Challenging the increasing momentum toward a nanny state

It seems increasingly relevant so here is a re-run of a February 7, 2009 post, with some updates:

As Obama, Pelosi and Reid accelerate the implementation of statist practices in America - building on what Bush started - it is helpful and necessary to reacquaint ourselves with fundamental economic principles and some specific significant issues animating today's public debate.

FUNDAMENTAL ECONOMIC PRINCIPLES

The 17-blog post series below was originally put together in 2006 and contains excerpts from the writings of Thomas Sowell, Reason magazine, Bruce Caldwell, Friederich Hayek, Milton Friedman, Arthur Seldon, Gordon Tullock, Jane Shaw, Lawrence Reed, The Freeman magazine, Leonard Read, Donald Boudreaux, John Gray, Bertrand de Jouvenel, and Michael Novak, with links to others like Walter Williams, David Boaz, and David Schmidtz:

Part I: What is Economics?

Part II: Myths About Markets

Part III: Why Policy Goals are Trumped by Incentives They Create & the Role of Knowledge in Economics

Part IV: The Abuse of Reason, Fallacies & Dangers of Centralized Planning, Prices & Knowledge, and Understanding Limitations

Part V: The Relationship Between Economic Freedom and Political Freedom

Part VI: More on the Relationship Between Economic Freedom and Political Freedom

Part VII: The Role of Government in a Free Society

Part VIII: The Unspoken, But Very Real, Incentives That Drive Governmental Actions

Part IX: More on the Coercive Role of Government

Part X: The Power of the Market

Part XI: Prices

Part XII: I, Pencil - A Story about the Free Market at Work

Part XIII: It is Individuals - Not the Society, Government or Market - Who Think & Act

Part XIV: On Equality

Part XV: Consequences of Price Controls

Part XVI: The Ethics of Redistribution

Part XVII: What Does "Social Justice" Mean?

No matter how emphatically these politicians rant and rave in their effort to re-write history, they cannot re-write the basic laws of economics. As a Reverend once said, those chickens will come home to roost at some point. The only question is when and how big a price we will pay when it happens.

PRIMERS ON ECONOMICS

As some of the above posts note and as further ammunition for the public debate, these books are excellent primers on important economic topics:

Henry Hazlitt - Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

James Gwartney et al - Common Sense Economics: What Everyone Should Know About Wealth and Prosperity

Milton and Rose Friedman - Free to Choose

Thomas Sowell - Basic Economics: A Common Sense Guide to the Economy

Thomas Sowell - Applied Economics: Thinking Beyond Stage One

An excellent site for articles, blogging, and podcasts on a broad range of economic issues is Library of Economics and Liberty.

Furthermore, the budding public debate in America touches on these significant issues, highlighted below and drawing on the 17 blog posts:

ISSUE #1: GRASPING THE ACTUAL INCENTIVES WHICH DRIVE GOVERNMENTAL ACTIONS

As part of their argument for a more intrusive government, one of the core arguments of the Left is that interventions by government in the marketplace are somehow more high-minded and of purer intent than private sector actions in the same marketplace.

Part VIII in the above blog series describes public choice theory, which explains the fallacy of that world view. While false, it is nonetheless a pervasive view that holds sway in many minds - even if not articulated explicitly - and has to be tackled directly.

Here are some excerpts from Part VIII about government failure:

...Many economics writers and teachers still present economic systems of exchange between private individuals or firms as "imperfect" and requiring "correction" by government. Most teachers of politics, politicians, and political journalists still present government as well-meaning and able to remove such "imperfections."...

In the past many economists have argued that the way to rein in "market failures"...is to introduce government action. But public choice economists point out that there also is such a thing as "government failure."...

...that government is imperfect carries with it two consequences. The first is that imperfections in the market process do not necessarily call for government intervention; the second is a desire to see if we cannot do something about government processes that might conceivably improve their efficiency...

Although public choice economists have focused mostly on analyzing government failure, they also have suggested ways to correct problems. For example, they argue that if government action is required, it should take place at the local level whenever possible. Because there are many local governments, and because people "vote with their feet," there is competition among local governments, as well as some experimentation...

What causes governmental failure?

...One of the chief underpinnings of public choice theory is the lack of incentives for voters to monitor government effectively...the voter is largely ignorant of political issues and that this ignorance is rational. Even though the result of an election may be very important, an individual's vote rarely decides an election.

Public choice economists point out that this incentive to be ignorant is rare in the private sector...he or she pays only for the [purchased item] chosen. If the choice is wise, the buyer will benefit; if it is unwise, the buyer will suffer directly. Voting lacks that kind of direct result...

Public choice economists also examine the actions of legislators. Although legislators are expected to pursue the "public interest," they make decisions on how to use other people's resources, not their own. Furthermore, these resources must be provided by taxpayers and by those hurt by regulations whether they want to provide them or not...Efficient decisions, however, will neither save their own money nor give them any proportion of the wealth they save for citizens. There is no direct reward for fighting powerful interest groups in order to confer benefits on a public that is not even aware of the benefits or of who conferred them. Thus, the incentives for good management in the public interest are weak. In contrast, interest groups are organized by people with very strong gains to be made from governmental action. They provide politicians with campaign funds and campaign workers. In return they receive at least the "ear" of the politician and often gain support for their goals.

In other words, because legislators have the power to tax and to extract resources in other coercive ways, and because voters monitor their behavior poorly, legislators behave in ways that are costly to citizens.

...bureaucrats in government...incentives explain why many regulatory agencies appear to be "captured" by special interests...Capture occurs because bureaucrats do not have a profit goal to guide their behavior. Instead, they usually are in government because they have a goal or mission. They rely on Congress for their budgets, and often the people who will benefit from their mission can influence Congress to provide more funds. Thus interest groups...become important to them. Such interrelationships can lead to bureaucrats being captured by interest groups...

Or, as is stated in Part III about any government action:

...One of the recurring themes in our consideration of various policies and institutions...has been the distinction between the goals of these policies and institutions versus the incentives they create...

What must be asked about any goal is: What specific things are going to be done in the name of that goal? What does the particular legislation or policy reward and what does it punish? What constraints does it impose? Looking to the future, what are the likely consequences of such incentives and constraints? Looking back at the past, what have been the consequences of similar incentives and constraints in other times and places?...

Now, does any sane person believe that the railroading of a nearly $1 trillion spending spree in about two weeks by Obama, Pelosi and Reid passes the smell test here?

Similarly, the financial crisis of the last year has provided numerous examples of governmental actions and inactions which created incentives for tawdry behaviors in the marketplace. Meanwhile, governmental agencies or individual players have not only suffered no adverse consequences but they are now using these recent events as justification for further governmental involvement in economic activities.

ISSUE #2: THE ROLE OF TACIT KNOWLEDGE IN COORDINATING ACTIONS IN A FREE MARKETPLACE

As Bastiat noted in the 1800's, Paris got fed every day without anyone intentionally planning that outcome. Similarly, Part XII above describes how a pencil is made without one person knowing or doing all the work. Why do those outcomes occur?

Appreciating how these outcomes occur via prices which comunicate the knowledge that enables individuals to coordinate their actions and create economic value is a critical issue usually ignored by public sector players. For example, when they aggressively insert disruptive government actions into the marketplace via a TARP bailout and pork-intensive spending legislation. Contrast that blunt hammer approach with potential legislation which seeks to alter incentives in a way which encourages certain constructive economic behaviors to happen naturally.

Parts III and IV above elaborate further on the role of dispersed knowledge:

...In addition to the role of incentives and constraints, one...other central theme has been the role of knowledge...

...the role of prices...[is to coordinate]...social action where knowledge is dispersed...

Hayek...zeroed in on the critical assumption of full or perfect information. He said that in the real world, we have millions of individuals who have little bits of knowledge. No one has full knowledge, and yet we see a great deal of social coordination...How does that happen? Hayek's answer is that a market system ends up coordinating individual activity. Millions of people are out there pursuing their own interests, but the net result is a coordination of economic activities. And prices are the things that contain people's knowledge.

Mainstream economists have picked up on this and talk about prices as containing information. Modern information theory certainly nods to Hayek as a precursor. He argued that pricing contains knowledge of specific time and place and the man on the spot. Prices contain knowledge that is tacit, that can't really be expressed by individuals. Individuals make actions in markets, and that's what causes prices to be what they are. People are acting in markets. They are not always explicitly saying why they are acting, but they are acting on their knowledge of local situation, the past, and more...

...Given the decisive advantages of knowledge and insight in a market economy...we can see why market economies have outperformed other economies that depend on ideas originating within a narrow elite of birth or ideology. While market economies are often thought of as money economies, they are still more so knowledge economies, for money can always be found to back new insights, technologies and organizational methods that work...Capital is always available under capitalism, but knowledge and insight are rare and precious under any system.

Knowledge can be bought and sold in a free market, like anything else...

...In all these cases, it was the knowledge that was built up over the years - the human capital - which ultimately attracted the financial capital to make ideas become reality...

Success is only part of the story of a free market economy. Failure is at least as important a part, though few want to talk about it and none want to experience it...Economics is not about "win-win" options, but about often painful choices in the allocation of scarce resources which have alternative uses. Success and failure are not isolated good fortunes and misfortunes, but inseparable parts of the same process.

All economies...are essentially ways of cooperating in the production and distribution of goods and services, whether this is done efficiently or inefficiently, voluntarily or involuntarily...

By portraying cooperative activities as if they were zero-sum contests...those with the power to impose their misconceptions on others through words or laws can create a negative-sum contest, in which all are worse off...

More on prices/knowledge is in Parts X and XI above.

Friedrich Hayek addressed the subject of knowledge in a seminal 1945 article and his 1974 Nobel Prize speech:

1945 - The Use of Knowledge in Society

1974 - The Pretence of Knowledge

ISSUE #3: RELEARNING THE FATAL FLAWS OF SOCIALISM & STATISM

The general definition of socialism involves governmental takeover/public ownership of the means of production. While there have been the takeover over several car companies, much of today's actions are more properly described as statist.

In a simplistic layman's nutshell, one could say that the failure of socialism/statism rests on its assuming away the real government incentives problem described in Issue #1 while blocking the flow of knowledge required to enable a free marketplace as depicted in Issue #2.

The bottom line: Incentives matter deeply and drive human behavior. It is a lesson statists and socialists never learn.

If you want to better understand and counter the world view which drives the socialistic mentality, here are some classics which rigorously address the fatal flaws of various shades of socialism and statism:

Friedrich Hayek - The Road to Serfdom

Friederich Hayek - The Fatal Conceit: The Errors of Socialism

Ludwig von Mises - Socialism

Thomas Sowell - A Conflict of Visions: Ideological Origins of Political Struggles

Thomas Sowell - The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy

Thomas Sowell - The Quest for Cosmic Justice

Jonah Goldberg - Liberal Fascism: The Secret History of the American Left, From Mussolini to the Politics of Meaning

Parts XVI and XVII above discuss the ethics of redistributive policies and the meaning of social justice, two themes which run through socialistic/statist thought and require the coercive force of government. Part IX above elaborates further on the coercive nature of government. Part XV above discusses the consequences of price controls.

ISSUE #4: LIBERTY & THE PROPER ROLE OF GOVERNMENT IN A FREE SOCIETY

The impact of the confusion regarding Issue #1 has caused the core American principle of liberty to be missing in action in the current public debate.

This lack of focus on liberty can translate into policies which have a repressive definition of equality measured by outcomes instead of the liberating equality of opportunity; see Part XIV above for further thoughts.

More specifically, this lack of focus on liberty has further highlighted the lack of commonly shared beliefs about the proper role of government if America is to remain a free society - a topic discussed in Part VII above, including these excerpts about the role of government:

...The widespread use of the market reduces the strain on the social fabric by rendering conformity unnecessary with respect to any activities it encompasses. The wider the range of activities covered by the market, the fewer are the issues on which explicitly political decisions are required and hence on which it is necessary to achieve agreement. In turn, the fewer the issues on which agreement is necessary, the greater is the likelihood of getting agreement while maintaining a free society.

...a good society requires that its members agree on the general conditions that will govern relations among them, on some means of arbitrating different interpretations of these conditions, and on some device for enforcing compliance with the generally accepted rules...most of the general conditions are the unintended outcome of custom, accepted unthinkingly...no set of rules can prevail unless most participants most of the time conform to them without external sanctions...But we cannot rely on custom or on this consensus alone to interpret and to enforce the rules; we need an umpire. These then are the basic roles of government in a free society: to provide a means whereby we can modify rules, to mediate differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play in the game.

...the organization of economic activity through voluntary exchange presumes that we have provided, through government, for the maintenance of law and order to prevent coercion of one individual by another, the enforcement of contracts voluntarily entered into, the definition of the meaning of property rights, the interpretation and enforcement of such rights, and the provision of a monetary system.

The role of government just considered is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game...

Parts V and VI discuss what combination of economic freedom and limited government enables liberty for us:

...How can we benefit from the promise of government while avoiding the threat to freedom? Two broad principles embodied in our Constitution give an answer...

First, the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow-citizens: to preserve law and order, to enforce private contracts, to foster competitive markets...By relying primarily on voluntary co-operation and private enterprise, in both economic and other activities, we can insure that the private sector is a check on the powers of the governmental sector...

The second broad principle is that government power must be dispersed...If government is to exercise power, better in the county than in the state, better in the state than in Washington. If I do not like what my local community does...I can move to another local community, and though few may take this step, the mere possibility acts as a check...If I do not like what Washington imposes, I have few alternatives in this world of jealous nations...

...The power to do good is also the power to do harm; those who control the power today may not tomorrow; and, more important, what one man regards as good, another may regard as harm...

The preservation of freedom is the protective reason for limiting and decentralizing governmental power. But there is also a constructive reason. The great advances of civilization...have never come from centralized government...

Government can never duplicate the variety and diversity of individual action...[see Part XIII above for more on how the individual is the unit of economic action]

It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem...such a view is a delusion...

Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensible means toward the achievement of political freedom...

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power...competitive capitalism also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other...

Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions...

History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition...

The relation between political and economic freedom is complex and by no means unilateral...

As [nineteenth-century, not twentieth-century] liberals, we take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements. Freedom as a value in this sense has to do with the interrelationship between people...in a society freedom has nothing to say about what an individual does with his freedom; it is not an all-embracing ethic...a major aim of the liberal is to leave the ethical problem for the individual to wrestle with. The "really" important ethical problems are those that face an individual in a free society - what he should do with his freedom. There are thus two sets of values that a liberal will emphasize - the values that are relevant to relations among people, which is the context in which he assigns first priority to freedom; and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy.

The liberal conceives of men as imperfect human beings. He regards the problem of social organizations to be as much a negative problem of preventing "bad" people from doing harm as of enabling "good" people to do good...

Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion - the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals - the technique of the market place.

The possibility of co-ordination through voluntary co-operation rests on the elementary - yet frequently denied - proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.

Exchange can therefore bring about co-ordination without coercion...

...Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce...The preservation of freedom requires the elimination of such concentration of power to the fullest extent and the dispersal and distribution of whatever power cannot be eliminated - a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.

Economic power can be widely dispersed...Political power, on the other hand, is more difficult to decentralize...if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power...

CONCLUSION

With the framework provided by the points raised in this post, we can assess and join in the public debate about the policy proposals we will see over the next few years. Along the way as we defend the marketplace, we will have to be careful to distinguish between crony capitalism/corporate welfare and the innovation arising from the more competitive entrepreneurial capitalism as well as ask ourselves if our private sector leaders, public sector leaders and citizens are holding themselves to a high enough set of ethical standards and transparency in their public behaviors. I predict that finding a way to do the latter in a way that promotes liberty and personal accountability without increasing the number of laws and regulations will be critical to neutralizing the self-righteousness and influence of those who promote various forms of coercive statism today. In that sense, winning the debate will require a modified strategy from what worked in the 20th century.

Finally, as another part of the discussion, we should also not forget to draw strength from the unique principles underlying our American Founding, including equality before God, as we engage in this ideological struggle to retain our liberty.