Necessary but not Sufficient

In my latest article for Libertarianism.org, I argue that the existence of a “market failure” is a necessary but not sufficient condition for government intervention in the economy.  A slice:

As with all economic questions, the answer is “compared to what?” Externalities, compared on an idealized hypothetical world where all information is known and transactions are costless, appear easy to solve via government regulation. However, when we compare a world of externalities to the real world, where costs and benefits are subjective and ultimately judgement calls must be made by analysts, we see that externalities are necessary but not sufficient justification for government intervention.

 

Big Changes Coming

Dear readers-

I have an announcement to make (please scroll down to see my latest blog post).

For the past three years, WordPress has hosted A Force for Good.  However, due to a number of circumstances (not the least of which is WordPress increasing their prices and reducing their ease of use), I will be moving this blog to my personal website: www.jonmmurphy.com.  The blog may be found here.

For the time being, posts will be made both here and at my other website.  When the integration is fully made, I will make another post.  Until then, you may continue to read here.

Commenting at the new blog will be handled through Disqus.  You will need an account, like with WordPress, but that’s it.  I am working on keeping all other functions the same.  I ask for your patience during this time.

Thank you,

Jon

The Metric Fallacy

We often hear some proclamation, usually in support of subsidizing some activity, that some activity is desirable because it leads to success (for example: “Education is an investment in the future”).  But this is what I will henceforth call the “Metric Fallacy,” which is a specific form of the “ad hoc ergo propter hoc” fallacy.

The fallacy goes like this:

Some desirable outcome, X, is highly correlated with broad category Y.

Therefore, to achieve X, one should increase Y.

The first statement is true (X and Y are correlated).  The second statement, however, is fallacious.  A practical example will help:

It is true that higher education is correlated with higher levels of income.  According to the College Board, a person with even just some college education earns approximately 13% more than someone with just a high school degree.  Higher levels of education are correlated with higher levels of income.

But it is fallacious to, therefore, say that education itself is the cause here.  We need far more information.  The type of education matters a whole lot more.  A person in theology earns considerably less than a person in chemical engineering.  Ceteris paribus, a doctoral degree in a STEM field will earn a lot more than a doctoral degree in religion.

Thus, the Metric Fallacy is: to increase income, we need to increase education.

We see the Metric Fallacy all over the place and in high-ranking areas (Education and Economic Growth Theory and subsequently foreign investment, just to name a few).  Many government policies are based off this fallacy, including minimum wage, subsidized college loans, foreign aid plans that involve capital donations, and the like.  Indeed, probably the greatest lie I heard as a child was “if you want a good job, you have to go to college.”

My colleague and professor Chris Coyne writes a lot about this in his excellent book “Doing Bad by Doing Good,” and it is the main thesis of Bill Easterly’s book “The Tyranny of Experts.”

The other day, I wrote about discovering prices vs imposing prices.  Discovering prices means that we see what prices emerge from the price system, people acting in response to relative scarcity.  When prices emerge, they provide information.  A person in a profession who earns a high salary means there is a relative scarcity of that profession.  He is indeed made better off by this, but it also signals that we need more of that profession.  Prices allow us to discover this information.  But it is a fallacy to conclude that his higher wage is in some way desirable for anything other than this purpose (eg, the protectionist who might argue if he is made “worse” off because of competition, we all are made worse off).

Today’s Quote of the Day…

…is from page 99 of Roger Koppl’s 2018 book Expert Failure (original emphasis)

Many thinkers (and most undergraduate economics students) seem to believe that any “laws of economics” would have to be first devised and promulgated and then followed.  If there is a law, there is a lawgiver.  But the “laws” of a spontaneous order generally function even when nobody is aware of them.  Thus, an increase in the supply of a commodity causes its price to fall in Homeric Greece no less surely than in nineteenth-century London.

JMM: We can broaden Dr Koppl’s statement to more than just economic laws.  Laws, as distinguished from legislation, are followed without necessarily any conscious knowledge of the law.  Some laws are universal (such as the increase of supply noted here), and some may be specific to a time and place (such as the orderly fashion a crowd leaves a stadium after a ballgame), but prior direction of the laws are not necessary to their functioning.  Indeed, we tend to pick up on the laws not necessarily through formal education, but rather through social cues from our interactions.

The fact that laws are not necessarily known beforehand and explicitly leads to the reason why they need to be discovered (see my post here).  Laws are something observed though human action.

 

Today’s Quote of the Day…

…comes from page 80 of Roger Koppl’s excellent 2018 book Expert Failure (link added, original emphasis):

Earlier we saw Lee Ellis argue for chemical castration of young men with “crime-prone genes.” Writers who, like Ellis (2008), view experts as reliable and nonexperts as powerless do not usually subject their theories to the reflexivity requirement.  Ellis’ essay illistrates, however, the importance of the reflexivity that all agents of the system be modeled.  He models persons with “crime-prone genes,” but not the experts who would administer sterilization policies.  He consequently wishes to place discretionary power in the hands of persons unlikely to exercise such power with the Solomonic disinterest and wisdom his policies would require even under the assumption that his eugenic ideas are correct.  In the theory of experts, as in all of social science, all agents must be modeled if we are to minimize the risk of proposing policies that would require some actors to behave in ways that are inconsistent with their incentives or beyond human capabilities.

JMM:  Economics, and the social sciences in general, try to emulate the natural sciences by means and methods.  But the social sciences differ from the natural sciences in the key way that Koppl mentions here: we are part of the very thing we are modeling.  To borrow a metaphor from elsewhere in Koppl, we are also the ants in the anthill.  So is government.

The big assumption made by many people, both on the left and on the right, is that government is somehow made out of finer clay than the rest of us mere mortals.  This may be because they were elected, or appointed by God, or appointed by some panel of experts, or whatever.  That, for some reason never really explained, those imposing rules and regulations upon us are free of the “crime-prone genes” or self-interest or moral failings of the rest of us.  Were this true, were men really ruled by angels, then we would be near Heaven.  But alas, human history indicates that this is not so.  We all make mistakes, even under the best of intentions.  The question is how to limit the danger of those mistakes.

Modern Miracles

https://www.facebook.com/plugins/post.php?href=https%3A%2F%2Fwww.facebook.com%2FConcordNHGS%2Fposts%2F2203504713202016&width=500

The above comes from the City of Concord’s facebook page.

What an amazing world we live in where the vast majority of us have little holes in our homes that whisk away unsanitary matter to be disposed of in a proper way and keep us all safe?  All I need do to remove potentially diseased meat juice from my home is to put it down this drain and *woosh!* it’s gone.  All I need do to remove human waste from my home is to push a lever and *woosh!* it’s gone.  All I need do to remove infectious excrement from my home is push a lever and *woosh!* it’s gone.

The sewer system is a miracle, pure and simple.  And the miracle workers are not some wizards or alchemists chanting arcane words, but hard-working men and women who keep the water flowing.  Our world is cleaner because of it.

Costs and Benefits are Culturally Dependent

futurama culture

The above screenshot is taken from Futurama.  Lrrr and his wife, Ndnd, rulers of the planet Omicron Persei 8, are aliens from a warlike race.  Violence permeates their culture.  While Lrrr himself is not particularly warlike (he half-heartedly invades Earth in one episode just to stop his wife from nagging him), the culture still is ingrained in him and much of his confusion regarding Earth is why it is not more warlike (another quote I could have chosen is when he is watching an episode of the in-show spoof of Ally McBeal called Jenny McNeil, he asks “if McNeil wants to be taken seriously, why does she not simply tear the judge’s head off?”).

Lrrr’s confusion stems from the two different cultures of Earth and Omicron Persei 8.  What is “foolish” behavior for him is normal behavior for the people of “ancient” Earth (Futurama takes place in the opening decades of the 3,000’s, so “ancient Earth” to him is the 90’s and 2000’s for us).  For Lrrr, there is a benefit to demonstrating strength before (or to) friends.  For the people of Earth, it is a cost.

This simple fact makes the job of the economist difficult when it comes to regulation.  The typical Econ 101 story for regulation is to do a cost-benefit analysis and, if the costs are less than the benefits, then regulation may be justified.  But this seemingly straightforward process is, as we can see above, actually quite complex.  What counts as a cost and benefit, as well as the relative values of those costs and benefits, are subjective.  It depends on the person observing the situation.  For us, Ross’ behavior is normal and praiseworthy.  For Lrrr, the exact same behavior is confusing and foolish.  And Earth observer might propose a regulation that rewards people who act like Ross.  And Omicron Persei 8 observer might propose legislation that punishes people who act like Ross.

Ultimately, the determination of regulatory behavior comes down to the subjectivity of the observer.  What this means is “optimal” regulation (such as a tariff, tax, wage, etc), while possible in theory, is practically impossible.  What may be an optimal tax for one observer may be too high/low for another and may be a subsidy for a third.

This subjectivity is why I adhere to a status quo bias and a presumption of liberty.  Legislative and legal changes should not be done casually, and even with great thought and analysis, should be undertaken only very carefully.