Market failure here, market failure there, market failure everywhere
28 Jun 2014 Leave a comment
in applied price theory, applied welfare economics, comparative institutional analysis Tags: Deirdre McCloskey, the Nirvana fallacy
Information costs are just costs?
25 Jun 2014 Leave a comment
in applied price theory, comparative institutional analysis, Ronald Coase Tags: Armen Alchian, Harold Demsetz, Yoram Barzel
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Yoram Barzel and Harold Demsetz pointed out that some economists want to stigmatise information costs. Armen Alchian was in this camp too.
Demsetz asked why the costs of finding, digging up and processing an ore deposit is a legitimate cost, but the costs of finding and interpreting information are illegitimate costs. There is an arbitrary classification of costs going on here according to Demsetz:
…there exists an efficient amount of ignorance in an economic system if the cost of acquiring information is positive.
The amount of ignorance that is efficient increases as does the cost of transacting (viewed as the cost of conveying information). Ignorance not only may be bliss, it also may be efficient.
One cannot claim that resources are wrongly allocated simply because information is not possessed or negotiation is absent; nor can one claim that resources are misplaced because a specific market does not exist.
None of these is free, and the costs of acquiring information and creating and maintaining markets may be so high as to make it efficient to forego some information and some markets.
A decision that something is not worth taking into account is not, because of this, a source of inefficiency. That this something is not taken into account is a reckoning if it follows from a thoughtful anticipation that it is not worth taking into account. An explicit accounting for every ‘something’ would be inefficient indeed in a world in which knowledge is not free
Same players, different game: how better rules make better politics
25 Jun 2014 Leave a comment
in comparative institutional analysis, constitutional political economy Tags: James Buchanan
Coase and Demsetz on comparative institutional analysis and the fallacy of comparing actual institutions with unrealistic, idealised alternatives
23 Jun 2014 Leave a comment
in comparative institutional analysis, constitutional political economy, Ronald Coase, Ronald Coase Tags: Harold Demsetz, Roanald Coase
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It is my belief that the failure of economists to reach correct conclusions about the treatment of harmful effects cannot be ascribed simply to a few slips in analysis. It stems from basic defects in the current approach to problems of welfare economics
Ronal Coase (1960)
The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement.
This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements…
the design of institutional arrangements that provide incentives to encourage experimentation (including the development of new products, new knowledge, new reputations, and new ways of organizing activities) without overly insulating these experiments from the ultimate test
of survivalHarold Demsetz (1969)
Neoclassical economists think the economy is freestanding and ignore institutions!
22 Jun 2014 Leave a comment
in Adam Smith, comparative institutional analysis, constitutional political economy, James Buchanan, Ronald Coase Tags: Adam Smith, Douglass North, Elinor Ostrom, James Buchanan, Robert Fogel, The institutional structure of production
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1991 was awarded to Ronald H. Coase:
for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy
The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2009 to
Elinor Ostrom “for her analysis of economic governance, especially the commons” and Oliver E. Williamson “for his analysis of economic governance, especially the boundaries of the firm”
The Royal Swedish Academy of Sciences has decided to award the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 1993 jointly to Robert W. Fogel and Douglass C. North
for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.
The Royal Swedish Academy of Sciences has decided to award the1986 Alfred Nobel Memorial Prize in Economic Sciences to Professor James McGill Buchanan for
his development of the contractual and constitutional bases for the theory of economic and political decision-making.
The order brought about by the mutual adjustment of many individuals in a market
21 Jun 2014 Leave a comment
in applied price theory, comparative institutional analysis, F.A. Hayek, Milton Friedman Tags: Adam Smith, FA Hayek, Milton Friedman, Pete Boetkke, spontaneous order
Pete Boettke has written extensively about how The Wealth of Nations is about social order among strangers. The market is a social order much larger than our span of moral sympathy.
In civilized society [man] stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature.
But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.
Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.
To realize this social cooperation, Boettke argues that social institutions must be in place such as private property, keeping promises through contract, and the acceptance of the legitimacy of the transfer of property by consent. The division of labour is the key to the ability of the market system to produce social cooperation among distant and different anonymous actors.
The civilising influence of commerce is well-known as is it as the key to peace. We fear neither Russia nor China because of extensive economic interdependencies makes war pointless for all. The common market ended war in Western Europe.
The co-operation and peace is a spontaneous product of Hayek’s concept of catallaxy which is
the order brought about by the mutual adjustment of many individual economies in a market
The youtube clip is Milton Friedman’s discussion of the famous essay I, Pencil and how strangers cooperated in peace and harmony in the market even though they might hate each other if they ever met. I, Pencil details the complexity of its own creation and the numerous people involved is the absence of a master mind, of anyone dictating or forcibly directing these countless actions. Instead, we find the invisible hand at work.
Capitalism is a system which enables cooperation between millions of strangers so that they may jointly pursue their diverse goals.
The great leap backward
17 Jun 2014 Leave a comment
in comparative institutional analysis, development economics, environmental economics, growth disasters, population economics Tags: Deirdre McCloskey
The importation of socialism into the Third World, even in the relatively non-violent form of Congress-Party Fabian-Gandhism, unintentionally stifled growth, enriched large industrialists, and kept the people poor. Malthusian theories hatched in the West were put into practice by India and especially China, resulting in millions of missing girls. The capitalist-sponsored Green Revolution of dwarf hybrids was opposed by green politicians the world around, but has made places like India self-sufficient in grains.
State power in many parts of sub-Saharan Africa has been used to tax the majority of farmers in aid of the president’s cousins and a minority of urban bureaucrats. State power in many parts of Latin America has prevented land reform and sponsored disappearances. State ownership of oil in Nigeria and Mexico and Iraq was used to support the party in power, benefiting the people not at all. Arab men have been kept poor, not bettered, by using state power to deny education and driver’s licenses to Arab women.
The seizure of governments by the clergy has corrupted religions and ruined economies. The seizure of governments by the military has corrupted armies and ruined economies.
What the experiments of the 20th century told me
14 Jun 2014 Leave a comment
in applied price theory, comparative institutional analysis, development economics, economic history Tags: Deirdre McCloskey, The Great Enrichment, The Great Fact
It would have been hard to know the wisdom of Friedrich Hayek or Milton Friedman or Matt Ridley or Deirdre McCloskey in August of 1914, before the experiments in large government were well begun.
But anyone who after the 20th century still thinks that thoroughgoing socialism, nationalism, imperialism, mobilization, central planning, regulation, zoning, price controls, tax policy, labour unions, business cartels, government spending, intrusive policing, adventurism in foreign policy, faith in entangling religion and politics, or most of the other thoroughgoing 19th-century proposals for governmental action are still neat, harmless ideas for improving our lives is not paying attention.
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