Sliding from Insightful Analysis to Careless Gloss, in Just Two Paragraphs

Noah Smith, discussing Arnold Kling’s new approach to thinking about economic activity, writes:

In a typical microeconomic model, the market clears, because price adjusts to balance supply and demand. In a PSST world, this does not happen. The pattern of specialization and trade will not always be disturbed by small changes in prices, because the global pattern itself represents a stable equilibrium (i.e., is “sustainable”). How many computers I buy and sell will depend not only on the price of computers, my desire for computers, and my cost of producing computers; it will depend on the prices, desirabilities, and costs of a bunch of other goods throughout the whole economy. The economy will be riddled with network externalities, and the resultant weakening of the price mechanism means that any market may or may not tend toward efficiency on any given time scale. In other words, in a PSST world, there is no invisible hand.

This opens the door for a hugely expanded role for government (or other large, centralized actors) in the macroeconomy. If global patterns matter as much as local prices, then an actor large enough to perceive and affect the overall pattern might be capable of nudging the economy out of a bad equilibrium and into a better one.

And this is what drives me crazy about so many economists. After all that careful thought about the details of how markets function, they utterly fail to put any thought into how government functions. “An actor large enough to perceive and affect the overall pattern…” There’s little doubt that government’s size allows it to affect at least some economic patterns, but how does government’s size enable its capacity for accurate perception and, the necessary follow-up, accurate policy direction? The only economists who seem to make a serious effort to analyze government with the same tools and care they analyze markets–public choice theorists–are, notably–the ones who seem least likely to share this confidence in government. In the middle of the last century, economists like Samuelson believed that if government could just collect enough data it could make accurate calculations leading to wise economic policy decisions in real-time. I don’t think many economists take that idea very seriously anymore–Hayek, et. al, won the calculation debate, after all–but I don’t see how Noah Smith’s claim about an expanded role for government can rest on anything but an unexamined assumption in government’s ability to calculate.

To be fair, Smith explicitly says that he’s not arguing that government would be good at this. But he still ignores the implication of government’s inability to calculate, which is that market failures don’t necessarily open up a role for government. After all, if there were in fact no medical doctors in this world, our illnesses could not reasonably be said to open up a space for witchdoctors or faith healers.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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9 Responses to Sliding from Insightful Analysis to Careless Gloss, in Just Two Paragraphs

  1. James K says:

    Sigh, and I thought we dealt with this in the 20th Century, Hayek and the Mont Perelain economists won the calculation debate pretty unambiguously.

  2. Matty says:

    Even without knowing any economics it looks like there is something wrong with his argument It seem to amount to “this is more complicated than we thought and therefore it is easier to control”, which just sounds unlikely. Am I misreading?

  3. Lance says:

    I find these kinds of arguments to be similar to the argument that an enlightened and benevolent dictator would be better at governance than a democratic system. This idea somehow imparts omniscience and omnipotence to a single leader based on the circular premise that if they “were” omniscient and omnipotent they would be superior.

    Even a fully benevolent dictator could make drastically bad economic decisions that set in motion consequences that were beyond their power to remedy. The same is true for government interventions into markets. Not to mention the obvious fact that governments are rarely wholly benevolent but often represent the interests of a minority faction.

  4. James Hanley says:

    governments are rarely wholly benevolent but often represent the interests of a minority faction

    Lance, surely you’re not intending to imply that representing the interests of a majority faction would necessarily equate to benevolence?

    Matty, I don’t think that’s exactly it. It’s just an extension of the general idea that any time the market doesn’t actually work in the perfect way of the ideal market of neoclassical economic theory,* then there is theoretical justification for government to step in and correct for the market’s failures. But of course the more complex those failures, the more difficulty the task of correcting them. And I don’t think Noah Smith, at least, is suggesting the task would be easier if the problems are more complex, just that more problems create more justifications (at least in theory) for government action.

    *Which is based on some necessarily unrealistic assumptions, such as perfect information, zero transaction costs, no externalities, etc.

  5. Lance says:

    Lance, surely you’re not intending to imply that representing the interests of a majority faction would necessarily equate to benevolence?

    Heavens no. I just used the interests of a majority to limit the injustice caused by the “benevolent” dictator to a smaller subset of people. In fact I find the word “benevolent” more frightening than dictator. It has all of the bad connotations of paternal with the added terror of a moralistic subtext.

  6. James Hanley says:

    In fact I find the word “benevolent” more frightening than dictator. It has all of the bad connotations of paternal with the added terror of a moralistic subtext.

    That’s why I love the character of Dolores Umbrage in the Harry Potter series, particularly as played by Imelda Staunton in the film. She perfectly characterizes the vicious, raging, intolerance that can hide under the cloak of “this is for your own good.” I love watching her character, even as I am utterly repulsed.

  7. Matty says:

    OK so “opens the door” should be read as makes easier to justify rather than makes easier to do?

  8. James Hanley says:

    Matty, I think that is probably what Noah Smith meant. At least that’s how I took it, and I couldn’t possibly be wrong.

  9. Pingback: Kling v. DeLong | The Bawdy House Provisions

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