Oren Cass vs. me

Schematically, our exchange went like this:

1 (Cass). Masonomics sucks!

2 (Kling). Here is an outline of Masonomics.

3 (Cass). You have no idea what my article was saying!

4 (Kling). I am afraid that makes two of us.

The first three pieces appeared in print in the Claremont Review of Books, with (1) an article in the fall issue and (2) and (3) appearing in the correspondence section of the winter issue. All are presumably behind a paywall, but the link to (2) -(3) is here.

The full version of (2) is below.

In “When Market Economists Fail” (Fall 2020), Oren Cass sets up a strawman version of free-market economics, which he proceeds to burn up in a blaze of rhetoric. Here is a version that I believe would be more recognizable to free-market economists:

The challenge for an economy is to achieve coordination and improvement. Government and markets are two processes for doing so.

For coordination, central planners lack the information to coordinate sensibly in the absence of a price system. Regulators who operate on top of the price system face the same calculation problem. In the end, regulators are as blind as the director of a totally centrally planned economy. As an example, consider how financial regulators in the early 2000s, in what was known as the “recourse rule,” reduced the bank capital requirements for holding mortgage securities with AA- and AAA-ratings, thinking that they were steering banks toward assets with lower risk. Oops.

For improvement, we need a process that experiments, evaluates results, and evolves by discarding failure and retaining success. For each of these, markets are better suited than government. Markets are conducive to more experimentation, because innovators do not require bureaucratic approval to attempt ideas that go against conventional wisdom. Markets evaluate more rigorously, using the profit and loss system rather than impressionistic estimates of benefits and costs. Finally, markets discard unsuccessful and outmoded operations, while ineffective and anachronistic government programs persist.

Market failure is real. In theory, if government officials could solve the calculation problem, they would provide incentives to increase or decrease the relevant activity to some theoretically optimal level. In practice, government does not steer the market to right quantity. Instead, government typically subsidizes demand and restricts supply, with countervailing effects on quantity but creating rents for narrow interest groups. This is true in housing, higher education, and health care.

In the absence of government intervention, markets are not stuck in failure. Often, a market failure creates an opportunity for an innovator to profit by building a business that produces a better outcome. In many areas where government claims success, it has stifled private solutions that worked better.

In short, the free-market economist says that economic outcomes, like all human phenomena, are imperfect. But we claim that the processes of coordination and improvement work better with less government intervention.