Sunday, July 10, 2005

Empirical Beliefs

I was convinced that economic liberty was largely beneficial, even for the poor, due to a series of changed factual beliefs. The "heretical" beliefs, derived from academic economics, include:

1. The standard of living for workers rose throughout the industrial revolution. The notion that "the rich get richer and the poor get poorer" was simply false.
2. The Great Depression, like the S&L crisis, was caused by government, not by an unregulated market.
3. In a free-market, monopoly has rarely been a serious problem. Government supported monopolies, such as labor unions, the AMA, taxi-cab medallion systems, public education, public utilities, the postal service, etc. have been (and continue to be) serious monopoly problems.
4. African-American wages increased as much, or more, before civil rights laws were passed as they did afterwards: a growing economy, rather than legislation, has improved the standard of living of minorities. Minimum wage laws and unions have been especially harmful to minorities. Affirmative action laws tend to benefit the wealthiest and best educated individuals within a minority while the least-skilled among the minority may be harmed by legally-mandated preferential treatment.
5. Union gains are largely made at the expense of other, non-union, workers and of consumers rather than at the expense of management and investors.
6. Wage and price controls are harmful, including minimum wage and rent controls. They lead to misallocations of goods (a more serious problem than I had realized) and they harm the poor disproportionately. Relatedly, price rationing is a wonderful policy tool and ought to be used more extensively, as in peak-load pricing of public transit.
7. Running out of natural resources (with the exception of unappropriated natural resources, such as clean air) is not a problem because of technological innovation and the price mechanism. People who ridicule the notion that technological innovation can prevent the horrors of resource depletion do not understand how effective price changes are in allocating resources.
8. The market can sometimes deal with externalities and collective action problems more effectively than can government (Coase theorem and public choice theory).
9. Because of a lack of clear ownership is the cause of externalities, more private property (such as of waterways, fishing rights, air, etc.) is the solution to most pollution and resource problems.
10. Economic growth is the most effective means of reducing the rate of population growth because birth rates collapse as nations industrialize.
11. Most regulatory legislation benefits existing firms, at the expense of potential entrants, and not consumers or workers.
12. The harms from environmental and safety regulation often exceed the benefits. The clear evidence of horrors which may occur without regulation are not ipso facto proof that the gains of regulation outweigh the costs. Liability law may serve as a substitute for regulation in some situations.
13. Most government redistribution is from one subset of the middle class to another rather than from rich to poor. In general it is from the more dynamic, creative, and industrious members of the middle class to a lazier or less creative segment which is in effect relying on law rather than exertion to obtain and protect their wealth.
14. Increasing consumer prices by means of taxes, regulations, etc. amounts to regressive taxation.
15. Advertising does not cause people to have the tastes that they have. Imposing elite tastes on others does not make them happier.
16. By and large, people are being paid what they are worth. If they are not being paid what they are worth, then someone can (and morally should) make a profit by employing them.
17. By and large, the market produces good products. If not, they someone can (and morally should) make a profit by producing better products.

What is interesting about this list to me is that most of the items on this list are largely accepted among academic economists today (including most Nobel laureate economists) whereas most of the items on this list are highly controversial (or are considered false) by most non-economists.

If I had not been convinced by economics that most of these items were mostly true most of the time, I would not be supportive of markets in the way that I am. Changed empirical beliefs were crucial.

9 Comments:

Anonymous michael vassar said...

Nice list. I want to mention that most people's opinions and attitudes are NOT generally changed by changes in empirical beliefs. This is a very impressive and rare display of rationality. However, I will pick a few minor bones with your list.

1. The standard of living for workers rose throughout the industrial revolution. The notion that "the rich get richer and the poor get poorer" was simply false.

We have already discussed this. Enclosure was outright appropriation of a public good, hence it benefitted the appropriators at the expense of the public. Working hours increased radically during the industrial revolution, while the desirability of the work generally declined, being dangerous, toxic, repetitive, noisy, and otherwise unpleasent compared to the far from idyllic but basically acceptible alternative. The Amish still live as low-tech farmers voluntarily rather than living in mainstream US society, basically no-one voluntarily lives as a sweat-shop worker when they have the choice of moving to the US (and modern sweat-shops are far better than those of 180 years ago). This is rational. Of course, workers were paid for accepting these conditions, and improved their material conditions.

4. African-American wages increased as much, or more, before civil rights laws were passed as they did afterwards:

I'd believe the fact, but it's unfair to compare 100 years to 45

Affirmative action laws tend to benefit the wealthiest and best educated individuals within a minority while the least-skilled among the minority may be harmed by legally-mandated preferential treatment.

I'm VERY skeptical of this. The best off don't need Affirmative Action, and sometimes resent it as an insult. Every economic analysis I have seen shows the average recipient does benefit, as would be expected from a wealth transfer.

9. Because of a lack of clear ownership is the cause of externalities, more private property (such as of waterways, fishing rights, air, etc.) is the solution to most pollution and resource problems.

Generally agreed, but allocation of rights must be done equitably (see the former USSR) and is not always practical in any event.

12. The harms from environmental and safety regulation often exceed the benefits. The clear evidence of horrors which may occur without regulation are not ipso facto proof that the gains of regulation outweigh the costs. Liability law may serve as a substitute for regulation in some situations.

Agreed, but the other side of this is that all of those statements were qualified and hedged for good reasons. The situation is complex.

13. Most government redistribution is from one subset of the middle class to another rather than from rich to poor.

Depends on the country. In the US most government redistribution is in the form of political pork. It goes from the middle middle class, who pay substantial taxes and own little stock, to the upper middle class and the rich, who sometimes hold unnecessary management jobs and often own stocks.

14. Increasing consumer prices by means of taxes, regulations, etc. amounts to regressive taxation.

But this is often the most efficient type of taxation. The utility costs of "sin" taxes and especially that of taxes on activities with externalities, can be positive. For instance, taxing roads/gasoline can in principle reduce traffic and raise gvmt revenues for useful purposes.

15. Advertising does not cause people to have the tastes that they have. Imposing elite tastes on others does not make them happier.

Imposed elite tastes are rarely sincere, but really having elite tastes DOES make people happier, if they can be fulfilled. Advertising does influence peoples tastes. I recommend that you watch children to see this in the most obvious form and then remember that most adults are just pretending not to be children.

16. By and large, people are being paid what they are worth. If they are not being paid what they are worth, then someone can (and morally should) make a profit by employing them.

Utter disagreement here, and my belief has tended farther away from this opinion. In a perfect market it would be true, but real markets are far from perfect in many many ways. Lots of professions set up barriers to entry, generate artifical demand (schools, school admins), many people work for gvmt doing useless or destructive tasks (school, DEA). Also, management have agency problems and don't serve stock-holders terribly well. Finally, in many bureaucracies it appears to me that most of the work is done by a few people who are not rewarded for it. Not infrequently these are unpleasent people who are unlikely to be promoted, cannot easily display their efficacy to potential employers, cannot work effectively on their own, but do accomplish far more per hour than their co-workers.

17. By and large, the market produces good products. If not, they someone can (and morally should) make a profit by producing better products.

The market produce pretty good products, but no so good as to sate the appetite for the good in question. It also produces many products that impose externalities (SUVs, car alarms, Hummers), or that exploit fear and ignorance (much mainstream and alternative medicine, many safety features of many products, much insurance, etc) time inconsistant utility functions (cigarettes, much "junk food", gambling), zero-sum status seeking (diamonds are the purest obvious example, lace, which became unpopular when it became cheap, is an even better one), or guilt and weakness (expensive funeral related products, much medicine for the very young or very old). Markets also have serious problems as sources of information, as was best argued here http://hanson.gmu.edu/expert.pdf and will sell inaccurate information over accurate if the former is likely to sell better, for instance, selling socialist economical arguments.

8:09 PM  
Anonymous michael vassar said...

Much of the point of Flow, or at least the point of Whole Lives, as I have understood it, is to focus on the fact that people's preferences are not laws of physics, but are in fact the result of experience, e.g. that education can make people more ethical. If this is not the case, the importance of education fades considerably, though prehaps remaining on the top of one's list of political concerns. If education influences preferences, why assume advertising doesn't? As the goals of advertising are less ambitious, and as advertising is provided by a market, not a government, it seems fair to assume that it does a far better job than education at shaping preferences.

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