misinformed, he apparently thinks he knows.

|6.18.07 @ 12:30PM|#

Or are the unwashed masses rational when acting as a Market, just not when acting as Voters?

The answer to that lies in the fact that people acting in the market are spending their own cash and dealing with willing vendors, whereas by voting they believe they are spending someone else's money to satisfy their unlimited whims.

In the first case the buyer is restrained by the fact that his own resources are limited.

In the second case the voters are only restrained by the politicians' willingness to pander.

As near as I can tell pandering by politicians is the only thing in the world available in infinite supply.

Edward|6.18.07 @ 12:31PM|#

Human irrationality (aka human nature) should give small comfort to rationalist utopian ideologies (e.g., libertarianism), n'est-ce pas?

|6.18.07 @ 12:33PM|#

I have had the same concerns as John's. If you believe that economists usually are right, how do you explain the 50 years when economists were wildly wrong about so many things?

I think the resolution of the conundrum is in noting that economists did not, during those dark ages, disbelieve most of what economists believe today. They simply thought that smart acting governments could improve on market solutions.

The consensus opinion of economists today is that governments in most cases can't. Those 50 years helped demonstrate that fact.

|6.18.07 @ 12:34PM|#

The answer to that lies in the fact that people acting in the market are spending their own cash and dealing with willing vendors, whereas by voting they believe they are spending someone else's money to satisfy their unlimited whims.

Surely you're not telling me that people always spend their own cash rationally or that spending money in one's own best interest automatically leads to the best collective results?

Anyway, am I hearing that you guys would prefer getting rid of elections and simply allowing some "experts" to decide all political policy in the United States?

Example One|6.18.07 @ 12:36PM|#

Funny article. Of course, they fail to point out that many "economists" earn their scare quotes by writing things like that at my name's link or things like this.

Those "economists" are foolish and naive enough to think that first-level financial impacts are all that matters and consistently fail to include impacts beyond that - as well as non-fiscal matters - in their analyses.

It's pretty sad that people could spend all that time and money on years of schooling and still be so unaware of how things work.

|6.18.07 @ 12:37PM|#

Since people are incapable of voting rationally, maybe we should set up a government agency to vote for them.

|6.18.07 @ 12:43PM|#

Libertarianism isn't utopian in the least. It, above all other philosophies of government, recognizes that plans fail where dynamism does not. Markets correct billions of times each second. Governments correct, eh, less frequently and with less effect.

Dan T: Read frikkin' Hayek before you embarrass yourself further.

|6.18.07 @ 12:44PM|#

Anyway, am I hearing that you guys would prefer getting rid of elections and simply allowing some "experts" to decide all political policy in the United States?

Yes, that's precisely what everyone's saying. Aside from all the words and concepts being entirely different, and the fact that you're wrong in every conceivable way.

|6.18.07 @ 12:48PM|#

"Markets correct billions of times each second." = Utopia.

There are more things that one can be utopian about than government, JasonL.

For exampole, "the tax cut fairies and private charity will elimate poverty" is a utopian statement.

|6.18.07 @ 12:54PM|#

In some ways Dan T has a point. This book is profoundly un-libertarian and elitist. If Libertarianism means anything it is that one party cannot claim a monopoly on rationality or personal interest. We don't buy this shit when we are talking about government bureaucrats why are we all of the sudden buying it when said by "economists"? If the truth of the world is so fucking obvious to Kaplan why don't we just make him king and all live in utopia?

He assumes that anyone who disagrees with him or "most economists" whoever they are is irrational. Bullshit!! It may be perfectly rational in Kaplan's mind to think that we should have open markets and be able to import our cars from Japan if Japan makes the best cars. If you are an American autoworker who will loose your 21-dollar an hour job and retirement without protectionism, you don't think opening the markets is such a good idea. Now, is they auto worker advocating a bad economic policy? Probably so. Is he irrational? Fuck no. He is doing exactly what we expect people to do, acting in his own best interests. But, Kaplan would consider him irrational, somehow less than human and less smart than enlightened Brahmins like Kaplan.

To give another example, I know numerous people who think that the U.S. should protect their markets because some day the country might not be able to buy every thing we need from oversees and we need to retain the industries and skills in areas like cars and farming so that we can take care of ourselves should that day ever come. I disagree with that. Not because it is irrational but because I think that it overvalues the risk of not being able to import goods. Kaplan would say these people are just irrational, meaning there is no coherent logic to their thinking. Again, Bullshit!! They are just as rational as he is, they just have different assumptions and in the end who is say those assumptions are 100% wrong? Pinheads like Kaplan were telling people in the 1920s that all of the world's problems had been solved.

Kaplan seems to be profoundly elitist and ill informed. I am really surprised that Reason would shill his book like this.

|6.18.07 @ 12:56PM|#

The vast majority of economists recognize that free trade will increase GDP growth.

Only a very silly minority of that group think that's the only quesiton to answer.

|6.18.07 @ 12:59PM|#

"The vast majority of economists recognize that free trade will increase GDP growth.

Only a very silly minority of that group think that's the only quesiton to answer."

For once I agree with you Joe, you are absolutely right. Further there are very serious economists who used to be defenders of unrestrained global trade who have come around to the other side. I don't agree with them, but I am not going to say that they are irrational or that there is absolutely no chance of them being right.

highnumber|6.18.07 @ 1:01PM|#

joe,

I know you've heard this before:
Free markets won't create a perfect world. Only a fool believes they could.

I want a better, freer world. I don't believe in a perfect world.

|6.18.07 @ 1:01PM|#

""Markets correct billions of times each second." = Utopia."

joe: I'm vastly understating here the flow of information in a modern market economy. I didn't say the outcome would match your preferences nor that the inputs are perfect. I said that the mechanism of correction is astronomically better than what you get when you take a poll every four years.

"For exampole, "the tax cut fairies and private charity will elimate poverty" is a utopian statement.""

I don't hear that often. I hear "economic growth is the greatest contributor to human welbeing ever on this earth. Governments can't eliminate poverty either. Let's go with what we know."

|6.18.07 @ 1:04PM|#

For once I agree with you Joe, you are absolutely right.

On Monday, June 18, 2007, the foundations of the world were shaken...

|6.18.07 @ 1:04PM|#

I think the resolution of the conundrum is in noting that economists did not, during those dark ages, disbelieve most of what economists believe today. They simply thought that smart acting governments could improve on market solutions...The consensus opinion of economists today is that governments in most cases can't. Those 50 years helped demonstrate that fact.

I don't think this is an accurate characterization of what was learned in those 50 years. Governments act to provide a context in which markets can operate. (Some) governments have learned how to provide a more stable context through their actions than they provided in the past, but I don't think it is completely accurate to say that governments can't "improve on market solutions." Or that most economists believe that. Governments are very big actors in the market. Their actions have both positive and negative effects on outcomes in the economy. Smarter policies lead to better results. Smarter policies are not in all cases "hands off." It is just more complicated than that.

JasonL,

Libertarianism isn't utopian in the least.

Whatever gets you up in the morning. But a faith in the dynamic utopia of a laissez-faire economy is a big part of the world view of many libertarians

|6.18.07 @ 1:06PM|#

John,

"Further there are very serious economists who used to be defenders of unrestrained global trade who have come around to the other side."

I will note that even these economists agree with the logic that leads to the conclusion that reductions in protectionist barriers tends to result in greater GDP growth all around. That's not where the disagreement lies.

highnumber,

Well, not all libertarians are fools. The point is, some are, and their philosophy lends itself to foolish utopianism just as easily as many others, if embraced by a utopian.

|6.18.07 @ 1:06PM|#

JasonL

You are missing the point. It is not about what is the best policy. If Kaplan had written a book that actually did some economic work and thought and argued how free markets benefit people, I wouldn't have a problem with him. But that is not what he did. What he apparently has done is written a book taking a cafeteria choosing of current economic thought and branded that the only rational way of thinking about the issue and then looked at how people vote and concluded that they are irrational because they don't always vote as their betters think are in their best interests. It is not about who is right or wrong about markets. It is about Kaplan being such a smug prick that he thinks that anyone who votes or thinks differently than him is irrational. Again, if the sollutions to the world are that easy, lets just make him king and stop worrying about it.

|6.18.07 @ 1:08PM|#

"I will note that even these economists agree with the logic that leads to the conclusion that reductions in protectionist barriers tends to result in greater GDP growth all around. That's not where the disagreement lies."

I am aware of that Joe. That is why I said "unrestrained global trade" not just global trade.

|6.18.07 @ 1:13PM|#

..."the tax cut fairies and private charity will elimate poverty"...

And if anyone made that statement I would stop short of calling him a blithering idiot only because I'm to polite to say so. Instead I would tell him he was mistaken.

A society in which poverty had been eliminated would be a utopia. I do not believe in utopias (utopiae?).

|6.18.07 @ 1:14PM|#

John,

Your auto worker and strategic nationalist examples are indeed acting rationally in their own best interests. Unfortunately, their best interests can only be served by restricting the best interests of the vast majority of everybody else. When, in fact, their interests are added into the mix with everyone else's interests, it is likely that exercising everyone's market-restricting interests will in the end hurt even those who want those restrictions for themselves.

It is neither utopian nor elitist to point that out, and neither is it utopian or elitist to suggest that restraints on government power to act on such narrow self interests would be better for everybody in the short, medium, and long run.

Do you think that government guarantees of free speech and free exercise of religion are utopian and elitist too?

|6.18.07 @ 1:16PM|#

"...getting rid of elections and simply allowing some 'experts' to decide all political policy in the United States?"

You got the first right.

uncle sam|6.18.07 @ 1:27PM|#

Nobody can agree on what utopia or perfection is. I have no idea what they would be.

OTOH, existence is perfect. That is, it is what it is and as it can only be at this time.

As far as an ideal state of society and government, any idea of perfection or utopia is meaningless. It seems to me that most peoples thoughts of utopia would end up being absolutely boring. It would appear to mean the end of the incentives to struggle.

Hence, libertarian thought is anti-utopian in that there is no plan, no perfect end, etc., just people being free to engage in the struggle of living without interference from those who believe that an institution of extortion can somehow make life better for all, or make people better.

The accusation that libertarianism is utopian is a straw man.

I'll tell you what is utopian... the idea that humans can be improved upon by threatening them with weapons, (such extortion is the tool of government) as if somehow government was something apart from human failings.

Oh ye, of unfounded yet unfailing faith in political government, stop complaining about the motes in libertarian eyes.

|6.18.07 @ 1:27PM|#

"When, in fact, their interests are added into the mix with everyone else's interests, it is likely that exercising everyone's market-restricting interests will in the end hurt even those who want those restrictions for themselves."

That is what you think but there is no gaurentee that you are right. Further, contrary to what you may think, people are more than just homoeconomicus. There are other values in the world besides money. There are issues like quality of life and national pride that drive people beyond just money. Perhaps people make the determination that they would rather spend more for a product and have the money stay in the country and give someone a decent paying job who wouldn't have otherwise had one and are willing to sacrifice some standard of living for that. That is not irrational. You may not agree with it, but ultimately what do you or I know? Nothing.

I suppose in some ways Caplan has just stated the obvious, that people vote on values other than money. Being a member of the amoral corporatist right, that I am increasingly starting to loath, Caplan just can't understand how anyone could value anything other than money, so he writes off everyone who doesn't as irrational.

|6.18.07 @ 1:33PM|#

For example, asked why petrol prices have risen, the public mostly blames the greed of oil firms. Economists nearly all blame the law of supply and demand. Experts are sometimes wrong, notes Mr Caplan, but in this case the public's view makes no sense. If petrol prices rise because oil firms want higher profits, how come they sometimes fall?

The two views aren't mutually exclusive. As a consumer, one may well be aware of market pressures causing fuel prices to rise, and at the same time blame the oil companies for taking advantage of the market to enrich themselves. If they perceive the rise in fuel prices as an economic calamity, they may feel resentment at those who profit from it.

uncle sam|6.18.07 @ 1:37PM|#

There are issues like quality of life and national pride that drive people beyond just money.

Oddly enough, the idea of market isn't applicable only to money.
Even so, things like quality of life have a deep relationship to money, that is, the ability to afford things like health care, food, shelter, clothing, etc.
Impoverished people have few values.

|6.18.07 @ 1:43PM|#

"...getting rid of elections and simply allowing some 'experts' to decide all political policy in the United States?"

It would never work. Experts in control NEVER admit to a mistake until they are no longer in control.

OTOH if you want to talk about professional juries, you have my attention.

|6.18.07 @ 1:43PM|#

I agree with those who criticize Caplan in characterizing people who disagree with his economic worldview as irrational. They may have a different value system than him or I, but they are not irrational.

I also note that public provision of non-public goods such as public education have more to do with human psychology than labelling things we dont like as 'irrational'. I have long noted that libertarianism is too long on reason and short on rhetoric.

|6.18.07 @ 1:59PM|#

"But a faith in the dynamic utopia of a laissez-faire economy is a big part of the world view of many libertarians"

You have to put this in context. There is a belief that a dynamic system of feedback creates less dramatic problems of lesser duration than an intrusive policy mandated from on high. That doesn't sound nearly so utopian. Not 'perfect', but 'better than the alternative'. Not 'magic' but 'responsive to dynamic feedback'. Not utopian, but practical.

|6.18.07 @ 2:05PM|#

You can prove a case that goes something like "the average person is more risk averse than they should be if they seek to optimize their end state security and wealth."

You see this all the time in retirement plans. A rational strategy for a risk averse person still contains a good chunk of 'risky' investments. If you dump all of your money into cash, you will lose over someone who was willing to take on diversified risks.

In that sense, people are not rational because they are ignorant of what risk really means. The risk of flat to no returns isn't rationally considered.

I suspect that voting on economic policy can be extrapolated to be irrational solely due to the variable of risk.

|6.18.07 @ 2:05PM|#

JasonL,

No one is claiming that libertarian thought leads invevitably to utopianis, only that it can.

You don't think there are any self-identified libertarians who blame any and all problems on government intervention? You don't think there are any self-identified libertarians who allow the caveats you put into your statement to fly right over their Rand-addled heads?

C'mon. Let the "no friends on the left" stuff go. There are loonies and dumbasses out there - yours, too!

|6.18.07 @ 2:20PM|#

"the tax cut fairies and private charity will elimate poverty" is a utopian statement."

I have never heard anybody make that claim. Welfare certainly doesn't end poverty. It promotes it by creating disincentives. Tax cuts have been shown to create jobs, including better paying jobs, and have also contributed to higher government revenues.

|6.18.07 @ 2:29PM|#

Cripes, people!

"I am not a utopianist" != "There is no such thing as libertarian utopianism."

I can make reasonable-sounding statements about leftist beliefs that are pragmatic rather than utopian, too.

I don't let that blind me to the silly/dangerous utopianism behind some leftist thought.

uncle sam|6.18.07 @ 2:29PM|#

Joe,

Edward 12:31pm

Human irrationality (aka human nature) should give small comfort to rationalist utopian ideologies (e.g., libertarianism), n'est-ce pas?

|6.18.07 @ 2:31PM|#

"OTOH if you want to talk about professional juries, you have my attention."

That sounds like a good idea in that it would do away with involuntary servidude and would make for better decisions of guilt and innocence, but wouldn't it be real expensive?

|6.18.07 @ 2:42PM|#

"Perhaps people make the determination that they would rather spend more for a product and have the money stay in the country and give someone a decent paying job who wouldn't have otherwise had one and are willing to sacrifice some standard of living for that."

Let's say you buy a lower priced foreign good. That means you have more money left over to buy other things, some of which are goods and services coming from America.

|6.18.07 @ 2:51PM|#

To all the Dan Troll/joe statist posts above:

Go to daviddfriedman.com and read his free online Price Theory before spouting off about economic theory that you don't understand. What Friedman shows is that in theory, a god-bureaucrat can in some instances give slight improvements to market outcomes, but that in practice the people we actually elect are not motivated to act this way, and even if they were so motivated, lack the god-like omniscience to make improvements over market outcomes. And yes, as pointed out already, political elections emphatically do not function like free markets where the buyers are spending their own money.

I've run an election campaign. Most voters are woefully ignorant of politics, and most of the rest are seeking to take other people's money faster than it is taken from them.

The rest are pretty much libertarians.

uncle sam|6.18.07 @ 2:54PM|#

I don't know if it's still true, but when I ran for office back in the 80s, my campaign manager told me the most important factor for winning, is name recognition.

Better the devil you know than the devil you don't know.

|6.18.07 @ 2:56PM|#

"Since people are incapable of voting rationally, maybe we should set up a government agency to vote for them."

Since people are incapable of voting rationally, maybe we should take away their ability to vote themselves other people's money.

Fixed that typo for you.

|6.18.07 @ 3:04PM|#

"Their actions have both positive and negative effects on outcomes in the economy. Smarter policies lead to better results."

Government intervention sends wrong signals. They divert peoples' choices in other directions. This causes dislocations. Only the invisible hand of the free market can direct the economy to provide the most goods and services at the best price and to give the choices that people want. Politicians and bureaucrats are arrogant if they think they can determine what's best for us and determine what prices we should pay for those goods and services.

|6.18.07 @ 3:25PM|#

Do you think that government guarantees of free speech and free exercise of religion are utopian and elitist too?

This question remains unanswered.

Come on... Surely you don't believe that, while free speech is in general good, the government can't improve on the well being of the populace with some key restrictions of it. After all, not everybody values money alone: Some are interested in keeping other people from saying or printing things that are harmful to society. Shouldn't they be able to exercise that interest through the ballot box?

And religion? Look how important it is to so many people. It's something we obviously should be voting on!

|6.18.07 @ 3:41PM|#

I don't know what is so hard about understanding the difference between endorsing a position and saying that any deviation from that position is irrational. Do I beleive in markets and would I agree with Caplan on most issues? Yes. My problem with Caplan is not his position on economics. It is his position that no rational person could ever vote contrary to his dogma that have a problem with.

We are talking about specific policies here. It is no so blindingly obvious that completely open borders and completely open markets are the right course in every case. More importantly, what is the defeinition of the right course? These are really hard questions. People on here see "free markets" and also the chance to diss on anyone who disagrees with them and have a pavlovian response to fall all over the guy and not think through what he is saying. The bottom-line is that conclude that voters are irrational you have to know what rational is and the fact is that economics is in no way an exact enough science to write off everyone who votes or thinks outside the current dogma as irrational. If that is too difficult for you to understand, then maybe Caplan is right and people are just stupid.

|6.18.07 @ 4:27PM|#

john,

I think you may be undeweighing Caplan's analysis. His claim is that there is persistent disagreement on economic policies between the public at large and the people who do economics for a living. He isn't talking about tarring anyone who deviates from any given point, he is noting that the public will consistently vote on policy based on inaccuracies in their economic understanding.

If people were were saying "I want an America that looks like me, so I don't want immigration," that is unpleasant but is a value judgement. If they are saying "immigrants take our jobs," they are engaging in inaccurate economic analysis.

|6.18.07 @ 5:08PM|#

joe says: "I can make reasonable-sounding statements about leftist beliefs that are pragmatic rather than utopian, too."

a) Perhaps you are capable of making "reasonable-sounding statements about leftist beliefs". Anything's possible. I look forward to reading those comments when they finally occur.

b) "pragmatic leftist beliefs" is an oxymoron

c) "reasonable-sounding" is not the same as "reasonable". But, thank you for admitting that, under even the most charitable assessment, you only sound reasonable.

Aloha, your foil, jh

|6.18.07 @ 5:11PM|#

Dan Troll says: "Surely you're not telling me that people always spend their own cash rationally or that spending money in one's own best interest automatically leads to the best collective results?"

"best collective results" is an oxymoron -- and one of the better indicators that the person writing is a statist

|6.18.07 @ 5:39PM|#

First, economics by itself is positive, not normative, so it makes no claim about what is "right" absent externally supplied values which have nothing to do with the economic theory in question. So with that, I suppose in a way, John is right - it is not so clear what the result of any economic analysis will be. Not because the theory is potentially wrong (of course that is always true of every theory, economic or otherwise) but because we need to know the values to be used as the measuring stick of "rightness".

For example, if you value the interests of a stranger born in Saginaw more than one born in Tijuana (as it seems John does, given his statements) then applying a sound economic analysis to the situation might well lead you to the conclusion that it is "better" to use the power and threat of force of the state to require that I and others deal (i.e. employ, buy from, rent to, etc) only with those humans lucky enough to have been born in the favored category.

Of course if you value a stranger born in Saginaw more than a stranger born in Tijuana it seems incumbent upon you to explain how this is different in principle between that and a racist saying that he prefers strangers born white to strangers born black. As in the case of a racist who merely wishes to prefer whites in his own life, I would, while holding his repugnant views in contempt, be happy to ignore him; likewise the person who prefers a Saginawian (??) to a Tijuanian (??) in his personal life is to be tolerated but ignored. However, when either of those people decides to enforce his view of humanity on the rest of us by dictating who we are allowed to associate with, then it is not the economic issues, theories, or outcomes that will ultimately matter, but a full airing and debate of the underlying values.

|6.18.07 @ 5:45PM|#

Government intervention sends wrong signals. They divert peoples' choices in other directions. This causes dislocations. Only the invisible hand of the free market can direct the economy to provide the most goods and services at the best price and to give the choices that people want. Politicians and bureaucrats are arrogant if they think they can determine what's best for us and determine what prices we should pay for those goods and services.

Wrong signals. Defined how? What is your metric for correct here? Your statements don't provide support for a position. They state one. If you assume that nothing but the invisible hand can make a correct choice, then anything else can only make incorrect choices. You have defined wrong signals in terms of those not made by the invisible hand, thereby creating an empty argument. What is your empirical evidence that all activities by the government in markets are "wrong?" Choose your metric and expound away...

"Divert people's choices" this, on its face, of a neutral value. How are you deciding that any particular diversion, or the aggregate of all diversions are in the "wrong" direction for the health of the market?

Politicians are arrogant...OK, I'll by that one.

|6.18.07 @ 5:58PM|#

For example, if you value the interests of a stranger born in Saginaw more than one born in Tijuana (as it seems John does, given his statements) then applying a sound economic analysis to the situation might well lead you to the conclusion that it is "better" to use the power and threat of force of the state to require that I and others deal (i.e. employ, buy from, rent to, etc) only with those humans lucky enough to have been born in the favored category.

But if you value the interests of a stranger born in Saginaw equally with the interests of a stranger born in Boise or, in general, equally with all Americans, then using the government to favor the interests of the person from Saginaw is doing more harm than good to the aggregate of all those you favor.

Protectionism isn't bad solely because it divides humanity into a favored class and an unfavored class, hurting the unfavored class as it helps the favored class. It is bad because it helps only a subset of the favored class at the expense of everyone else in the favored class.

In the former sense, protectionism is simply (in my opinion) immoral. In the latter sense, however, it is in fact irrational: The result of the protectionism does not achieve the intended goal of the protectionism.

|6.18.07 @ 6:02PM|#

You are all missing the point that compared to the way people lived 500 years ago we already ARE living in a utopia.

And it wasn't due to love, compassion, looking out for our fellow man, democracy, striving for equality, the grace of god or any of the other stupid things people have believed in.

No reason we can't make another similar jump in quality of life in a much shorter time period. The only thing that can stop it is listening to the socialists.

|6.18.07 @ 6:22PM|#

It is bad because it helps only a subset of the favored class at the expense of everyone else in the favored class.

MikeP, I certainly agree with that, but that does rely on a certain set of values, which I presume we share, to come to that conclusion. Some people could argue that the benefit to the subset outweighs the expense to everyone else (how we decide what "outweighs" means comes from a statement of values, not economics).

In other words, yes, I think economic theory is clear that people are individually poorer under protectionism in the long run (even the short-term protected class), but that poorness can be countered by those who would claim that it is compensated by other things like "national pride" or whatever, or who weight the subset highly enough to outweigh everyone else.

I guess the point I was trying to make is that what counts as harm or benefit is ultimately tied to what (and how much) one values certain things. Economics can, given those values, tell us if we are "better off" with a certain policy or not, but what defines "better off" is always tied to some axiomatic values and not economics. Perhaps a relevant example might be that people could argue (as some have and do) that being more equally poorer is better than being individually richer but with much greater variance in wealth.

Anyway, let me say that I think you do an amazingly good job fighting the good fight on here against very determined resistance so nothing I said was meant to disagree with your overall analysis.

|6.18.07 @ 6:35PM|#

Grand Chalupa -- Awesome post.

|6.18.07 @ 7:07PM|#

Brian Courts,

Fair enough. I can see how other senses of values may lead one to believe that government intervention is worth the loss of actual wealth. I don't know that most Americans go that far with their thinking, although they may if given the opportunity. Rather, I think they are mostly unaware that protecting auto jobs in Saginaw makes it harder for a person in Boise to buy a car and protecting steel jobs in Gary makes it harder for a person in Saginaw to sell a car.

But I do see where you are coming from. And thanks for the kind words.

|6.18.07 @ 7:17PM|#

For exampole, "the tax cut fairies and private charity will elimate poverty" is a utopian statement.

You forgot the "tax increases create jobs elves and the perverse incentives protect the environment druids"

Edward|6.18.07 @ 7:42PM|#

Inasamuch as a libertarian society on any scale has never existed, believing that it will surely work is utopian. The state in some form--the successful ones have been centralized and strong--is an abiding feature of human culture. Insisting on good evidence for cherished beliefs, however, isn't.

uncle sam|6.18.07 @ 8:14PM|#

Inasamuch as a libertarian society on any scale has never existed, believing that it will surely work is utopian.

However, the state being a feature of all societies, enables us to compare those societies with all-powerful states with those with constrained states and conclude if more is better or not. Just about everyone acknowleges now that markets work better at poviding the goods than "command economies".

Economists have been studying the matter of states and markets and it is becoming rather clear that political intervention into the economy causes more problems than it resolves.

Edward|6.18.07 @ 8:24PM|#

"Economists have been studying the matter of states and markets and it is becoming rather clear that political intervention into the economy causes more problems than it resolves."

Becoming rather clear, is it? Clear enough to justify a dogmatic libertarian position? All major economies today are mixed. How much the state should intervene is a matter of pragmatic considerations, not libertarian dogma.

Alan Augustson|6.18.07 @ 9:29PM|#

Economics is by no means a perfect predictor of human behavior, but I respectfully hold that it's the best we have at this time. The reason for this is that economics tracks *demonstrated* priorities, not expressed ones.

Anthropology, sociology, psych, and survey sciences all give the subject ample opportunity to lie. Economics isn't having any of that; it follows the money trail. *That's* where you find the real priorities of a people.

And our aggregate money trail makes liars of us all. Sweatshop labor, global heating, wars over oil, the offshoring of jobs, and the economic catastrophe waiting to happen in China; all stem directly from our insatiable desire for cheap consumer goods. While pollsters and philosophers scratch their heads, economists say "what the hell were you expecting?".

Economics also gives us a better understanding of policymaking. Transaction-cost theory, median-voter theory, Arrow's Theorem, and other products of political-economy (the study of political action, as a product of individuals trying to maximize their benefits for minimum effort), give us terrific insights as to why every Changing-of-the-Guard in Washington still yields status-quo policy.

I'll take one honest (non-partisan) economist over every poll Gallup ever produced.

|6.18.07 @ 9:57PM|#

Neu:

The point about the wrongness of politically arrived at economic distributions is that left to their own devices, millions of people making billions of decisions aggregated to make some things profitable and others not.

There is a lot of arrogance in assuming that any person or group of lawmakers acting on an infinitesimal fraction of the information, inaccurately measured and delivered months too late can arrive at a better decision. Whatever they choose, they are trumping a awful lot of local decisions that were freely made.

There is good reason not to assume an imposed outcome has equal value with an evolved one.

|6.18.07 @ 10:10PM|#

Dan T. said

Surely you're not telling me that people always spend their own cash rationally

Straw man. No one said 'always', they said that using your own resources weeds out irrational behavior.

or that spending money in one's own best interest automatically leads to the best collective results?

I don't see why not. At least in a market economy.

Anyway, am I hearing that you guys would prefer getting rid of elections and simply allowing some "experts" to decide all political policy in the United States?

Another straw man. Why do you come here?

|6.18.07 @ 10:14PM|#

John says: "Perhaps people make the determination that they would rather spend more for a product and have the money stay in the country and give someone a decent paying job who wouldn't have otherwise had one and are willing to sacrifice some standard of living for that. That is not irrational."

I know people like that who voluntarily choose to pay more money for products made in this country, and only products made in this country. I'm fine with that -- I don't agree with their philosophy, I think they're harming themselves, but, hey, that's their choice. The problem is, most of these people want to pass laws forcing that same philosophy onto me, and that's where I vehemently disagree with their attempt to coerce me into buying products I don't want to buy.

|6.18.07 @ 10:36PM|#

John says: "Perhaps people make the determination that they would rather spend more for a product and have the money stay in the country and give someone a decent paying job who wouldn't have otherwise had one and are willing to sacrifice some standard of living for that. That is not irrational."

Ironically enough, John's comments are prime examples of both make-work bias and anti-foreign bias, both of which are discussed in the excerpt from Caplan's book which is linked to in the post.

|6.18.07 @ 10:41PM|#

"There is good reason not to assume an imposed outcome has equal value with an evolved one."

Since you are walking around in complex adaptive systems land...a feature of complex adaptive systems, of which economies are an excellent example, is that as their complexity increases they have a tendency to off-load some of that complexity into their environment and to develop regulatory mechanism that will smooth out their operation. Regulatory mechanism are a feature of evolved complex adaptive systems. Those regulatory systems arise naturally to optimize the functioning of the system and adapt at a different rate than the other features of the system. It is a feature of regulatory systems to operate on a different time scale, with information aggregated on a different level of detail. This is not a bug in adaptive systems, but an essential feature.

Some interesting reading on the trade-off between internalized and externalized complexities in adaptive systems

http://www.santafe.edu/research/publications/workingpapers/03-12-070.pdf

And this is an interesting look at markets and how incentive operate...
http://www.santafe.edu/research/publications/workingpapers/07-01-003.pdf

And a look at processes in economics
http://www.santafe.edu/research/publications/workingpapers/06-10-038.pdf

|6.18.07 @ 10:41PM|#

In response to this: "Economists have been studying the matter of states and markets and it is becoming rather clear that political intervention into the economy causes more problems than it resolves."

Edward said: "Becoming rather clear, is it? Clear enough to justify a dogmatic libertarian position? All major economies today are mixed. How much the state should intervene is a matter of pragmatic considerations, not libertarian dogma."

North Korea -- Lots of state intervention. Starving people trying desperately to get out.
South Korea -- Less state intervention. Thriving economy.

East Germany under communism -- Lots of state intervention. Horrible economy with people trying desperately to get out.
West Germany -- Less state intervention. Thriving economy.

Cuba -- Lots of state intervention. Horrible economy with people trying desperately to get out.
Florida -- Less state intervention. Thriving economy.

China during Great Leap Forward -- Lots of state intervention. Horrible economy with starving people trying desperately to get out.
Hong Kong -- Less state intervention. Thriving economy.

Russia -- Growing state intervention. Economy going to hell (again).
Japan -- Less state intervention. Thriving economy.

Any discernable trend from these comparisons of neighboring areas with different levels of authoritarianism? None whatsoever, yeah? So why this dogmatic belief in less government despite no evidence to support this belief, unless we libertarians are simply irrational?

|6.18.07 @ 11:15PM|#

jh,

Not that your nifty list of minimal pairs isn't informative, but it doesn't really address edward's point at all...

Which of those countries you listed has a mixed economy? Which follows a strict "libertarian dogma?" Do the successful countries have governments that make pragmatic decisions regarding their economies?

|6.19.07 @ 12:21AM|#

The most libertarian of all of those examples, Hong Kong, had the least natural advantage yet saw the greatest growth. In less than two generations it grew from an impoverished rock to have a per capita GDP higher than that of its colonial masters -- masters who, incidentally, had a decidedly and intentionally more mixed economy during that generation and a half.

Show us an outlier. Name one country that has a more libertarian economic system than similar wealthy countries yet is not wealthy.

uncle sam|6.19.07 @ 1:31AM|#

How much the state should intervene is a matter of pragmatic considerations,

Rather than moral principles or even results.

It's all about the politics of getting elected and re-elected. "Show me the money!"

uncle sam|6.19.07 @ 1:39AM|#

As if libertarians aren't aware that most nations have mixed economies...including the U.S.
You can't score points here pointing out the obvious. As a libertarian, I am well aware of how politics works. I've run for office and seen first hnad how a successful candidate is able to wear the various faces necessary to garner sufficient support to get into office. They are quite subtle about it. Even the snakes can come off quite well when they are in the spotlight.

uncle sam|6.19.07 @ 2:01AM|#

IAC, there is little point, except cheap self-satisfaction in telling people how wrong, stupid, whatever you think they are.

|6.19.07 @ 8:40AM|#

"Regulatory mechanism are a feature of evolved complex adaptive systems. Those regulatory systems arise naturally to optimize the functioning of the system and adapt at a different rate than the other features of the system."

Oh, I don't disagree that regulatory systems arise and can theoretically assist by ameliorating actual market failures and externalities. Alas, what happens in the real world is that regulatory bodies instantly become tools of politics, and there is very little correspondence between what may win someone an election every four years and 'optimizing' the adaptive operations of the economy.

Edward|6.19.07 @ 9:26AM|#

Pragmatic interventions:

http://www.foreignaffairs.org/20070701faessay86403-p10/kenneth-f-scheve-matthew-j-slaughter/a-new-deal-for-globalization.html

A New Deal for Globalization
Kenneth F. Scheve and Matthew J. Slaughter
From Foreign Affairs, July/August 2007

Summary: Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

Kenneth F. Scheve is Professor of Political Science at Yale University. Matthew J. Slaughter is Professor of Economics at the Tuck School of Business at Dartmouth and Adjunct Senior Fellow for Business and Globalization at the Council on Foreign Relations. He served on the White House Council of Economic Advisers from 2005 to 2007.

|6.19.07 @ 11:00AM|#

Alas, what happens in the real world is that regulatory bodies instantly become tools of politics, and there is very little correspondence between what may win someone an election every four years and 'optimizing' the adaptive operations of the economy.

And other mechanisms in the system address these issues on yet another time scale. Overall the US system has become more complex over the years, adding layers of regulation. At some point those mechanisms will become so sub-optimal as to be overturned...but don't confuse the interface between the political and the economic with the system as a whole. The economy and the political system are subsystems within the larger system of the society, which has many tools to deal with challenges. Attempting to impose restrictions on the available options (a libertarian ideal, impose restrictions on one aspect of the system, the government) faces the same challenges that you point out for trying to direct the economy through command and control. It only works up to a point. At some point, the strict dogma will run up against a context that requires a different solution than is available in the preconceived framework. That is why it is important to have mechanisms for allowing the system to adapt. The US constitution provides those mechanisms. They've worked well so far, because the society has been more pragmatic than dogmatic throughout history.

Libertarian ideas are always an important consideration in any discussion of government action, but strict adherence to its principles are no more warranted than strict adherence to any other incomplete framework of ideals. A mixed system will have better results on the ground because it will utilize higher level latent features of the society automatically.

|6.19.07 @ 11:15AM|#

Hong Kong, had the least natural advantage yet saw the greatest growth

Just to nitpick... Hong Kong had three natural advantages...location, location, location. It is easy to give the credit to your favored theory, but it would be much harder to prove causality. The complexities underlying Hong Kong's success involve more than just the interface between market and politics. Particularly since its success was so dependent upon the international context.

|6.19.07 @ 11:24AM|#

"Read frikkin' Hayek before you embarrass yourself further."

Hayek recognized that some challenges in the economy/society interaction cannot be effectively resolved through competition. Hayek advocated government intervention to address market failures and defended regulation in certain areas of the economy as long as the measures are consistently and generally applied.

Hayek avoided the trap of dogmatic libertarianism.

|6.19.07 @ 11:54AM|#

NM:

The Hayek was directed at a specific comment of DanT's. He doesn't understand the argument, and he makes that abundently clear at the top of the thread. You do understand the argument, but you are latching onto this anyway for some reason. Don't attribute an argument to me that I didn't make.

Regarding "dogmatic" libertarianism, if you are a minarchist (as opposed to an anarchist), the dogma is harder to see. Government action has the hurdle of being coercive and ill informed. Always. As such, it is a last resort to free action.

Of course there is a mixed system. From a minarchist POV, the government provides the enforcement of property and contract that makes ecnonmic activity flourish. After that, it is acting blind.

I also struggle with your yardstick. Better for society is slippery, and if you define it the wrong way, you just wind up with majoritarianism.

|6.19.07 @ 12:39PM|#

JasonL,

Not trying to pick a fight. I was just pointing out that Hayek is a good role model.

I think the problem I have with much of the framing of this is that instead of saying...

"Less government meddling in the market is better than more..."

Too much of the time I see it presented as...

"Government action in the market is always bad (see MikeP's assertion that government action in the market sends "wrong signals")."

The first is a workable pragmatic guideline... the second is incorrect on its face.

Since edward's statement "How much the state should intervene is a matter of pragmatic considerations, not libertarian dogma," seems more in concert with the first position than the second, to argue against it gives the appearance that you are taking a stand in defense of the dogmatic application of libertarian ideals. Defense of dogmatism is, imho, rarely a fruitful position to find yourself in...

|6.19.07 @ 12:56PM|#

"Since edward's statement "How much the state should intervene is a matter of pragmatic considerations, not libertarian dogma," seems more in concert with the first position than the second, to argue against it"

But here we run into the problem that edward's statement is loaded as well. Pragmatic here doesn't mean pragmatic. Dogma here doesn't mean dogma.

|6.19.07 @ 12:59PM|#

see MikeP's assertion that government action in the market sends "wrong signals"

To be fair to Rattlesnake Jake, that was his assertion -- although I in general agree with it.

On your main point, the standard I place on the legitimacy of government action may indeed strike the balance you seek: Government must restrict its actions to those that address actual market failures.

Here I am using the strictest definition of market failure: The economically efficient outcome cannot be approached through free market mechanisms alone. Bringing this back to the topic of the original posting, it is the science of economics that informs us what markets are liable to fail, how to recognize that failure, and the minimum government action that will correct the failure.

Note that this does not mean that any government behaving under this constraint is a good government. Nor does it mean that such a government does not cause worse problems than it is trying to solve, as I believe is generally the case. It simply means that such a government can at least claim the pretense of legitimacy.

|6.19.07 @ 4:18PM|#

Here I am using the strictest definition of market failure: The economically efficient outcome cannot be approached through free market mechanisms alone.

I am not sure you can meaningfully constrain the term "market failure" in terms of economic efficiency, unless I am misunderstanding your point. If economics is seen as the top of the hierarchy, then it might make sense, but if you see economics as embedded in a larger context, the market can fail to provide for non-economic challenges as well.

Probably a dead thread by now...but a good discussion.

=^)

|6.19.07 @ 5:06PM|#

but if you see economics as embedded in a larger context, the market can fail to provide for non-economic challenges as well.

Markets and economics can explain lots of challenges that one might at first think were "non-economic".

National defense against the Soviet Union, for example, would likely have been underproduced by the market -- making it a market failure legitimately handled by the government.

Mitigation for the next flu pandemic is something that the market might underproduce before it breaks out and then overproduce afterwards as the population panics. Again, that market failure points to an area of legitimate government action.

uncle sam|6.20.07 @ 1:18AM|#

The contention here seems to be between dogmatic libertarianism and dogmatic pragmatism.

The aspersion of dogmatic is not very illuminating. If there is one thing that most people are dogmatic about, it's the (perceived) necessity of the state as the mount for civilization.

It's right up there with the survival urgeLet's boil it down a little and see how it looks.
The state is that institution of social control via arms, that is, the threat of death to obtain submission to its command.
Troublingly, that also fits your typical mugger. It's just that the mugger doesn't have a license and doesn't have the prtense of mugging you for your own good, or the good of everyone.

The questions I put forth then are:

Does civilization exist only because of the license to engage in this extortion?

Are there insufficient benefits to participating in civilization to obtain voluntary participation by its members?

Is there no other possible arrangement to limit undesirable (aggressive) human behaviors than the power hierarchy (which appears to be a heritage or our primal tribal origins)?

|6.20.07 @ 2:22PM|#

Uncle Sam,

The state is that institution of social control via arms, that is, the threat of death to obtain submission to its command.

I take issue with this as an accurate characterization of the relationship between government and society. It may be an aspect of the relationship, but it is not definitional.

Dogmatic libertarianism, I think, can be judged by the degree to which you take such a statement as being true versus being a helpful way to think about specific aspects of government policy. Dogmatic thinking takes the underlying axioms of a system of thinking equivalent to reality rather than approximations/models of reality. This error can be based on any set of beliefs, libertarian or otherwise.

|6.20.07 @ 2:22PM|#

Urm...

"as equivalent"

|6.20.07 @ 2:43PM|#

Dogmatic libertarianism, I think, can be judged by the degree to which you take such a statement as being true versus being a helpful way to think about specific aspects of government policy.

By the very definitions you present, do you not see anything dogmatic in taking the existence of government as a given?