Category Archives: Politics

The Coasean State

One justification for property rights is dispute resolution: resources are scarce, and private ownership helps reduce conflict over them. By establishing an enforced system of rules that determine ownership of goods, we can create an environment allowing for the best use of resources (property rights allow for a pricing process — most likely an unintended result of early institutions of property). Who determines these rules? In part, they are determined spontaneously. We are implicitly shaping rules when we trade property rights in a division-of-labor. Oftentimes, however, trade through markets is made unattractive by transaction costs. Thus, we also need, for example, legal and political systems.

When discussing property right exchange, Coase was specifically addressing the problem of negative externalities: costs which are imposed on an unwilling party. A factory, for example, might pollute, damaging neighboring houses. Or, a cattle rancher may not be able to fully control his cattle, which graze on land which does not belong to him. These people are consuming resources which are claimed by others, causing a dispute. The Coase Theorem states that, assuming zero transaction costs, existing property rules are irrelevant, because the parties involved will flesh out their own rules for their own particular situation. But, when transaction costs are positive, disputes may have to be resolved in other ways.

When we think of property disputes with no Coasean solutions we turn to the legal system. At least, this has been the main application of Coase’s theory. When parties cannot privately resolve a conflict, they need someone to arbitrate between them (ignoring the possibility of outright violence). On what basis does the justice system solve these conflicts? Whatever the standard, legal systems are also built on rules — not just rules that minimize inefficiency and injustice within the organization, but also rules which help arbitrators reach solutions. These rules are not the best solution all the time, but we want the ones that maximize the probability of a “good” solution for each trial. But, what if there is a conflict that a court, or a private defense agency, or an arbitrator, can’t resolve?

When a dispute involves a few people, private solutions may be easy. The legal system helps extend the range of private solutions, but it can’t solve everything. While a court might order a factory to build a smokestack, it’s more difficult for a court to impose that ruling on every factory externalizing its costs on its neighbors. These other factories might one day also be brought to court, and the ruling may still usually be on the side of the victim, but the process can be long, expensive, and not very satisfying — and, there may be some factories that aren’t brought to court at all (maybe it’s too expensive, because the externalized costs are too widely dispersed). We may need other organizations, working with a different set of rules, to resolve issues that are too costly for Coasean solutions or the legal system.

One such alternative is the state. There are many kinds of states, so to keep things simple let’s assume we are working with an “ideal” representative democracy. What I mean by ideal is that a constitution, with more-or-less unanimous consent, binds (constrains) a set of institutions and organizations of governance. These may include, for example, a bicameral (multicameral?) legislature, a division of power within governments, a division of power between various local, regional, and national governments, et cetera. Different organizations, such as the House and the Senate, may have asymmetric sets of rules; different legislatures, for example, may have different voter sources, different rules of proceeding, and so on. Decision-making need not be unanimous, as long as there is agreement with the overall rules of the game.

We don’t need to narrow down property rights disputes to things like pollution, there are many social conflicts that an economic imperialist could classify as property disputes. Discrimination imposes costs on the discriminated — psychological costs, for example. Think of the costs to women — not only foregone wages and profits, but also potential psychological burdens — a biased, limiting culture may cause. The “right to discriminate” can come at the expense of the discriminated (which is why it makes dubious sense to believe in an absolute right to discriminate/disassociate). People may also want to impose certain “meta-rules” on other institutional sets, such as markets or the legal system, as well. For example, a division-of-labor may only fully agree to associate if there is a general rule to minimax the position of the worst-off.

If we frame the state in the context of property rights, it no longer seems so alien. Humans develop rules that govern their claim to property, including their claim over each other. Some of these rules are flexible on a very simple level. Some property rights can be defined with a simple exchange between parties. But, costs to these types of transactions make alternative organizations and rules, such as the legal system, attractive. Like the legal system, governments have their own asymmetric set of rules, and they have a comparative advantage when resolving certain property disputes.

It might be worth thinking beyond “property disputes.” Just like property is one way of resolving certain conflicts, maybe there are other ways, or other kinds of conflicts that can’t be resolved through property rights. And, just like there are “private” solutions to these other conflicts, there are “public” solutions as well.

China: Future Migration Hotspot?

China is still a sending state, more migrants leave than come in. According to the World Bank, about 1.5 million people emigrated from China in 2012, on net. I am not sure how much of that includes emigration to Hong Kong and Macau. Still, compared to the United States, which received, on net, 5 million immigrants, China does not seem like a major attraction to migrants. But, will China always be a sending state, or will it soon begin to receive net immigration? Immigration is already an important facet of the Chinese economy, and there is reason to suspect that China, like Western Europe and the United States, will, down the road, become a receiving state.

Historically, China has always been a sending state. The World Bank measures net migration as the number of immigrants minus the number of emigrants. China has had a negative figure since 1962, which is when the data I have starts at. But, net emigration does not imply no immigration, and, as their economy continues to grow, with a growing demand for labor, immigrants have turned into vital means for growing productivity. While the amount of net emigration remains significant — although, the data includes emigration to Hong Kong and Macau (two important net recipients of Chinese migrants) —, the number has been steadily decreasing since the early 2000s: from 2.2 million immigrants, on net, to 1.5 million.

The country, however, is going through a structural change. It is going through a process similar to that of the U.S., between 1820–1910. Industrialization has brought with it one of the largest internal migrations in the world, as large amounts of people move between provinces. This includes movements from rural areas to the cities, and movement from poorer (typically, rural and agricultural) to wealthier regions. While there are not always known opportunities for higher paying jobs in the cities — migrants are often displaced by a falling demand for labor in the rural areas —, it is true that Chinese industry is a sponge, in need of a growing labor supply.

Domestic labor is not always enough, especially given China’s low population growth rate (0.5 percent, in 2012). If the demand for labor increases, and the labor supply is more-or-less stable, we should expect higher wages. According to the “neoclassical” theory of migration, where changes in relative wages cause migration between countries, we expect rising Chinese wages to attract migrants. This does not necessarily mean, though, that immigration will occur up until wage rates between countries are equalized — in fact, emigration to China may push wages up, inviting even more immigration.

If there are economies of scale, larger populations mean higher real wageMonopolistically Competitive Markets. As population grows, all else equal, so does output. This lowers the average cost and price, raising the real wage. Larger population also means a larger amount of firms, greater product diversity, and the accompanying welfare gains to the consumer. This result was formalized by Paul Krugman, in his work on trade theory.

Trade, or the movement of goods and capital, creates the same effect as an increase in population: an increase in the division-of-labor. But, if trade is restricted, or if bad policies elsewhere leads to low growth and high unemployment, the movement of labor may replace the movement of goods. Consider some of the “stylized facts” of sending states: history of low growth, extractive political institutions, and relatively low wages. Sending states each have a division-of-labor which is significantly isolated from the world’s. While China’s political climate may still be unattractive to many, the economic factors may grow in relevance. The country is surrounded by many others which are worse-off, and growing Chinese wage rates will become increasingly attractive.

Other factors, besides relative wages, that determines migration are “linkages.” Think of a linkage as a shared history. For example, many Indians migrated to the United Kingdom, because India is a former colony. Similarly, Spain attracts a disproportionate amount of South American migrants, because of their shared history. Countries with linkages are more likely to be involved in a migration pattern than countries without them, all else equal. China has shared histories with not only its neighbors (many of which, however, are also growing and/or prosperous), but also with populations one might at first suspect. The Chinese have invested heavily throughout Africa, and many Africans have migrated to do business in China. As African networks in China grow, this might attract larger flows in the future.

Growth, however, does not always mean less emigration. The evidence shows that growth may actually lead to increasing emigration rates, below a certain threshold per capita income,

Emigration Flow to GDPPC

In early stages of development, other factors may dominate the marginal increase in relative wage. Since the poor are typically credit constrained, rising incomes will help them finance migration decisions. Networks in other countries may also attract large emigration flows. If early flows were restricted by asymmetric information, where potential migrants were simply unaware of the opportunity, growing networks in receiving states will correct this asymmetry and increase the flow of migration. Changes in relative income are important to consider, too. If early growth raises certain incomes disproportionately, the relative wage rates between countries for the non-affected income groups remain the same. Maybe this explains, in part, why China attracts high-skilled labor from South Korea and Japan, but exports low-skilled labor.

But, China’s GDPPC (GDP per capita) is just about at the threshold in the data. According to the World Bank, China’s 2012 GDPPC, in current U.S. dollars, was about $6,000. Net emigration has fallen since the early 2000s, and real wages in China continue to grow. Is China poised to become an important receiving state in the future? This will bring with it interesting problems. An immigration shock provokes hostility amongst a homogenous local population, leading to civil rights issues — issues the Chinese government will have to deal with. It will also have a significant effect on the global economy. The U.S. became a major industrial power in large part thanks to immigration. But, the U.S. started out with a relatively small population. China is already the largest country on Earth and there is still a growing demand for labor, despite the already large labor force. How will the Chinese government approach the “immigration problem?” How will this affect the United States and Western Europe? By 2070, or sooner, we might see large communities of American workers in Beijing!

Explaining Religion’s Survival

One challenge to atheism is: if belief in God is so wrong, why has religion survived for as long as it has? Why have humans been religious, for as long as we know? I have a Hayekian theory. If you are religious, and my theory offends you, assume it applies to every other religion except yours.

I was thinking of a situation where the morally dubious option is very attractive, but something external to me makes it unattractive. For the record, I am for all intents and purposes an atheist. Also, your moral intuitions may differ from mine, but to interpret my point try to step into my shoes. Suppose you are given two options,

  1. You can continue with your current life, but you will not fulfill your most valued dreams. Your current life includes a healthy, loving relationship with your wife.
  2. You can re-start your life, with the guarantee that you will be able to fulfill your most valued dreams. For you, let’s assume, that means being a famous football player, able to sleep with the most beautiful women in the world.

What would make me say “no?” I find it morally dubious to abandon my wife, even if it turns out that she would never be aware of anything. I have a commitment to my wife (or, I would, if I were married), and it just seems wrong for me to abandon her — even if she would be ignorant to it (her alternative life would exist without me ever being in it) — so that I can sleep with dozens of beautiful women in my alternative dream life.1 But, when I was thinking about it, this wasn’t the intuition that made me choose option (1). Rather, I had a feeling that I would be judged, and that I would pay in some way for choosing (2). I am an atheist, but I felt that I would be judged by God. I have never been religious, but that feeling of being judged by some spiritual being did not evolve endogenously; it had to be imparted to me culturally.

“Don’t cheat on your wife” is not the only value religion imparts on believers. In fact, there were probably many religions that did not stress monogamy, and there were probably even religions that valued polygamy. But, most religions do try to instill certain values, and most religions ask for peace between members. The religions that have survived — the most popular and most robust religions — tend to require strict adherence to some set of values. Greek mythology, for example, is partly designed to teach people certain moral rules. These rules might not have religious origins, but rules without religion usually don’t have an omnipotent, omniscient enforcer.

The belief that you are being judged by someone who you can’t evade, who knows your motivations, and will unflinchingly apply the rules by which He commands you to live your life is very powerful. It makes getting away with morally dubious behavior impossible. To get around this constraint, you have to have a very strong belief that there is no spiritual enforcer. I am very skeptical of the existence of God.2 Yet, for whatever reason, having a sense of an omniscient, omnipotent enforcer strongly weighs on my moral intuitions.

Let’s take a step back and move in another direction, that will loop back to the question of why religion has survived. In Rules and Order, Hayek lays out the foundations for a theory of spontaneous order. The set of rules that govern entire societies/communities aren’t designed by a single mind, rather they emerge over time and are selected based on their survival value. It’s easiest to explain Hayek’s argument through an example. Suppose we live in world where there are various communities, each with its own set of rules. Over time, one community develops the heuristic “do not murder,” probably because they notice how much more well-off they all are if they can trust that their neighbors will not murder them. That’s the thing: this rule makes this community better off relative to others, so the probability of the rule being adopted by others is high. Alternatively, a rule that promotes disorder is likely to be abandoned, because societies that employ it will be relatively less successful than societies that don’t (all else equal).

Religion can impart rules that promote disorder, such as a willingness to wage war against non-believers, but these rules usually guide inter-, not intra-, community relations. Rules that do promote intra-community disorder usually die out over time. Implicit antisemitic rules in Christianity, for instance, have mostly died out, because communities that promote religious tolerance and cosmopolitanism are typically more successful than those that do not.

Order-inducing rules can emerge without religion. In fact, most rules that religion codifies probably emerged independently. They were adopted, because they make sense and are order-promoting. But, there is an advantage that religious rules have over non-religious rules, and it’s that religion promotes a kind of self-regulation. Non-religious rules can be enforced by secular institutions of governance, but this is easier today than it was 200+ years ago. If it wasn’t for self-enforcing rules, society may not have advanced to the point where it’s at today. A fear of God (or, the gods) is a powerful enforcement mechanism. So is the vaguer, but related, notion that there is a spiritual enforcer that will make us pay for our morally dubious decisions, even if everyone else is ignorant of our choice.

There is a strong impulse to spread religious values (although, not in all religions — Judaism is remarkably insular). If religious values promote peace, and if these values are “self-enforced,” it will be good for society to spread religion to non-believers, so that they too will be constrained in the same way. There are other motivations behind spreading religion, of course. But, a religion that relies entirely on conquest will not be very successful. Roman and Greek religion, for example, did spread through conquest, but the strongest reasons for accepting certain deities were probably cultural. And, Roman and Greek religion did not survive for long when superior alternatives were made available, even when these alternatives were oppressed (as was the case during the Roman Empire).

If there is no God (or no gods), why has religion survived for as long as it has? Or, if there is a God (or gods), why have false religions survived? Because religions impart order-promoting values, and the idea of an omnipotent, omniscient God that judges all of our choices is a powerful mechanism of self-enforcement. Religious societies were probably simply more successful than non-religious societies, which is most likely the reason why non-religious societies did not exist (or were very rare) prior to the growing secularist movement. Even in increasingly secular societies, there is still an implicit notion of a final judge that we can’t avoid — this is still the same mechanism of self-regulation. One thing that does seem to follow from my theory — and this might make some uncomfortable — is that as superior alternative processes of enforcement arise, religion will become less relevant.

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Notes:

1. There is the additional fact that I would rather be with my wife than with any other woman, but this isn’t a particularly strong feeling for many men, and it was even weaker historically.

2. But, it’s important to me that I cannot be certain of God’s non-existence.

To Know How Government Fails…

Hayek once wrote something along the lines of, “To know where markets fail, we need to know how they can work.”

I’ve written quite a bit about governance these past two weeks. A long post would be repetitive, so I’ll keep my point short and sweet. I’m motivated — or, at least, reminded of this — by Daniel Kuehn’s brief critique of Bob Murphy’s recent article on space exploration. He thinks that some libertarian economists don’t take externality arguments seriously enough. They aren’t willing to concede the a priori possibility of the existence of a public good. I certainly see where Daniel is coming from, and I agree to some extent or another. But, I think there is another, related problem.

Most economists, libertarian or otherwise, probably do agree that there are such things as externalities, information asymmetries, et cetera. The reason they do think that these do not call for public provision of the affected goods and services is because they assume, a priori, that government can’t fulfill this task without creating more inefficiency than we originally started out with. I think this is certainly a possibility, and is definitely true regarding some (probably extensive) range of goods and services. But, it doesn’t necessarily have to be true.

Libertarian economists also probably overstate the case against government. Or, maybe they don’t. But, I don’t think there is any set of theory out there that can tell us for sure. Actually, there is — The Myth of Democratic Failure (?), “Voting as Communicating,” The Calculus of Consent, “The Allocation of Goods by Voting,”… —, but it doesn’t usually inform libertarian policy prescription and there is probably a lot of room left for research. Libertarians rarely ask themselves, “How do institutions of governance communicate local knowledge and coordinate disparate plans between agents to provide order?” But, to know where government fails at achieving order, we have to understand the process by which it reaches the order it does. If we have no theory about how exchange-based governance works, how can we comment on what the proper role of government is?

This is a theme I’ve been pushing on this blog, because I don’t think most libertarians take it seriously enough. Before we can say how governments fail, we have to know how governments work.

Illusion of Purity

The claim that there is such a thing as “pure libertarianism” should puzzle you. What is the definition of “pure libertarianism?” Do we find that definition in Rothbard? Nozick? Hayek? Mises? Rand? Which Rothbard? Nobody’s views are intertemporally consistent. If they were, our views wouldn’t evolve. The answer can only boil down to a definition which equals exactly what you believe “pure libertarianism” is, because you are going to choose between alternatives based on what you agree with. That seems a bit shallow.

Within some range, “pure libertarianism” will inevitably be impure. Few libertarians would doubt Roderick Long’s libertarian credentials, even though he prefers virtue ethics over a certain brand of deontology. Okay, Long avoids the term “capitalism” (according to his Wikipedia entry), so maybe Long is not a “pure libertarian.” But, no serious academic holds a identical set of beliefs with another. There is always some degree of reasonable disagreement. You cannot define a “pure libertarianism” without defining yourself as irrelevant, because the only “pure libertarian” will be you.

If you accept that there is a range of beliefs that can be considered libertarian, how do we determine that range of “reasonableness” (is that a word?)? Mises — except that government nonsense, but it’s okay, because it’s Mises1 —, plus Rothbard, plus Hoppe? Do we exclude Hayek, Buchanan, Friedman,2 Nozick, Gaus (?),…? Surely, you cannot define the range by what is generally agreeable to you, because that defeats the purpose of having a range of reasonable disagreement. You would have a difficult time arguing that Stiglitz’ political views ought to be considered libertarian. Hayek, though? How could the views of one of the most influential academics on libertarian thought not be considered reasonable in the debate on what libertarianism is? It would, of course, be just as absurd the other way around. How could Rothbard’s views not be considered libertarian?

The point I’m making is that any determinant definition of “pure libertarianism” is arbitrary, in that it requires the person writing the definition to choose based on her own judgment. Where is this authority derived from? What if there is some chance that she’s wrong? There is no way to even know whether we believe in “pure libertarianism,” because “pure libertarianism” is impossible to define with certainty. The concept is empty.

So far, most of you may agree with me. But, I don’t want you to agree with me. I want to give you a headache. I am going to take another step forward, making the strong claim that libertarianism as a political philosophy is too exclusive to be useful.

The limits to what is libertarianism will always be arbitrary. But, if we leave those limits up for debate, I think that debate is easier to solve than the one over “pure libertarianism.” At least, we have a fuzzy border around libertarianism. For example, it’s clear that Krugman is not a libertarian. But, Buchanan is — at least, his ideas can directly inform libertarianism. But, here, libertarianism defines only a narrow group of reasonable beliefs over the right institutions of governance. There are reasonable non-libertarian beliefs, as well.

If a group of people join into a division-of-labor, they will have to develop an arbitration process (whether planned or spontaneously) to settle disputes. There will be several orders of rules. Personal defense associations, for example, will appeal to a higher order of rules to settle inter-association disputes. If you are an anarchist who believes that people will settle into communities with more-or-less consistent political views, you should still recognize that people will want to associate with others outside of their community — there are gains from trade by extending the division of labor. People of different communities may come into disputes against each other, and there will need to be a process by which these disputes — where there are two conflicting set of rules — are solved. Let’s call the highest order of rules, and the process by which these rules emerge, the meta-process.

How do rules emerge out of the meta-process. Maybe a dictator is the final word of the law. That doesn’t seem very appealing. Imposing Rothbardian deontology would be dictatorship, because most people would want a completely different set of meta-rules. Further, we have no way of knowing if Rothbardian deontology is right, and we want the meta-process to at least evolve over time, so that its rules can improve. Because we know that there is a range of reasonable opinion on what kind of rules there should be, the process of rule-making should consider a plurality of opinion.

The people governed by the meta-rules will include libertarians, but libertarians are a minority of the total population. Reasonable debate would need to include reasonable non-libertarian beliefs. The meta-process would be a liberal one. It’s hard for me to accept the possibility of both agreeing with the public reason approach and believe in a libertarian political philosophy. Public reason is extremely attractive, because it is consistent with heterogeneity of beliefs and pluralism (i.e. liberalism); maybe a libertarian political philosophy does not make much sense. Libertarianism can’t even describe the ideal society, because if societies include non-libertarians then the rules, in a voluntary society, will be, at least in part, non-libertarian. Public reason leads to compromise, not unanimous consent in favor of one of the extremes.

The libertarian has some preference set on meta-rules. But, you can’t advocate an overarching philosophy of a just political process that requires either belief homogeneity or coercion of the non-believers. Well, I suppose you could. But, calling that philosophy one of “liberty” should raise eyebrows. Libertarianism, then, is not useful at all for the purpose of helping us achieve a free society. But, (public reason) liberalism can. I agree that this might lead us to other uncomfortable conclusions, but that’s no reason to reject my argument. Of course, the catch in believing that there is some probability (0 < p < 1) that a belief is wrong is, well…that your beliefs can be wrong. So, prove me wrong!

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Notes:

  1. I guess Mises’ “partisan biases” don’t matter.
  2. Both Milton and David. Pure libertarianism might require two points. You earn one point for being an anarchist, which David is. You earn another point for being an Austrian. Sorry David. And Milton might as well be Stalin.

Governments (and Markets) Fail, but They Can Succeed Too

Don Boudreaux criticizes modern economics for “simply assum[ing]” that governments are able to intervene without being subject to the same, or worse — Boudreaux invokes public choice theory —, imperfections as markets. I am deeply sympathetic to “politics without romance.” But, I find critiques like Boudreaux’s unpersuasive, because they give their intellectual opponents too little credit and they are often susceptible to similar scrutiny. That is, governments may not be perfect, but they are not necessarily entirely worthless, either.

“Free market economists,” for lack of a better term, like to impute onto the intellectual opposition the belief that governments are, for all practical purposes, perfect and that they can realize the supposedly optimal solution these economists calculate on paper. But, this view has never been accurate. In a 2012 paper, Roger Backhouse and Steven Medema correct certain economists’ view on the assumptions and beliefs of the “Cambridge School” welfare economists, such as Alfred Marshall and A.C. Pigou. As it turns out, these economists were often just as skeptical of government as anyone else! The same is true of modern economists. It’s simply not true that any economist assumes: (a) apolitical politics;1 (b) no human imperfections; (c) with more information than markets.

I do agree with, for example, Peter Boettke when he suggests something along the lines of some economists do not take public choice problems as seriously as they should. But, the idea is that the margin at which the costs of applying government-skepticism are higher than the benefits are different for different economists, which is saying something much, much different to what Boudreaux is claiming. Boudreaux’s post presents these scientists as completely unreasonable, making obvious mistakes when drawing conclusions from their beliefs, but this simply is not the case. What does exist is reasonable  disagreement on where public choice and radical ignorance problems become too relevant to choose collective action over private action, but Boudreaux has nothing to say about this, which is why his argument is unpersuasive.

Why do (some) “free market economists” characterize their relatively “pro-interventionism” peers so uncharitably? I don’t think there is any intention of wanting to mislead, or any purposeful deceit in any sense. Rather, I think that free market economists (including me) are much more skeptical of government than the mean, and that the margin at which we draw the line (delineating the proper functions of government, which many libertarians think is zero) is, in absolute terms, very far from that mean. We are so biased — and I use this term in a neutral (statistical) sense — that even the average opinion on government seems unreasonable. Given that some libertarians (not Boudreaux, of course) like to call others “sheep,” I don’t think I’m that far off.

In the introduction to The Better Angels of Our Nature,2 Steve Pinker channels his inner Tversky and Kahneman to explain the average person’s estimate of the probability of crime. He argues that because of the increasing quality of communication technology, we simply hear, watch, and/or read more crime than we used to. While crime has actually decreased over time, the average person today is likely to over-estimate the probability of crime, and even be prone to the belief that crime has increased over time. If someone were to ask us to estimate the probability of, say, murder, because examples easily come to our head — thanks to the news we read, watch, and listen to —, we will guess that probability as being higher than it actually is, maybe even by a wide margin.

The case is the same with government failure, and this is especially true of libertarians. We tend to choose our news sources based on how close their views fit our own, whether we think so explicitly or not. I am someone who thinks of themselves as being open-minded, and open to alternative views. I try to organize my blog roll, to the right, around this mantra. But, I still have more libertarian blogs than I do non-libertarian, and when it comes to actually reading what’s on my blog roll, I tend to choose libertarian over non-libertarian posts. I have been reading more non-libertarian material recently, but my views have changed during that time — in what direction does causality run? Some people rather read Lewrockwell.com, the Wall Street Journal, or Forbes, rather than the New York TimesJacobin magazine, et cetera. If we think that some source of information frequently produces bad information, why would we want to read it? Selection bias has reasonable causes. But, if what we read produces 10x more articles on government failure than any other source, we are probably going to overestimate the relevance of government failure.

Pinker also argues that our standards on crime have significantly grown over time, and the same is true of politics. Our political institutions have gone through tremendous improvements. Hoppe aside, most of us rather live under developed democratic institutions than under a monarchy or dictatorship. We recognize that modern governments are more exchange-based, and less extractive. This is not left-liberal opinionating; Buchanan’s The Calculus of Consent is entirely on political exchange in a representative democracy (the other side of public choice theory that isn’t invoked as often by “free market economists”). Thus, the standards to which we hold government are much higher today than they were 100+ years ago. And, this is a good thing! It means governance has improved.

I am skeptical of government. I think public utilities should be turned over to the competitive market. I think the banking industry can be “deregulated” (or, that private regulation is superior to public regulation, in this case). I am not saying libertarians and other “free market economists” should become government-lovers. What I’m saying is that we need to map our own intellectual position in reference to that of others, and realize that we are the ones close to an extreme. We are the ones who are most likely to overestimate the probability of bad governance (granted, there are many who will underestimate that probability). Thus, when it comes to having intellectual discussions on these problems, we should be more open to what others have to say and less trigger-happy to make uncharitable interpretations of their position.

It’s not that many economists assume governments are perfect, it’s that many “free market economists” assume governments are completely broken.

Addendum: One last attempt to frame my point. A common complaint leveled against a large chunk of “mainstream” economists — I, for example, critiqued Mark Thoma on this topic — is that perfect competition should not be the assumed standard by which to judge markets. The reason markets work exist independently of perfect competition: the institutions which allow markets to overcome problems of the unknown unknown, information asymmetries, externalities, et cetera. The same criticism can be turned around, however. Maybe some libertarians judge government by the unfair standard of perfect governance. Of course governments will fail, but we also need to look at where, and how, they work.

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Notes:

  1. I’m actually not sure what Boudreaux means by “apolitical” politics. I don’t think “political” decision-making is necessarily discoordinating. Certainly, the process of vote trading will have some “political” aspect to it — there has to be a bargaining process between politicians, after all —, but vote trading can be Kaldor-Hicks optimal. It was none other than James Buchanan who made this argument.
  2. I temporarily abandoned Pinker’s book, in favor of Piketty’s Capital in the Twenty-First Century. I read both books’ introductions, and I thought Piketty’s was the most interesting.

Why Do Large States Exist?

Before answering the question in the post title, I will provide a background. By the way, I have made this point before. One problem with blogs is that old posts are buried over time, and it’s rare that someone stumble upon an old post and revive it. Maybe that’s not so much of a problem, because it allows the point to be repeated later, but after the idea has matured for a little while longer.

Suppose we could distinguish between two polar opposite forms of governance: extraction- and exchange-based. Let the variable g represent the total number of people whose ends are served through political institutions; let n represent the total number of people within that society. On one pole, g = 1 (and n > 1), so that the political process serves only that one person’s end, and on the other pole g/n = 1, which is what I call perfect pluralism. Extractive institutions, where g/n is considerably less than one, allow a minority to fulfill their ends at the expense of other, non-represented (n–g), members of society. Under exchange-based, or liberal, political institutions, a multiplicity of ends are served — in the same sense that markets serve a multiplicity of ends.

The reason I make the distinction between extraction- and exchange-based societies is to frame my point within a world where only exchange-based institutions exist. Not necessarily perfect pluralism, but somewhere along that spectrum where we can all agree that the government in question is “not so bad.”

Would large states exist? There are some reasons that they would, and they involve internal economies of scale. Internal economies exist when marginal cost is below average cost, so that average cost decreases as “the firm” produces more output. The common example is a firm that faces high fixed costs, so that the larger total output the more finely distributed those fixed costs are. In the study of market structures, internal economies are important, because their existence implies a force that favors larger over smaller firms. That is, all else equal, the market will be characterized by a relatively smaller number of larger firms (where there are no internal economies, we expect relatively more firms, which are smaller in size). The same is true if we swap “governments” for “firms.”

Before moving on to the important part of the post, I should comment on the empirical status of public goods and, more generally, “collective action” problems. Some people think roads are public goods, many others do not. Some people think there is some public good aspect to the provision of security, others do not. This post is not about which goods are public goods and which aren’t. I am talking on a more abstract level. I’m asking you to accept that there may be such a thing as a public good, and that if these goods exist then some of them differ in the requirements to provide them (including fixed and marginal costs). Any examples I use are for the purpose of illustrating the point alone. I acknowledge that, for example, it is debatable whether roads are really public goods, despite using them as examples. And, I hope that the reader generalize the points I make using specific examples.

There are some “collective action” problems that are cheaper to solve by larger governments. Take the provision of security. To simply, let’s assume that the only form of security is a standing army. Standing armies require large fixed costs, such as military installations. Inputs, such as equipment, are also often cheaper in bulk (the suppliers also benefit from internal economies). The probability of internal economies of scale is very high. Governments that provide security, then, are bound to be large, to exploit these economies of scale.

Another example — maybe one that is a little easier to swallow — is an upper order of a justice system. Suppose that there are many local courts, whether private or public, and these interact with each other (because, for instance, one association’s client attacked another association’s client). There will be an incentive to appeal to a higher order of rules, or a common standard between local courts, if you will. These orders might be like nested circles, where there are many of them — similar to what a modern court system looks like in a developed country. Establishing these levels require some fixed cost, but the marginal cost of extending the standard to new courts is very low. And, the benefits to an overarching standard increase as the number of people who abide by it rises: a network effect. These are related to internal economies, and the consequence is the same.

When exchange-based governments increase output, the implication is that they are appealing to a larger number of peoples’ ends. If g/n is approaching 1, then close to all of these people will be involved in the decision-making process. When there are internal economies of scale, what we should expect — in the context of exchange-based governments — are large governments that involve large quantities of people in the decision-making process. Using democracy, because that’s the most inclusive form of governance that we know of at this moment, when there are internal economies we should expect large democratic governments.

The truth is that there can be a broad range of goods provided by government. Some of these might have large internal economies, others may have no internal economies. A government that has a comparative advantage in producing one good may not have a comparative advantage in producing another. What this leads to are several governments, or several levels of governance, where each level specializes in producing a certain range of goods. This is exactly what modern representative governments are moving towards. Take the United States: we have local governments at several levels — city, county, and state, for example — and a Federal government. Each of these have their own range of services they provide, and they even have their own, sometimes different forms of funding. So, abstracting from the details, institutions of governance in a world where g/n is relatively high look remarkably similar to those which exist today in much of the developed world.