Author: marklutter

The real stakes of the Asia-Pacific pivot

The most important geo-political change of the last few years is not the resurgence of Russian aggression, nor the Arab spring; it is the American pivot to East Asia. The U.S. is shifting its focus from the Middle East to contain China, strengthening regional alliances to curb Chinese attempts to expand their sphere of influence.

While much ink has been spilled over the strategy, few seem to actually understand the basic tradeoff. America can limit Chinese sphere of influence by (slightly) raising the possibility of war. We can imagine a circle around China; the larger the circle, the lower the probability of war. However, the countries inside the circle are less likely to have democracy and open markets.

Policy preferences are going to depend on the relative weights placed on the alternatives. If you believe the probability of war is slight, or you discount the cost of war, you will prefer a more aggressive containment strategy. On the other hand, if you think China will allow relatively open markets, or think the cost of war is high, you will allow China to peacefully expand.

People on both sides of the debate will deny these terms. Neocons will argue the probability of war is so close to zero it can be ignored. Noninterventionists will ignore the unfree markets that China imposes on its neighbors. However, as it is probable this tension will continue for at least a decade, it is worth understanding the tradeoffs being faced.

We live in ‘Brazil,’ not 1984

It has become cliché to make comparisons of the modern world to Orwell’s 1984. Government collection of metadata means we are always being watched. Homeland Security illustrates the penetration of doublespeak in our lives. That we are engaged in a never-ending war against terrorism is analogous to having “always been at war with Eastasia.”

However, despite many important parallels, I find the primary theme of 1984 to be an inaccurate portrayal of modern life.  1984 imagines the evil of unified power. It is personified through Big Brother. The primary theme, “If you want a picture of the future, imagine a boot stamping on a human face — forever,” is simply not apt.

Most people do not feel the boot on their face. Obama, despite the fact he occasionally drones children, is not Big Brother. Homeland Security is not the Ministry of Love, it is the DMV with police powers. Rather than the horrors of totalitarian dictatorship, we have the horrors of rampant, dysfunctional bureaucracy.

“Brazil,” directed by Terry Gilliam and loved by those who have seen it, captures these themes expertly. It follows Sam Lowry, a low-level bureaucrat with fantasies about saving a woman from his dreams.

A clerical error leads to the imprisonment, looking very much like a modern SWAT raid, of a Mr. Archibald Buttle, instead of terrorist Archibald Tuttle. This is reminiscent of putting Rahinah Ibrahim on the no-fly list because of a clerical error. It took 8 years for the government to admit its error.

Later, Archibald Tuttle, an air conditioning repairman gone rogue because of his dislike of paperwork, helps Sam fix his air conditioning. I can’t help but think of licensing laws and how they keep people impoverished.

Overall, the picture is painted is not one of evil, but incompetence. The bureaucracy is impossible to navigate, but no one is responsible. It is the result of human action but not human design. Our world today is the same.

Have economists given up on the free market?

This is the thesis offered by Noah Smith. He argues that the rise of data and new theories has led to economists to move away from free market theories. Adverse selection, moral hazard, and game theory have shown how rational agents can lead to suboptimal results, while behavioral economics has cast doubt on the assumptions about human rationality.

It seems to me that he conflates two things. The first is how the public perceives economists. The second is the political preferences of economists themselves. The distinction is important because even if economists have become more liberal, they still might appear to be free market dogmatists if the public continues to not understand economic theory. Bryan Caplan has demonstrated there continue to exist biases in the public understanding of economics. While adverse selection is important, I think most economists agree comparative advantage is even more so. Paul Krugman at least used to agree.

Noah also falls prey to the nirvana fallacy. He compares supposed market failures with idealized solutions. These idealized solutions rarely happen, the reason being public choice, an innovation he failed to mention. Government actors are the same fallible humans as market actors.

Take behavioral economics for example. While it is often applied to market actors, the same logic also applies to the government actors making and enforcing the rules. Therefore, on net, it isn’t clear whether behavioral economics justifies government intervention. Applying behavioral economics to government might imply restricting state intervention.

However, Noah’s more central point is about the change in attitudes of the economic profession. David Henderson already responded about macroeconomics. My research has been on development economics and that field has become substantially more likely to favor open markets.

It is worth noting that the traditional dichotomy between liberal and conservative is misplaced. While I favor lower marginal tax rates and less government intervention, far more important is government recognition of property rights. The question is not, is Sweden a better model than the US, it is, why is Africa poor? The (relatively new) consensus among economists is that Africa is poor because of bad institutions.

This wasn’t always the case. Peter Bauer was for years a loner voice against state led planning. Though Douglass North won the Nobel Prize in 1993 for his work on institutions, the turning point didn’t occur until Acemoglu, Simon Johnson, and James Robinson published “Colonial Origins” in 2001. They were the first to causally show through econometrics that institutions caused economic performance and not vice versa.

While institutional economics cannot be described as entirely libertarian in its implications, it is substantially more so than previous development theories. Two recent books, Why Nations Fail and Violence and Social Orders offer similar frameworks. They differentiate between two types of governments; I will call them an open state and a predatory state.  Predatory states are defined by elite expropriation of wealth and monopoly privileges. Open states allow any person to enter the marketplace and encourage competition. These distinctions are comparable to indices of economic freedom.

Part of the reason Noah might have the impression he does is because economists used to assume the existence of strong stable property rights. The discussion was over government intervention given those property rights. Perhaps given that assumption he is correct, but the importance of institutional economics is abandoning that assumption.

As I tell my students, the reason there are poor countries is because their governments steal too much from the people and don’t respect their property rights. I do not think most economists would have agreed in the 1960’s or 1970’s, but I do think they would today.

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Was Mises a fascist?

Anyone who has bothered to read Ludwig von Mises immediately knows that the answer is no. However, because of a few out of context quotations from his book, Liberalism, every few years he is attacked as one. The most recent offender is Michael Lind, making such ridiculous arguments I wonder if Poe’s law applies to Salon.

He quotes Mises:

It cannot be denied that Fascism and similar movements aimed at the establishment of dictatorships are full of the best intentions and that their intervention has for the moment saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.

Now this quotation looks bad. Mises literally writes that fascism has saved European civilization. However, it is important to consider the context within which Mises was writing. The Soviet Union was about a decade old and had already starved 3-10 million people under war communism. The output of heavy industry had fallen to 20 percent of 1913. Communist parties were all over Europe and close to power.

Mises, out of all people, stood to be most horrified by this. He wrote the most penetrating critique of communism, warning of the impossibility of rationally allocating resources without prices. Prices were only meaningful with private property and market transactions. Fascism, on the other hand, was a new phenomenon. Hitler hadn’t taken power in Europe. Fascists had not started any wars. They had not yet committed genocide.

Hindsight is 20-20. Perhaps it is too much to expect Mises to be knowledgeable about the future evils of fascism — wait, no it isn’t. Mises was a genius. Let’s quote the entire passage rather than the two sentences Michael Lind does.

So much for the domestic policy of Fascism. That its foreign policy, based as it is on the avowed principle of force in international relations, cannot fail to give rise to an endless series of wars that must destroy all of modern civilization requires no further discussion. To maintain and further raise our present level of economic development, peace among nations must be assured. But they cannot live together in peace if the basic tenet of the ideology by which they are governed is the belief that one’s own nation can secure its place in the community of nations by force alone.

It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history. But though its policy has brought salvation for the moment, it is not of the kind which could promise continued success. Fascism was an emergency makeshift. To view it as something more would be a fatal error.

So, not only does Mises dislike fascism in 1927, he also fully realizes the threat to European peace that it is. He takes the likelihood of what fascism will lead to as so obvious it “requires no further discussion.” Viewing fascism as anything more than an “emergency makeshift” would be a “fatal error.”

Reading the full passage it is clear that Mises had a nuanced and amazingly prescient understanding of fascism. Forced to choose between two of the greatest evils of the 20th century, he chose the fascists, fully recognizing where they would lead if they retained power and warning against it.

Now, unlike Michael Lind I try to be reasonable. I read passages in full, and do not selectively quote to obscure meaning. That being said, based on my reading of Liberalism I am forced to conclude Mises was a time traveler. It is the only possible explanation of such brilliance.

As a bonus, if you’re interested in what Mises wrote about the domestic policy of fascism:

Many people approve of the methods of Fascism, even though its economic program is altogether antiliberal and its policy completely interventionist, because it is far from practicing the senseless and unrestrained destructionism that has stamped the Communists as the archenemies of civilization. Still others, in full knowledge of the evil that Fascist economic policy brings with it, view Fascism, in comparison with Bolshevism and Sovietism, as at least the lesser evil.