In Praise of Dogma

Will Wilkinson has a solid takedown (and an interesting followup) of Jon Chait's self-satisfied New Republic piece, which proposed that liberals are distinguished from conservatives by their relentless empiricism and flexibility.

Two brief additions. While I generally agree with Will, I don't think Chait's wholly off base either: I do think liberals tend to focus more on empirical details, though that may just be my own sample bias. But I'm not convinced that's always better. Assume for the moment that we're dealing with an issue where, per impossible, there isn't actually a deeper normative divide turning on, say, the intrinsic value of choice as opposed to efficient promotion of health or widget production or whatever. One of Hayek's great insights was that the point of adhering to principles is to prevent you from having to make case-by-case decisions. This, Hayek suggests, is because the great virtue of markets isn't the efficient allocation of "given" resources to satisfy "given" human needs or wants, but rather the discovery process they facilitate. The best case for allowing markets greater leeway was, he thought, that regulators and planners couldn't anticipate what millions of entrepreneurs and consumers might invent or want. And since these unknowns are precisely the market's strength, a case-by-case examination would always tend to err too far in favor of regulation, because planners would incorporate the gains from past learning and innovation, perhaps even figure out a more efficient way to satisfy old needs by old means, and the gains from future innovation erased by intervention would remain invisible. If Hayek was right, then, a certain indifference about the empirical details in a particular debate about the wisdom of innovation could constitute a kind of rational dogmatism.

The second thing I want to add is more an illustration by way of anecdote of Will's general point. Last summer, I did a debate on the Kojo Namdi show with a guy from SmokeFree DC about the wisdom of a proposed smoking ban. One of the callers was a doctor who said something to the effect of: "Well, the evidence for how harmful cigarettes are is so overwhelming that only some kind of ideology could inspire you to oppose such a clearly benificial measure."

Now, I'm not wholly sold on the case against secondhand smoke, but that's beside the point, since I hadn't really been disputing that cigarette smoke is unhealthy. The real difference between us was that my ideology was that people should be free to make choices that are unhealthy, and his ideology was that a healthy population is the summum bonum, and if people don't know what's good for them, there's nothing intrinsically good about letting them make "bad" choices.

We moved on to other topics, so I didn't have a chance to bring this point out, but what was interesting was that he seemed to think that I was the only one in the argument working from ideological premises. In a sense, his expertise prevented him from recognizing the real bone of contention, because the empirical data swamped and obscured the normative component. Hyperfocus on the means can, it seems, serve as a distraction from reflection on the end.

Comments

[thoreau]

I suppose liberals might very well be more interested in evidence to the extent that, as a Reason writer observed not too long ago (sorry, I can't remember who, otherwise I'd give props), they love to regulate our lives in the name of "9 out of 10 experts agree." Conservatives prefer to regulate our lives in the name of God and/or "It just seems wrong to me!"

Sadly, liberals are largely uninterested in evidence when it shows that their programs aren't working as intended. Or they claim that the evidence proves they need more funding.

I'm actually very interested in data and evidence, but it all needs to be taken in context. Without context I could probably come up with data "proving" that restricting gun ownership to convicted felons would lower the crime rate and the laws of thermodynamics are wrong.

Once you demand context, a lot of social science data turns out to be murkier than originally believed. Professionals who publish in peer-reviewed journals tend to be aware of this. But the "9 out of 10 experts" are frequently pundits who put 2 numbers together without context and loudly proclaim them in the media.

[E. Steven]

I think Chait's point was that in the area of economic policy, people who worship the market with the zealotry of religious fundementalists are no different than Communists who fetishize the totalizing state. In both cases an absolute adherence to an abstract ideal takes the place of any kind of pragmatic give and take between competing ideals.

[Ken Shultz]

I've often voiced concern over the libertarian tendency to frame an argument in cost benefit terms only.

It's a question of marketing. Go watch daytime TV for as long as you can stand it; it's people talking about questions of ethics--all day long. Why do libertarians limit their pitch to the small group of people who think logically? Why not pitch our message to people who can't do the math?

The minimum wage is bad because it adversely affects young, urban, black males. That's a quantifiable fact, but it's also a moral judgment. The average Joe doesn't have to be able to do the calculus--if they cost more per hour, people will hire fewer of them.

Show me an effective speaker--someone who is persuasive to a general audience--and I'll show you someone who appeals to people's sense of ethics. Ronald Reagan--an effective speaker if ever there was one--spoke of the Evil Empire and talked about how unfair it was for the government to take your money.

Logic is great, and we should always argue logically. However, most people do not think logically, and shaping our appeals to them without considering this is supremely illogical.

[Mark Borok]

Mr. Sanchez's example uses non-intervention (i.e. not regulating based on principle) vs. intervention (i.e. regulating based on available data). What about cases of intervening based on principle, without examining the data? Such as, for instance, installing a democracy in a given country on the principle that "democracy is good", while ignoring the specific cultural, historical and religious facts about the country which might bring about some undesirable result?

Also, not all regulations necessarily limit choice. A regulation requiring warning labels on cigarettes or ingredients labels on food is beneficial. Another instance where an ideologue wedded to an idea might not be able to see where exceptions to that idea might be a good thing.

[gaius marius]

not all regulations necessarily limit choice

absolutely, mr borok. a modern market is a regulatory construct.

i think it too often overlooked that laissez-faire (or as close as we're likely to see) was tried in this country and was abandoned for a mild fascism in 1933 because it was thought to be destroying the social fabric.

it's not that regulation is the font of all wisdom or that markets don't allocate goods more efficiently (not efficiently, but more efficiently) than planning tends to.

but it must be accepted empirically that the experiment of laissez-faire was a disaster -- and it was a disaster because free market theory relies on abstracted participants who are implicitly rational and moral as well as self-interested. real people are not so.

[Ken Shultz]

"but it must be accepted empirically that the experiment of laissez-faire was a disaster -- and it was a disaster because free market theory relies on abstracted participants who are implicitly rational and moral as well as self-interested. real people are not so."

Recently, there was a book published that observed that when people are asked to guess something like the number of jelly beans in a jar, the average of their guesses is often--if not a majority of the time--closer to the true number than the nearest guess.

...That's the great thing about markets--people don't need to be rational in order to benefit, and, what's more, the market's ability to make irrational people appear to be acting rationally makes it the most efficient mechanism for distribution most of the time.

[fyodor]

gaius marius,

And government bureaucrats are...not real people? Why else would they be more moral or rational than the rest of us?

[PintofStout]

Regulations will almost certainly always limit your choices. If you regulate everyone equally your choice is the same, but the cost of meeting these regulations may raise the price to the point that you can no longer choose to buy it.

[Jason Ligon]

Good stuff, Julian.

It is no secret around here that I am on the right side of the libertarian divide. As a result, I most frequently find myself in arguments with liberals. One of the most frustrating aspects of arguing with a liberal is the repetition of the claim that non liberals are 'ideologues' or that other value preferences are different from liberal values because they are, gasp, 'religious' and not 'empirical'. It is all a bunch of crap. Liberals have value preferences that lead them to assess things in a way that is more religious than any market fundamentalism. If I am a market fundamentalist, certainly they are regulatory agency fundamentalists.

To put a finer point on Julian's initial comments about liberal empiricism. The decision to regulate is not one that can be arrived at empirically. Empiricism allows you to make judgements about the state of the world, but it doesn't tell you anything about the necessity to regulate. Once we are talking about how much force to employ, we are in the realm of preferences and values. Empiricism may someday be able to tell us THAT man made global warming is having an impact on our planet, but it can't tell us what to do about it. As soon as we suggest a mandatory price tag for the fix, we are imposing a value system on all payors.

At the end of the day, it isn't that liberals are more empirical than anyone else, it is just that they more frequently make the mistake of not acknowledging when they are imposing value judgements.

[gaius marius]

Why else would they be more moral or rational than the rest of us?

they aren't. i'm not making the case for regulatory perfection, mr fyodor. i'm simply saying that markets are not infallible. they are a means to an end -- not the only means to all good ends.

is it not entirely possible that an laissez-faire market economy of maximum efficiency is inherently undesirable? in fact, that very value judgement was made with the support of most of the population in the new deal.

the market's ability to make irrational people appear to be acting rationally makes it the most efficient mechanism for distribution most of the time.

i agree that they do so, mr schultz -- most of the time. unfortunately, markets also provide rare events that are extremely unpleasant and can provoke bloody revolution on a fairly frequent basis. 1818. 1837. 1847. 1857. 1860. 1873. 1893. 1907. 1929. each of them nearly rent the country to pieces.

you'd be hard pressed to make the case for virtuous laissez-faire markets to people destroyed by market misallocation in manias and bubbles. and those rare events are not accidents or ignorable sidelights to markets -- they are intrinsic to the idea.

and then of course there is the issue of the have-nots as capital is concentrated where it can best be deployed. these people make a formidable army, history indicates.

[fyodor]

i'm not making the case for regulatory perfection, mr fyodor.

And I didn't say you were, mr gaius marius. But I'll see your strawman and raise you a strawman: I don't know who ever said that markets are infallible or assumed perfect rationality and morality by self-interested parties, but such absurd assumptions are hardly necessary to prefer the free market to statism.

is it not entirely possible that an laissez-faire market economy of maximum efficiency is inherently undesirable?

Of course it's perceived as undesirable by some, but so what? That some people, even a majority, think that doesn't make it correct! Besides, most people probably don't understand the entire concept of economic efficiency. They see things they don't like and want the government to make it right. And besides as well, the primary underpinning of libertarianism is not market efficiency but non-initiation of force, a moral issue. Efficiency maximization is a nice side effect.

[Jason Ligon]

"and then of course there is the issue of the have-nots as capital is concentrated where it can best be deployed. these people make a formidable army, history indicates."

I think you are overstating your case, gaius. There must be an agent of allocation. No agent of allocation is perfect. Democracy doesn't help those displaced in permanent minority status. In each of the cases you cite, it is not at all clear that an indictment of laizzez faire is in order. Rather, the complex interaction between the market, the availability of information, the regulatory bodies, the central banks, and so on come together in unpleasant ways at times. The benefit of the market is that you can recover. While it may be true that the virtues of markets can't be taught to someone who is displaced by a bubble, that is a lesson in the limited sense of scope we have as human beings and not a lesson in the limitations of the market when compared to any alternative.

The market giveth and the market may taketh away, but every bust is followed by a bigger boom as rising averages dominate the long term picture.

[gaius marius]

that doesn't make it correct!

i agree with some of what you're saying, mr fyodor, but isn't the core of ideology the belief in a set of principles -- platonic universals, as it were -- that is Right? if this is the market, then what is empirical about that? one can thusly dismiss the list of catastrophic depressions as the noble price you pay for being Right?

here is the central problem. one cannot make the empirical observation that markets are the best possible economic system. one can only say that markets best serve ends which one finds desirable. and who is to make the judgement that these ends are Right?

before the accusations fly, this is not an assassination of market economies. i happen to think that markets are an essential component of any durable social construct.

but i do think that, as an advocate of markets, one must be honest. markets are not rational or self-evidently good. markets do not predict the future. markets fail. markets are ultimately regulatory constructs. markets regulated unsufficiently devolve into a format that might best be described as 'sicilian'. markets are an ideology unto themselves.

[gaius marius]

Recently, there was a book published that observed that when people are asked to guess something like the number of jelly beans in a jar, the average of their guesses is often--if not a majority of the time--closer to the true number than the nearest guess.

i've read some of that book -- surowiecki is the author -- and this is something of an illusion.

the number of beans in a jar has a reasonable maxima and minima based on human experience. some outlier guesses will be recorded, but their effect will be small in a large number of guesses. between the boundaries, then, guesses will fall on a normal distribution. it is perfectly natural that the average of the guesses then would be close to the midpoint of the boundaries. no magic there.

that does not necessarily relate to markets, however, because in markets 1) the boundaries are not always broadly approximable by experience, and 2) the distribution of guesses is not always normal. indeed, in 1999, the distribution of guesses was wildly biased to the optimistic.

surowecki's book is called "the wisdom of crowds" -- but he is careful to choose his examples favorably and to bound the wisdom with conditions for success, ie regulation.

[thoreau]

gaius, a lot of what you say I'd file under the category of "good things to keep in mind." Unlike some people here, I'm not convinced that absolute libertopia would really be all it's cracked up to be, and maybe if the libertarian movement got some traction and started to actually implement its agenda I'd have to part company at some point and say "OK, that's far enough for me."

But simply complaining that every ill in the world is the result of "rampant individualism" and saying it would be better if everything was planned out by The Elite doesn't really do much for me.

[gaius marius]

it shoudl be said too that the important condition for surowecki's examples is non-correlation -- in other words, guesses are not dependent. this is never really true in markets because people talk and watch tv and read papers. at times, correlation of guesses is very high, and this skews the distribution, producing misallocation of capital and malinvestment -- fostering the bust.

there is a limiting point of groupthink beyond which the results of a heavily-skewed distribution are so terrible as to be irretrievable. we might we witnessing it in dollar-denominated debt instruments at the moment, in fact.

But simply complaining that every ill in the world is the result of "rampant individualism" and saying it would be better if everything was planned out by The Elite doesn't really do much for me.

fair enough, mr thoreau. i have to say i screed on about anarchism so because our society has an extremely high content of it -- i like to think i'd be a libertarian, i suspect, if i lived in the 17th century as locke did.

but that is what i think most people fail to appreciate -- how far from the historical median of individual-vs-social we really are, and how that which once benefitted us will, in excess, destroy us.

[Ken Shultz]

"i submit to you that every laissez-faire economy is doomed to destroy itself in a bust."

I suspect this turns on what you mean by laissez-faire. In a world where fraud, theft, etc. are undeterred, I might agree with you.

...But even in markets where fraud and theft are common--take black markets everywhere for instance --the market doesn't always end in Tulip Mania.

[EZE]

"markets are not rational or self-evidently good. markets do not predict the future. markets fail. markets are ultimately regulatory constructs. markets regulated unsufficiently devolve into a format that might best be described as 'sicilian'."

You confess that markets are "essential," but then propose sufficient regulation is necessary and unavaiable. What is "sufficient regulation"? How do you evaluate any of these alternatives as being more Right than the free market?

Most of us here would counter that the "sicilian" events are almost always caused by corrupt or simply moronic intervention. You cite 1929 when in fact most local banks that failed in this error were local banks which were prevented from diversifying their loan portfolios by laws passed by legislators who decided they were more Right than the Free Market. Shortly thereafter, monetary policy tightened credit while politicians voted to increase taxes. And any natural market ripple was turned into a calamity.

While I will concede that people will make choices that in retrospect will be evaluated as poor, I certainly don't agree with your assertion that the any market has been approaching free to date.

[Gary Gunnels]

Julian Sanchez,

Hayek credited Bastiat with the original insight re: economic regulation; that is, it will undermine future prosperity by forestalling the creation of unknown benefits. Its probably safe to say that Hayek spent most of his professional life exploring length and breadth of Bastiat's thesis. Its too bad Bastiat isn't more read.

[MJ]

That's "...free markets run amok caused the Great Depression..."

[gaius marius]

mj, that recounting is so divorced from reality that i don't know how to address it. i'm no fan of fdr -- he was an unacknowledged fascist and gutted constitutional government in this country. but that doesn't mean that fascism and keynesian economics weren't a direct response to conserve capitalism in some form by integrating it with the government -- something hoover was incapable of considering, for all his measures -- while denying the theology of marxism.

keynesian/fascist economics has its own problems -- which we're experiencing today -- but it has been extremely smooth running compared to the laissez-faire era that keynesianism was built to destroy. that's what any empirical observation must concede.

the downturns lasted only about a year before the market corrected itself.

are you joking me, mr mj? have you read anything at all about american economic history?

or are you one of those theologists that seriously think that all crashes are responses to some outside interference in their pristine "free" markets? that's so delusional as to be unaddressable.

[gaius marius]

I certainly don't agree with your assertion that the any market has been approaching free to date.

i agree, mr eze -- free markets *cannot* exist. there's no such thing. it's an abstraction. it's why i said above that the laissez-faire era of the 19th c was not free marketeering but as close as we'll get. markets are, after all, regulatory constructions -- even in gangland.

You cite 1929 when in fact most local banks that failed in this error were local banks which were prevented from diversifying their loan portfolios by laws passed by legislators who decided they were more Right than the Free Market. Shortly thereafter, monetary policy tightened credit while politicians voted to increase taxes. And any natural market ripple was turned into a calamity.

are you seriously suggesting that these silly little laws are responsible for the great depression?

it didn't matter what banks were in -- after all, depressions were quite common in the laissez-faire era. the problem is that they were in it way over their heads, trying to make money in the boom. they were overextended, and caught out in the rain when liquidity dried up. and that is a result of altogether typical human hubris. we would have seen a very similar cascading event had the fed not intervened in ltcm in 1998, organized a rescue and shot the markets full of liquidity.

that kind of fascism obviously has hazards of its own, i don't deny it. but no one will take market advocates seriously if they can't address these simple points of market fallibility without sounding like dishonest religious kooks.

[Ammonium]

"i submit to you that every laissez-faire economy is doomed to destroy itself in a bust. it's only a matter of time, just as every company eventually goes bankrupt, every share of stock is eventually worthless. the argument must be whether the time between disasters is valuable enough to endure the inevitable."

That sounds a lot like a religious end of the world scenario. They happened because God was angry. Eventually the world will end and anybody who didn't worship the right god (the god of regulation) will sent to hell.

Everything must come to an end, right? That is, unless control is given to a government planner -- a rare breed of omnipotent man who chooses to use his powers for benevolence by telling others what to do than making gigantic amounts of money in private pursuits.

[Jason Ligon]

"every market works to undermine its own safekeeping by doing what it is supposed to do -- concentrate capital."

It is interesting to me that on the one hand you acknowledge that previous concentrations of capital no longer exist and on the other indicate that that concentrations of capital undermine the functioning of the market. It seems to me that the reallocation of capital toward productive purposes is not the same as concentrating capital per se. The promise of profits approaches zero as profit potential approaches zero, but that is only to say that capital is being diverted toward more useful purposes.

"-- a total seizure of the capital and credit markets. that event could easily have brought down -- meaning failure and closed doors -- citi, goldman, ubs and others (who were all exposes to tens of billions in losses) and with them the american (and global) capital markets."

Uh. I agree that a total seizure of capital and credit markets would have been catastrophic. Talk like that was overblown at the time, and, though I'm sure those of you in hedge funds saw the end of the world, the rest of the world didn't. The bailout of Long Term Capital Management amounted to a subsidy of stupidity at best and crony capitalism at worst. If you organize your hedge such that you are 100% counting on Russia to support their currency - well, you aren't hedging very well, are you?

Sudden collapse is not good, but again I ask that you put the whole thing in context. It is the nature of vested interests to argue to the government that the world will return to the stone ages if they don't get their bail out, but that doesn't mean we are in fact better off bailing them out. To what extent would adjustments resulting from allowing LTCM to fall have moderated the 1999 'irrational exuberance'? Gee, I wonder how exuberance became irrational? My money is somewhere too big to fail! This is great!

[gaius marius]

the rest of the world didn't.

that's because the rest of the world consists largely of financial idiots, if i may be so bold, whose understanding of markets and investing ranges from cnbc to a few castle-in-the-sky books regarding homo economicus by hayek or friedman.

seriously, mr ligon, that bit of "crony capitalism" -- which i'm sure pains your ideology greatly -- was in reality a world-saving measure (at least for the time being). it may not comport with freemarket religion, but it averted disaster on an unimaginable scale. the system really is, for all the bluster and propaganda about it, remarkably frail when panic hits.

If you organize your hedge such that you are 100% counting on Russia to support their currency

fwiw, ltcm was quite a bit more than that. they were seen by all of wall street to be the geniuses of risk control. what did them in was multifaceted, irrational and entirely repeatable.

but would it really matter if they were simply "poor hedgers" if their failure destroys the market? the fact is that there are a number of ltcm's out there right now, making a killing, too big to fail safely. there always are. jp morgan (who was rumored near default in oct 2002) is one. goldman sachs (a highly-levered hedge fund disguised as a bank) another. any number of mortgage players -- particularly the derivatives giants like freddie mac. they lie in wait of the unforseen correlated event that will blow them up. it's particularly dangerous now given the ubiquity of very similar var models and massive, layered leverage in the black financial quarter.

but hey, you don't have to believe it. but i really would recommend this book. it is a devastating read if you're a rational market idealist. nassim taleb's book is also an excellent dissection of the nature of rare events and why they kill.

Gee, I wonder how exuberance became irrational? My money is somewhere too big to fail! This is great!

i concur, mr ligon, that greenspan has built an incredible amount of moral-hazard leverage into the system, beginning in 1987, that isn't as risk-responsive as it should be. the result of fascism has been to foster unhinged levels of debt.

but it is the greed of participants and their willingness to get vastly overextended in an uncertain world that does markets in. that isn't an invention of the fed.

[Jason Ligon]

"but it is the greed of participants and their willingness to get vastly overextended in an uncertain world that does markets in. that isn't an invention of the fed."

The moral hazard is precisely that it is not an uncertain world if you continue to be bailed out. This is a circular proof.

I'm not a financial genius, but I am familiar enough with the major issues at play here. I submit first that the major banks were nowhere near as unprotected from flight to liquidity as the 'dominoe' collapse argument made them out to be. I submit second that the extent to which everyone was willing to hold positions that mirrored LTCM was greatly amplified by moral hazard. No potential for bail out, no uniformity in risk analysis. The savings and loan debacle was the same story.

[gaius marius]

I submit first that the major banks were nowhere near as unprotected from flight to liquidity as the 'dominoe' collapse argument made them out to be.

mr ligon, you should no be so faithful in the banks. many of them are simply hedge funds.

No potential for bail out, no uniformity in risk analysis.

i disagree! when an idea takes hold, wall street is just a crowd like any other. black-scholes was an idea. VAR is an idea. there's nothing calculated about the swell of ideas, mr ligon! humans are animals and we herd.

for a long time, the idea of government bailouts in financial markets was ridiculous. did that prevent people from swarming into the same investments, the same models, the same ideas -- and then being simultaneously exposed in a rush to the door? utterly not! the behavior is old as history.

and that's the core of it. markets are not rational nor efficient but behavioral and often manipulated. this is the reality of the chicago markets i learned from. it's too bad the kids down in hyde park didn't spend more time on the floor.

[gaius marius]

gaius goes on forever about 1933 being a temporal Great Divide between free marketry and fascism, but the machinery was set in place well before that, in the Roosevelt I and Wilson administrations.

i agree on some level, mr kevrob. 1933 didn't emerge ex nihilo. but the crisis of the great depression resulted in the demand of the society -- not some small cadre of intellectuals, but society -- to go much further in linking the state to the economy.

Especially important to the advent and exacerbation of the Great Depression was the nationalization of the money supply wrought by the creation of the Fed.

the difficulty with that argument is that it is supposed that a central bank was created in 1913.

one has to remember that the idea of a central bank was the response to the panic of 1907, when it was widely realized for the first time that morgan essentially already WAS the central bank. subsequently, very large banks were found to be colluding to expand the money supply through lending, creating a boom, and then retracting it, creating a bust. this led to the "money trust" hearings of 1912.

thinking that too much power for a profit-minded group of private citizens was not crazy, imo.