What I believe now, part 2: strong imperfection

What I mean by “strong imperfection” is that human beings and their societal arrangements are very far from perfect. We are nowhere close to utopia, and we cannot see how to get there.

A major reason for this is lack of knowledge. We know today much more than we knew one hundred years ago. It seems reasonable to expect that in another hundred years, today’s level of knowledge will seem low. If we look at all of the past beliefs that today seem wrong-headed, we should be hesitant to commit to what we believe now. On this topic of what we do not know, check out the econtalk podcast with Russ Roberts and Michael Blastland.

The implications of this are:

1. We should be humble about predicting the consequences of public policies. In an economics textbook, a single “market imperfection” is shown in isolation, with the implicit assumption that everything else is perfect. Under those assumptions, the right tax, subsidy, or regulation can reliably produce improvement.

Most economists are familiar with the “theory of the second best,” which points out that trying to fix one problem, when there are other problems or constraints, can make things worse. This is a useful concept, but it only scratches the surface of strong imperfection.

2. We should welcome trial-and-error learning. The economic and social progress we have made is largely due to trial and error, not central planning. Because of strong imperfection, we know that many flaws and problems still exist. It is likely that solutions will come from trial and error going forward, just as in the past.

3. We should try to limit the number of personal flaws that we see as inexcusable. Both as a society and as individuals we should try to extend tolerance and forgiveness. Given our current state, I do not think we can do away with prisons, but I think we should be aiming in the direction of limiting their use. I also think that we should be reducing the number of “firing offenses” in the work place, not adding to them. As individuals, we should aim to reduce the set of excuses for cutting people off as friends.

4. We should avoid the “nirvana fallacy,” which involves comparing the current state to a perfect state. The most realistic change is likely to be from an imperfect current state to another imperfect state.

5. We should resist becoming Manichean. The motives of opponents are usually not as bad as we are inclined to make them out to be.

Source: What I believe now, part 2: strong imperfection

Edward Glaeser’s “Four Freedoms” Strategy for Revitalizing American Capitalism

Harvard economist Edward Glaeser is one of the world’s leading experts on housing, urban development, and economic mobility. In a compelling recent article published in the City Journal , he lays out a “four freedoms” strategy for revitalizing American capitalism by expanding opportunity for the young.

Source: Edward Glaeser’s “Four Freedoms” Strategy for Revitalizing American Capitalism

The first of the four freedoms is the freedom to learn, which is being fought by, of all entities, the teachers’ unions.

The other three are, stronger right to work, greater freedom to sell and to launch new businesses, and freedom to build.

Quotation of the day on socialism as a machine for empowering insiders…

…. is from Edward Glaeser’s article “ How to Fix American Capitalism “:

What many young people today don’t realize is that socialism is a machine for empowering insiders. Few insiders have ever been rewarded more assiduously than the nomenklatura of the Soviet Union. Few governments have been as gray—in every sense of the word—as the Brezhnev regime. A vast expansion of the American government, as imagined by today’s Democratic Socialists, would create its own privileged elite.

From its inception, by contrast, capitalism was designed for outsiders. Its original apostles, such as Adam Smith, argued that entrepreneurs needed freedom from the royal regulations that limited trade and the formation of new enterprises. When the government controls decisions to work or to start a business, political pull becomes a prerequisite for success. The whole point of economic freedom is that all people—not just the connected—can use their talents to help themselves and, potentially, to change the world.

Source: Quotation of the day on socialism as a machine for empowering insiders…

YOU’RE GOING TO NEED A BIGGER BLOG: What Pope Francis’s Attacks on ‘Free Markets’ and ‘Trick…

YOU’RE GOING TO NEED A BIGGER BLOG: What Pope Francis’s Attacks on ‘Free Markets’ and ‘Trickle-Down Economics’ Get Wrong . 1. Blaming Free-Market Capitalism for the COVID-19 Crisis This is probably Pope Francis’s weakest argument of all.

Source: YOU’RE GOING TO NEED A BIGGER BLOG: What Pope Francis’s Attacks on ‘Free Markets’ and ‘Trick…

Why Socialism Failed

The failure of socialism in countries around the world can be traced to one critical defect: it is a system that ignores incentives.

In a capitalist economy, incentives are of the utmost importance. Market prices, the profit-and-loss system of accounting, and private property rights provide an efficient, interrelated system of incentives to guide and direct economic behavior. Capitalism is based on the theory that incentives matter!

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The strength of capitalism can be attributed to an incentive structure based upon the three Ps: (1) prices determined by market forces, (2) a profit-and-loss system of accounting and (3) private property rights. The failure of socialism can be traced to its neglect of these three incentive-enhancing components.

FEE.org

The price system in a market economy guides economic activity so flawlessly that most people don’t appreciate its importance. Market prices transmit information about relative scarcity and then efficiently coordinate economic activity. The economic content of prices provides incentives that promote economic efficiency.

Socialism also collapsed because of its failure to operate under a competitive, profit-and-loss system of accounting. A profit system is an effective monitoring mechanism which continually evaluates the economic performance of every business enterprise. The firms that are the most efficient and most successful at serving the public interest are rewarded with profits. Firms that operate inefficiently and fail to serve the public interest are penalized with losses.

A third fatal defect of socialism is its blatant disregard for the role of private property rights in creating incentives that foster economic growth and development. The failure of socialism around the world is a “tragedy of commons” on a global scale.

The Value of the Price System is Priceless

(Don Boudreaux) Tweet In my latest column for AIER I again sing praises that cannot be sung too often – namely, the praises of market prices . A slice: This system of prices and wages conveys reasonably reliable information to each individual about the consequences that will be experienced not only by her, but also by other people – most of them complete strangers – as a result of her choice of how to use her resources.

Source: The Value of the Price System is Priceless

The only good kind of socialism

There’s been a lot of talk about socialism in this election cycle. The people pushing for it assure everyone that they’re not talking about socialism as seen in the Soviet Union or Venezuela. Instead, they’re promoting “democratic socialism”. But what does that even mean?

Oxford Dictionaries—whose slogan is “Language Matters”—defines socialism as “a political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.” It offers these terms as synonyms: leftism, welfarism, progressivism, social democracy, communism, and Marxism.

Maybe now we’re getting somewhere. Sounds precise, right? Hardly. What is meant by “the means of production, distribution, and exchange should be owned or regulated by the community as a whole”? Should a convenience store have to put to some public vote the decisions about what to stock the shelves with or whom to hire for the night shift?

And what about this “regulated by the community as a whole” stuff? Have you ever known a regulatory body to be everybody in town or all 325 million people in the country? Don’t such bodies end up being some handful of people with political power?

The XYZ’s of Socialism

It occurs to me there is a form of socialism where the entire population votes on these things. My local grocery store changes how it stocks its shelves based on the votes of every person in the entire country, although most of these people vote “I don’t care”. The tally of these votes, received almost continuously, tell the store owner which stock items to keep, which to buy more of, and which to get rid of. And if enough people care about who’s working the night shift, the store owner hears about that too.

And this is perfectly democratic. It’s much more democratic than our politics are, since the voting is not restricted to an election cycle or a voting day. Furthermore, the store owner has an incentive to seek more votes, so he can make better decisions. Store owners who ignore votes wind up losing business.

So when all is said and done, the very best form of “democratic socialism” is what we call “capitalism”.

Capitalism: Folks Doing Stuff

Although the term “capitalism” has long worked as a shorthand signifier for a market economy, there is a sense in which to use it at all is to accept the socialist’s premise that a market economy is a consciously created system, manipulated by its creators for their own material ends. But it isn’t that. A socialist economy is, by definition, a system—it must be created, planned, vigilantly monitored and forcefully regulated in order to function. But a market economy has no plan. It begins to exhibit the qualities of a system when its wealthiest actors are allowed to bend governmental policies to their advantage, but that is a vastly different thing from a system deliberately designed for stated goals from the beginning.

We will surely go on using the terms “socialism” and “nationalism” and “democracy” without knowing quite what we mean by them. We can hardly do otherwise. But at least those things exist. “Capitalism,” in the sense in which its leftist critics use the term, never did.

Wall Street Journal

The problem with the term “Capitalism” is that it was a label bestowed by opponents of capitalism, or at the very least, supporters of the planned economy alternatives. They approach the issue from the belief that the economy must be designed, and must have a designer. As a result, they bestow upon capitalism the assumption that it, too, is designed and planned.

It’s not. It’s just the result of folks doing stuff.

Quotation of the Day…

(Don Boudreaux) The principal job – certainly the first job – of the economist is to explain to the general public how economic order arises spontaneously, guided largely by market-determined prices. This job, I believe, is a high calling. Without a correct understanding of the emergence and maintenance of economic order, the typical person supposes that the economy is created and run consciously, and the only question then being whether the conscious directors of the economy are to be private parties or government leaders (with the former always acting only to promote their own narrow interests, while the latter at least have the potential to act to promote the public interest).

Source: Quotation of the Day…