Posts filed under ‘Classical Liberalism’
Can Markets Be Designed?
| Peter Klein |
A fundamental distinction between organizations and markets is teleological: organizations are established by specific individuals to achieve specific purposes, while markets emerge, organically, from the bottom up. Carl Menger used the terms “organizations” and “orders” to distinguish these two categories of institutions; Hayek preferred the obscure Greek terms taxis and cosmos. Invoking this distinction does not deny, of course, that there are “organic” elements within firms, or that markets are infused with institutions that are at least partly “designed” (civil law codes, for instance).
What, then, is meant by “market design,” as in designing markets for cadaveric organs, education vouchers, or tradeable emissions permits? Do attempts to do so constitute what Hayek called “constructivist rationalism” or “constructivism,” the belief that we can remake social institutions that have emerged incrementally, over long periods of time, to suit our current whims?
Lynne Kiesling and Mike Giberson have been wrestling with this question over at Knowledge Problem (here and here). How, asks a reader, “does one invoke Hayek in one breath and then speak of ‘designing’ a market in the next while keeping a straight face?” Lynne and Mike offer several responses: (more…)
Private Legal Enforcement in Global Commerce
| Peter Klein |
A new paper by Margaret Blair, Cynthia Williams, and Li-Wen Lin, “Assurance Services as a Substitute for Law in Global Commerce,” describes the market for “assurance services” as private means of enforcing commercial arrangements.
In this article we examine the rapid emergence and expansion of a private-sector compliance and enforcement infrastructure that we believe may increasingly be providing a substitute for public and legal regulatory infrastructure in global commerce, especially in developing countries where rule of law is weak and court systems are absent or inadequate. This infrastructure is provided by a proliferation of performance codes and standards, and a rapidly-growing global army of privately-trained and authorized inspectors and certifiers that we call the “third-party assurance industry.” The growth in the third party assurance business has been phenomenal in the last decade. The business first developed to facilitate making and carrying out private contracts, but in recent years, assurance services are being deployed for purposes that are more appropriately seen as regulatory in nature. Third-party assurance may thus be providing a new institutional structure through which private commercial exchange is being harnessed and regulated for essentially public purposes.
See also Alex Tabarrok on private assurance contracts, which function similarly to enforce contributions to public goods and club goods.
Average versus Marginal: Blowback Edition
| Peter Klein |
Republican Presidential candidate Ron Paul caused a stir recently by suggesting, to the horror of the other Republican candidates, that US foreign policy might have something to do with Muslim anger toward the US. The Bush Administration, of course, maintains that “they hate us for our freedom.” No matter what the US government does, in other words, Islamic extremists will target Americans in retaliation for the Declaration of Independence, McDonalds, and Paris Hilton. (Rudy Giuliani, incredibly, claims he has never even heard of blowback.)
Of course, these explanations are not incompatible. US culture and institutions could, in theory, account for the average level of anti-Americanism in the Islamic world. To explain a specific terrorist act, however, we have to think in marginal terms. What we call “terrorism,” as Robert Pape has brilliantly explained, is a tactic, not an ideology. Whatever his general attitude toward the enemy, the terrorist must choose to attack this target or that, to attack now or later, to select one more target or one less. Even if exogenous US characteristics were responsible for overall terrorist attitudes and beliefs, blowback is probably still the best explanation for specific terrorist acts.
Note that this is an application of a more general point about intrinsic and extrinsic motivation, an important issue for management theory. (more…)
Jewish Economic Theory
| Peter Klein |
Five principles of Jewish economic theory, as described in Judaism, Markets, and Capitalism: Separating Myths from Reality by Corinne Sauer and Robert M. Sauer (forthcoming from the Acton Institute):
- Work, creative activity, and innovation are the avenues through which the divine image is expressed.
- Private property rights are essential and must be protected.
- The accumulation of wealth is a virtue not a vice.
- Man has an obligation to care for the needy through charitable giving.
- Government is inefficient and concentrated power is dangerous.
Sauer and Sauer compare this passage in 1 Samuel to Hayek’s warnings in The Road to Serfdom: (more…)
Paul David on Path Dependence
| Peter Klein |
The second issue of Cliometrica features essays by heavy hitters Paul David, Eugene White, and Angus Maddison. David’s contribution is a summary and overview of his work on path dependence. Note the rather immodest title: “Path Dependence: A Foundational Concept for Historical Social Science.” Well. . . . David’s attachment to the QWERTY concept appears as strong as ever, though the facts of David’s examples have been seriously contested, including not only the typewriter keyboard but also the choice between AC and DC power, the VHS format over Beta, and so on. David’s response to his critics here seems surprisingly weak and tentative:
The contention that the process of “market competition” eventually works to rectify the mistakes of profit-motivated agents by harnessing the interests and capabilities of other profit-seekers — who will find opportunities for gain by eliminating existing sources of inefficiency — undoubtedly warrants serious consideration in this regard (see Liebowitz and Margolis 1990; Puffert 2002). But that means it ought not be accepted on faith. Rather the opposite approach, however, seems to be adopted by those who argue that it is implausible to suppose that market incentives will not operate rapidly to eliminate sources of substantial inefficiencies in the production and use of commodities, and that the burden of empirical proof therefore should lie upon those who claim that sub-optimal outcomes of decentralized market-guided choices in the past have saddled subsequent generations with quantitatively significant economic costs.
I hardly think the critics are asking that their revisionist historical analysis be taken on faith! (more…)
Private Provision of Public Goods, Mario Puzo Edition
| Peter Klein |
Nicolai tells me The Sopranos is the most popular show among Danish libertarians. I bet they like the Godfather trilogy as well. What libertarian can resist this classic exchange between Michael Corleone and Kay Adams in the first film:
Michael: My father is no different than any powerful man, any man with power, like a president or senator.
Kay: Do you know how naive you sound, Michael? Presidents and senators don’t have men killed.
Michael: Oh. Who’s being naive, Kay?
The films are terrific, but the original novel by Mario Puzo is even better. (The newer books by Mark Winegardner aren’t bad either.) One of Puzo’s themes, which isn’t emphasized so much in the movies (aside from the opening scene in the first film), is how the Mafia functioned as a kind of private government, providing protection for people, primarily poor immigrants, who were refused protection from the inefficient and corrupt formal legal authorities. (more…)
More on Legal Origin
| Peter Klein |
Back to the debate over the role of legal origin in economic performance (see here and here). Stefan Voigt proposes an interesting natural experiment: In many international transactions parties can choose the contract-law regime governing their relationship by designating a particular national legal system in a mandatory arbitration clause. As expected, English common law is most frequently chosen. Surprisingly, however, Swiss (German civil law) and French civil law are chosen almost as much. Unfortunately the data do not permit an econometric analysis of legal-regime choice that controls for other possible influences. Still, the fact that civil-law codes are chosen so often raises questions about the view of LLSV (not to mention Hayek, Leoni, and many others) that common law is fundamentally superior to civil law.
The Dark Side of Capital Pooling
| Peter Klein |
The great advantage of joint-stock companies, whether public or private, is the ability to create value by pooling capital. Unfortunately, capital pools can also be channeled to activities that destroy value. (HT: Against Monopoly.)
Political Instability and Financial Development
| Peter Klein |
The latest salvo in the debate over the role of legal origin in financial-market performance comes from Mark Roe. In “Political Instability and Financial Development” (with Jordan Siegel) he argues that political instability is a more important determinant of financial development than trade openness, latitude, and, particularly, legal origin as modeled by LLSV. “Surprisingly, despite the widespread view in the law and finance literature of legal origin’s importance, not only is political stability highly robust to legal origin, but, for many years, our results for key indicators and specifications neither show Common Law to be consistently superior nor French Civil Law to be consistently inferior to other legal families in generating strong financial development outcomes.”
See also my “Politics and Productivity” on the interaction between political institutions, economic freedom, and national economic performance.
Does Hayek Still Matter?
| Nicolai Foss |
I may be wrong, but I have the feeling that the thought of Friedrich von Hayek is receiving less and less attention. This worries me for personal reasons — I wrote my Master’s Thesis in economics in 1989 on Hayek’s business cycle theory, and his work has continuously served as an important source of inspiration to me (e.g., this paper) as well as to countless others — and for the reason that Hayek’s thought is too important to vanish in influence. (more…)
Unintended Consequences and the Social Sciences
| Nicolai Foss |
According to a prominent tradition in economics and classical liberal thought, the social sciences (particularly economics) are primarily concerned with explaining unintended phenomena, whether more temporary outcomes, such as market phenomena, or more permanent ones, such as institutions, in terms of the intentional actions of multiple interacting agents. In contrast, the social sciences are not really taken up with explaining individual action per se.
This is an understanding, or perhaps even doctrine, that is perhaps most famously associated with Hayek, but it has also been echoed by Ludwig Lachmann (among Hayek’s contemporaries) and by many modern Austrians, as well as by philosophers, notably Karl Popper, Michael Polanyi, and Edna Ullman-Margalitt, and (non-Austrian) economists such as Andrew Schotter (in his 1981 book on institutions). (Of course, the notion of unintended consequences itself is by no means unique to classical liberal economists but can be found in the thought of most major thinkers on social science and political philosophy).
However, there are several problems with the doctrine that the social sciences are mainly about unintended consequences. Here are two that seem to have not been previously noticed: (more…)
Mel Gibson and Social Category Bias
| Peter Klein |
Back to cognitive biases and heuristics. One interesting and common example is a sort of stereotype or social category bias. To make sense out of complex information about people we often think in terms of clusters of attributes, assuming that individuals possessing one trait in the cluster possess the other traits as well. Economics professors, for example, tend to be logical, systematic, nerdy, and socially awkward. If we meet someone who is logical, systematic, and nerdy, we assume he is also socially awkward, even without knowing anything specific about his social skills.
This came to my mind last fall when when reading about Mel Gibson’s film Apocalypto. Gibson’s Passion of the Christ made him a hero among conservative Christians. In promoting Apocalypto, an action-adventure set during the twilight of the Mayan empire, Gibson was harshly critical of the Bush White House, likening the US invasion and occupation of Iraq to Mayan imperialism and the death of US soldiers to Mayan human sacrifice. In response, the conservative film critic Michael Medved accused Gibson of selling out to “Hollywood liberals.” (more…)
Kicking Some AAS
| Peter Klein |
Bob Sutton may have a clever name with his “No A–hole” project, but here’s an even better one: Kick All Agricultural Subsidies, a.k.a “kickAAS.” It’s a blog, sponsored by the Guardian (UK), seeking the abolition of farm subsidies. Lots of interesting material there.
Reader’s Reports on The Road to Serfdom
| Peter Klein |
A new edition of The Road to Serfdom is coming out this year, positioned as volume 2 of The Collected Works of F. A. Hayek. Like all the volumes in the Collected Works, it includes a new foreword (here by series editor Bruce Caldwell), standardized and corrected notes and references, and previously unpublished supplementary material. This week’s Chronicle of Higher Education features some excerpts from the new material. Here, for example, are the reader’s reports on the manuscript, solicited by the University of Chicago Press in 1943 from Frank Knight and Jacob Marschak: (more…)
Enacting Privatization
| Nicolai Foss |
Here at O&M we have often criticized and poked fun at ideas on social construction and their derived notions in management, such as Weickian “enactment.” Still, it is a fundamental tenet of classical liberalism that ideas matter and matter crucially (although some classical liberals, notably George Stigler, have argued that ideas matter much less than economists would like to think). One crucial area where ideas would seem to have mattered a great deal is privatization (a term that seems to have been invented by Peter Drucker).
In a paper, “Palace Wars and Privatization: Did Chicago Beat Cambridge in Influencing Economic Policies,” just published in the European Management Review, J. Muir McPherson adds to his earlier work with Bruce Kogut (this paper; for a related idea diffusion paper, see this), and examines the influence of “the epistemic community of American-trained economists” (based on the number of non-US, US and Chicago PhD degrees in a given country) on privatization policies. The dataset encompasses self-collected data on 13,422 economists. The statistical methodology is a hazard model. The results indicate a clear impact of the frequency of US-trained economists on the probability of privatization, but it is also noteworthy that among theUS economists, “As Chicago ideas won out . . . the difference between Chicago economics PhDs and graduates from other schools could no longer be detected from the general influence of US-trained economists on the decision to privatize.”
Milton Friedman: Patron Saint of Blogging?
| Peter Klein |
Left to the free market of ideas and instant reader feedback, good writing, quality and reliability in blogging secures a readership and reputation solely on merit. The analogy to “democracy” may be clichéd but the blogosphere is a prime example of Milton Friedman’s credo (“Capitalism and Freedom”) that minimal (or no) regulation and state licensing are best; they are too often a pretext to shut down competition not protect the populace. — Jens F. Laurson and George A. Pieler
I appreciate the sentiment, but am not sure why Friedman deserves the honor. I suspect most bloggers would take Hayek instead (1, 2). (This cynic offers a slightly different take.)
European Entrepreneurship
| Peter Klein |
Europe’s economic problem, writes Nobel Laureate Ned Phelps in last week’s Wall Street Journal, is its lack of dynamism — “how fertile the country is in coming up with innovative ideas having prospects of profitability, how adept it is at identifying and nourishing the ideas with the best prospects, and how prepared it is in evaluating and trying out the new products and methods that are launched onto the market.”
Europe, Phelps argues, lacks the economic culture and economic institutions to encourage dynamism. Europe’s economic institutions “typically exhibit a Balkanized/segmented financial sector favoring insiders, myriad impediments and penalties placed before outsider entrepreneurs, a consumer sector not venturesome about new products or short of the needed education, union voting (not just advice) in management decisions, and state interventionism.”
Man, how simplistic and comical can you get?
Intellectual Property: Who Needs It?
| Peter Klein |
Michele Boldrin and David K. Levine provide a succinct overview of the economic argument against strong IP in the January 2007 issue of the Freeman. In “Open-Source Software: Who Needs Intellectual Property?” Boldrin and Levine argue that open-source developers benefit primarily not from writing code, but from selling complementary services such as support, and that these incentives, not altruism, are responsible for the substantial innovations coming out of the open-source community. They conclude:
[T]he market for software is not unique. Innovation and competition unprotected by patent and copyright have gone hand in hand in other industries, from financial securities to fashion. The message of open-source software is a message for all industries: IP not needed for innovation here.
Posner versus Hayek
| Peter Klein |
Todd Zywicki — what an unfortunate name in a profession where author order is usually alphabetical! — has a new paper with Anthony Sanders, “Posner, Hayek, and the Economic Analysis of Law.”
This Essay examines Richard Posner’s critique of F.A. Hayek’s legal theory and contrasts the two thinkers’ very different views of the nature of law, knowledge, and the rule of law. Posner conceives of law as a series of disparate rules and as purposive. He believes that a judge should examine an individual rule and come to a conclusion about whether the rule is the most efficient available. Hayek, on the other hand, conceives of law as a purpose-independent set of legal rules bound within a larger social order. Further, Posner, as a legal positivist, views law as an order consciously made through the efforts of judges and legislators. Hayek, however, views law as a spontaneous order that arises out of human action but not from human design. . . . This limits the success of judges in consciously creating legal rules because a judge will be limited in the forethought necessary to connect a rule to other legal and non-legal rules and what Hayek termed “the knowledge of particular circumstances of time and place.”
Paul Krugman once described Robert Barro as “esteemed but not revered” among professional economists (borrowing the phrase from a description of Stephen Hawking). Surely the same applies to Posner. Or perhaps it should be “admired but not esteemed.” One of my great pleasures in recent months was sharing a meal with a couple of University of Chicago law professors and listening to them swap Posner stories. Wow.
Do I Need an (Ideological) Affirmation?
| Steven Postrel |
Arnold Kling has proposed that “libertarian conservatives” form an “Ideological Affirmation Task Force” (IATF) and requested comments on an initial draft of such an affirmation. Borrowing the lingo of Internet governance, he calls this an “IATF RFC.” I loosely qualify to be part of the interested group, so here are a few random thoughts, not a systematic treatise, on his first draft (which is a quick read, so you might want to look at it): (more…)
Organizations and Markets 
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