Russ Roberts

Dan Klein on Coordination and Cooperation

EconTalk Episode with Daniel Klein
Hosted by Russ Roberts
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Dan Klein of George Mason University talks with EconTalk host Russ Roberts about the marvel of economic coordination that takes place without a coordinator--the sequence of complex tasks done by individuals often separated by immense distances who unknowingly contribute to everyday products and services we enjoy. Klein also discusses what he calls "the people's romance"--the idea that the highest form of human cooperation is through government action.

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0:36Intro. Example from Adam Smith, rough woolen coat is the product of the work of a multitude of people. Leonard Read's "I, Pencil." Coordination. Chain of activities as a kind of concatenation, chain, series of linked and mutually complementary activities. Exhibits a kind of coordination. Way of talking about comparative institutions, politics and policy. Simpler coordinations take place in firms where bosses coordinate the basic skeleton of activities. Can thus have both planned and un-centrally-planned concatenations. Super Bowl Sunday is the number 1 pizza day of the year, beer, hot dogs, other items. If you want a croissant on Super Bowl Sunday, you can still get one. They don't say you can't get one because all the flour is gone, in use for making hot dog buns and pizza. Somewhat marvelous. But is it that hard? What's the difference between that and what happens in a firm where someone is coordinating it? Doesn't seem incredible (Incredible Bread Machine.) Human beings' ability to fathom this vast concatenation of links. Anybody's attempt to say they really know this vast concatenation in any detailed way would not be incredible. We are wowed by an athlete's ability to do something and use the word "incredible"--it can't be explained, beyond our articulate knowledge. We should think about what it tells us about policy and politics.
10:15Web of interaction. In a chain if you miss a link it falls apart. Timeliness, not just that we eventually get pizza--we get it when we want it. How is that happening? Justify the claim that it's hard for us to wrap our minds around. Pursuit of profit, how do two different links hook up. Mutual coordination, Thomas Schelling, game theory, dominant kind of coordination as opposed to concatenation. Super Bowl Sunday has been studied as an important day of mutual coordination, book and paper by Michael Chwe: What kind of goods get advertised during the Super Bowl? Disproportionately what he calls "social goods"--soft drinks, styles, computer programs. Not only do people watch it, but people know that other people are watching it. Common knowledge that Pepsi was advertised during Super Bowl might make it stylish or acceptable to have it at your party. Some people bemoan the proliferation of choice because we lose that shared experience. "Better when we only had three channels on TV" because then people had something to talk about. But maybe you value hearing about something different from what you did or saw. Valid human value to share experience, though the defenses may ignore the benefits of fragmentation but defenders of fragmentation should recognize that something is being lost. Public education: standard justification is idea that we should have a shared body of knowledge. What that shared body is, is up for political grabs once it's in the public's domain. Fragmented school system (word "fragment" seems negative), don't fight over prayer in school, just go to the kind of school you want under competition, and avoid the kind of political dissension that occurs when you force a single solution. Pledge of allegiance. Public school system is leading example of effort to give a shared experience. Empirically, a lot of people get a lot out of this sense that there is a shared experience, shared purpose. People's romance, encompassing romance among the people of the polity, can't throw it out as not counting; but it's potentially dangerous.
24:03People's romance, using the nation as an organization. Two coordinations, concatenate and mutual, distinguish cooperation. Bread factory, workers coordinate to produce bread. Referent concatenation, activities within the factory link to produce bread and produce it profitably, knowing that profits get shared. Among the people, mutually coordinating their awareness, understanding, and sentiments as part of a team. They are aware that they are part of a team. If you go one link and then a few links down in making a woolen coat, they don't have a sense of cooperation as within a factory. Also have competitors. Bastiat and Henry George speak as the vast concatenation as an instance of cooperation. Instances. Marx saw this clearly, hated capitalism because it wasn't a vast cooperation. Don't have a language or metaphor for non-cooperative coordination that is spontaneous. If there are thousands of people whose actions are coordinated in making the pizza. If you put them in the same room, they could all say "we" are all making the pizza, but that's not the same as people literally in the same room making the pizza as a team. Hayek frustrated, no language, no verb or pronouns to describe that. The People's Romance is the urge to find a sense of cooperation, solidarity; want a polity that literally cooperates. Mythological, but it's a deep undercurrent in politics, both left- and right-wing. Society as organization, yearnings about common purpose, common narrative. Earns points with readers to play the People's Romance card. But there is a cost, foregone benefits. Atavism, social justice, penchant, learn to subdue. Nice to eat sweets to outrun prey, so we evolved to like sweets, but we have learned to subdue it because there are also drawbacks.
32:14Why is People's Romance mythological? People like something bigger than themselves. Many ways to satisfy this urge: politics, bowling group. But what's wrong with the platitudes of all banding together to solve problems like putting a man on the moon, stamping out hunger? Not an effective way to solve these kinds of problems, analogous to their not working to produce a woolen coat. Get systems that don't work well in other terms, even if they do well in terms of the People's Romance. Cultural disaster. Have to sustain the power structure and superstitions. Fail in intellectual terms. Is this a question of taste or of reality? Social Security. "In 20-30 years Social Security will have some financial problems and we won't be able to take care of the elderly." But of course we will. Illusion. Do we want to take that illusion away from them? Us taking care of us, social safety net, if you go really wrong you will fall in the social safety net. More than just intellectually dishonest. In Adam Smith, in Theory of Moral Sentiments, earthquake in China doesn't upset most people here. If world really did rely on all of us caring about each other, the world would be in an untenable situation. What works is that we don't have to rely on love. Relying on that romance to take care of the elderly is risky. Inefficient. Risk of tyranny, real evil. Dangerous, degrading. Smith's first book posited that we have a sense of empathy, mutually coordinated sentiment, natural impulse, evolutionary impetus to be not brutish. Works out okay to focus on the local, authorizing narrow self-interest to be cut loose because it works better.
42:19Cultural claim, fabric of day to day life, better to take care of your grandmother than for her to just get a check in the mail. Club romance, Buchanan's club goods. Religion, churches produce candor and moderation, Larry Iannaccone. Real sense in which the People's Romance destroys cooperation, crowds it out, is jealous of it. Home schooling v. private schooling, source of antagonism towards Wal-Mart. NY Times book review described Peter Lynch, fund manager for Magellan Mutual Fund, recognized and thanked for the fund's returns; but reviewer was horrified that a mutual fund rather than labor unions being thanked. Being liberal in the classical sense of the word. When we talk about a factory, owners want profits (constrained, not rent-seeking), they have a sense of coordination. But when we talk about the whole big grand concatenation, in what way is aggregation going on? What we do is imagine a mind able to behold it even if we cannot. What would that mind find pleasing? What should we count as more beautiful to this mind? Always groping, incomplete. What is the maximand; not: what maximizes the maximand? Efficiency, optimality, social welfare function arose in place of concatenate coordination. After Schelling and game theory economists glommed onto mutual coordination instead.
50:14To clarify: What mind could comprehend it? Religious person might say mind of God. Extraordinary set of choices available to American consumer, always available. Not just TVs but also peaches, software design. But we don't get as much common experience. Get it within islands of specialization, say in the economics department or factory. Nothing being maximized. How can we look at this vastness and say it's good or working well? Economists point to the shelves and say look how it gets better over time. Adam Smith makes distinction between two types of rules. Definite and exact, like grammar: clear rules and criticism only takes a negative form; you don't congratulate someone for achieving grammar. Blank sheet of paper is grammatically correct. Aspirational rules, more of an aesthetic. Smith calls it loose, vague, and indeterminate. Economists, pretensions to being scientific. Criticism can be positive or negative. Not arbitrary--some movies are just bad, not good aesthetically, but can argue towards some convergence, beauty in art is not arbitrary, but also is not exact. Coordination fits into that, maybe an aspect of the all-encompassing goodness. Criticism: its unaesthetic, getting and spending we lay waste our powers [William Wordsworth], Dickens' characters having venal, narrow lives. Is there a tradeoff between concatenate order and shared purpose that would argue for more communal activity that is coercive? Some people argue that way. Is all you get from concatenate order a bunch of woolen coats, colas, and pizzas and flat-screen TVs? Degrading, what's the aesthetics in that? Subdue it and come to a contentment with a more limited cooperation and its beauty. Greediness in insisting on the People's Romance and using force to get it. Traditional modern argument is that concatenate order is efficient. Producer's surplus, consumer's surplus, supply and demand, not nearly as well-defined as economists have made out. Partly conveys richer notion of some kind of goodness, brings out aspects of it, but doesn't nail it down into a grammar, brings out points about the costs of interventions. Should we or shouldn't we have a minimum wage? Those models help us see some of the costs and benefits on each side.
1:01:15A lot of what we do in our classes is dumbed down graduate economics instead of what a civilized person should know about the world. What does economics contribute to our understanding of the world? Concatenate order and what is marvelous about it is an interesting subject. We are not ruling out the beauty or value of shared experiences. You are listening to this with thousands of other people.
1:03:18Econ Journal Watch: Online journal, 3 times a year, scholarly journal. Criticizes omissions, relevance in publications in major journals, invite commented-on author to reply. Emphasis on accountability. Replicability. Investigations about the character of economics, institutions, specific areas and policy conclusions, Journal of Economic Literature and Journal of Economic Perspectives. May be critical because not much to lose. Comes from a kind of liberal, Smith-Hayek perspective. Getting a place at the table, maybe not excluded but a group-think problem.

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COMMENTS (27 to date)
Unit writes:

It was great to hear so many vocabulary words to try to convey this difficult subject. Here are some more. I wouldn't hesitate to say that people who wish for more "shared purpose" on grand-scale levels are in a sense narrow-minded and intolerant.

I'm not sure about the genetic explanations for our urge to "belong" etc...I wonder if it's just the fact that most of our life we pine for our (idealized) youth. Children are protected and live very focused lives. The focus is on self-improvement and physical tasks directed at a goal. In a sense our body epitomizes "shared purpose". Luckily our left hand doesn't often spring off in a serendipitous search, while our right foot tries something new. On the other hand, biology might one day discover that even our body is not all command-and-control, who knows...

I tend to be optimistic here and think that people carry both instincts: the "shared purpose" feeling, but also the intuition that unintended benefits will flow when free unconstrained exchanges are maximized.

Martin Brock writes:

In the podcast, you say, "It's really better to take care of your grandmother than for your grandmother to get a check in the mail ..." I suppose you refer to Social Security here.

Social Security is a transfer from the young to the old, so it is far more like supporting grandma (and grandpa) than it is like "saving for retirement", yet proposed reforms typically replace the program with "saving for retirement". I suppose Social Security is a poor substitute for supporting our parents, and I suppose "private accounts" filled with Treasury notes would be even worse. Isn't there something wrong with abandoning our parents to increase our own future consumption? Shouldn't we support our parents first? They supported us. Right? Don't we just owe it to them?

If we stuff "private accounts" with Treasury notes, don't we burden the next generation just as much and devalue parental contributions to the tax base even more? Is this system of distribution equitable? Does it return equity to genuine investors? Isn't it simply a statutory entitlement formula much like the Social Security benefit formula, only even less equitable?

I wonder whether you agree that the following proposal is more truly a reform of Social Security than either the Bush proposal or similar proposals that I'll call "the Cato model" of reform.

http://www.knology.net/~marbrock/psupp.htm

Martin Brock writes:

Unit:

Luckily our left hand doesn't often spring off in a serendipitous search, while our right foot tries something new. On the other hand, biology might one day discover that even our body is not all command-and-control, who knows...

See "Gordon on Ants", the podcast on 2007/08/20. It's one of my favorites.

I tend to be optimistic here and think that people carry both instincts: the "shared purpose" feeling, but also the intuition that unintended benefits will flow when free unconstrained exchanges are maximized.

Isn't respect for property rights a "shared purpose"?

Optimism is fine, and I'll borrow a million bucks to start a business tomorrow, if I may incorporate, but an exchange of forcible proprieties is never unconstrained, and unintended consequences are not always beneficial.

We can't pretend that simply making titles marketable makes everything beneficial, regardless of the entitlements. If we all trade entitlement to one another's tax revenue, as when we trade Treasury notes, and do nothing else, we ultimately starve, so when I see the volume of Treasury notes expand dramatically, I'm alarmed, and I wonder what other unproductive rents have expanded.

John Majewski writes:

This discussion was enlightening and provocative, especially when dealing with The People’s Romance (TPR).

In the interview, there are hints that TPR—the desire to see something larger than ourselves—is rooted in human nature (the evolutionary comparison with sweets was particularly interesting). If so, are not libertarians barking at the moon in critiquing of the TPR? We should certainly criticize the authoritarian nature TPR—especially when centering on war and violence—but at some level the critique of more benign types of TPR boils down to tastes and values. Why not enjoy the sense of community (fictitious or not) that providing unemployment insurance or sending a man to the moon gives many people? The idea of a "Club Romance" as a substitute for TPR has appeal, but I wonder if belonging to a smaller group really satisfies the desire to be part of more encompassing “community” (especially one focused on the nation-state) that the TPR provides. The underlying desires behind TPR will always be with us.

I wonder if, as a practical matter, libertarians should accept some elements of TPR but minimize its negative impact with easy exit options (such as private schools and home schools in the case of education, or the ability to opt out of social security) and then make clear that the viability of some forms of TPR (like the welfare state) often depends on free trade, open markets, and other forms of Smithian coordination to produce wealth.

Such a politics might be called "liberaltarianism"--the idea that there a certain mutuality between TPR of modern liberalism and the market order celebrated by libertarians. Certain forms of TPR need the wealth and creativity of free trade, free flow of capital, and open immigration to sustain itself in the long run; while in a practical sense people will never really accept free markets without some form of TPR in their lives

Unit writes:

"Isn't respect for property rights a "shared purpose"?"

Martin, as was mentioned in the podcast our language is deficient in talking about this. Many concepts have dual meanings, one that implies (or urges) government action and one that doesn't (Hayekian version). You're asking if there's such a thing as "shared purpose in the Hayekian sense". I think the answer would be yes: a general agreement that property rights are important, that traditions are somewhat robust, that voluntary exchanges should be allowed, etc...

I propose that to avoid all confusion from now on we should qualify every sentence with either "in the Hayekian sense" or "in the scientific socialist sense"....kidding aside, I do think that the instinct of The People's Romance or the urge to "change the world for the better" are useful human traits that should not be diminished, they come from the heart. However, they should also be moderated by the brain and by the Hayekian advances in understanding on how the world actually works.

Martin Brock writes:
... a general agreement that property rights are important, that traditions are somewhat robust, that voluntary exchanges should be allowed, etc...

That children should support their aging parents. That a community should support widows and orphans. That debts are forgiven every seven years. These traditions are as old as any and far older than much, if not most, of what we call "property" these days, certainly older than Treasury notes, which are a very poor substitute for the first.

I propose that to avoid all confusion from now on we should qualify every sentence with either "in the Hayekian sense" or "in the scientific socialist sense"....kidding aside...

I know you're kidding, but in which sense does a community support widows and orphans, leaving aside the gender equality issue?

... Hayekian advances in understanding on how the world actually works.

I'm all for that. Agreement on what Hayek advanced on how the world actually works takes some time though.

James writes:

I think John Majewski's 'barking at the moon', and his definition of TPR (which I would alter slightly to 'the desire to be part of something larger than ourselves') are excellent.

No one seems to challenge the fact that the TPR is currently with us, but after the first listen to the podcast, I'm not sure if Dan Klein thought the 'TPR always be with us' (he suggested an evolutionary cause, if this were the case, it's unlikely to disappear soon), whether it can be reformed and re-channeled to be 'less greedy', or whether it disappear entirely (because it just goes out of fashion or is rationalised away, or both at the same time).

I don't really know what this says, but an admission:

When Russ invoked the image of the thousands of other people listening in various ways and places to the podcast as a 'shared experience' in a community of strangers, I felt a twinge of emotion. Well. A twinge of TPR emotion at the thought of all us TPR sceptics together.

Floccina writes:

Your discussion of the people’s romance and the idea of shared experience lead me to think about people’s response to home schooling. We home schooled our children for a few years and what people would tell use led me to believe that many see our schools as sort of initiation in to American society. They would say things like I got beat up in schools by bullies until I learned to stand up to them and your children need to go through that to, but my memory was that few ever really stood up to the bullies. It is a we had it though and so should all children whether it benefits or not. Other people would tell us that our home schooled children would have an unfair advantage. I think that this idea of initiation that builds fraternity underlies support for our Government run school system.

Digression:
(On the other hand it amazed me how creative, progressive and innovative very conservative Christians would get with home schooling once they got started. They would use things like online learning, computer programs, cutting edge DVD programs like Math-U-See swapping services with other home schoolers for subjects that they are weak in etc. I was also amazed at how the unschoolers could make it appear that our government schools do not even beat nothing.).


Also you touched on social security; a person once told me that people would not be able to afford to take care of their parents if it where not for social security, like the goods and services that people on SS require to live falls out of heaven as long as SS exists. I asked him who did he think was paying to take care of those parents now with SS.

The thing that aggravates me most about SS is the recipients are grateful toward and thank the politicians for their daily bread and never think to thank those who pay the tax.

Dear Dan,

You made the point that people who want everyone compelled to be part of "the people's romance" are greedy. Good point. Here are my main four additions to that.
1. They're also not particularly introspective. When you get people talking about their lives in our government schools, you don't get a whole lot of fun stories. It's typically the opposite.
2. When I'm in those "people's romance" situations, that is, government-enforced get-togethers such as traffic school, I seem to be one of the few who actually gets into the people's romance, the bonding, etc. Not sure where to go with this, but the irony seems relevant somehow.
3. We have opportunities for community in many parts of our day. The way we deal with people in stores, etc. We can just be on automatic pilot. Or we can treasure those little opportunities to be and feel connected.
4. The Internet has allowed people, especially unusual people, to have incredible connections. My late brother, Paul, was unusual, and not mainly in bad ways. He committed suicide when he was 22. Of course, I'll never be able to prove this but I think he would be alive today had the internet existed in the 1960s: he would have found people like him all over the place. For all the talk about shared experiences, the fact is that virtually everyone wants to share experiences with people they somehow have something in common with, not with humanity in general.

muirgeo writes:

I listened to this podcast 2 times and some parts 3 or 4 times. I have many comments and I'm not sure where to start.


First I think we all appreciate the emergent properties and "unplanned coordination" or as you say the concatenation of wool coats, pizzas and pencils. Most appreciate the idea that generally markets for such items are best left alone. I don't generally see much government oversight in the production of these things.


But then a sudden leap to compare pizza with education?? Wow!
So what works for pizza should work for education. Do you have any real life evidence of this? My argument is that every wealthy developed modern nation has a public school system at least as developed as ours or better. It's not evidence that public education is the reason for the success of these nations but if you could point to one nation that doesn't have public education and is as successful in the modern world or even through all of history that would bolster your claim.

muirgeo writes:

The next point I would make is that one has to recognize that these pizzas don't get made devoid of a government. They seem to get made most cheaply and efficiently in a democracy.

I know of no Liberal (classic) societies in which pizzas were made more efficiently. Are there any examples of Liberal societies through history to support the efficiency of economies run in such a way.

I think of societies like Dickens wrote of or of the days of Lords, Vassals and serfs when property rights were protected and no democracy existed.

muirgeo writes:

The general theme seems that we like self-organizing systems because they are neat and pure. They are somehow perfection in a Darwinian way the best systems rise to the top.

But if darwinian evolution is our guide didn't we evolve as a successful species able to rule beast and other men much stronger then us by organizing into planned societies.

The idea that we have public education because we want shared experience just seems perverse. I always thought we had public education because we could organize it efficiently and and make smart citizens capable of increasing their pizza productivity to the benefit of all. The idea that the economy is ALL that matters and all other purposes for society are insignificant seems extremely narrow minded.

Russ Roberts writes:

Muirgeo,

Lots of interesting ideas. The first point to make is that most people who favor less government in the world aren't anarchists in favor of zero government. We like democracy, too. But the question is what is the best role for the government in education. The answer can be 'zero' without arguing that government should have no role in the courts, say, or police.

Pizza and education aren't really analogous--pizza involves the concatenated coordination of thousands of people. Education might be simpler. The point of the education example was not to argue that it's like pizza. It was to argue that people invoke the shared experience argument to justify government provision of education. But let's stick with the most general form of the analogy--that we can choose between bottom up privately provided education vs. top-down state provided education. Is there any evidence that the private efforts to produce education might work as well as they do in providing pizza? Well, there's the best university system in the world, that of the United States. It's pretty much the only private one. (Yes, I know there's plenty of government involvement. Let's not debate whether that's a net plus or minus. Just consider that it is possible to have privately employed professors and administrators.) Then there are the private schools of grades K-12. They do pretty well. They attract people willing to pay a sizable amount when they have the free alternative of government schools. Yes, some of them are wealthy, consuming something other than education. But poor people when given the chance, are eager to go to private schools. So yes, I think that private schools have the potential to work pretty well.

Has there ever been a state that let private schools thrive without state competition? Perhaps someone more educated than I am knows of such an example. But the fact that there hasn't been one doesn't mean it isn't the ideal or that government intervenes in education for idealistic reasons. Why would you argue against privately provided schooling just because governments don't allow it?

Martin Brock writes:
Also you touched on social security; a person once told me that people would not be able to afford to take care of their parents if it where not for social security, like the goods and services that people on SS require to live falls out of heaven as long as SS exists. I asked him who did he think was paying to take care of those parents now with SS.

The thing that aggravates me most about SS is the recipients are grateful toward and thank the politicians for their daily bread and never think to thank those who pay the tax.

Exactly. Supporting my parents, who supported me, is honorable and equitable, and I have no problem with the obligation. On the contrary, it is traditional property, and I advocate its respect. Pretending through a statutory program that "my saving" supports me when I'm old dishonors the contribution my children make. I want no part of this pretense. It is not traditionally proper, and it is not rational economics either. It's just the state.

Martin Brock writes:
But let's stick with the most general form of the analogy--that we can choose between bottom up privately provided education vs. top-down state provided education.

Universal education happened largely from the bottom up. Local communities adopted the idea following the lead of reformers like Horace Mann in Massachussetts and elsewhere. Some of these people, like Mann, were called "socialists", but the word had a different meaning then. There was no central government mandate.

"Public education" is just another word for compulsory, universal education. The issue is financing, not ownership of the buildings.

Then there are the private schools of grades K-12. They do pretty well. They attract people willing to pay a sizable amount when they have the free alternative of government schools. Yes, some of them are wealthy, consuming something other than education. But poor people when given the chance, are eager to go to private schools. So yes, I think that private schools have the potential to work pretty well.

Most children have no money. We have this idea that states pay for education instead of parents, but the idea is not historical or economically rational. Parents never provided universal, formal education of the modern sort, so there was never any parent financed system to replace. Public education is far more like a system of credit wherein children receive education and pay for it later, and this system is the only economically rational one.

Has there ever been a state that let private schools thrive without state competition?

Childhood education akin to the modern public school model? I doubt it, because I doubt that it ever could have happened. The closest thing is apprenticeship, sometimes with parents effectively selling their children into apprenticeship.

Apprenticeship is a model worth considering. Essentially, parents choose educators for their children, and these educators then are entitled to a portion of their students' income for a period after the education. This title is negotiable, so if a particular student doesn't yield much, his educators may sell the title to other educators who might do better. The less a student yields, the lower the market price of his title, so if I train you to make wagon wheels and that doesn't work out, I have nothing to lose and something to gain by teaching you something else. This system is chattel slavery only if the portion of income is excessive.

Why would you argue against privately provided schooling just because governments don't allow it?

The early arguments against universal education involved its compulsory nature rather than ownership of the buildings. Educational institutions could organize for profit and compete for students, but financing is still an issue.

Martin Brock writes:

If schools organize for profit and compete for students, but taxpayers finance tuition through vouchers, we privatize the profit but socialize most of the risk. This arrangement is more like corporatism than the market. I don't say "fascism" here because that wouldn't be nice ... even if it's true.

Unit writes:

Muirgeo,

public education as made it overvalued. Why do we subsidize years and years of schooling and essentially force people to forgo profits until their mid-twenties. In the rich European societies that you look up to, people stay in school until their thirties and then don't find a job. Is this optimal?

muirgeo writes:

Unit,

I'm not saying are public education can't be improved, it can. But to totally privatize these institutions..I mean we had that prior to the New Deal. The the illiteracy rate was super high and old people starved and froze in their homes in large numbers prior to setting up safety nets. Heck we had Poor houses we shipped the old people to.

Sounds to me more like there is an Economist Romance for something thats pure but not really practical. Economic aesthetics is a nice thing in theory but in the real world the sloppy imperfect combination of individuals working both for their betterment and of societies is the natural order of things.

I always point to the fact that there are 40+ social democracies around the world that have the best standard of living ever along with the most personal freedom. They have lots of problems and room for improvement but the fact that NO Liberal societies exist tells me they are not stable or effective or practical. So the best we can do is to minimize regulation and improve regulation when it is needed.


Simply deregulating things has shown in my opinion to be a recipe for disaster. I believe the current subprime mess and all it's implications are the results of loosed regulation on our lending and financial institutions leading to predatory lending.

Russ Roberts writes:

Muirgeo,

I'd be interested in any evidence that literacy was particularly different before and after the New Deal. I'd be surprised to see a dramatic difference. One reason is that I don't think the New Deal changed education much in the United States.

On the safety net side, there was a government safety net before the New Deal, it came from the states and the cities, along with private charity. What was significant about the New Deal is that it made helping the poor a Federal responsibility for the first time and also increased the size of the payments dramatically.

I agree with you that it is hard to sustain freedom--regulations and coercion are prevalent. The question is what should decent people advocate--more freedom or less, given the current level of government intervention.

Martin Brock writes:
But to totally privatize these institutions..I mean we had that prior to the New Deal.

The New Deal had little to do with it. Public education was well established in the nineteenth century. It presumably expanded under the New Deal, but I've never heard much about that.

http://en.wikipedia.org/wiki/Public_education#History

This history is one of the few interesting things one learns in a "teacher's education" curriculum, where one allegedly learns to teach without learning to teach anything specifically. Been there. Done that.

Martin Brock writes:
The question is what should decent people advocate--more freedom or less, given the current level of government intervention.

It's just not as simple as "more freedom or less". Free to do what? I prefer a voucher system to what we have now, but a sufficient number of schools must accept the voucher as payment in full for a child's education, and I don't expect any miracles from this reorganization.

Children are poorer than other people for obvious reasons, and their parents are poorer than other people for obvious reasons (they support children). Parents are also poorer than other people for not so obvious reasons. A system financed entirely by parents or simple money lending is not rational.

saifedean writes:

Does anyone know of any serious psychology or economics literature that discusses the reasons for human bias against many facets of free markets, individualism, free enterprise, economies-of-scale, free trade and entrepreneurship? Why do people generally view Bill Gates, Warren Buffet, Wal-Mart and other rich people as bad people, though very clearly they did not steal their money, and they accumulated their fortunes by having consenting adults paying them for valuable services. Why do many people view seeking personal gain as greedy and not honorable?

I can certainly see that our bias against trade and exports is a clear manifestation of a general anti-foreigner bias clearly prevalent in almost all of humanity. Dan suggests the reason we value having a common purpose lies in our evolutionary history, as we evolved as social beings in groups. I am not entirely convinced with this explanation, and would like to see more psychological research on it.

Here's one explanation I have thought about:

For the vast majority of human history, and even today in the majority of the world, the main way to be rich is through carrying out indecent and immoral activities. Extortion, theft, thuggery and the immoral use of force are the main way that the rich got rich. It is hard for human psychology to adjust to the idea that someone like Bill Gates really did become very rich by doing something good. Even today, if you look at the richest people in developing countries, you will find people with criminal records, corrupt politicians, proprietors of inefficient government-mandated monopolies that place a large cost on the population. When we see Wal-Mart driving small businesses out of business it echoes the history of extorters and leaders destroying people's livelihoods for their own economic gains. Perhaps it is a generalized rule about human history that private wealth can only come through immoral means, and that exceptions really are rare.

Thoughts?

Martin Brock writes:
Does anyone know of any serious psychology or economics literature that discusses the reasons for human bias against many facets of free markets, individualism, free enterprise, economies-of-scale, free trade and entrepreneurship?

What's the psychology behind human bias against a progressive consumption tax or any number of other systematic enactments we could discuss? I suppose these questions have answers, but you seem to regard the bias you describe as particularly harmful or irrational.

Why do people generally view Bill Gates, Warren Buffet, Wal-Mart and other rich people as bad people, though very clearly they did not steal their money, and they accumulated their fortunes by having consenting adults paying them for valuable services.

I don't think Bill Gates is a bad person. I think he got a crack at the operating system for the IBM PC for lots of reason, not least that his mother served on the board of the Red Cross with IBM executives. I also think he didn't write the O.S. himself. He bought it off of someone down the street, presumably someone without the same crack. Then he gained from reams of forcible proprieties like copyright and trademark and contractual relationships between Microsoft and thousands of employees who actually wrote Windows and other Microsoft products. Most importantly, he got these breaks, and I didn't.

I may have a detail wrong there, but the gist of the story is true.

I like Bill Gates. I wish we'd enact a progressive consumption tax so that he could pay less tax than you do. I like Warren Buffet too. Visit cafehayek.com, and you'll find lots of people calling them "socialists". I have no idea why, but these same people also think that I hate rich people, because I advocate a progressive consumption tax. Maybe you think I hate rich people for this reason too. People believe weird things. It's just a law of nature.

I say that a progressive consumption tax is completely consistent with free markets, individualism, free enterprise, economies-of-scale, free trade and entrepreneurship, but various people dispute me.

Why do many people view seeking personal gain as greedy and not honorable?

It's not the personal gain. It's a network of forcible propriety from which people feel excluded for various reasons. This exclusion is simply inevitable, so seeing wealthy proprietors as greedy and dishonorable is pointless; however, this fact does not imply that limiting the prerogatives of very wealthy proprietors is always counterproductive. I don't believe it is. And Warren Buffet advocates a progressive consumption tax too.

It is hard for human psychology to adjust to the idea that someone like Bill Gates really did become very rich by doing something good.

Not really. If you took a poll, I suppose you'd find Gates with higher favorables than Bush II. I think Gates became rich by doing something good. I don't conclude therefore that he should be entitled to build himself a private castle or take a vacation to the moon or something. He's good, but he's not that good.

muigeo writes:

Martin,

I agree with you Gates and Buffets fortunes don't bother me much. Yes I said much but that's a longer discussion. But Walmart is a bit different because so much of its profit is made by skirting laws for labor and the environment set up here.
Where do we draw the line? If a company called Slavemart ran Walmart out of business because its cheaper goods came from a country that used child slaves would that still be OK.

Where do your ideas on progressive consumption tax come from? I'd like to learn more.

Martin Brock writes:
Where do we draw the line? If a company called Slavemart ran Walmart out of business because its cheaper goods came from a country that used child slaves would that still be OK.

For a variety of mostly practical reasons, I basically go along with the liberal dogma on free international trade. It bugs me that some nominal "conservatives" oppose liberal trade with illiberal regimes like Cuba but don't lose much sleep over child labor and other violations of proprieties we adopted along ago in the U.S., but my position is more consistent. We don't police the world. We don't establish labor standards outside the U.S., and we don't establish other proprieties outside the U.S. either. We don't draw the line anywhere. If you can deliver goods to the U.S., we'll trade with you, unless the goods themselves are illegal here. Accepting the limits of one state's power does not condone every excess of every other state.

If some U.S. citizens actively conspire to violate standards we uphold, even outside the U.S., beyond simply receiving goods produced outside the U.S., I have no problem with holding the individuals accountable.

Where do your ideas on progressive consumption tax come from? I'd like to learn more.

My ideas are mostly mine, of course, but scholars at the New America Foundation, like Maya MacGuineas, advocate a progressive consumption tax along the lines of what I advocate. The most recent proposal to be seriously considered in the legislature is the USA (Unlimited Savings Allowance) proposal sponsored by Nunn and Domenici in the nineties. Lawrence Seidman wrote a book about it.

None of these proposals is precisely my idea, but my idea admittedly is utopian. Most tax reform proposals begin with "revenue neutrality" as a starting premise and then advocate the "fairness" or economic efficiency of the reforms. I'm not much interested in "fairness" as this word often is used, and I'm certainly not interested in revenue neutrality. I'm often accused of wanting to "soak the rich", because I would limit their authority to consume the yield of capital, but I don't take these accusations seriously. Entitling Bill Gates to pay no more tax than you or I, if he chooses to consume no more, is hardly soaking the rich.

In the regime I imagine, "the rich" deliver vastly fewer resources to central government, not because they're so privileged but because they're already part of the state themselves and moving these resources to an even more central authority is counterproductive. The point is more reinvestment by the individuals receiving the yield of capital most directly as well as as a proper limitation of their authority to consume this yield. Most "progressive consumption tax" advocates still see the wealthy as part of "the private sector" who must pay "their fair share". This attitude only leads to great corporatism, with more and more resources tied up in corporate structures wherein many transfers are not any individual's "income".

Brad Hutchings writes:

How is the story of "The People's Romance" any different from plain cynicism? It's the most obvious charge and the easy one to stick. As you point out, left and right are susceptible to grandiose government solutions that sound like shared purpose, from single player health care to no child left behind to mars missions to nation building in Iraq or Darfur.

I wonder... Opponents to the Iraq War have avoided the cynic label. How likely is it that opponents to a government overhaul of health care and health insurance could do the same?

Jacob Briskman writes:

Russ,

I am interested in something that was said in this podcast relating to the hang nail and the earthquake in China. I find it especially interesting in the context of the recent podcast with Peter Collier.

I would argue that people are affected by the earthquake in China (or as Collier referenced the failed state of Somalia). It doesn't so much have to do with their love of people in China/Somalia as it does with the fact we live in a interconnected world, as Collier made the strong case for in the Bottom Billion. So while you may be right that there is not enough love to go around (although I am not clear what that means), if people had the information that an earthquake in China actually affects them in myriad ways, then there is reason for caring.

Thanks!

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