"What the U.S. system did was to democratise invention and innovation"

"The problem we have globally and historically is that innovation has usually occurred as a one-off, maybe as a flash of brilliance, but it hasn’t been able to be sustained or consistent because for most of human history and in most places in the world today, the conditions were not present to enable an investment in sustained and transformative innovation. ... What the U.S. system did was to democratise invention and innovation, to say we’re going to make rights available to anyone who can do something innovative and allow them to invest themselves, not as a hobby, not as a sideline, but as a living. ...

"[F]ive distinguishing features ... make the U.S. unique:

• the American economic approach enables risk taking and failure, fosters competition and ensures goods and services can cross state lines, 
• provides property rights, 
• is based on the rule of law, and 
• establishes markets.
• mobilising resources and making them available for investment in new areas

“You have to set those conditions where you can access all of that private capital. And then you can use it for the high risk, the high-end deliverables that really change the world. You know, those technologies for energy that are going to tackle climate change, the new cures for HIV and cancers, the new modes of food production that will, you know, feed 8 billion plus and growing people around the world.
    "The rule of law in the United States has allowed markets to operate effectively and with dynamism because 'it took all the friction out of the system.' ... When we fail to provide rule of law whether it’s in a store or at the border or in intellectual property then the system starts to break down and we don’t have those dynamic benefits of a market economy.”

~ Patrick Kilbride in conversation with Gene Quinn on 'The Case for Market Economics, Innovation and Rule of Law'

3 questions for a regulatory reform minister

 

So let's say you're a minister in a reforming government, a rare enough beast. And that you're someone who has both the job and the intention of reforming regulations. (An even rarer animal in any political environment!)

Economist Jon Murphy offers 3 simple questions to guide your work. And they start with Ronald Coase ...

As many economists have been pointing out since at least Ronald Coase’s famous 1960 paper 'The Problem of Social Costs,' we exist in a complex world of pre-existing social, economic, legal, and legislative arrangements. These arrangements influence our actions. Like Chesterton’s Fence, we cannot pretend they do not exist, nor discard them because we do not understand their purpose.
    And yet, many interventionists do ignore current arrangements.

Many interventionists simply load new intervention upon old intervention, assuming either the new intervention will fix the unintended consequences of the old intervention — or, worse, ignoring altogether that the old interventions exist!

But let's assume our political reformer is honest as well (an even rarer beast in politics!) Then your first question would be:

Question 1: What is the current state of affairs?

... Of course, it is impossible to articulate every single aspect of the current state of affairs. Rather, one should focus on the most salient (eg, direct laws, institutions, etc). ... There are all sorts of preexisting arrangements that influence [affairs]. These preexisting arrangements, as Coase pointed out, are crucial. If they are misunderstood, then interventions can make the situation worse.
    Answering this question also helps understand why existing patterns are what they are.

As Hernando de Soto liked to point out, if you see people doing insane things, then that's your clue there are some bad laws against which people are trying to just do their best. Talking about the developing world's shanty towns, for example, he pointed out it's no surprise that folk there tend to build their furniture before their roof: the reason being that the laws give them no chance to get secure land title, so their lounge suite will always be more secure than their shelter. People respond to incentives, even if bad law only encourages shitty ones.

Which leads us to the next question.

Question 2: Why have pre-existing arrangements failed?

If the answer to Question 1 leads one to conclude that there is indeed a failure, now we need to understand why that failure has occurred. Is there something about the current state of affairs that triggers that failure? What are the actual causes of the failure? What are the incentives people face?

Understanding those shitty incentives is the key here. And Do Soto's example is still on point: we should assume that people making apparently bad decisions are acting rationally. It's not they are irrational; it's the incentives they face that are irrational. So, in our example, our reforming political animal should examine  how poor property rights protection encourages these poor property decisions.

Here at home, he could do worse than start with the bad outcomes of the RMA and the Building Act.

And then consider ...

Question 3: Is your proposed solution the best method achievable?

Hopefully, by this point, [our enlightened political beast] has a pretty good understanding of the current state of affairs. Now is the time to start considering proper interventions. Note that this question actually has two elements to meet: 

1. the intervention is the best method to achieve the goal, and
2. the intervention is achievable.

... What is "best" may not be a positive intervention (meaning that one takes a new action) at all. Indeed, while investigating Questions 1 and 2, one may discover that the best thing to do is remove an existing intervention! 

Given the encrustation of existing legislation and regulation, that would be an enlightened first option.  

The second element relates back to our first question. Whether or not some intervention is achievable will depend on the current institutions. ...

And more crucially, will depend on the principles and political agility of the reformer, and the support they can garner for their goals.

My own suggestion would be to always head in the direction of more freedom, however small the increment, just as long as there is no new impediment to freedom imposed. That would be a principled, practical approach to reform. More white with no new black.

Or set off one or two small steps that would self-initiate many more, such that the liberating process might be unstoppable. (This was Hernando De Soto's approach with title registration in South America.)

We've seen more than one pinstriped "reformer" end up preening their ego rather than doing the work. But if the reformer's motivation were to remain sound, great things could be achieved even in small steps.

"Coase insisted that government should largely limit itself to defining and enforcing property rights."

"[Ronald] Coase showed that as long as property rights are clear and secure, and people can bargain freely with each other, nonphysical resources (such as the electromagnetic spectrum) will eventually be owned by those people and businesses that use these resources most productively from society's perspective....
    "Suppose [for example, that bureaucrats] award a part of the spectrum to a station that insists on broadcasting insect noises. That station is unlikely to be the one that uses that part of the spectrum most productively from the public's point of view. Another station that has plans to use that part of the spectrum in ways more useful to the public — say, by broadcasting pop music — will offer to purchase the insect station's property right in the spectrum. And the insect station will voluntarily sell because the pop-music station will attach a higher value to owning that part of the spectrum than will the insect station....
    "An upshot of Coase's insight is that command-and-control regulations are almost always harmful, or at least suboptimal. Such regulations dictate in detail how firms should behave and deny them the flexibility to find better ways to achieve the same desired outcomes. If each steel producer, say, is told that it must install pollution scrubbers on its factory's smokestacks, every steel producer is barred from using less costly ways to reduce pollution.
    "Coase insisted that government should largely limit itself to defining and enforcing property rights. Bargaining in markets — bargaining to buy, to sell and to use such rights as individuals on the spot judge best — will almost always generate better outcomes than will top-down diktats."

~ Don Boudreaux, from his op-ed 'Property Rights' Importance'

Why is free speech so frequently disparaged today -- dismissed as "freeze peach" by the commentariat -- by those who, yesterday, were in the forefront of the battles to defend it? As Peter Jacobsen explains in this Guest Post, a 1974 paper by Nobel Prize-winner Ronald Coase (below) has a convincing answer.

Why do we hear increasing calls for censorship in the market for ideas?

by Peter Jacobsen

After Elon Musk’s offer to purchase Twitter was accepted, the Department of Homeland Security unveiled plans for a “disinformation” governance board. Musk’s purchase is not final, and the governance board is now paused, but the reaction to these events has been telling.

One might expect professionals in the market for ideas would be concerned by a government agency policing speech. Curiously, many groups who historically have defended free speech against interference seem slow (or absent) in response.

Members of the journalism industry have reacted negatively to Musk’s vocal support of free speech. His purchase is “dangerous,” and his commitment to free speech will lead to people being “silenced.”

Meanwhile, the Associated Press attacked Musk for wanting free speech, claiming that this desire was inconsistent with the fact that he has criticised people in the past.

This claim by the AP is terribly confused since, as most sane people understand, criticism is obviously compatible with free speech.

Time magazine voiced opposition to Musk from another angle, trying to disparage what they called his “tech bro” obsession with free speech." 

Meanwhile, CNN writers crafted the suggestive headline, “Twitter has been focused on 'healthy conversations.' Elon Musk could change that.”

And over at The Conversation, Filippo Menczer, a professor of informatics and computer science at Indiana University, argues John Milton’s idea of the uncensored marketplace of ideas is outdated and calls for “refereeing” of social media. And of course, this refereeing isn’t at all what we'd call censorship. Why would you think that?

Another professor writing for The Conversation, Jaigris Hudson, argues Elon Musk’s free-speech push will make speech less free because if harsh language is allowed some people will apparently just stop talking. This article when set next to this Washington Post piece and the AP tweet underscores a consistent theme of mistaking free speech for freedom from criticism.

Head bureaucrat of the government’s “paused” disinformation board, Nina Jankowicz, also wishes Twitter would move in another direction. Jankowicz wonders, why not allow verified accounts to edit the Tweets of people using free speech too dangerously?

Although it isn’t uncommon for high level military bureaucrats like Jankowicz to desire censorship, academics and journalists have long been stalwart defenders of the importance of an uncensored marketplace for ideas. For a long time, universities and newspapers were seen as places where controversial means and ends could be debated publicly. The common final defence of these institutions against calls for censorship was “the truth will out.” No longer.

But this once-common defence of the marketplace of ideas was so universal among the professional intellectual class that it inspired Nobel Prize-winning economist Ronald Coase (1910-2013) to write a paper trying to explain why this was so. And, using this same paper, we can see Coase implicitly predicted the increasing favourability of censorship among the professional intellectual class.

The Market for Goods vs. the Market for Ideas

In a 1974 paper, Coase, the Clifton R. Musser Professor of Economics at the University of Chicago Law School, mused over an interesting puzzle. Professional intellectuals focus tremendous effort in highlighting why the market for goods and services requires regulation. Meanwhile, those same intellectuals often argued that the market for ideas should be free from regulation.

So, why the asymmetry?

To answer this puzzle, Coase first dismissed two popular but wrong explanations for this paradox.

The first explanation is that markets for goods and services can have so-called 'market failures.' For example, if gasoline buyers and sellers don’t have to pay for the pollution gasoline generates, they will buy and sell too much at the expense of those who experience pollution. (Coase's solution was to ensure all such costs were internalised.)

However, the problem with this explanation is obvious. There can also be failures in the market for ideas. Even if it’s correct that the best idea will win, it’s obvious that the best idea won’t always win immediately. Pollution in the market for ideas, such as disinformation, is also possible.

In other words, the market for ideas also has market failures. On this criteria, either both types of markets should be regulated–or neither.

The second wrong explanation for why professional intellectuals defend the market for ideas from regulation is that unregulated speech is necessary for a functioning democracy. This explanation sounds okay at first, so what’s wrong with it?

Well, the market for goods and services is also necessary for a functioning democracy. As Coase puts it,

For most people in most countries (and perhaps in all countries), the provision of food, clothing, and shelter is a good deal more important than the provision of the “right ideas,” even if it is assumed that we know what they are.

So good ideas being necessary for a functioning democracy can’t be an explanation for why the market for ideas should be unregulated, since professional intellectuals favour regulation for goods and services which are also necessary for a functioning democracy.

The asymmetry remains.

Coase finishes his 1974 essay by solving the paradox. Why do professional intellectuals defend the market for ideas against regulation but not the market for goods and services?

The market for ideas is the market in which the intellectual conducts his trade. The explanation of the paradox is self-interest and self-esteem. Self-esteem leads the intellectuals to magnify the importance of their own market. That others should be regulated seems natural, particularly as many of the intellectuals see themselves as doing the regulating.

So, the market for goods and services is one over which the intellectuals would like to exercise control. Whereas the market for ideas is, in 1974 at least, the market already controlled by the intellectuals. And they see their market as a higher and more important calling. The market for goods and services, in their view, is both less important and more corrupted.

The Masses Take Over the Market for Ideas

So how does Coase’s explanation here predict the increasing calls for censorship in the market for ideas?

Remember the explanation Coase gave. Professional intellectuals considered the market for ideas as above regulation because they controlled the market.

But times have changed since Coase wrote his article in 1974.

The internet has revolutionised the landscape of the market for ideas. It’s no longer the case that the well credentialed have the most sway in the ideas market. Recent years have been characterized by creators on YouTube, podcasts, and, most recently, Substack dominating the market for ideas.

Now that the market for ideas is no longer dominated by academia and the journalism industry, and some of those places in which they do hang out intellectually look to be controlled by what they see as out-of-control billionaires, members of those groups no longer have the same incentives to stop industry regulation.

In fact, as in many industries, it may be in incumbents’ best interest to regulate competition. After all, if people get their new commentary from Joe Rogan and not CNN, that hurts CNN’s bottom line.

So, although Coase did not foresee in his piece the decentralisation of the market of ideas, the logic of his paper gives a clear prediction. If the ones who hold the reins to the market for ideas lose their grip, calls for regulation are sure to follow. And this is exactly what we’re seeing.

* * * *

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. His website can be found here.
His post previously appeared at the blog for the Foundation for Economic Education (FEE).

A Coesian case for an MMP parliamentary system?

An Israeli writer makes a Coaseian case for an MMP parliamentary system over, say, the American presidential system ...

His primary argument is based on Ronald Coase's famous approach to so-called "missing markets": 

People can’t buy and sell pollution, national security etc. The political system creates markets in public policy, where constituencies trade policy preferences.

    The bottom line is that a parliamentary system has many more margins where preferences can be traded. It is a much richer market. There are more parties, and with a coalition virtually every decision is a compromise = a deal = a utility-promoting exchange....

Tough luck however if it's your ox being gored by the horse-trading! 

He also argues that the system offers some advantages to those favouring even a narrowly--focussed minor party , for example ...

In Israel, 16 seats in a parliament of 120 belong to ultra-Orthodox parties. Virtually everything these parties want is unpopular among all 104 other Knesset members. However, the price of these compromises is low for other Knesset members and these parties don’t make many demands beyond their narrow interests. They don’t have a huge amount of political capital but they spend it all on a few policies that are very important to them.

We might however also call this "the wail wagging the dog." And that would depend a great deal on whether or not you're in favour of a narrowly-focused minor party.

He also argues that the degree of "regulatory capture" is much less because ministers in a parliamentary system are politicians rather than from that same industry -- and so there is less chance emerging of the likes of the "Government-Sachs" revolving door that so plagues American administrations (But it does disregard how many lawyers there are in parliament, many adhering to what Dickens called "the one great principle of English law [which] is to make business for itself" -- and how many former schoolteachers...)

And there are two additional incentive for better government too, he argues, in that ...

every minister wants to be Prime Minister someday and has a very powerful incentive to make a successful reform that will make him/her memorable to voters. At the very least a successful reform will guarantee a high place in the list and an additional term.

And then there's the budgetary competition between ministries...

Every minister wants a lot of money and power for his ministry, but there is a government. There is only so much money and only so much power so these are also assigned by negotiation. Each minister has a powerful incentive to make the best possible case for his ministry. It’s like a court where good decisions are stimulated by division of labour between the defense and the prosecution who make carefully argued cases to the judge. (In this case the government and ultimately the public.)

Notably however, he provides no examples of these allegedly "good decisions." (There are few enough around our way, that's for certain! And there is a one-word response to the situation in which the Prime Minister also pulls all the budgetary strings, and that word is "Muldoon"!

Nonetheless, it is still superior he argues to the US system ...

[which] I see it more as a “market maker” model rather than an exchange model. The President decides all these margins him/herself. The problems with this are myriad. There is a cognitive issue – even if the President is politically accountable to the same spectrum of constituencies as a parliament, s/he has limited bandwidth. There is no wisdom of crowds. 

Second of all, the President is not accountable to everyone, there’s just a limit to who can have his/her ear. 

Finally, if you are a market maker you have market power. If there is a deal with surplus which will only get made if you broker it, you will be able to appropriate some of that surplus. This is a big drag on the market.

He makes some good arguments about the benefits of an MMP parliamentary system to a reforming government. He does miss however the primary virtue of the American system, with its separation of powers setting each of the branches of government against each other, with its Bill of Rights and Supreme Court as the ultimate restraint (albeit long breached) which is that they are intended to impede activist governments, not support them.

The tragedy is that this has only managed imperfectly.

.

"A striking and ironic feature of socialism is its inherent anti-populism. Unlike democracy, socialist governments can afford to ignore and even harm the interest of the majority, often justifying these actions under some grand but empty banner."

"A striking and ironic feature of socialism -- both its advantage and ... its fatal flaw -- is its inherent anti-populism. Unlike democracy, which is forced to be responsible to the average voter, socialist governments can afford to ignore and even harm the interest of the majority, often justifying these actions under some grand but empty banner."

~ Ronald Coase + Ning Wang, from their book How China Became Capitalist.

Economics for Real People: Why do firms exist?

 

News for all of you from our friends at the Auckland Uni Economics Group. Here’s what they’re inviting you to tomorrow night: an an analysis of why firms exist even though most economic theories say they shouldn’t.

Only three years ago, the winner of the 1991 “Nobel Prize in Economics”, Ronald Coase, died aged 102. He won the prize largely for the ideas contained in his celebrated 1937 paper "The Nature of the Firm", which went unnoticed for around 30-40 years following publication.
    When it was “rediscovered” in the 1960s it then went on to transform not just the whole field of economic analysis but many economies around the world.
    How did his ideas influence the structure of the NZ economy? And how do the ideas of Coase influence how products are manufactured including the electronic device you using to read this message?
    And what is his explanation for why firms even exist?
   In this week's seminar, our guest speaker, Julian Darby, will use real life examples to examine the ideas of an economist who some call “Britain’s greatest economist since John Maynard Keynes.” [He’s actually far better than that sounds – Ed.]
We look forward to seeing you there!

    TIME: 6pm
    DATE: Thursday, August 18
    LOCATION: Case Room Two, Level Zero, Auckland Uni School of Business and Economics
                      (corner Symonds St & Grafton Rd; plenty of easy parking in the basement)

See you there!

.

Economics Group Seminar - Coase's Insights into ‘The Firm’

Here’s your update for this Thursday evening’s session run by our friends at the Auckland Uni Economics Group. (Why not head along: they’re a great way to discover and learn about the economic errors that repeatedly reproduce the same catastrophes.)

Only two years ago, the winner of the 1991 “Nobel Prize in Economics”, Ronald Coase, died aged 102. He was still writing. (Always intellectually curious, his last published book was his 2013 How China Became Capitalist.)
    Coase won the Nobel for the ideas contained in his celebrated 1937 paper "The Nature of the Firm," which went unnoticed for around forty years following publication. When it was “rediscovered” in the 1960s it then went on to transform not just the whole field of economic analysis but many economies around the world.
    How did his ideas influence the structure of the NZ economy?
    And how do the ideas of Ronald Coase influence how products are manufactured, including the very computer you using to read this message? 
    In this week's seminar, we will use real life examples to examine the ideas of an economist who some call “Britain’s greatest economist since John Maynard Keynes.” (Mind you, those were people who liked the meanderings Maynard...)
    Come join us!

    Date: Thursday, May 21
    Location: Room 040C, Level Zero, Auckland University Business School (OGGB)
    Time: 6pm-7pm

All welcome: We look forward to seeing you there.

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PS: Keep up to date with us on our 2015 Facebook page.

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