Economics

On child labor

I have been in Honduras since Monday and am spending the next week in El Salvador. One thing I notice when traveling in the third world is child labor. There are always children, some as young as 7 years old, trying to sell you something, usually gum, other candy, or cigarettes. These kids are not in school and their futures are bleak. However, despite the obvious poverty of their situation one feels compelled to buy from them. Buying from them increases their income, making them better off. There is an implicit recognition that the alternative is not school, but hunger.

There are two reactions to child labor, one which comes from thinking about it, and the other which comes from seeing it. No one likes the idea of child labor to the extent that even considering it can get you ostracized from polite society. However, actually seeing child labor elicits a different reaction. The feeling is not to ban the child labor itself, but to help the kids in another way. The visualization of child labor forces one to understand the poverty of the choices they face.

The question is how to get people to understand opportunity cost as an abstract concept. Common arguments that children are working because it is the best option available to them fall on deaf ears. Even pointing out the outcomes that follow from restricting child labor is not enough. Paul Krugman notes that when Bangladesh banned child labor many kids turned to prostitution or starved. Even this is sometimes not enough. People have ideological predilections so strong they ignore problems of scarcity, ignoring the fact that the literal alternative to child labor is occasionally starvation.

When we think about child labor sometimes it is better to forget the statistics. Remember the kid trying to sell you gum. Would you take away his livelihood? How would he live? How would he eat?

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A review of Peter Leeson’s ‘Anarchy Unbound’

Anarchy Unbound by Peter Leeson is the newest addition to the academic anarcho-capitalist literature, books and articles that attempt to engage mainstream academia on the topic of anarchism. He begins by setting an admittedly low bar, why anarchism works better than you think. Then he takes you on historical examples to show how self-governance can produce better outcomes than governments.

I strongly recommend this book. It is the clearest exposition of the George Mason approach to anarchism. That being said, reading it, I can more clearly identify a growing gap between popular anarchism, exemplified by attendees of Porcfest, and academic anarchism.

Popular anarchism is a social program, an argument that a stateless society today can lead to better outcomes than most countries. Snapping ones fingers and replacing the state with Friedmanesque, non-territorial, dispute resolution agencies would improve social outcomes. Transitioning is, or course, tricky, but can be ignored for the current discussion.

The primary critique of anarchism is that it is unstable. If a state is inevitable, than anarchism as a social program is, at best, an unachievable ideal. Unfortunately, Leeson never investigates the inevitability of states. As such, I do not think his book has much value for those interested in the possibility of actually enacting of a modern stateless society.

The most recent research suggests the state emerges whenever there is a surplus of wealth that can be expropriated. Raul Sanchez de la Sierra studies villages in Congo, a country whose central government can barely project power outside the capital. He finds pseudo-states emerge in these villages when the price of cobalt rises. On the other hand, nothing of the sort happens when the price of gold rises, as gold is easy to conceal.

This suggests a different research path for those interested in the possibility of a modern anarchist society than Leeson has followed. Rather than investigating stateless societies, anarchists should examine the emergence and growth of states. Under what condition are states inevitable? Do those conditions still exist? Responsible advocacy of anarchism requires answers to these questions. Unfortunately, few are currently considering them.

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.

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.