Friends in high places

A number of experts on technology have expressed concern about the national security implications of allowing Chinese companies/products like Huawei, TikTok and WeChat to have access to the US market. I’ve been skeptical of their arguments, although I concede that I am not well informed on technology issues. On the other hand, I wonder if tech experts have sufficient awareness of the “public choice” aspects of giving the government the power to run an industrial policy.

Previously I noted that the US government’s original intention to protect US consumers from possible spying by Huawei has morphed into a crusade to destroy the Chinese company. Political considerations also seem to be showing up in the TikTok case. Oracle has offered to purchase a portion of TikTok and insure that user data is safe, but some Trump administration officials remain unconvinced:

Several people said such a plan could satisfy career officials at Cfius. But some cautioned that the situation was not analogous to any previous case.

“We have a president who is running a campaign against China and any indication of giving in to Beijing over TikTok will be seen as weakness,” said a person involved in the negotiations, who was concerned about the deal receiving approval from the Trump administration. . . .

A veteran Cfius lawyer said any deal with ByteDance that let the Chinese company retain a majority ownership of the app in the US would be hard for the Trump administration to swallow.

I get worried whenever I see news reports of economic policymakers wanting to avoid perceptions of “weakness”, or outcomes being “hard to swallow”.  Does this address national security issues, or doesn’t it?

In the end, I expect the deal will likely go through, but I am not entirely reassured by the reasons why:

Oracle was originally brought into the negotiations to provide an alternative to Microsoft Corp., MSFT +1.69% a rival bidder with Walmart as a partner, said one person familiar with the talks. The U.S. investment firms Sequoia Capital and General Atlantic, which are existing investors in ByteDance, went in search of a tech company with close ties to the administration and settled on Oracle, the person said.

Oracle co-founder Larry Ellison hosted a fundraiser for Mr. Trump this year at his house, and Chief Executive Safra Catz also worked on the executive committee for the Trump transition team in 2016.

It seems that the Chinese believe that US economic policy decisions are made based on personal connections with the administration.  I’m not sure if that’s true, but the perception is enough to distort the market.  Would a takeover attempt led by a Trump critic have had an equal chance of success?  I have my doubts.

However you feel about this specific issue, it’s important to recognize that we are a long way from national security decisions being made by philosopher kings.  Once you grant the government the power to enact an industrial policy, don’t expect the decisions to be free of political/personal considerations.  On balance, I trust the market more than I trust any government.

PS.  My wife traveled to China last week and I’ve started using WeChat.  I’m willing to accept the risk that the Chinese government is spying on my calls.  For years I’ve assumed that the NSA knows whatever they want to know about my digital communications.

(0 COMMENTS)

Read More

Public Choice: The Normative Core

The economic analysis of politics goes by many names: political economy, rational choice theory, formal political theory, social choice, economics of governance, endogenous policy theory, and public choice.  Each of these labels picks out a subtly different intellectual tradition.  Each tradition expands our understanding of the world.  My favorite, though, remains public choice.

As a GMU professor, you may attribute this to home-team favoritism.  Yet before I was a professor at GMU, I was a student at UC Berkeley and Princeton, and neither school fostered the love of public choice… to say the least.  The main reason I prefer public choice, rather, is for its normative core.  All economists who study politics do cost-benefit analysis, but the public choice approach is wiser.  And heretical.

What exactly is this “normative core” of public choice?  Simple: After doing standard microeconomic analysis of government policy, public choice adamantly states:

That’s an upper-bound on how well government intervention can work.  In the real world, government intervention usually works much more poorly.  Before we claim government intervention passes a cost-benefit test, we can, should, and must use past government performance to predict future government performance.

The upshot: Public choice economists end up opposing many government interventions blessed by textbook and policy wonk alike.

Example: Most economists – even economists who study politics – are fans of Pigovian taxation to address externalities problems.  What public choice reminds us, though, is that Pigovian taxation is the best that governments can accomplish.  In the real world, however, governments are worse in dozens of ways.   Before you advocate a regime where government sets Pigovian taxes to address externalities, then, you should estimate what real-world governments will actually do when you give them that kind of power.

Another case: When I was a grad student TAing Industrial Organization, I often argued with the junior professor teaching the class.  He knew a lot of theory, but almost no economic history, so I told him about quite a few famously anti-competitive antitrust decisions.  After a while, I recall a little exchange that went roughly like this:

Junior Professor: Bryan, I don’t care about what government did in the past; I care about what government is going to do in the future.

Me: Shouldn’t we use the past behavior of government to predict the likely future behavior of government?

Junior Professor: By that standard, government should never do anything.

Me: [double-take] Not really, but OK!

For Junior Professor, the normative core of public choice was practically a reductio ad absurdum.  But that’s only because he started with a firm pro-government conclusion, and rejected even ironclad premises that undermined it.  When I applied the normative core of public choice, he saw a big bias against government.

This so-called “bias,” however, is simply well-justified pessimism.  If actual governments abuse the power to tax, subsidize, and regulate, then it makes cost-benefit sense to put the officials who set tax, subsidy, and regulatory policies in a few chains.  Or a lot of chains.  Or a solid block of concrete.

Mainstream economists tend to scoff at this mentality.  Frankly, that’s because they’re fifty years behind the research frontier.  Although textbook demonstrations that well-crafted government policies can make the world better are fun homework problems, they end up being an intellectual smokescreen for demagoguery.  The normative core of public choice shows that laissez-faire is undervalued: Even when good government is plainly able to make things better, past experience teaches us to be deeply skeptical that government will do so in practice.  Until economists judgmentally study government in action, they have no business recommending that government do much of anything.

(0 COMMENTS)

Read More

One Thing Rationally Ignorant Voters Don’t Know

A Twitter follower of mine just praised president Trump for saving money by donating his salary back to government departments (I didn’t bother to add  the many justified “sic”):

“He takes a ZERO salary from the american people. How much did americans paid for Obama, Biden, Pelosi, Schumer, etc?”

Is this a significant saving for “the American people,” that is, American taxpayers? To check that, the voter must do some simple calculations. But even among those voters who can easily find the data sources and do the calculations, “rational ignorance” (as public choice economists say) will prevent most from doing it. Rational ignorance is the fact that the voter remains rationally ignorant of politics because he or she, individually, has no impact. It’s not as when he buys a car: he pays the money and gets the car he ordered. Politics and voting are very different: Why take the trouble and cost of finding information when your vote is not going to change the result of the election anyway? You’ll get the same political car anyway. Add partisanship to the mixture, and a perfect anti-Enlightenment storm is forming.

So let’s calculate if we should be grateful to the president for being so thrifty with public money. The annual salary of the president is $400,000—which means at most $300,000 after tax. This corresponds to 1/16,000,00o (one sixteen-millionth) of the annual expenditures of the federal government, which were roughly $4.8 trillion ($4,800,000,000,000) in 2019, before the pandemic struck. It can be easily calculated that in 2019 (note again: before the pandemic), the amount by which Trump increased the annual expenditures of the federal government was a bit more than $600 billion ($600,000,000,000) compared to the last year of Obama’s presidency (see https://fred.stlouisfed.org/graph/?g=vzfE).

Thus, by foregoing his presidential salary, Trump saved the American taxpayer $300,000 a year and, by the end of 2019, was spending $600,000,000,000 more of their money on an annual basis. This means that what Trump saved the taxpayers is 1/2,000,000 (one two-millionth) of what he ended up spending over and above what Obama spent during his last year. (It is of course much worse since the beginning of 2020.)

Many taxpayers, if they knew, would have preferred that Trump ran with his $300,000 and showed frugality with the trillions of dollars of federal expenditures. According to USA Today, two previous presidents, also very wealthy, John Kennedy and Herbert Hoover, also donated their salaries. But they did not increase annual federal expenditures by half a trillion dollars.

PS: Thanks to Jon Murphy for his comments on a draft of this post.

(0 COMMENTS)

Read More

What Is Populism? The People V. the People

“Populism” has received many definitions and historical interpretations. Some analysts take it simply as a more active form or stretch of democracy, but this may underplay the existence of very different theories and practices of democracy. One analytically useful definition of populism was given by political scientist William Riker in his 1982 book Liberalism Against Democracy. He defines the essence of populism as a political ideal in which the will of the people ought to be public policy: “what the people, as a corporate entity, want ought to be social policy.”

“The people” and “the will of the people” have long been invoked by populists of the right and populists of the left. Carlos de la Torre (University of Florida) summarizes the history of populism in Latin America (see his article of the Oxford Handbook of Populism, 2017):

I understand populism as a Manichaean discourse that divides politics and society as the struggle between two irreconcilable and antagonistic camps: the people and the oligarchy or the power block. Under populism a leader claims to embody the unitary will of the people in their struggle for liberation.

The idea of the will of the people being incarnated in a popular leader was strongly expressed by Hugo Chávez, whom de la Torre quotes as saying:

This is not about Hugo Chávez, this about a people. … I am not an individual, I am the people.

Closer to us, both Donald Trump and Elizabeth Warren have invoked the will of the people, in a less flamboyant manner:

Elizabeth Warren (quoted by David Frum in The Atlantic, December 2019):
“We have to … have leadership from the inside, and make this Congress reflect the will of the people.”

 

Donald Trump at the 74th session of the United Nations General Assembly, on September 25, 2019:
“A permanent political class is openly disdainful, dismissive, and defiant of the will of the people.”

Jack Holmes, politics editor at Esquire, who believed that Alexandria Ocasio-Cortez’s primaries platform was reasonable, wrote (“The President’s War on Democracy Is a War on the American People,” August 14, 2020), speaking of president Donald Trump:

Since democracy is our mechanism for communicating the will of the people into the laws and policies that govern our lives, this does not merely make the president an enemy of democracy. It makes him an enemy of the people. He ought to recognize the phrase.

Populists of the left and populists of the right invoke the same will of the people against each other. Populism is the people against the people.

Which brings us back to William Riker, who explained, on the basis of Arrow’s Impossibility Theorem and social choice theory, that the “will of the people” simply does not exist. It does not exist because there is no “the people” to have a will like an individual has. The “will of the people” is a rhetorical device to exploit a large proportion of the individuals who are the only reality under “the people.” The people’s preferences cannot be aggregated into a sort of social superindividual without being either dictatorial or incoherent, which is the essence of Arrow’s theorem. Those who pretend to represent the will of the people, from the French Revolution until 20th-century populist experiments, can only be authoritarian rulers, with or without the legal forms of democracy. (See also my Econlog post “Missing Something About Populism?“)

The tyrannical strand of the French Revolution—there was also a classical-liberal strand, rapidly overcome—was anchored in the thought of Jean-Jacques Rousseau, who made “the people” and “the will of the people” the foundation of his political philosophy (see his The Social Contract, 1762; see also Graeme Garrard’s short piece, “The Prophet of National Populism“). Rousseau may be the father of modern populism of the left and of the right.

Perhaps this illustrates what John Maynard Keynes wrote at the end of the General Theory:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

(3 COMMENTS)

Read More

What Is Populism? The People V. the People

“Populism” has received many definitions and historical interpretations. Some analysts take it simply as a more active form or stretch of democracy, but this may underplay the existence of very different theories and practices of democracy. One analytically useful definition of populism was given by political scientist William Riker in his 1982 book Liberalism Against Democracy. He defines the essence of populism as a political ideal in which the will of the people ought to be public policy: “what the people, as a corporate entity, want ought to be social policy.”

“The people” and “the will of the people” have long been invoked by populists of the right and populists of the left. Carlos de la Torre (University of Florida) summarizes the history of populism in Latin America (see his article of the Oxford Handbook of Populism, 2017):

I understand populism as a Manichaean discourse that divides politics and society as the struggle between two irreconcilable and antagonistic camps: the people and the oligarchy or the power block. Under populism a leader claims to embody the unitary will of the people in their struggle for liberation.

The idea of the will of the people being incarnated in a popular leader was strongly expressed by Hugo Chávez, whom de la Torre quotes as saying:

This is not about Hugo Chávez, this about a people. … I am not an individual, I am the people.

Closer to us, both Donald Trump and Elizabeth Warren have invoked the will of the people, in a less flamboyant manner:

Elizabeth Warren (quoted by David Frum in The Atlantic, December 2019):
“We have to … have leadership from the inside, and make this Congress reflect the will of the people.”

 

Donald Trump at the 74th session of the United Nations General Assembly, on September 25, 2019:
“A permanent political class is openly disdainful, dismissive, and defiant of the will of the people.”

Jack Holmes, politics editor at Esquire, who believed that Alexandria Ocasio-Cortez’s primaries platform was reasonable, wrote (“The President’s War on Democracy Is a War on the American People,” August 14, 2020), speaking of president Donald Trump:

Since democracy is our mechanism for communicating the will of the people into the laws and policies that govern our lives, this does not merely make the president an enemy of democracy. It makes him an enemy of the people. He ought to recognize the phrase.

Populists of the left and populists on the right invoke the same will of the people against each other. Populism is the people against the people.

Which brings us back to William Riker, who explained, on the basis of Arrow’s Impossibility Theorem and social choice theory, that the “will of the people” simply does not exist. It does not exist because there is no “the people” to have a will like an individual has. The “will of the people” is a rhetorical device to exploit a large proportion of the individuals who are the only reality under “the people.” The people’s preferences cannot be aggregated into a sort of social superindividual without being either dictatorial or incoherent, which is the essence of Arrow’s theorem. Those who pretend to represent the will of the people, from the French Revolution until 20th-century populist experiments, can only be authoritarian rulers, with or without the legal forms of democracy. (See also my Econlog post “Missing Something About Populism?“)

The tyrannical strand of the French Revolution—there was also a classical-liberal strand, rapidly overcome—was anchored in the thought of Jean-Jacques Rousseau, who made “the people” and “the will of the people” the foundation of his political philosophy (see his The Social Contract, 1762; see also Graeme Garrard’s short piece, “The Prophet of National Populism“). Rousseau may be the father of modern populism of the left and of the right.

Perhaps this illustrates what John Maynard Keynes wrote at the end of the General Theory:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

(0 COMMENTS)

Read More

Five Essential Books on Public Choice

Earlier this pandemic year, I shared a post on five great books to read first if you want to start learning about public choice economics. Looking back at that list, I’m still pleased with those selections, and think they hold up as “must-reads” for anybody with an interest in public choice. Now, I’d like to build on that list by sharing five contenders for most defining, most impactful, most essential books in public choice economics.

My focus here is on works that I’ve personally found most useful in being able to use public choice as a framework for conducting applied research. There is of course much that gets left out here, and no doubt I have colleagues working in the field of public choice who would come up with completely different lists. Those more influenced by the Rochester than the Virginia or Bloomington approaches to public choice would come up with the most different set of selections. While the Virginia and Bloomington approaches are closely linked in that they are both embedded within political economy and heavily invested in questions of constitution-building and rule formation, the Rochester approach tends to place more emphasis on modeling political coalitions and voting behavior. But that’s an over-simplification; for those interested in more detail on the relationship between these three approaches, I highly recommend William C. Mitchell’s article “Virginia, Rochester, and Bloomington: Twenty-five years of public choice and political science.”

So, with caveats in place, here are five essential books in public choice economics that belong in every library:

 

Calculus of Consent: The Logical Foundations of Constitutional Democracy

James M. Buchanan and Gordon Tullock

The theory at the core of this book is about why people form governments and how particular decisions and areas of life are deemed either in or out of the bounds of public influence. Although the dividing lines between public and private can be easily taken for granted at any particular moment in time, the answers to these questions are actually quite varied across societies and can change radically over time. The book’s approach to these fundamental questions is deeply democratic in that it roots collective action in individuals pursuing their plans and interests while remaining keenly aware of the limits of large scale collective action. This balancing act between optimism about the coordinative power of rules and skepticism about the high potential for abuse and misuse of political power, which can be traced back to the constitutional debates at the time of the American founding, is still a defining feature in public choice today. The importance of this book to the development of the field is a big part of why Buchanan won the Nobel Prize in Economics, and why Richard Wagner called Calculus of Consent the “Ur-text” of the Virginia political economy approach to public choice.

 

Bureaucracy

Gordon Tullock

This volume is actually a mash-up of two books by Tullock, The Politics of Bureaucracy and Economic Hierarchies, Organization and the Structure of Production. The vision that brings them together is the desire to understand behavior within political organizations from the perspective of those on the inside. By providing a framework for understanding political behavior as a function of what it takes to advance within a particular system, Tullock offers a way forward for those seeking to better understand the incentives and constraints facing decision makers within bureaucracies.

 

The Logic of Collective Action: Public Goods and the Theory of Groups

Mancur Olson

Olson’s enduring contribution to public choice economics is perhaps best remembered for its presentation of the free rider problem, and the implied difficulties that any group of significant size will face when trying to work together. Seeming to have a shared goal is not always enough—differences in strategy, priorities, and the trade-offs faced by individuals raise the possibility of shirking and conflict. By exploring the internal politics of groups, Olson’s Logic of Collective Action gives us another useful way to look under the surface of collective action in order to really understand the ways that what people want out of their associations—governments, unions, lobbies, corporations, NGOs, clubs—might differ from what they are likely to get.

 

Governing the Commons: The Evolution of Institutions for Collective Action

Elinor Ostrom

This book is the culminating presentation of the first thirty years of theoretical and applied research into local public goods and community problem solving by Elinor Ostrom and her colleagues in the Workshop in Political Theory and Policy Analysis. The big idea here, in a sense, is to turn Olson on his head. Instead of focusing on the ways groups might fail, Ostrom’s emphasis in this book is on the ways groups might succeed. (Though admittedly the contrast is overblown, because both find cooperation among groups to be most successful when power is scaled down to the level of local actors with the most relevant information and incentives.) In additional to providing a theoretical framework, the book catalogs extensive case studies of local populations working together to resolve seemingly insurmountable problems and analyzes them for common threads.

 

The Political Theory of a Compound Republic: Designing the American Experiment

Vincent Ostrom

This may be the least orthodox choice on the list, but in my view, Vincent Ostrom’s work here is an integral part of the big picture of public choice. In this book, Ostrom engages in a careful analysis of Alexander Hamilton’s and James Madison’s contributions to The Federalist in a return to the great question of the American founding: is it possible to design a better government through reflection and choice? Or are we doomed to the vagaries of history and tyranny? All the books above can be seen as addressing versions of this question. And it is a critically important one. Understanding what can and cannot be accomplished in a political setting is critical to avoiding missed opportunities, yes, but also the excesses of power (and the abuse, oppression, and waste that accompany them) that are the greater problem in the modern world.

 

 

These five books are essential reads for anyone wanting to get the full picture of public choice. Taken together, they represent a holistic and adaptable approach to understanding political and economic systems that takes seriously the great power of working together—for better and for worse. There are many more works that deserve a place on this list, too many more to even name here. Share your picks in the comments below and we’ll all get to reading.

 

 

Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.

 


As an Amazon Associate, Econlib earns from qualifying purchases.

(0 COMMENTS)

Read More

Tyranny Comes Home: Abigail Hall and Chris Coyne

We recently wrapped up an #EconlibReads online reading group on Tyranny Comes Home: The Domestic Fate of U.S MilitarismAuthors Abby Hall and Chris Coyne were kind enought to sit doen with me and answer some question about their work:

 

Amy Willis (00:02):

Hi, I’m Amy Willis with econ lib. Welcome to my conversation with the authors of tyranny comes home, Abigail Hall and Chris Coyne. Chris, would you like to introduce yourself?

Chris Coyne (00:12):

Certainly? Well, thank you for having us. My name is Chris Coyne. I’m a professor of economics at George Mason university, and I’m also the associate director of the FAA hike program for advanced study in philosophy, politics and economics at the Mercatus center.

Abby Hall (00:28):

Thanks Abby. My name is Abby hall. I’m an associate professor of economics at Bellarmine university in Louisville, Kentucky. Great, welcome. And thanks again for talking with us. As viewers may know, we recently conducted an online reading group based on your book. Tyranny comes home with domestic fate of U S military militarism. Unfortunately, as the three of us were discussing before we started recording this book is incredibly timely these days. We’re very grateful that you are willing to talk to us. And I have a couple of questions for you. So we’ll just launch right in the first question I have is you, you guys do a great job talking about your intellectual influences in the beginning of the book, Robert Higgs in particular comes to mind, but can you tell us a little bit more about how this particular project emerged? We know you’ve been doing work on this and we understand the context of your intellectual engagement, but why this particular this particular inquiry

Chris Coyne (01:27):

I’ll start and then Abby, you can jump in you know, for, for me, you know, given, given that, you know, the, the overarching themes of foreign policy and foreign intervention have been something I’ve been interested in now for certainly my entire academic career. But even prior to that, but this particular topic really kind of emerged when Edward Snowden released information about the surveillance operations of the U S government and, you know, one day I was just sitting around reading about Snowden and, and, you know, you heard, heard about the NSA and the NSA, this Dana said that. And I said, I don’t know a lot about this. So I started looking it up, just Googling around reading Wikipedia articles and the NSA in its current iteration was formed in the early 1950s. But then I just started kind of clicking back and reading about the history and I realized that, that this stuff had gone all the way back to the, to the late 18 hundreds in the Philippines really in an organized form that that is the, the surveillance operations of the U S government. And that kind of just got me thinking about it. And then through a series of conversations with Abby we kinda came up with the idea behind the, what we call the boomerang effect and kind of everything just, just went from there. Abby, I don’t know if you have more to add beyond that, Any other places where we saw some of these effects of foreign intervention coming back to be use domestically.

Abby Hall (02:47):

So as Chris mentioned issues of surveillance, but also too, one of the very thing, actually, it was the very first project that we worked on together was on policing and police militarization. And so starting to see within that research, although what we ultimately found in writing the book was that the connections went back much, much further than what we had initially thought. But seeing the incorporation of tools of foreign intervention being used by police but then also in the process of doing research on unmanned aerial vehicles or drones, one of the things that popped up in several of these articles at the time of doing that research. So run like 2012, 2013 was that the us customs and border patrol were using the same drones that were being used abroad in the global war on terror. And it was something that we started to think about and discuss. So for me, in addition to what Chris talked about, there were these other things in just various projects that just kept popping up of like, here’s a domestic connection to something that’s going on abroad. And then as Chris said, just the broader discussion of, well let’s think about and look into more detail and exactly how this dynamic works.

 

Amy Willis

So I want to ask a brief question with regard to the Philippines and that’s this, this is a great story of how you sort of started clicking backwards, right? So I suspect that you, a lot of readers concerns about the global war on terror, the war on drugs, these things were less surprising as having sort of a relationship between international and domestic policy, but the Philippines is a constant theme in your book. One that surprised me at least, and maybe this is a somewhat sort of curricular question, but that seems to be an incident in American history that we hear comparatively less about. Why do you think that is? And is there some relationship there to this boomerang effect?

 

Abby Hall

II can take that one. So you’re right. That I think a large part of it is a curricular issue. And I know that when I’ve presented on this and for what it’s worth, I was also very surprised at how frequently and predominantly the U S occupation of the Philippines came in to this research. And so part of, part of my reading was, well, why don’t we know about this, because if you were educated, I think particularly in the American school system, if you know about the U S Philippine war, it’s mentioned kind of as a footnote to the Spanish American war, and then no one talks about it. So they leave it alone. My understanding and reading the history of that was that Teddy Roosevelt considered that conflict to be a pretty large embarrassment and took active steps to try to deter people from really talking about it or thinking about it and appears to have been largely successful in that endeavor and getting people to just kind of ignore it and, and forget about it. That makes me feel better too. Chris, did you want to add anything about that?

Chris Coyne (06:04):

No, no. I mean, the only other thing to add is, you know what Abby said, and then of course, since then there’s been major conflicts. The United States has been involved in of course the, the world Wars and, and numerous others, which receive a lot more attention. And of course, you know, people oftentimes suffer from presentism, you know, what, what, what is going on now or in the, in the recent past is typically what they focus on. And so I think a combination of all these things together kind of explains the point you’re raising or, or helps to explain it. Yeah.

Amy Willis (06:36):

Okay. Next question. In my reading of your book I read a claim that interventionist foreign policy undermines democratic institutions domestically, but there’s also a lot of talk about the trade off between security and Liberty and what the citizenry is either willing to accept or in some cases even demand. So what if the citizen rate recognizes and actively chooses security over Liberty? In other words, if they’re willing to trade that off, even if it’s a somewhat false trade off, as you definitely point out in your book, does that really what does that mean about your claim with regard to democratic institutions? In other words, maybe are we getting what we deserve to some extent,

Chris Coyne (07:19):

Certainly. I mean, you, you can make that argument. And so, you know, w where we fall down at the end of the book is one that ideology held by the populace is ultimately the driver of a lot of this for better or for worse. And so if, if people are willing to, to give up Liberty for for suppose it, or, or potential security, and I think that’s important, I’ll come back to that in a moment then, then they are getting what they’re asking for. But as a caveat, and let me just clarify the potential point, you know, just because government says, they’re giving you security doesn’t mean anything as we all know, political rhetoric is quite cheap and often fails to be delivered on in any kind of meaningful way. And more so than that, it’s not just that that political initiatives might fail, but they actually might do more harm than good. That is things that are undertaken in the name of making the populace safer might actually make them less safe, either from external threats or internal threats, the internal threats being various components of the state apparatus. And so one of the things that we want to point out is the nuance of this supposedly simple trade off. It’s not that simple, but also that even if citizens think they’re trading off security for Liberty, they might not get what they want because they might be being sold a, a, a false promise of what security entails. And of course, another aspect of this is that much of this place in secrecy. So, you know, we’re told we, the, the populous are told there’s threats, there’s threats around every corner, but, you know, we’re never provided much detail on, on what those threats entail, the likelihood of those threats coming to fruition, to the extent that they do exist and so on, and the name of national security and secrecy. And so it makes it extremely difficult for either citizens or watchdog groups, or even congressional representatives who are on oversight committees and what have you to, to oversee the security state apparatus. And so that’s just some of the nuances that, that are involved in unpacking that security Liberty trade off.

Amy Willis (09:38):

Thanks Abby. Anything you want to add to that?

 

Abby Hall

Just very briefly that one of the things that Chris and I try really hard to point out in the book is the potential constraining power of ideology. But just also to add on to everything that Chris said is that for people who are really concerned with issues of Liberty questions of ideology present yet another compounding factor and are another piece of this puzzle, because to the extent that people are willing and interested in trading off Liberty for safety, again, whether that’s a real trade-off or a false one that potentially really makes the job of those of us who are pushing back against that all that more difficult.

 

Amy Willis

So I definitely want to talk about ideology, but a briefer question perhaps before that. And that’s that, so Abby, you just mentioned the group of people concerned about Liberty. To what extent do you think the same people are those that are concerned with foreign policy as with some of these domestic threats in particular, the issues you talked about, like drones and police, militarization and surveillance…

 

Abby Hall

I’d be interested to know Chris’s perspective on this as well, but in, in my mind, and one of the things that we lay out earlier in the book is that typically people, I think, tend to try to divorce those two arenas. So for many people, there’s this idea that foreign policy is just that it occurs over there and domestic policy is domestic policy and that, you know, narrowed the two shall meet. But what we’re interested in pointing out is that those two arenas are by no means separated and in fact very much can and do influence each other with our focus, particularly being on how the foreign intervention or the foreign aspect influences the domestic component of that. I don’t think that’s to say that people who are concerned with domestic policy, aren’t concerned with foreign policy and vice versa, but I do think that there is a real tendency of people to overlook that idea that foreign policy can and have a very real implication on domestic institutions. And so I think that for people, even if you are 100% American centric need to, or it would benefit them to pay attention to what’s going on in a foreign capacity.

Chris Coyne (12:15):

You know, I think this gets at a bigger question that is of interest to classical liberals, big tent, classical liberalism, which is that, you know, many classical liberals take is given to the extent they want. They refer to it as a limited state or a minimal state or nightwatchman state. What they typically mean by that is things like police and courts domestically. And then they’ll say things like a military or national defense, a defense against external threats, and they kind of stop there and that might work. And then of course, within that, they want to very limited government operating within, within that kind of infrastructure. And one of the things that I think is a gap in, in a lot of classical liberal thinking is applying the same things that are applied to other government programs, to police, to court, to military and national security, which is all of those things are government programs. And it’s not just that they’re normal government programs, that they are government programs, and that there are resources that are taken from taxpayers, filtered through a political process, then outputs are produced, but there’s something unique about them. And one of those things is that they entail the control of a significant amount of force or, or tools of force the, that, and I don’t mean just guns and tanks, even though there’s that as well, but a surveillance apparatus the ability to in prison people, the ability to murder people, human beings. And I, I think that’s important to remember this isn’t, you know, some the way I got a lot of people talk about foreign policy is almost like a chess board, and we need to balance the middle East or balanced China as if it’s kind of a game that, that, that intelligent people can play in design. So what if we take seriously hikes warning about the fatal conceit? What if we take seriously Buchanan and Tullock warnings about the pathologies of democratic politics, and we apply that same logic to national security to the military. What would that mean? Now? People might say in many do, okay, I get that, but we still need this in order to have Liberty and freedom. And that might very well be the case. I don’t, I don’t think, and, and we certainly are very careful to, to take our, our opponents, if you will. And I want it, that’s kind of a strong word. The people we are taking a different position from, we don’t view them as being malicious anti Liberty or, or, or, or anything of the sort what we, what we believe. And I feel comfortable speaking for Abby on this, because we’ve talked about it is that they underestimate the costs. So, so it’s, it’s a basic seen and unseen, and we’re trying to highlight one of the unseen costs that we think is quite significant. Other people might disagree on that, of course, but that’s where it really comes down. What, what waiting do you put on that? We put a, quite, quite a heavyweight on that cost but others won’t, but I think that’s kind of where it falls down to. And again, beyond this book for people interested in these topics in classical liberalism, this is certainly an area where you know, and, and our heroes you know, like Hayek, James Buchanan, Milton Friedman, and many others. They all take it in the background. What I referred to earlier is that the nightwatchman state as being necessarily, they never really delve into any of the details about how that will operate, what the costs will be, both the, the, the monetary outlays, but these other costs in terms of the unseen costs on democratic institutions as well. And so that’s a very fruitful area I would think for, for future inquiry.

Amy Willis (15:47):

Great. Yeah, that’s, there’s a lot of potential there. So let’s, let’s shift to ideology. And let me preface this a little you, the book does a tremendous job as Abby was talking about, about trying to sort of close that rift between the domestic and the foreign, but if there’s a critique to be made about the book that while, while masterful at diagnosing a problem, some might regard it as being short on solutions. And this is of course, where ideology comes in, you do assert that ideological change is needed to sort of tame the boomerang effect. And so this is where I think your book is a bit of a departure, particularly from some traditional public choice analysis, right? So Chris, you were just talking about the need to sort of think more about what actually constitutes this nightwatchman state, but you guys also say this is actually on page one 77, that the ability of formal rules to protect freedom is only as good as the ideology of the people living under the government. And you do go through and give a lot of suggestions about under, under the need for an anti militarist etiology, as you call it about understanding the paradox of government, recognizing that patriotism can require a critical attitude towards the government. And so on, you tell us in several places that citizens are not helpless pawns in this problem. Well, what are the action steps? How do we actually get to this anti militarist ideology beyond questions of understanding, tell us some concrete things that people could do to try to affect this change towards the anti militarist ideology.

Chris Coyne (17:27):

How do you want me to go, or do you want to go if you want? Okay. Let me start by stepping back for a moment again, to situate this in, in a broader kind of puzzle and a difficult puzzle that many people before us have talked about, and it, and it’s a puzzle about the relationship between formal rules and ideology, or if you want to call it informal norms, whatever you want to call, whatever’s required to maintain those formal rules. And, and let me try to sum up a very complex topic in a few lines, which is this formal rules, the way that constitutional scholars, certainly scholars like James Buchanan, talked about them are meant to constrain people such that when there is variation in ideology or opinions, you’re still bound. That’s why Buchanan always used the imagery of Ulysses bound to the mass. It’s when, when you list these here’s the siren sing, he can’t get freed. So when, when, when the people are calling on government to do something, their hands are tied and they can’t get free. Okay, well, there’s two big questions there. Number one, how do you get Ulysses hands tied? And then number two, can they stay tied? And that’s the question. That’s the question that Tocqueville was wrestling with and at least part of a democracy in America. It’s it’s how do you maintain a democracy? Vincent Austra more recently what and his writings on democracy are taken from Tocqueville. What’s the burden on citizens in a free society. And one, again, one of the interesting puzzles is that number one, at the end of the day, all of these scholars in various ways, the ones I’ve mentioned come down on the importance of ideology towards the end of his career. You can, for instance, has a wonderful article called the soul of classical liberalism. He has another article called afraid to be free. What’s the summing up more complex, nuanced arguments and align. If people don’t want to be free, if people don’t believe in freedom or hold it as a relatively high end, then you’re going to lose those things. They’re there, you are basically going to turn to government and say, treat me like a child, give me stuff. And then the game’s over there, you know, because not only are you giving them the power now to give you stuff, assuming they can do that, but you have set the precedent and untied Ulysses hands, if you will, to do lots of things in the future. So then what’s the burden on citizens. Well, it’s quite high. And again, this is Tocqueville, Oh, strum. You can, and the burden on citizens in a free society is really, really high. You have to care about freedom. You have to recognize the threat posed by the state, and then you need to be willing to participate as a citizen. And that doesn’t mean watching the news posting on Facebook and going to the voting booth. There’s something deeper that they have involved there’s community engagement. There is what Tocqueville called self interest. Rightly understood recognizing that my self-interest is not some narrow atomistic self-interest, but it also relies on my neighbors. But then that requires me participating in a various set of collective action situations to assist my fellow human beings and vice versa, them assisting me and for Tocqueville. That’s what we today call civil society plays a role as a crucial check on government, because we are not turning to government to give us goodies. And so that’s a check. It’s not a formal check in a constitution, but it’s based on citizen action, grounded in their ideology. And so we put a list of what we call the anti militarist ideology at the end, and we list some of the characteristics. And so, you know, to my way of thinking in terms of action steps, not I’ll, I’ll, I’ll turn it over to Abby. If she has anything to add. Number one is, is understanding the nature of the state. And again, even classical liberals. And I, and I, I feel comfortable saying within the classical liberal big tent world, I think Abby and I are probably in the minority in our view of national security, which is we view national security as one of, if not the greatest threat to Liberty that is counterintuitive. Because again, most people think about national security as being crucial to Liberty. But what if it’s not, what if it is the greatest threat? Well, that’s important to think about and recognize then what can you expect from the state?

Chris Coyne (21:40):

What do we give up when we say, well, it’s bad when government tries to provide education domestically, because government’s terrible at running the DMV. But then we say, well, government should be intervening abroad to build an entire education system, healthcare system and liberal institutions and other societies and thinking about those tensions. And so recognition is the first point. And then thinking about alternatives, thinking about alternative ways to provide security, because we don’t pretend that there’s, the world is a utopia. It’s not like there’s no threats or threats to EV there are threats to our person on our property to everyone. That’s just nature of the world in which we live. And so part of the classical liberal project, where there’s an interesting gap from my perspective is then to think about what those alternatives might be grounded again, in all of our intellectual heroes, who I think offer a sound framework for thinking through those issues.

Abby Hall (22:39):

Sure. I just add to that a little bit. I agree with Chris that I think as he mentioned, that we’re probably alone on our little Island, or maybe have like three other people who might be there with us. So it’s a, it’s, it’s not a, a common opinion, even among people who are generally skeptical of what it is that government can do. One of the things Amy that you had mentioned at the beginning is that it does feel like that maybe we’re a little bit short on solutions and when I’ve presented not only this, but, but presented some of the other work that Chris and I have done it’s something that we hear relatively frequently. Well, there’s a lot of problems being pointed out here, but what are the solutions? And one of the things that I think is also important to point out is that we don’t we don’t pretend as though we have a concrete set of steps or solutions to take to fix these problems unless we wind up running a foul of, as Chris mentioned already, some of our intellectual heroes who have pointed out correctly that there are real problems in terms of wealth, bringing to, to the forefront suppose that, you know, top down solutions first mentioned earlier, a Buchanan and tying us’ hands to the mast. And then of course, people like Hayek and Mises. Critiquing top-down planning with the idea of knowledge. So one of the things that we, we try not to do, or to fall into those traps of offering solutions that we necessarily necessarily just can’t can’t know, ex-ante what those look like.

 

Amy Willis

Thank you. Well, and maybe rather than a critique, we might understand that as a request for further writing and another book. Right. So, all right. Last question. This is the question that, you know, we sort of have to close with and that’s the following. So you can, you can choose the extent to which you would like to reply to the two parts of this. And that’s the following since the publication of the book in 2018, lots of stuff has happened. Most of it not good, right. So one is, well, both are domestic issues, but I wonder the extent to which you would like to comment on the potential ramifications of the boom around the fact either as far as predictions that you might want to make or cautions that you might want to add. And those two events are of course first and foremost, the tragic case of George Floyd and the resulting protest against that. I mentioned to both of you earlier that this book was one of the easiest choices we’ve made for a reading group, given the current events that have been surrounding us. And the second we’re recording this still during the Kobe pandemic one of the themes that you talked about so eloquently in the book is fear on the part of citizenry. And certainly we are living in a time of great fear from both of those things. So I’ll leave it at that and let you decide again, to what extent you want to comment on that. Abby, do you want to go ahead?

 

Abby Hall

Sure. Maybe I’ll take the the policing piece and then Chris, if you want to take the COVID piece, that might be a good division of labor. One of the things that we point out in the book when it comes to policing, and one of the things that we’ve discussed elsewhere in other works on policing is that those trends of militarization and the importation of tools of foreign intervention into domestic policing are likely to continue. And what we’ve seen with George Floyd, what we’ve seen with Breanna Taylor. And certainly there are lots and lots of other examples. I think these are all  Examples of that. I don’t really see that trend rolling back at any point. And again, I think one of the issues that we can come back to our issues related to citizen ideology and also the constraints that are placed or not placed on law enforcement. So looking at the George Floyd incident in particular, you continue to see this I suppose, a stark dichotomy between different groups of people. That to be critical of police means that you hate the police and so on. People talking about, well, police need to have, you know, these weapons, this gear, these tactical operations that they use and so on. So I think the, the short answer is that I see that trend largely continuing. Although I, I do have some cautious optimism because this, this time and the, the, the protest and the attention that is being paid this time around compared to earlier seems to have a different fervor to it then than it did before. And so maybe there’s reason for optimism there that people are starting to push back on this. But I think in terms of the ideological component, that that’s a really tall order because you have to start changing the way that people feel about a lot of really big policy issues, including things like the war on drugs, which at this point is so embedded and so ingrained. I’m not necessarily optimistic that that is a arena in which a lot of people are going to reverse course and say, we need meaningful change, right?

Chris Coyne (28:17):

Yeah. I think the overarching theme and prediction, it’s a very broad one, but then, you know, you unpack it or can unpack it the way Abby just did on the margin of policing is you cannot maintain it. If our, if you follow what we’re saying and agree with it, you cannot maintain a aggressive, proactive militaristic empire abroad and not have that spill over to domestic life. They are, they given the, the nature of the apparatus that is required both to build up, maintain and extend that empire and that proactive foreign policy can’t have it. They can’t keep them separate. And so to the extent that still exists, you, we should expect this stuff to come back home to vary in varying various ways. The other key point I want to highlight here is, you know, for the same reason, we proponents of markets point out that look in markets, entrepreneurs come up with new and better ways of doing things. They’re more efficient costs fall that applies to government as well when it comes to military technologies, which oftentimes of course there are partnered with private firms. So what do I mean by that? Well, just like some entrepreneur right now is coming up with a new and better phone or tablet or computer. Someone has a government contract that’s coming up with a new and better way of surveilling you. That’s harder for citizens recognize because that’s what makes for good surveillance, cheaper and so on. And so again, you need to understand the nature of the beast and what it means. The onus then to my way of thinking is not on Abby and I to come up with a list of solutions to solve the problem, but rather on those who make the grand proclamation the government can somehow overcome all of the ills that plague it and its normal day to day operations at a in relatively simple tasks and overcome those when you apply it to a much more grandiose government program that also includes awesome powers to, to in prison murder and main people at their will.

Chris Coyne (30:28):

And that’s what, what the onus is on those who argue for the need for government to do these things now on COVID. And I can link these things together, hopefully, you know, that’s a complex topic, it’s, it’s a hard topic. And I think the challenge is this, you know, externalities or real, or, or, or what economic epidemiologists call infection externalities in the case of infectious disease, people have to deal with them. So how do you deal with any externality? One way is to turn to government. Another is to seek out alternative solutions that can be private market solutions, or they can be private solutions to collective action problems as demonstrated by Eleanor Ostrom and her work on the comments that people are able to come together under certain conditions and resolve collective action problems where you fall down on that. Of course it is a matter of, of individual analysis and the weighing of various costs and benefits. But one of the things I do want to point out, and this is how it links back to what we’ve been talking about into the book is that, you know, people, they, they miss the symmetry of assumptions point. And so a lot of people get mad. For instance, if the Trump administration and they say, you know, I don’t like the way the Trump administration’s handling this, that they’d done X, Y, and Z. It would have been different. And perhaps it would, but unfortunately that’s not the world we live in, whether it is because of Donald Trump, himself and his flaws or his cronies, or the structure of government itself. But more broadly, you can’t have your cake and eat it too. You can’t say Trump, there’s an authoritarian. Trump wants to start Wars with the world. Trump wants to do X, Y, and Z, and then say, I want to give Trump power to fight COVID well, there’s a tension there. The tension is, is that if, if you believe that, and the same, by the way, I’m going to pick on Trump. The same went for Obama. I remember many people, including many classical liberals got quite upset at his foreign policy. Well, which one is it? He’s either incompetent domestically, which means the last thing you want to do is give him a more control over nuclear weapons and, and, and the, the most powerful military apparatus in the history of mankind, or he’s not, he can’t, it can’t be both. And it’s the same with Trump. And so if you look at around the world, not just that the United States in response to COVID, what you see is what I’ve called with an, another cost or pandemic police States. And so what they’ve done is they have used the pandemic situation to unleash police, state technologies, methods, and techniques. So you look at Russia, you look at China and so on. And so certainly you can stop a, an infectious disease by locking people in their house by dragging them out of their house in the middle of the night and taking them away to quarantine camps by putting cameras outside their house and so on by making them carry papers around. But there’s a cost to that. And that cost is the one we’ve been talking about. You’re going to lose your Liberty. Now, people might be willing to give that up. But you know, once the toothpaste is out of the tube, it’s really hard to give up or excuse me to, to put back in the tube. And that’s really one of the many costs that people need to think about as it pertains to the pandemic and to COVID, it’s not the only cost, but it’s certainly one that that I would suggest is important to consider.

Amy Willis (33:50):

Thanks. Those were excellent answers to our questions. And I want to thank you both again for the book for a terrific conversation today, your willingness to engage with us and our readers. And I think that’s a good place for us to stop. And hopefully we’ll see another book from both of you following up on this one.

(0 COMMENTS)

Read More

Purdue Uses the Spike

As a number of universities have backed away from their initial plans to reopen to face to face classes in the wake of some evidence of COVID outbreaks on campus with the arrival of students, Purdue University president and former Indiana Governor Mitch Daniels has decided to use Tullock’s Spike.

Purdue has, like many other institutions, spent the summer trying to prepare for having students back on campus.  They are requiring all students to submit a negative COVID test from no more than 14 days prior to arrival on campus.  They have set up labs for on campus testing, moved some classes on-line, and increased distancing requirements in dorms and public areas.  All of this has culminated in something that Daniels has required all students to sign – the Protect Purdue Pledge.  As part of that pledge, Purdue is requiring their students to commit to safe behavior or face punishment.  In the wake of actions of other universities, Daniels announced that students would now be prohibited from hosting or attending events- read here parties- that did not have social distancing or mask wearing.  Violations of that policy would be treated like stealing or illegal drug use.  In short, they would expel students who go to parties.

 

Setting aside for a moment arguments about the relative risks that students that age face from the virus, or the likelihood of them transmitting to others who might be at risk, all I want to say here is that somewhere Gordon Tullock is smiling.

(0 COMMENTS)

Read More

George Will’s Public Choice Contradiction

I recently listened to Juliette Sellgren’s 36-minute interview of Washington Post columnist George Will. Juliette does an excellent job of briefly stating Will’s argument about the growth of presidential power at the expense of Congress. Her statement starts at 5:15 and ends at 5:52. Will says that she has “efficiently and accurately” distilled his argument about the presidency. I agree.

From about 5:52 on to about 8:15, Will lays out his argument in more detail.

In doing so, though, he presents a puzzle and it’s not clear that Will sees it as a puzzle.

Here’s what he says, starting at about 7:45:

Congress, out of careerist interests, job security interests, and the sheer press of time has hollowed itself out. We constantly hear people complaining that presidents are usurping powers. Well of course they do. The Founders understand that all people in power try to usurp more power. But, to say that Congress’s powers have been usurped is too kind to Congress. Congress has all too willingly given them up.

I agree with Will about the factual issue: Congress has all too willingly given up its power.

But notice the contradiction in the last three sentences. All people in power try to usurp more power. Surely that would include members of Congress. Yet Congress has willingly given up power.

So it’s not true that all people in power, or, at least in the case of Congress, even most people in power, try to usurp more power.

So Will has contradicted himself. But possibly more important, he’s presented a puzzle. Why does Congress give up power? Is it just that they want the job and the perks that go with it–the first 2 of the 3 reasons Will gives in the quote above?

I don’t know.

(0 COMMENTS)

Read More

Ronald H. Coase: Chicago School or Virginia School Economist?

It is not uncommon for Ronald Coase to be identified as a “Chicago School” Economist. For several reasons, this would not be an unfair characterization. First, Coase joined the faculty of the University of Chicago Law School in 1964, and remained there until his retirement in the early 1980s, during which time he had also been the Editor of The Journal of Law and Economics until 1982. Secondly, as a student at the London School of Economics, Coase, like other economists of the Chicago School, had been greatly influenced by the work of Frank Knight, particularly Risk, Uncertainty, and Profit (1921). Although Coase had regarded himself as a socialist in his youth, his training at the LSE under Arnold Plant and his study of the workings of the operation of markets in public utilities, postal services, and lighthouses solidified his free-market convictions, as is often identified with Chicago School economists, such as Milton Friedman, George Stigler, or Gary Becker. Moreover, the tendency for government regulation to serve special interests, rather than the public interest, also affirmed his skepticism of government intervention. It would seem, then, that Coase carried all the trappings of a Chicago economist.

However, as economist Steve Medema has argued, the “relationship between Coase and the Chicago School could be considered a case study in the dangers of assuming some sort of Chicago homogeneity” (Medema 2010, p. 262). Indeed, Coase shared similar public policy conclusions as his contemporaries at Chicago. But to identify an economist by his or her free-market policy conclusions, instead of the methodology by which they arrive at such conclusions, renders indistinguishable the distinction between the Chicago School and the Austrian School, or between Chicago and its intellectual cousins at the University of California, Los Angeles (UCLA), University of Washington, or the University of Virginia (UVA) for that matter.

 

In terms of methodology, I would argue that Coase would be better identified as an economist of the Virginia School, from which Public Choice theory was born at the Thomas Jefferson Center for Studies in Political Economy and Social Philosophy (TJC) at the University of Virginia (UVA) under James Buchanan and Gordon Tullock. Though Buchanan, Tullock, and other faculty members, such as Rutledge Vining and G. Warren Nutter, had been trained at the University of Chicago, what distinction, if any, exists between the “Virginia School” and the Chicago School? Moreover, how can we attribute the distinction of “Virginia School” to Coase?

Though Coase’s own work shares many policy conclusions with that of public choice theorists, particularly skepticism of government intervention to mitigate supposed market failures, the relationship between Coase and Public Choice introduces another danger of homogeneity, since other branches of Public Choice have emerged as well, besides that which emerged at UVA (and later Virginia Tech and George Mason University). These include the “Bloomington School” of Vincent and Elinor Ostrom and the “Rochester School” of William Riker. Moreover, Public Choice was also developed by economists at the University of Chicago, including Gary Becker, Sam Peltzman, and George Stigler (see Mitchell 1988 and Mueller 1976).

 

What I wish to highlight here is a point that Peter Boettke and I have made in paper recently published in Public Choice, titled “Where Chicago Meets London: James M. Buchanan, Virginia Political Economy, and Cost Theory” (2020), in which we argue that the Virginia School of Political Economy emerged from the marriage of subjective cost theory that had been developed at the London School of Economics (LSE) under F.A. Hayek and Lionel Robbins, and price theory from the University of Chicago.

 

The work of Frank Knight had been a cornerstone of the education of students at the University of Chicago and the LSE alike in the pre-WWII era, and Knight had been highly influential in Coase’s education. But whereas price theory at Chicago had been primarily Marshallian, in which costs are taken to be objective, price theory at the LSE had been primarily Wicksteedian, in which supply curves are simply the demand curve of suppliers, and therefore part of the total demand curve for a good or service, the value of which is subjective. In his own recollection of the LSE of the 1930s, Coase remarks that, unlike at Chicago, at the LSE, “Marshall was in the calendar of saints but few of us prayed exclusively to him. Marshall was one among many economists studied”, and goes further to state that, “[i]n fact, we thought his views on cost confused” rather than clarified the analysis of market processes (1982, p. 34).

 

Therefore, what Coase shared with Buchanan and other economists of the Virginia School, which made them distinct from their intellectual cousins at Chicago (see Wagner 2017, 2020), is the fact that they saw opportunity costs not as constraints to which economic actors passively respond, but as variables defined by the act of choice itself. Because of this, Virginia School economists, such as Coase, directed their analytic attention to choice among constraints, and thus saw institutions, organizations, and other contractual arrangements as a by-product of individuals striving to realize the gains from exchange. Virginia School economists therefore took a constitutional perspective, which focuses on analyzing “the rules of game” and how the modification of institutions could generate positive-sum forms of interaction. Therefore, whereas their contemporaries of the post-WWII Chicago School took Pareto-optimality as an assumption that characterizes real-world market outcomes, Coase and the Virginia School understood the conditions of Pareto-optimality to be a by-product of individuals devising institutional arrangements, not only to reduce transaction costs, but also to exhaust the gains from trade.

 

This distinction is best highlighted not only by how economists at the University of Chicago first reacted to what later became known as the “Coase Theorem,” but also how the Coase Theorem is still interpreted today. “The Problem of Social Cost” (Coase 1960) had been written in response to what Friedman, Stigler, Harberger, and other economists at the University of Chicago had perceived as a fundamental error in Coase’s analysis of Pigovian welfare economics, as had been first argued in the “The Federal Communications Commission” (Coase 1959). However, what needs constant reminding is not only that both of these papers were written when Coase was a faculty member at UVA, but also that, at UVA, his ideas were regarded as an evolution of the common knowledge that he, Buchanan, Nutter, and Vining had inherited from Frank Knight. Surprisingly, as George Stigler (1988) recounts in his autobiography, it was among Knight’s former pupils, including Friedman and himself, at the University of Chicago that Coase’s ideas were considered a revolution that overturned Pigovian welfare economics.

 

Though the Coase Theorem has become a cornerstone of law and economics and institutional economics generally, Coase’s central message cannot be fully understood unless we first realize how he understands the nature of costs. As he recounted repeatedly, the Coase Theorem was never meant to direct our attention to a world in which transaction costs are zero. In such a world, markets will have already exhausted all the gains from trade, and institutions are therefore redundant. Rather, what Coase was trying to stress is how positive transaction costs represent future profit opportunities for their reduction, and how entrepreneurs will profit from perceiving a way to reduce transaction costs by devising institutional arrangements, thereby creating the gains from trade.

 

As Coase has highlighted throughout his work, from seminal paper “The Nature of the Firm” (Coase 1937), to his last book, How China Became Capitalist (Coase and Wang 2012), the benefit of institutional and organizational arrangements, such as contracts, firms, money and property rights, are that they reduce the costs of making an exchange (i.e. transaction costs). Costs are not a constraint independent of human choice, but are an artifact of human choice, and therefore can be manipulated by restructuring the payoff structure embodied in institutions through human creativity. It is this understanding of market processes that Coase shared with his colleagues at UVA, and distinguished him from his colleagues that he would later join at the University of Chicago. It is in this respect that Coase should be considered economist of the Virginia School.

 

 

 

 

References

Candela, Rosolino A., and Peter J. Boettke. 2020. “Where Chicago Meets London: James Buchanan, Virginia Political Economy, and Cost Theory.” Public Choice 183(3-4): 287– 302.

Coase, Ronald H. 1937. “The Nature of the Firm.” Economica 4(16): 386–405.

Coase, Ronald H. 1959. “The Federal Communications Commission.” The Journal of Law and          Economics 2: 1–40.

Coase, Ronald H. 1960. “The Problem of Social Cost.” The Journal of Law and Economics 3: 1–44.

Coase, Ronald H. 1982. “Economics at LSE in the 1930s: A Personal View.” Atlantic Economic      Journal 10(1): 31–34.

Coase, Ronald H. and Ning Wang. 2012. How China Became Capitalist. New York: Palgrave Macmillan.

Knight, Frank H. 1921. Risk, Uncertainty and Profit. Boston, MA: Houghton Mifflin.

Medema, Steven G. 2010. “Ronald Harry Coase.” In Ross B, Emmett, ed. The Elgar Companion to the Chicago School of Economics (pp. 259–264). Northampton, MA: Edward Elgar.

Mitchell, William C. 1988. “Virginia, Rochester, and Bloomington: Twenty-Five Years of Public Choice and Political Science.” Public Choice 56(2): 101–119.

Mueller, Dennis C. 1976. “Public choice: A Survey.” Journal of Economic Literature 14(2): 395–       433.

Stigler, George J. 1988. Memoirs of an Unregulated Economist. New York: Basic Books.

Wagner, Richard E. 2017. James M. Buchanan and Liberal Political Economy. Lanham, MD:         Lexington Books.

Wagner, Richard E. 2020. “Chicago Political Economy, and Its Virginia Cousin.” GMU Working       Paper in Economics No. 20-11. Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3597754

 

 


Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Associate Director of Academic and Student Programs  at the Mercatus Center at George Mason University

(0 COMMENTS)

Read More