Information, Coordination, Calculation, and Libertarianism I

I have recently found a really great blog (by a former classmate of mine from grad school) called Facts and other stubborn things.  Daniel posts really well thought out pieces on a variety of topics and his posts are well informed and very insightful. Check it out...link to the right------->

He has recently written quite a lot about libertarianism, the Socialist Calculation Debate (SCD), which is linked to on the right hand side of this blog, and its ramifications today.  I started this when he had only 2 posts on this but he has been posting things faster than I can respond.  So I will respond to each...apologies if my comments are addressed in later posts.

1.  http://factsandotherstubbornthings.blogspot.com/2010/05/calculation-problems-vs-incentive.html


 First, I'd just like to say that I was fortunate to read the Socialist Calculation Debate in depth with noted Austrian economist Howard Baetjer as an undergraduate in comparative economic systems.  It was truly one of the cornerstone moments in my intellectual development and the impetus for a profound chnage in my political and overall world view.

I'd like to address some issues and perhaps clarify some points.  Quotes from Daniel are in italics.

the "socialist calculation problem" has never really interested me that much. It just strikes me as so obvious...[the debate came after] my primary influence (Keynes) had made his impression on the discipline, and wrapped itself up before I was even born and with all the modern economists that I admire coming down against Lange and Lerner. Moreover, none of the economists in the interim that I admire - Phelps, Friedman, Hicks, Modigliani, Minsky, Coase, Williamson - really succumbed to the Lange-Lerner infatuation with socialism. I can certainly understand why someone who grew up during the Cold War could maintain an interest in this skirmish even into the twenty-first century, but it doesn't hold any particular interest for me, because it seems so eminently obvious and conclusively decided.

On a cursory reading the SCD is a fairly obvious critique ex post.  Socialism clearly failed and history has shown that the failure of the Soviet Union was in a large part due to the problems in central planning of an economy.  But I believe that to call it a calculation problem leads one away from the central point of Hayek's essays from 1945 and 1948.  In my reading, I find that what is important is not that socialism failed, not that calculation could not be made, per se, not that resources could not be allocated properly, but that market derived prices are so important.  The information in market prices is awesome and they are a wonderful example of spontaneous order.  The most important, relevant point is that interference in the markets' ability to freely set prices, unencumbered, has to be the very highest priority. 

I think Hayek's essays after the war had two points of relevance and he and Keynes were not just two great economists passing in the night as it were.  First, historically, Hayek's writings must have been influenced by Keynes at this time.  Hayek and Keynes' close relationship, particularly during the war (I love the mental picture of the two of them arguing economics while on fire duty together on the roof of Kings College at Cambridge), must have influenced Hayek's writings at this time.  Second, I would argue that while although no one would call Keynes a socialist, he did take an approach that diverged from the classical liberals who dominated economics prior to the Great Depression and placed a heavier emphasis on reliance on government intervention.  In some way perhaps, Hayek's essays served to try to influence Keynes to place the priority of market prices higher rather than sacrificing some of their robustness in the pursuit of full employment.

I agree wholeheartedly with Daniel that the framing of the efficient allocation argument has degenerated into a senseless disagreement because of confusion from both sides about calculation and incentives (if I am reading your term incentive problems correctly).  Hayek was not writing about incentives in the SCD.  The calculation problem exists even in the presence of the so-called benevolent dictator.

I do think that a large portion of the population does believe that government can allocate resources better than individuals.  Not economists in general, but this is a widespread belief among a wide swath of the population; even the concept of scarce resources is difficult for many educated, thoughtful people. 


Daniel asks 2 questions:
First, is a "market failure" a genuine market failure or is it, as Boettke says, an opportunity for arbitrage? If it's just an opportunity for arbitrage then "market failure" is a misnomer. If it is a genuine market failure, we then of course have to ask ourselves what the best solution is. In some cases a public solution will be appropriate, and in some cases a private solution will be appropriate.

Unlike Boettke, I differentiate between market failures and information problems.  They are overlapping sets, but do not share all elements.  Strictly speaking, I think the term market failure is misused as many problems are attributed to market failures, but no market is without distortions.  I have no reason to believe that a truly free market won't arbitrage away market failures, but show me a free market.  Information problems are another story.  Information problems is one area in which I split with the Austrians.  There is overwhelming evidence that information problems exist, even in the most transparent environments and, as the amount of information has exploded exponentially in the recent past, there is no way to sort through it all.  At its most basic level, both buyers and sellers have the incentive to work in their own best interest, but it is much easier to hide information from each other now or mislead and both sides are usually at fault.

The second question is: [D]oes the admitted fallibility of the state preclude a public solution or doesn't it[?]

Given that the state is fallible, we should not expect a solution, simply a Pareto improvement at best.  I would also suggest that any "solution" is an intervention subject to the risk of the Theory of the Second Best.  I also invoke Bastiat here: "There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."  These ideas can be applied easily to the example of the carbon emissions Daniel gives.  A negative externality exists, the lack of a market (because of no property rights) creates a public bad.  This is not a market failure and not an area (sorry anarcho-capitalists) that property rights will fix (true for many externalities).  What Daniel suggests is directly in line with my thinking about Pareto improvement.  However, where we differ is how to deal with it.  I am not entirely convinced that a small tax is better than doing nothing.  A tax costs overall welfare, a tax on carbon emitters has enforcement costs, and a broadly applied tax has free rider problems.  I would be in favor of tax cuts for carbon emitters and shift the burden of proof of reduction of carbon emissions to the companies if they want to take advantage of the tax cuts, vastly reducing enforcement costs. 

More to come