Sunday, March 23, 2014

When the Scientist is a Bad Philosopher: Some Thoughts on Mankiw

I have let Greg Mankiw’s latest piece for the New York Times simmer in my brain for a few days, and now I have to let some of the noxious vapors escape.

Here’s what he says.  Most economic choices are complex, with positive and negative effects on many parties.  The utilitarian calculus, the greatest good for the greatest number, doesn’t work, because it means helping some people by hurting others.  Unless there is a clear case of market failure—externalities—it is best to defer to the voluntary choices made by individuals in a free market.

What makes it difficult to respond is the multitude of errors and omissions in the Mankiw formulation.  It’s hard to know where to begin, so let me just make a list.  All of these are interconnected, of course, so the whole list is more than the sum of its elements.

1. Externalities are not the only market failure!  It’s scary that one of the planet’s most widely read undergraduate textbook authors could say this.  For the record, you’ve also got imperfect competition, public goods and asymmetric information, and together they apply to a lot of economic terrain.

2. A different issue, not yet classified under market failure, is multiplicity of equilibrium.  I’ve written a lot on this in the past and won’t repeat myself here, but interaction effects between economic agents, as well as the goods and services they produce, routinely make possible potential returns to collective action.  To not see this is to not see the “social” in social science.

3. It is true that market transactions, if participants are self-interested and rational, filter out possible actions that make some better off at the expense of others.  But surely to rule out all social change that is not voluntarily accepted on all sides is to commit to an extreme conservatism.  The world we live in is the product of the past, with all the irrationalities and inequalities that have been transmitted to us by history.  Maybe, just maybe, we might want to rectify some of them, even if history’s beneficiaries are against it.

4. Embedded in Mankiw’s quasi-libertarianism is a profound distrust of democracy.  No one, he says, can reasonably weigh the competing claims of the winners and losers from a policy proposal.  Well, that’s what democracy is supposed to do.  In theory, we discuss it.  We ask people to not simply assert their interests but give reasons why society should defer to them, and then we assess these reasons.  Obviously, actually existing democracy falls far short of the ideal, but its performance is not completely worthless, and there is untapped potential even in existing institutions to do this job a lot better.  It isn’t hard to find examples from modern history where democracies have risen to the occasion and brought about social change that, in hindsight, most of us now endorse.  I sentence Mankiw to 40 hours of mandatory service to his own brain, in the form of reading John Dewey on democratic theory.  He can get started here.

I can see the value in giving people plenty of scope to make voluntarily arrangements with one another.  There is real freedom involved, and it’s important that there be lots of opportunities for individuals to take initiative as they see fit.  But this is one value among several, and its weight varies from one policy context to the next.  Knee-jerk libertarianism is simply lazy philosophy.


Eric Nilsson said...

All Mankiw ends up offering is that only Pareto Optimal moves should be accepted...even when obvious market failures exist (such as in the case of health insurance markets).

Sandwichman said...

Played by the Rhetoric of Reaction playbook. Neither a 'scientist' nor a 'philosopher.' A hack.

Sandwichman said...

And just WHO is going to neutrally enforce those voluntary contracts between individuals?

"The continuing emphasis on free will sends the message that we really do have a "free market" -- a place where people can pursue their individual objectives through voluntary exchanges. The theoretical availability of duress as an excuse for avoiding a contract sends the message that the free market rests on a baseline standard of business ethics, and that transactions resulting from the unfair exploitation of another's weakness will not be enforced. The fact that very few cases actually end with a finding of economic duress sends the further message that virtually all marketplace transactions are fundamentally fair, despite the vast differences in wealth and bargaining power, and that the legal system stands ready to catch the few exceptions.

"The underlying ideological message is thus 'don't worry, be happy', although dressed up in suitable legal terminology."

'One Truth is Clear, Whatever is, is Right': The History, Indeterminacy, and Ideological Significance of the Doctrine of Economic Duress

Typo Boy said...

Also on your point one, there is also split incentive which can happen even if both parties are well informed (landlord/renter). There is principal/agent conflict which combines asymmetric information with split incentives. All this assumes rational actors, which is a whole other issue.