Innovation and Market Constraints: The Case for Artificial Selection
Bruce Wilder had an excellent comment recently in the Crooked Timber thread on markets, economic rents, and the constraints on economic actors, excerpted by Dan here, and more with comments by Jazzbumpah here. (If you like the thinking there, run don’t walk to read this windyanabasis post and comments.)
The emphasis on constraints prompts me to revisit a post I made a few years back, pointing out that constraints, not innovation, are the shaping forces of economies:
Lane Kenworthy’s Big Idea
Attributing the robust state of modern economies to the “free” market is like saying that Arabian stallions, champion Rottweilers, and freshly-picked sweet corn are the result of mutation.
Would you and your family rather live with a wolf, or Good Dog Carl?
That’s the thought I come away with after reading Lane Kenworthy’s chapter on “The Efficiency of Constraints” in his book In Search of National Economic Success: Balancing Competition and Cooperation (1995).
After quoting Smith’s seminal “invisible hand” passage, Kenworthy says (emphasis mine):
The reason actors engage in economically beneficial behavior, according to the [neoclassical] theory, is not that they have unlimited freedom of choice, but that they must choose within a particular set of constraints – the constraints imposed by market competition. … It is this constraint, rather than freedom of choice, that is the crucial efficiency-generating mechanism in a capitalist economy.
In other words, extolling the “free” part of free markets is like getting all drippy about mutation without selection. More Kenworthy:
The issue is not free choice versus constraints, but what type of constraints produce economically productive activity.
Natural selection — in this case the constraints imposed by the natural and human environment and by other free-market agents — is a powerful force. But Kenworthy asks, quite reasonably, whether it is always more efficiency-producing than artificial selection (a.k.a. human-directed selection, a.k.a….breeding). In many cases, the visible hand of government creates more efficient markets.
Free-market advocates tend to ignore the reality that market-generated constraints often act directly against the formation of efficient markets. To choose what is perhaps the most obvious example: competition creates huge incentives for market participants to make sure that all information is not known. Disclosure regulations address that inefficiency, and result in the kind of robust open markets we see today in prosperous countries. Kenworthy gives three more (detailed and well-analyzed) examples in his chapter.
Even Adam Smith doesn’t assert that market constraints have some a priori claim to superiority. Says Kenworthy, quoting Smith,
…an individual who “intends only his own gain” is “led by an invsible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
“Nor is it always.” “Frequently.” Cherry-picked, at least, it verges on a mealy-mouthed endorsement. Smith, in his wisdom, is not nearly so categorical as his latter-day disciples.
Kenworthy’s attention to constraints — market-imposed and otherwise — strikes me as a profound insight, cutting straight to the heart of the laissez faire philosophy of neoclassical economics. But the idea — at least in this form — has not been taken up much by mainstream economists. A notable exception is Kenworthy’s colleague Wolfgang Streeck (who Kenworthy credits with inspiring his chapter in the first place).*
Not surprisingly, Kenworthy has a lot more than one good idea. National Economic Success has a boatload. Ditto his latest, Egalitarian Capitalism: Jobs, Income and Growth in Affluent Countries (2007). This post is already altogether too long, so I’ll leave it to other posts — and other posters — to delve into those ideas.
* “Beneficial Constraints: On the Economic Limits of Rational Voluntarism.” In Contemporary capitalism: the embeddedness of institutions, ed. von J. Rogers Hollingsworth.
Cross-posted at Asymptosis.
“In many cases, the visible hand of government creates more efficient markets.”
Steve, how are you defining efficiency in this case, and how would you propose to measure it? I’m assuming that by “government” you’re referring not to “governance,” e.g., electronics manufacturers voluntarily adhering to a Thunderbolt interface standard, but to a “State” which overrides voluntary interactions by force or by the threat thereof. If so, any aggressive override of voluntarism necessarily disregards the values of at least two parties in favor of the values of some other party or parties. To claim this is “efficient” would be to claim that it’s possible to measure and compare the subjective values of different parties.
In my experience, people are all for government in the Statist sense when its forceful actions align with their own personal values, but become vociferous change advocates when it doesn’t.
BTW, the windyanabasis blog post was quite intertesting, thanks for linking it.
of course. but that’s why we invented democracy. so we could fight about these choices without killing each other.
i don’t know of any democracy that is so overbearing that the capitalists have any legitimate complaint about the restrictions actually imposed on their free choice. try to think of it like the referee in football. the game might be more “fair” from your point of view without the rules and the referee, but it would be a lot less interesting.
and this brings up my friend the wolf. been living with one or more for a number of years now. and those teeth are on my side because we share family values. god help us, i love puppy dogs, but i am so glad my friends haven’t been taught sit, stay, fetch, and heel.
and if you think this means i favor “free competition” you are not thinking.
Most illicit drugs are prohibited in the U.S. But, that market seems to be pretty efficient.
I hate the word “free” added to markets. IMO you either have markets or you do not. So long as there is demand, you generally have people meeting supply within whatever constraints exist – government or otherwise.
Why do we not have a national health plan – well look no further than governmnet price controls that gave birth to the market for employer provided health insurance. Where there is demand the market will provide.
Of course today’s “capitalists” don’t have legitimate complaints about democracy. They’re able to extend the power of their wealth enormously in such a system, with no expensive “on-balance-sheet” violence.
A better analogy would be a referee who consistently awards points to the team that bought him a shiny new whistle before the game.
“Why do we not have a national health plan – well look no further than governmnet price controls that gave birth to the market for employer provided health insurance.” mcwop
Would you please go into a bit more detail in regardes to “government price controls that gave birth to the market for employer provided health insurance”? How did the former give rise to the latter? Be specific. What you leave out will be more informative than what you include.
given who owns the government today, i’d be inclined to accept your characterization, except that i think you are implying we would all be better off without government. and that is just too fanciful to entertain.
we have reasonably free markets in spite of quite a bit of government regulation. even the extent to which the government subsidizes the defense industry does not convince me the people would be better off without the arrangement.
though i am pretty sure the whole thing could be managed better.
that won’t happen as long as the people are so easily fooled by right and left. which as Jack reminds us is, “forever.”
depends on what you mean by efficient. it does keep the price up, to the advantage of the suppliers and their enablers.
i think mcwop is pretty confused about the relation of “price controls” and the tax subsidies that encouraged employer provided high cost health care.
i’ll wait and see if he straightens me out, but my ovservation has been that people string sentence fragments together by “sound” and not by “sense.”
“with no expensive “on-balance-sheet” violence”
WWII wage and price controls led to employer paid health insurance to increase compensation, and the IRS ruled health insurance a “legitimate cost of doing business” and not taxable income for the employee. Result? Institutionalized employer-provided health care. A huge market, not easily dismantled.
governmnet price controls that gave birth to the market for employer provided health insurance.
Somehow I got the notion that employer-provided health insurance arose in the days post WW II when the American economy was expanding rather rapidly, and there was a lot of need and therefore competition for labor. Kinda why so many people moved to Detroit, back in the day.
Health insurance became part of the package in a competitive market for labor. You had to offer it if you wanted to hire anybody.
Now, if you want to bring government into it, I’d suggest looking at Britain, which took rather a different approach around that same time . . .
Efficiency, is simply the ability to deliever the goods. I’d say the illicit drug market does a pretty good job considering the regulations it is up against.
ER health was used as a way to get around WWII wage and price controls to attract EEs.
Not the British system please. If we do National Health care France’s system is the model. Better than Canada or the UK IMO.
if that’s your definition of efficiency…well, it explains why we don’t understand each other.
Interesting that, as it turns out, both mcwop and JzB are correct in their understandings of the development of health insurance in the US. Neither has the entier story which is a long history of need and growth. Capitalism doing something right A brief history is given on a web site for neuro sugeons within which this paragraph hits on both explanations: http://www.neurosurgical.com/medical_history_and_ethics/history/history_of_health_insurance.htm
“Employee benefit plans proliferated in the 1940’s and 1950’s. Strong unions bargained for better benefit packages, including tax-free, employer-sponsored health insurance. Wartime (1939-1945) wage freezes imposed by the government actually accelerated the spread of group health care. Unable by law to attract workers by paying more, employers instead improved their benefit packages, adding health care.”
Wikipedia gives a similar history so I assume there is a reasonable degree of accuracy to their stories.
“Kenworthy’s attention to constraints — market-imposed and otherwise — strikes me as a profound insight, cutting straight to the heart of the laissez faire philosophy of neoclassical economics. But the idea — at least in this form — has not been taken up much by mainstream economists.”
There’s nothing new about this at all. Kenworthy’s right to bring attention to it, of course, but I’m surprised that you think that it’s a startling revelation.
Firstly, neoclassical /=/ laissez faire. So toss that idea right away.
Secondly, huge swathes of the literature are about exactly this specific point. Market design. How do we design and constrain markets so as to provide us with those very constraints which improve outcomes? Everyone actually working on the field has absorbed exactly the lesson that Kenworthy is pointing to. So much so that it’s actually the received wisdom.
Take, just as one example, the debate over climate change. Yes, a problem, one that we ought to do something about. So, what do economists recommend? Either cap and trade systems or a carbon tax. Exactly Kenworthy’s point. Judicious intervention into a market, construction of a market, to provide the contraints which lead to a better outcome.
The entire Kyoto, Son of Kyoto, various cap and trade systems, the Stern Review, half of the IPCC are all based on exactly Kenworthy’s point. How is this not mainstream?
The beauty of the market is that in-market constraints, i.e. dominate market positions like those of Microsoft, IBM, GM,etc. which would preclude “rational” entrepreneurs from entering their niche, can be disrupted by in-market innovation. Imposed constraints, ex-market constraints, cannot be disrupted by in-market forces. Consequently, my thought is that the utility of market sectors under inefficient contraints would drop. I don’t see how ex-market constraints would increase efficiency, other than in the short run, at best. The market’s adaptive nature would incorporate the constraints in its response. Its response would be less efficient than its original pathway toward its goal. Wouldn’t increased inefficiency tend to undermine Kenworth’s argument?
jack straightened me out. a bit. i still see the hand of government subsidies more than i see the hand of price controls in the spread of employer provided health insurance.
i don’t know what mainstream economists say, but the ones who appear in the news sources are all for unrestricted free enterprise.
and of course cap’n trade is a boondoggle.
but it’s good to hear that you take climate change seriously. now if we could only get Obama to.
sounds to me like over intellectual tail chasing. it would help if you thought seriously about your assumptions.
what do YOU mean by efficiency? lowest price to the consumer? highest profit to the business?
least damage / most good to “the general welfare?
i can always find a short cut that works for me.
@coberly: “intellectual tail chasing”
Right. Circular reasoning. Explained (wonky):
The goal is to maximize aggregate human utility.
Sort of by default (how else do you do it?), economists measure gross utility via the “revealed preferences” of spending.
People’s revealed preferences (which measure utility) show that they maximized their utility (which is measured by revealed preferences).
The measurement method “proves” its own method to be valid.
The problem: the “revealed preferences” measurement method assumes that individual decisions, *when aggregated,* maximise utility (even if individual decisions don’t, the plus errors balance the minus errors).
This in turn assumes that individuals are randomly irrational, so everything nets out to The Best Of All Possible Worlds.
But we know that humans are *systematically* irrational in a host of different ways. So all the wrong decisions do not net out to deliver maximum aggregate utility.
Revealed preferences are false measure of aggregate utility.
i would buy that.
I have read most of them and got a lot from them. To me, you are doing the great work. Carry on this. work at home In the end, I would like to thank you for making such a nice website..burleigh heads accommodation
Demand for turnkey rental the past few years has increased — a function of foreclosures and fewer existing rental properties making the decision to buy
When turnkey rental business is strong, we sometimes forget about being frugal, but we all remember the “bad days” of the appraisal recession in the mid-1990s. rental properties