Liberal economists are open to persuasion. What about conservatives?
by Eric Kramer
Liberal economists are open to persuasion. What about conservatives?
There are many examples within the economics profession of cases where liberals have been persuaded by conservative arguments that raise doubts about the value of government intervention in markets.
Harold Demsetz argued that it is a mistake to call for government intervention simply because markets depart from perfect efficiency, because not all inefficiencies can be corrected by government. Specifically, he pointed out that government cannot correct the inefficiency caused by moral hazard in insurance markets, because if private parties do not have the information needed to control moral hazard then the government generally will not have this information either. Demsetz’s point has been widely accepted by liberal economists.
Ronald Coase argued that the Pigouvian approach of using pollution taxes or nuisance liability to make the private costs of an activity equal to its social costs breaks down in a second-best world with more than one externality. For example, making railroads liable to farmers for fires caused by passing trains will lead railroads to take steps to reduce sparks, but it will also give farmers an incentive to plant too close to the tracks, so it is not clear a priori that making railroads liable for fires will improve overall welfare, even though it internalizes external costs on one margin. Coase’s point is widely regarded as correct.
Liberals have largely accepted the Lucas critique in macroeconomics. Many liberals have come to agree with conservative scholars that current zoning regulation and occupational licensing rules create serious social costs.
In many of these cases it is plausible that their natural skepticism of government led conservatives to think about problems in a novel and productive way, and to question policies or methods of economic analysis that liberals may have been too willing to accept. Intellectual diversity is valuable, at least if people are willing to have their ideas challenged.
But it is not clear to me that similar examples could be given of conservative openness to liberal ideas. Certainly, individual conservatives sometimes become more liberal in their orientation. This seems to be true, for example, of many of the scholars currently at the Niskanen Center. But are there any examples of communities of conservative scholars in the past 50 years modifying their views in response to liberal insights and endorsing a larger role for government than they previously were willing to accept? Have the followers of Hayek or Buchanan recognized the validity of any liberal criticisms of their views?
Conservative–by definition–means not changing. Looking backwards.
I think that is the definition of conservative vs liberal.
Where is all this leading? I mean, when we take the economists advice, and they get something wrong, what is their defense in the trials when we arrest them for fraud.
My advice to economists is to give the options and risks with an error band, then STFU before you get arrested on war crimes.
Please read the interview with Glenn Hubbard, Dean of the Columbia Business School and GOP economic advisor, in the Wall St. Journal online, May 18, 2018.
Please read The Case for the Wage Subsidy in the National Review Online by conservative economist Oren Cass, November 16, 2018. Also note that the leading figure behind the wage subsidy is the Nobel Prize winner and conservative economist, Edmund Phelps.
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My God that Coase example is terrible. He may sometimes have a case, but surely he could have found a better example. It sounds a bit like the “seatbelts, airbags, good breaks make drivers worse sort of argument”. Possibly true but not sufficient.
The above comment is I think a more general point than is obvious at first glance. As I’m Robert Waldmann will agree with me, a lot of the “contributions” of conservative economists are what-about-isms and don’t really amount to much empirically and that applies explicitly to almost all the examples you provided. Me thinks that we conceded too much.
Harry Chernoff: I say in my post I’m not denying that some conservatives sometimes support liberal policies. I’m interested in whether the field of conservative political economy as a whole has recognized the validity of any liberal arguments for a more active role for government. Sure, this is a difficult assessment to make, and it could well be that I’m overlooking something, but I’m really not aware of any general movement. Even though some conservatives would acknowledge that Hayek and Buchanan were wrong on some specific points, I don’t see this changing their views about the role of government. Conservative political economy remains committed to limiting the scope of government. I don’t see a lot of support for progressive taxation or raising the minimum wage or the EITC coming out of the Mercatus Center, Cato, AIER, AER, etc., despite the rise in inequality over the past few decades. I don’t see a lot conservative support for greater spending on children, despite the growth of research showing that spending on poor families has important benefits for poor children.
Reason: I agree that many conservative arguments are “whataboutisms” – I said as much in my last post. On the other hand, I don’t believe that everything conservatives say amounts to whataboutism. I also agree that some of the arguments I cite have been abused by conservatives. Demsetz’s Nirvana Fallacy argument has arguably been abused by conservatives, but that doesn’t mean he was wrong about moral hazard. New Classical Macro I think was a disaster, but on the narrow question regarding the importance of expectations didn’t Lucas have a point? I think Friedman was much too critical of occupational licensing, but it seems plausible to me that it has become a problem. And it seems plausible that land use restrictions in major cities is a serious problem. (In fact, I believe that one of Elizabeth Warren “plans” addresses this issue.)
Eric: Please read this excerpt from Hayek’s Road to Serfdom on social safety nets. https://sites.google.com/site/wapshottkeyneshayek/hayek-on-health-care-social-safety-nets-and-public-housing. It directly addresses your comment.
Separately, with respect to the minimum wage, either the demand curve for labor is inelastic, in which case the minimum wage does not signficiantly reduce the demand for labor or the demand curve for labor is elastic, in which case the minimum wage does significantly reduce the demand for labor. Either case can be made but it’s illogical to simultaneously support both a high minimum wage (inelastic demand) and a high wage subsidy (like the EITC, elastic demand) . Liberals go for the min wage, conservatives for the wage subsidy.
At the same time, if liberals believe the demand curve for labor is highly inelastic (i.e., min wage good), then shifting the supply curve to the right via immigration (particuarly of low-producitivity workers) substantially reduces the equilibribum demand for labor, which liberals deny. In other words, it’s reasonalble to support either proposition – inelastic demand and minimum wage does not displace workers OR elastic demand and high immigration does not displace workers but it is not reasonable to support both – which is what liberals do. Tyler Cowen and John Cochrane recently had pieces on their blogs (Marginal Revolution and The Grumpy Economist) addressing this point.
Eric: One additional point. Conservative objections to liberal spending policies are typically not based on whether the spending is objectively good or bad (as in the case of child care, for example), they are typically based on the liberals’ unwillingness to answer the “compared to what?” question. Liberal economic policies are increasingly based on the notion that scarcity is scarcity is a social construct that can be swept away with enlightened (i.e., liberal) policies. If scarcity is a social construct and not the inescapable organizing concept of economics, then AOC and her followers are correct. If scarcity is real, then Bastiat and his followers are correct. Pick one.
Demsetz’s Nirvana Fallacy argument has arguably been abused by conservatives, but that doesn’t mean he was wrong about moral hazard.
Moral Hazard is a general problem with all insurance. Insurance companies usually do two things about it – 1. deductables 2. evidence based research. However private insurance worries me with moral hazard in the other direction – I pay now to receive later => somebody received now on a promise that may not be honored in the future.
New Classical Macro I think was a disaster, but on the narrow question regarding the importance of expectations didn’t Lucas have a point?
Yes expectations are important, but didn’t Keynes also believe that. Don’t “Austrians” mostly ignore them.
I think Friedman was much too critical of occupational licensing, but it seems plausible to me that it has become a problem.
It is an attempt to address information asymmetry. As we have seen the problem is far worse if it is privatized (e.g. Standards and Paul’s) because it is almost openly corrupt given who pays for it. The question should not be whether to regulate it should be how to regulate. That is a good faith argument we need to have. Conservatives are not arguing in good faith.
And it seems plausible that land use restrictions in major cities is a serious problem. (In fact, I believe that one of Elizabeth Warren “plans” addresses this issue.)
I like some of the arguments the Steve Waldmann makes on interfluidity about this and the views of Cameron Murray at fresh economic thinking. It is not so simple either from a moral or a policy point of view. My personal view is that cities are best built as a conglomerate of smaller units of a maximum of about 1 million (bigger than that a congestion costs more than the gains from size). So I think we need more compact cities with better connections between them rather than ever more concentrated cities. So I think the problem is we are spending far too little on infrastructure.
To clarify the last point, the answer to a monopoly issue of any sort is competition – we don’ t so much need to move more people to good places, we need more good places. I.e. We need more good cities . We also need to stop banks from pushing up the prices of existing assets rather than lending for investment.