Silly Things Nobel Prize Winners Say

21 August 2006 at 2:05 pm 8 comments

| Nicolai Foss |

It is comforting to us ordinary mortals that Nobel Prize winners in economics have contributed their share of nonsense.  Here at O&M we hope to make the Silly Things etc. post a regularly occurring feature. Today’s quotation is from Douglass C. North’s recent Understanding the Process of Economic Change (2005: 122):

Economists of a libertarian persuasion have for some time labored under the delusion that there is something called laissez faire and that once there are in place “efficient” property rights and the rule of law the economy will perform well without further adjustment. The scandals involving Enron, Dynergy, WorldCom, and others in 2001-2002 should have laid such a delusion to rest.

Entry filed under: - Foss -, Classical Liberalism, Ephemera.

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8 Comments Add your own

  • 1. Sean  |  22 August 2006 at 12:41 am

    For us simple mortals you’ll have to explain what make the statement so silly. I certainly wouldn’t consider the listed corporate scandals to be because of libertarian or laissez faire economics. I think I have a sense of where you’re going, but I want to know if I’m on the right track.

  • 2. Nicolai Foss  |  22 August 2006 at 12:50 am

    Hmmm, where to begin? Associating “laissez-faire” with corporate scandals is silly (as you point out). So is the critique of libertarians in the first sentence: If indeed property rights are efficient, the economy _will_ perform well etc. What makes this argument particularly strange is that North himself talks about “efficient property rights” (in the same book, in fact). Further, efficient property rights would (at least in one interpretation) have ruled out corporate scandals, so the whole argument is self-contradictory.

  • 3. Peter Klein  |  22 August 2006 at 9:46 am

    Moreover, as we’ve discussed on this blog before (e.g., https://organizationsandmarkets.wordpress.com/2006/05/28/ken-lay-local-boy/), Enron was hardly a creature of the free market, but rather the unsurprising product of a labyrinthine regulatory structure and a highly politicized energy industry.

  • 4. Joe Mahoney  |  22 August 2006 at 3:01 pm

    Demsetz (AER) 1967 maintained quite optimistically that in well-functioning market systems (scarce resources are owned by someone; property rights are exclusive rights; and transferability from low to high yield uses works smoothly) property rights would evolve toward economic efficiency.

    Libecap (1989) in CONTRACTING FOR PROPERTY RIGHTS makes clear that swift institutional responses to large common pool loss problems cannot be taken for granted. Disribtuional conflicts inherent in any new property rights arrangement can block, or critically constrain, the institutions that can be adopted.

    North (1981, 1990) argues that rulers devised property rights in their own vested interests, and transactin costs resulted in typically inefficient property rights prevailing. As a result, it was possbile to account for the widespread eixtence of property rights throughout history (and in the present) that did not produce economic growth. The coercive power of the state has been employed throughout most of history in ways that have stymied economic growth.

    Demsetz (1967) characterizes the fomulation of decision making with regard to property rights solely in terms of private benefits and private costs. Such a theory in some ways misses the point. The theory does not deal with the free-riding problems that plague group decision, nor is there any attempt to model political processes.

    The main point of North in my judgment is not silly at all. A rudimentary knowledge of economic history or modern economic systems rules out the neoclassical economic theory that property rights necessarily evolve toward efficiency. Neoclassical predictions, near enough, have been falsified. At the least, Demsetz’ optimistic neoclassical model of the evolution of property rights would need to come to terms with interest-group theory of legistlation and government.

  • 5. Peter Klein  |  22 August 2006 at 4:03 pm

    Joe, I certainly agree that we cannot assume that property rights necessarily evolve toward “efficiency,” in the naive Chicago sense of efficiency. Most of the modern literature on the evolution of the common law, e.g., by Paul Rubin, rejects precisely this claim. (Even though Rubin himself was one of the pioneers, in the 1970s and 1980s, of the efficiency-of-common-law argument, along with Posner.)

    As for North, I don’t necessarily object to the first of the two sentences quoted above (though it’s unclear, out of context, exactly what he means by “perform well without further adjustment”). But I do find the second sentence, with its gratuitous invocation of Enron etc., to be a non-sequitor.

  • 6. Nicolai Foss  |  22 August 2006 at 8:45 pm

    Joe, You are right that North’s overall point “is not silly at all.” All libertarians would agree with his point on how the state has usually “stymied economic growth.” However, the specific way he argues in the cited passage is, hmmm, strange, not just because of the Enron association, but also because it seems to suggests that libertarians “labor under the delusion” that the Coase theorem is descriptive of the real world. I know of no libertarians who hold such a position.

  • 7. Joe Mahoney  |  23 August 2006 at 9:26 am

    As always, Nicolai, you absorb ideas with such clarity — probably from hanging around Kirsten Foss so much !

    In the absence of transaction costs, markets will efficiently establish and allocate property rights (Coase, 1960), but in the real world of positive transaction costs (such as with asymmetric information and distributional conflicts) the unfettered market does not necessarily lead to effiiciency.

    My interpretation too is that North suggests that libertarians labor under the delusion that the Coase theorem is descriptive of the real world. Since you know of no libertarians who hold such a position, I now understand your major objections to North’s statement. (Also, the Enron invocation does SEEM like a non-sequitor, as Peter notes)

    It’s nice to learn together in conversation.

  • 8. Professor Porter  |  2 July 2015 at 8:34 pm

    I have three terminal degrees, so let me spell it out:

    Baggers be teatarded!

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