State Capitalism, by Joshua Kurlantzick. His theme is that many developing countries have the government own and manage large companies in important industries. However, they use prices rather than commands.
I had not been aware of how prevalent this practice has become. My reaction is that it is a viable model as long as those industries are not disrupted.
What President Obama has been pushing for, and moving toward, is more insidious: government control of the economy, while leaving ownership in private hands. That way, politicians get to call the shots but, when their bright ideas lead to disaster, they can always blame those who own businesses in the private sector.
Another advantage of using regulation of private firms is that it allows political leaders to finesse the socialist calculation problem. They do not have to know how to implement their goals, or even to have goals that are implementable. They put that challenge to the private sector.
If the government had to tried to actually run a mortgage relief program along the lines that many economists were proposing back in 2009, it would have never gotten off the ground, because there were so many legal and practical difficulties. And when those programs were to slow to get underway and produced disappointing results, the politicians had the mortgage industry to blame.
The is no plausible argument that Hong Kong’s success is in any way a success story for statism, and there is no plausible argument that Greece’s failure has anything to do with neoliberalism. To suggest otherwise is to engage in The Big Lie. So what does this mean?
Read the whole thing.
Let me try, in a somewhat charitable way, to express what I believe is the mindset of the left.
1. Start with the assumption that there is a science of government. I need to credit Jeffrey Friedman with influencing me to articulate this assumption. Note that everyone uses the term “social science,” even though Jeffrey and I would argue vehemently that economics, sociology, et al, are not sciences.
2. If there is a science of government, then there is no reason to tolerate market failure. Since market failure is widespread, government intervention should be widespread.
3. If there is a science of government, then government failure is avoidable. Government failure only results from leaders not heeding the scientists.
4. If there is a science of government, and people on the right believe in markets, then they must believe that markets are perfect. They are clearly wrong about this.
According to this scheme, the key to intellectually overcoming the left is to get people to concede that there is no science of government. And in particular, it means taking economics down a peg. That is what Jeffrey is trying to do with his next book, and it is what I try to do in the book that will be out later this month.
Neil A. Abrams and M. Steven Fish write,
Scholars often treat the rule of law as a prerequisite for market-oriented economic policies such as liberalizing prices and trade and eradicating wasteful subsidies. They’re getting it backward. Instead, first eliminate the subsidies and purge the compromised bureaucrats who stand in the rule of law’s way. This is hard to do. It will provoke tremendous resistance from those who profit from the status quo. But it’s far more realistic and effective than simply encouraging countries to adopt the rule of law.
Read the whole thing. To me, one implication is that massive foreign aid is likely to hinder the appearance of the rule of law. To me, the poster child for that is the West Bank and Gaza. The once-entrepreneurial Palestinian society was replaced by criminal gangs, because there was more profit to be found in getting control over the distribution of aid than in business.
I did not treat Doug, whom I have known and have loved since 1967, as an “enemy.” That is a strange way to characterize my scientific criticism of his views on so-called “institutions.” I merely think Doug was, and the many folk who accept his views, mistaken. Briefly, the new orthodoxy about institutions “mattering” (as people usually put it) ignores human ethics and language, reverts without admitting it to a conventional Samuelsonian Max U framework, is strikingly inconsistent with historical evidence, mixes static efficiency with dynamic discovery, never offers quantitative oomph, and retreats to tautology and personal abuse when challenged. It shares such features with psychoanalysis and Marxism and the more dogmatic expressions of Samuelsonian economics. I don’t make such arguments against the new dogma out of some strange animus against one of the most amiable members of our profession, no more than did, say, the rare American geologist before 1965 who advocated for moving continents. I make arguments, as I know you do in your own work, because I believe them to be (probably, with an open mind) true. One can assess my reasons for thinking so by reading pp. 296-354 of Bourgeois Dignity (2010), or earlier this year a paper in the Journal of Institutional Economics and a subsequent debate with Greif, Mokyr, Langlois, and others in reaction, or in the forthcoming volume 3 of the trilogy, out in April: Bourgeois Equality. It is silly and unfair to characterize a serious scientific disagreement as “treating Doug like an enemy.” Doug would never have done so.
The abstract of a study for the World Bank by economist David J. McKenzie reads
Almost all firms in developing countries have fewer than 10 workers, with the modal firm consisting of just the owner. Are there potential high-growth entrepreneurs with the ability to grow their firms beyond this size? And, if so, can public policy help alleviate the constraints that prevent these entrepreneurs from doing so? A large-scale national business plan competition in Nigeria is used to help provide evidence on these two questions. The competition was launched with much fanfare, and attracted almost 24,000 entrants. Random assignment was used to select some of the winners from a pool of semi-finalists, with US$36 million in randomly allocated grant funding providing each winner with an average of almost US$50,000. Surveys tracking applicants over three years show that winning the business plan competition leads to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having 10 or more workers. These effects appear to occur largely through the grants enabling firms to purchase more capital and hire more labor.
Pointer ultimately from Tyler Cowen. My cynical thoughts:
1. How does one keep corruption out of such a program?
2. Does this imply that there is an unexploited profit opportunity in lending to would-be entrepreneurs in underdeveloped countries? Note that the money the firms received seems to have been in the form of grants, not loans.
Congress should establish a commission to identify archaic and wasteful regulations and another to identify failed or needless executive-branch programs. Each would take suggestions from the public and work with congressional support agencies to ensure the cuts are sensible. Upon completion, each commission’s report would be delivered to Congress for introduction and a prompt up-or-down vote. So long as the program and spending reductions and terminations are modest and defensible, congressmen would have a difficult time voting against such a package.
The latest issue of National Affairs contains a few articles on the topic of Congressional weakness vis-a-vis the administrative state. In a subscriber-only article, Charles J. Cooper, after despairing of role of the Supreme Court in protecting the administrative state, offers this:
The only other way to correct the Court’s constitutional mistakes is for the people to do it themselves. The Constitution provides a procedure for the American people — ”the only legitimate fountain of power,” as Madison emphasized in Federalist No. 49 — to rein in an out-of-control federal bureaucracy, even in the face of congressional opposition. That procedure is the Article V convention process, by which two-thirds of the states can call a convention “for proposing amendments,” subject to ratification by three-fourths of the states.
You may recall that my suggested remedy is to have Congress focus on re-chartering each agency every few years. One goal would be to remind agencies that they are answerable to Congress. My thought is that this might make the FCC or the EPA less frisky about expanding their power and scope.
In addition to transport arteries, I would also mention the importance of setting aside space and access points for sewage, electricity, and information arteries. It’s not even necessary that government provide these services or even the plan itself (private planning of large urban areas is also possible) but a plan has to be made. By reserving space for services in advance of development, developers and residents can greatly improve coordination and maximize the value of a city.
I think there is some truth to this, but it is more complicated. Planning is something that never stops. What is the plan for the planning process? How do you keep the planning process from being captured by NIMBYism or other rent-seeking forces? How do you keep it from becoming stifling? How do you enable a city to adapt to new circumstances?
So countries with a lot of trust and good institutions can create very complex computers that are able to process large volumes of information and create complex products that are rare and have a big premium on the market. So by thinking of economies in terms of information and computation, you can also connect institutions with the mix of products that countries make and with wealth. A social network is nothing other than a distributed computer.
Pointer from Mark Thoma. Read the whole interview. Perhaps he is one of those fellows who sounds deep and profound but is not really saying anything.
But I think that there is some significance in the availability of the computer and the Internet as a metaphor. In 1960, machines were the most salient sources of metaphors, and so economists thought in mechanistic terms. As we start to expand our use of computers and networks as metaphors, I think this affects how we view the economy. In some sense, the emphasis on institutions and other components of what Nick Schulz and I call the “software” of the economy are insights that are more likely to occur to economists living in the computer age.
Robin Hanson quotes from a subscription-only New Scientist article by Deborah MacKenzie.
hierarchical control structures ballooned, with more layers of middle management. Such bureaucracy was what really brought people together in nation-sized units, argues Maleševic. But not by design: it emerged out of the behaviour of complex hierarchical systems. As people do more kinds of activities, says Bar-Yam, the control structure of their society inevitably becomes denser.
In a sense, I began thinking about this fifteen years ago.
Consider two evolutionary processes that could lead to a winner at a particular business.
a) natural selection. Many small firms enter the market and make decisions, and one of them has the skill and luck to make the fewest mistakes, becoming the dominant firm.
b) bureaucratic filtering. A single firm with a large bureaucracy faces many of the same choice points, and it uses its resource-intensive planning processes to sort out the decisions. These processes minimize mistakes, enabling the firm to reach the same point that would be reached in the natural selection process.
My guess is that process (a) will increase in importance in the future, and that process (b) will be less productive. The challenge with defending this guess is the fact that large companies with bureaucratic management are so successful at present.
That particular essay did not deal with the issue of nation-states. But it is consistent with the idea that industrialization and the nation-state would evolve at the same time, because bureaucracy was more important and effective in an industrial economy than in a pre-industrial or post-industrial economy.