Pur Autre Vie

I'm not wrong, I'm just an asshole

Wednesday, July 06, 2011

Lifted from the Comments

Sarang links to this old Yglesias post, one that I also find compelling. For now I'm just putting the link up here where everyone will see it (also it is hard to click through in the comment that Sarang left).

Monday, July 04, 2011

Progress and the PPF

The production possibility frontier is an important concept in economics, but I would like to apply it a bit more broadly. First, a quick explanation.

The idea of the production possibility frontier is to chart a line showing the trade-off between two goods. For instance, imagine that a society must choose between defending itself (guns) and feeding itself (butter) (this is of course a classic example). One might put a point on the y axis describing the output of guns if the society puts every possible spare resource into gun production, and a point on the x axis describing the output of butter if the society puts every spare resource into butter production. Then one connects the points with some sort of line or curve, describing every combination of production of guns and butter that could potentially be achieved by the society (hence the name production possibility frontier).

So far so good. But a society may be operating within its frontier - that is, producing less of both guns and butter than it theoretically could. This may be because of bad social policy (too high a minimum wage, say).

Now, to extend this beyond economics, think of the two kinds of policy changes one might want to effectuate. One is a movement to the northwest or southeast - that is, trading away one good for another. Another is a movement to the northeast (or, I guess in theory, the southwest) - an improvement in the production of both goods.

And you can put almost anything on the axes. It could be redistribution vs. economic growth, or environmental protection vs. economic growth, or whatever. "Centrists" tend to search for policies that are "non-ideological" or "non-partisan" in that they eliminate waste and move us to the northeast (toward the frontier) (of course, one still has to choose whether to move more north or more east - ideology can never be eliminated entirely). "Partisans" deny that there are any "easy answers" and want to trade away one good for another (move to the southeast or northwest).

I don't have much more to say than this - I just think it's a useful framework for thinking about political issues. You should ask yourself, "Would it be feasible to move toward the frontier, or will any gains for my side come at the expense of the other?" But it's also important to remember that moving toward the frontier may be all but impossible (which effectively means that we are at the frontier, given what is under our control). This arises when some group can block any efficiency-enhancing measure that threatens its interests.

Further Thoughts on the Ideological Division of Labor

Earlier I posed about the social division of labor and how different ideologies approach it. Already Sarang has posted a comment about cross-cutting preferences, noting that he is hostile to non-inclusive institutions. This is an important point. Part of conservatives' taste for family and church is that these institutions are much more tradition-bound and identity-based than the state. An important element of conservatism is its taste for glacial, Burkean change and its skepticism of deliberate, rapid change. One might go "meta" here and say that liberalism is preferable where the need for change is urgent and compelling (as in the civil rights movement), and that conservatism is preferable where there is much path-dependency and much to be lost by abandoning tradition (as in property rights vs. collectivism).

So there is the Burke point, and there is also the question of cosmopolitanism. Liberals tend to be universalist and to seek diversity and pluralism - these are values that are generally (but by no means always) promoted by a strong, centralized, interventionist state. Conservatives tend to have more taste/tolerance for nationalism and other forms of group-identification, and are baffled by the idea of diversity as a virtue. So as far as I know, conservatives have no real problem with redistribution that occurs within a church (everyone tithes, or whatever, and some of the money goes to feed the poor). Liberals think this is fine, but insufficient, because it excludes non-church-members and imposes various intrusive behavioral controls. To some extent it's a question of choose-your-coercion: would you rather be taxed, against your will (but subject to democratic controls), to provide a social safety net? Or would you rather be ostracized unless you attend church, donate money, obey religious strictures, etc.? (To some extent, libertarians need to confront the reality of these trade-offs, though of course they are entitled to propose alternatives, including a let-them-starve approach.)

So one might argue that the division-of-labor question really comes down to these motivational questions of discrimination, nationalism, religiosity, etc. In that case, one could imagine a realignment as society changes. A lot of people may find themselves on the conservative side once gay equality has been accomplished, for instance, because at that point there may not be any real danger of discrimination no matter what institution controls any given social function (except I guess churches?).

I'm not sure what to make of this overall - it's clearly correct on some level to say that the choice of institutions stems from preferences about tradition, nationalism, etc., but at any given moment it does seem useful to ask the division-of-labor question.

The Surplus(age) of Lawyers

The first law school I was admitted to was Washington University in St. Louis, an excellent institution in a tastefully named building. When I visited, the dean gave a brief talk to prospective students. He argued that what is unique about the law is that it is concerned with justice, that lawyers are essentially creators of justice in the world.

I have more sympathy for this point now than I did then, but I still think it misses the mark. What is remarkable and valuable about law is that it is basically the way that our society allocates surplus. A well-functioning legal system provides clear, predictable allocation of wealth and thus facilitates markets and cooperation. This, in turn, facilitates the creation of "surplus" from exchange and from investments in technology, cultivation, etc.

What I think people often miss is the pervasiveness and the difficulty of the surplus-allocation question. Practically all social activity (defined broadly to include market interactions) creates, or seeks to create, some kind of surplus, and unless you have good mechanisms to allocate that surplus, much of it will be squandered in various forms of rent-seeking. By rent-seeking I mean activity that tends to redistribute wealth but not to create it, such as stealing.

The law is not strictly necessary (or even relevant) where people interact frequently, because non-legal social mechanisms control behavior (the central point made by Robert Ellickson's Order Without Law). But many interactions are anonymous or sporadic, and often there is enough at stake that the normal non-legal "punishment" (loss of access to the market) is not strong enough to control behavior. The law can also provide a framework (such as spectrum licensing) to create a market where none would likely emerge from decentralized behavior.

And even pedestrian law (all law is pedestrian law) plays an important role. Contracts, obviously, but also torts, wills, tax, bankruptcy, maritime law, etc. etc. Lawyers are engaged in the allocation of resources, whether before- or after-the-fact. Quite often it is sordid, and it is far from an exact science (the extent of both legal certainty and legal uncertainty is greatly exaggerated - if this makes any sense). But lawyers, great and small, have a vital role to play in building a good, prosperous society.

And this is notwithstanding that many lawyers are engaged in what is essentially rent-seeking. First, what is rent-seeking from the individual's perspective may be surplus-creating from the social perspective (as when a plaintiff sues a tortfeasor and puts the fear of God into other potential tortfeasors).

But there is such a thing as pure, indefensible rent-seeking by lawyers. This is the challenge of the legal system, to provide the benefit of the law in facilitating surplus-creation, while minimizing the cost of the law in the form of rent-seeking and diversion of resources (primarily the diversion of smart people into the law). It is emphatically not a waste to send smart people to do this job, but it is a shame when the law induces legal arms-races to no good end, and at great cost.

And this is what I think the deans of law schools should be telling law students. We are engaged in an ancient and noble profession, one that is fundamental to a good society. But the dark side of law is its potential for surplus-destroying, rent-seeking behavior. System-designers are responsible for the overall incentives in this regard, but any system will depend to some extent on being implemented by well-trained lawyers who understand the difference.

The Regulatory State

I think that the reaction of Keynes to The Road to Serfdom, as recounted in Skidelsky's John Maynard Keynes: Fighting for Freedom 1937-1946, essentially captures the modern political dilemma, and it is particularly applicable to regulation (which is only a subset of government intervention). Recall that Hayek argued that when we intervene in decentralized, free-market decision-making, we are on a slippery slope, at the bottom of which is a dystopian statist nightmare. (As an aside, the failure of the western world to abolish government intervention or to plummet into serfdom is strong evidence of an angle of repose.)

Here is Keynes in response (I draw this from Skidelsky, who highlights the passage on p. 285 of Fighting for Freedom):

You admit . . . that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere, and that the logical extreme is not possible. But you give us no guidance whatever as to where to draw it. It is true that you and I would probably draw it in different places. I should guess that according to my ideas you greatly under-estimate the practicability of the middle course. But as soon as you admit that the extreme is not possible . . . you are, on your own argument, done for, since you are trying to persuade us that as soon as one moves an inch in the planned direction you are necessarily launched on the slippery path which will lead you in due course over the precipice.

Skidelsky says that on this point, "it is game, set and match to Keynes." I am inclined to agree. Empirically, we know that governments can intervene fairly significantly in the economy without dooming their people to poverty, slavery, or whatever. (Though an ardent Hakeyian might argue that it is "too early to say," and that the US, Canada, Australia, and western Europe may yet collapse into a Soviet-style hell - or, alternatively, that we are living in such a hell and suffering from widespread false consciousness. On this account, for some reason we fail to appreciate that cap-and-trade is the moral equivalent of chattel slavery.)

And but so, having fairly convincingly refuted Hayek (at least as to his apocalyptic rhetoric), you can't stop there. Keynes goes on to write about the dangers of planning and the importance of having policymakers who are alert to those dangers.

And this is the thing about regulations. They have the following flaws (my list is not exhaustive):

1. Often they are simply misguided. And because they have the force of law, they can seriously distort markets.

2. They are prone to regulatory capture, in which the regulated entities "capture" the regulators (by hiring them, or because of frequent interaction, or by some kind of reverse Stockholm syndrome or something). Then the regulations are used as barriers to entry and are even used to preempt other legal controls that might be imposed.

3. Even when "successful" (i.e., well-intended and intelligently written), they cumulatively impose a serious cost on doing business that functions like a tax, but a tax that raises no revenue. Resources are devoted to understanding them and testing their limits. Arms races ensue.

4. The cost of regulation is increased by the fact that they must be rigorously (if carefully) enforced. This is because an infrequently-enforced regulation may be far worse than either a fully-enforced regulation or no regulation at all. In the first instance, selective enforcement means that some firms will be penalized and some won't, skewing competition. Perhaps more importantly, if enforcement can be avoided by strategic behavior, then firms will devote resources to avoidance instead of compliance (for instance, hiring lobbyists or disguising proscribed behavior). If enforcement is weak, then competition will sometimes favor evasion over compliance, actually driving honest firms out of business. The same dynamic is in play in the area of tax enforcement - if you "cut" taxes by gutting the IRS, then you raise less revenue, but you raise it in a "lumpy" way - some taxpayers pay the full rate, some pay nothing. Better to cut taxes across the board and make everyone pay. Greece appears to have fallen into a horrible equilibrium in this regard.

And so here is the synthesis:

1. Regulations are indispensable in modern life.

2. Regulation is problematic and very difficult to get right.

3. The only reasonable approach is to use some combination of restraint in imposing regulations and effort to recognize and address their known problems. The absence of regulation is not an option, and the indiscriminate use of regulation may be even worse.

So the real ideological battle should be about the former balance - regulatory design vs. regulatory forbearance (an argument in which conservatives have much to say that is valuable - and even when conservatives lose the argument, an appreciation of their critique can enhance regulatory design). Unfortunately, political rhetoric almost always seems to center on the second (untenable) choice between unbridled regulation and no regulation at all.

The Ideological Division of Labor

Modern liberals and conservatives fundamentally disagree about the following things (there is a lot of overlap, and the first item basically subsumes the rest):

1. The "division of labor" among social institutions such as the state, the church, the family, the market, the courts, and labor unions.

Liberals favor the state, the courts, and labor unions. Traditional conservatives favor the church, the family, and the market (to some extent). Libertarians favor the market and the courts (though mostly inasmuch as the courts defend the market and guard against majoritarian intrusion on liberty).

None of these is a perfect social institution, and so a sort of "meta" approach is to try to achieve some kind of optimal allocation based on their relative strengths and weaknesses (but this is fundamentally a question about values - more on this later). "Fundamentalists" of various stripes tend to be blind to the shortcomings of their preferred institutions. An important strain of modern conservatism is its critique of the state, while an important strain of modern liberalism is its recognition of the extent to which well-functioning states and courts are necessary for markets to work.

2. The extent of redistribution.

I don't have much to say about this at the moment, but it is obviously an important (arguably the most important) area of disagreement. I have phrased it in a somewhat conservative-friendly way, in that the "re-" prefix implies that there is some kind of natural pre-existing distribution of resources that is disturbed or perverted by state action.

3. The extent of regulatory control of economic activity.

I will address this in my next post. The basic idea here is that regulation is absolutely necessary, and yet it is prone to serious flaws that can make the cure worse than the disease. Implementing an effective regulatory system is one of the biggest challenges of modern governance, and countries that are good at it will benefit tremendously.