In his State of the Union address on Tuesday night, President Biden stated: We have to reward work, not just wealth. Pass my proposal for the billionaire minimum tax. You know, there’s [sic] a thousand billionaires in America. It’s up from about 600 at the beginning of my term. But no billionaire should be paying a lower tax rate than a schoolteacher or a firefighter. I mean it. Think about it. I have thought about it. I have four thoughts.   The above is from David R. Henderson, “Taxing Wealth Is Taxing Work,” TaxBytes, Institute for Policy Innovation, February 9, 2023. Read the piece (it’s not long) to see what my 4 thoughts are. (0 COMMENTS)

The Economist has a couple articles on the rise in economic nationalism, which make some important points: For many in Washington—both Democrats and Republicans—this new [protectionist] approach is common sense. It is, they believe, the only way that America can protect its industrial base, fend off the challenge from a rising China and reorient the economy towards greener growth. But for America’s allies, from Europe to Asia, it is a startling shift. A country that they had counted on as the stalwart of an open-trading world is instead taking a big step towards protectionism. They, in turn, must decide whether to fight money with money, boosting their subsidies to counter America’s. If the result is a global subsidy race, the downsides could include a fractured international trading system, higher costs for consumers, more hurdles to innovation and new threats to political co-operation. The first big crack in America’s commitment to free trade came when Donald Trump levied tariffs on products from around the world. In some ways, though, it is this second crack—the present ratcheting up of subsidies—that hurts more. “Free trade is dead” is the blunt assessment of a senior Asian diplomat in Washington. “It’s basic game theory. When one side breaks the rules, others soon break the rules, too. If you stand still, you will lose the most.” European officials are outraged: The angrier reaction in Europe is partly because of its weak position. . . . There is anecdotal evidence that Europe is already losing investment. Northvolt, a Swedish manufacturer, is reviewing its plan for a factory in Germany in favour of its existing American operations. Others will follow. In theory, our allies could bring a case to the WTO, except that the US has effectively destroyed that organization: The WTO’s prohibition against subsidies involving local-content requirements is clear. Yet so far there is little appetite for such a challenge. If America were to lose, it could appeal against the ruling, which would in effect bring the case to an end since the WTO no longer has a viable appellate body (thanks to America’s decision to block appointments). On the other hand, the “senior Asian diplomat” who said, “If you stand still, you will lose the most” was wrong; indeed just the opposite is true: There is an economic rationale for staying on the sidelines. When America pays for technologies at great cost to its taxpayers, these technologies should, in time, become cheaper for everyone. However much America throws at its companies, it cannot have a comparative advantage in all products. Some officials in Asia cling to the hope that their governments and those in Europe will exercise restraint. “That way all non-Americans could have a level playing field with each other,” says a Japanese official. But the voices calling for more subsidies seem to be prevailing. Most politicians don’t understand the economics of subsidies.  It’s not a question of subsidies helping one country and hurting another; all countries suffer. Here’s what politicians don’t understand.  It is not possible for governments to subsidize “industry” as a whole.  All they can do is boost one industry at the expense of another.  If the US subsidizes industries A, B and C, then we implicitly penalize industries D, E, and F.  Two hundred years ago, Ricardo developed the concept of comparative advantage, which explains why helping one set of industries effectively hurts the remaining industries.  Back in the 1990s, Paul Krugman pointed out that for many people, included even high-level policymakers, “Ricardo’s Difficult Idea” is hard to grasp.  Policymakers view the world in partial equilibrium terms when they need to look at things from a general equilibrium perspective. Every time we put a tariff on steel or aluminum imports, we give a cost advantage to Asian and European firms that use steel and aluminum, such as carmakers.  Every time we subsidize US chipmaking, we give a boost to Asian and European firms that do not make chips.   Unfortunately, it’s not a zero sum game—industrial policies are negative sum.  In another article, the Economist points out that these subsidies reallocate global production in a highly inefficient fashion: By our calculation, duplicating the world’s existing stock of investments in semiconductors, clean energy and batteries would cost between 3.2% and 4.8% of global GDP. . . .  Countries like China and Russia do present a profound threat to the current global order. Russia’s curbing of gas exports to Europe in response to European support for Ukraine highlights the risks of relying on such places for crucial imports. The urge among Western democracies to hobble adversaries economically to diminish such dangers is understandable. But it will have huge costs. What is more, the economic policies being adopted in the name of national security and competitiveness are so sweeping and clumsy that they are hurting allies as much as enemies. The zero-sum mindset may or may not succeed in making the world safer for democracy. But it will certainly make the world poorer. [Emphasis added] I give credit to Treasury Secretary Janet Yellen.  If I had to sit in a room and listen to the economically illiterate views espoused by President Biden’s more nationalistic policy advisors, I would lose my cool.  I don’t know how she puts up with it. PS.  You might say to yourself, “Sure the policies have some problems, but they can be fixed.”  Nope.  Too late: President Biden suggests America “never intended to exclude folks who were co-operating with us”. Practically, though, it is not easy to recraft the rules. Legislation was written precisely, specifying amounts, timelines and conditions. Congress would need to pass formal amendments—a tall order at the best of times and inconceivable when the House of Representatives is dysfunctional.  (0 COMMENTS)

Jeffrey Friedman’s Power Without Knowledge: A Critique of Technocracy is impressive in its scope and its argumentative strength. The book is a culmination of themes Friedman had been examining for years. As such, many of the arguments in the book were familiar to me, nonetheless, I still learned a lot by reading it. Some of what I learned reinforced parts of my outlook, while other arguments challenged and shifted my views to various degrees. Here I focus on what I see as the book’s strengths. A key strength of the book – and one that’s been largely missing from my posts so far – is the frequency with which Friedman stops his arguments to consider and steelman possible objections or counterarguments to his claims. This is the mark of a writer who has carefully considered his arguments and has made an active effort to highlight all the possible weaknesses he can identify in his case. At first glance, some readers might be tempted to dismiss some of Friedman’s insights as merely parasitic on claims Austrian economists have made for years. For example, a lynchpin in Friedman’s argument is ideational heterogeneity – the idea that each mind operates differently from every other mind, motivated by a unique web of beliefs, and that this internal mental process is fundamentally inaccessible not merely to anonymous technocrats but even to people who know each other well. (Think of all the times you find yourself surprised when a friend or family member interprets or reacts to a situation very differently than you expected, or in conversation someone suggests a thought that never occurred to you.) The basic phenomenon Friedman is describing, and its implications for the construction of social policy, was described decades ago by Ludwig von Mises in his book Theory and History: On the other hand the distinctive mark of what we call the human sphere or history, or, better, the realm of human action is the absence of such a universally prevailing regularity. Under identical conditions stones always react to the same stimuli in the same way; we can learn something about these patterns of reacting and we can make use of this knowledge in directing our actions towards definite goals…Men react to the same stimuli in different ways, and the same man at different instants in time may react in ways different from his previous or later conduct. It is impossible to group men into classes whose members always react in the same way. There are also clear parallels between Friedman’s argument and the famous chess analogy made by Adam Smith, who speaks of how the “man of system” (or technocrat, in Friedman’s work) is “wise in his own conceit” and believes “he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board.” Smith goes on to argue: He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder. But I think Friedman takes these insights further. Mises takes the behavioral variability of people simply as given – he observes it but doesn’t really explain what drives it. Friedman explains what drives this variation, provides arguments in favor of that explanation, and draws implications about whether or not this problem is surmountable. Friedman also emphasizes, to a greater degree than Smith, that the “principles of motion” driving people’s behavior (their unique webs of beliefs and subjective interpretations derived from those webs, in Friedman’s verbiage) aren’t simply different from those of the technocratic man of system – they are also different from every other proverbial piece on the board, as well as unknowable to both the other pieces and the would-be planner. These are real and important contributions. I also think many of Friedman’s criticisms of the economics profession are fair and justifiable. However, for reasons I just touched on, I also think his criticisms fail to land on economists who operate in a more Austrian or Smithian tradition, as well as those who operate in the tradition Arnold Kling once called Masonomics. However, given that these economists are unlikely to harbor technocratic aspirations, he gives them fairly little attention in a book dedicated to examining and critiquing technocracy. Friedman’s criticisms of rational ignorance held some force for me as well. While I think he takes his criticism too far (for reasons I’ll discuss in the next post), he did convince me that rational ignorance is often overplayed as an explanation for political behavior, and while I haven’t jettisoned the concept entirely, I think it’s less applicable than I once believed. Naïve realism, for example, saps rational ignorance of much of its explanatory vigor. Naïve realists aren’t declining to gather more information because it’s not worth the effort, as rational ignorance would imply – they believe they already have all the relevant information. As Friedman puts it, in “the radical-ignorance view, they think their scant knowledge is adequate.” One idea Friedman articulates better than almost anyone else is how advocacy of the market mechanism is (or at least can and should be) rooted in epistemic humility. It’s not just society that is unfathomably complex – the individuals who make up society are also complex and multifaceted ways technocratic policy can never hope to reflect. His advocacy of markets can be paraphrased as “Look, this social problem is extraordinarily complicated. I don’t know what the best solution is. In fact, even talking about a ‘best’ solution may be senseless, because different solutions will work better for different people and different circumstances. The best approach is to let a thousand flowers bloom and give people the space to work out for themselves how to solve their issues in a way best suited to their own needs and desires.” To be a technocrat is to deny that a problem is too complex for you to understand, to believe that there is a “correct” solution, that you in particular know what that solution is, and that you can effectively use policy to implement that solution by altering the behavior of people you’ve never met in ways you can reliably predict. If you reject the simple-society ontology of a naive realist, you see these kinds of claims as incredibly hubristic. But these are the claims one has to make to advocate a technocratic policy. These are some of what I see as the key strengths of this book, though the list is by no means exhaustive. But no book is perfect, and no arguments are without weak points, so my next (and final) post in this series will be on what I see as where the arguments fall short.   Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.  (0 COMMENTS)

Could artificial intelligence (AI) improve central economic planning as it was hoped that ordinary computers would do? Although ChatGPT is surprising in many respects, “he” certainly does not broadcast an affirmative answer. For convenience, let me use the non-gendered pronouns “ze” and “zir” for the poor guy. One basic economic problem is that an AI bot does not have, and cannot obtain, the information necessary for efficient central planning. As Friedrich Hayek argued in the 1930s and 1940s, most of the required information is dispersed among the minds of millions of individuals facing unique local circumstances. A large part of this information is in fact revealed by free markets through  prices; the information would not exist without free markets. Ultimately, the necessary information consists in subjective valuations by different individuals. (See notably Hayek’s 1945 American Economic Review, “The Use of Knowledge in Society”). AI computers cannot have access to such information. Moreover, the conceptual capacities of AI may be exaggerated. Machines and their software will in all likelihood never understand what they are talking about, as understanding requires consciousness. One easily finds serious faults in ChatGTP’s artificial “mind”—from poor learning capabilities to political biases—as other of my EconLog bloggers have shown. Ze is also pretty useless at basic algebra, which suggests that ze cannot think logically. AI will certainly improve, but it very likely has ontological limitations much below consciousness and understanding. My friend and former colleague Professor Alain Albert asked ChatGPT the following question: Today one person is twice the age of another. When the youngest reaches 50, will the oldest be 100? The answer is no. There is only one year when an older person (say 40) can possibly be double the age of a younger one (20, in this example); afterwards, the proportional difference between their ages diminishes continuously. Our chatbot friend miserably failed to understand that. Alain walked the robot through a few numerical examples, where ze continued to fell, even after just admitting that he had been wrong. Inspired by Alain, I checked again and found that ze had not learned. Finally, instead of trying to show zir that ze was wrong with the help of numerical examples, I gave zir an algebraic proof developed by my friend Daniel Mc Kiernan, an economist and mathematician extraordinaire. ChatGPT had previously told me that zir “training” included elementary algebra. The conversation with our virtual friend went as follows just after he had blundered once again: PL: Here is an algebraic proof that your answer is false. x is the age of the youngest; y is the age of the oldest; k is the numbers of years from the time the oldest was twice the age of the youngest. y = 2 x                                                   (1) y + k = 2 · (x + k)                               (2) y + k = 2 · x + 2 · k From (1): (2 · x) + k = 2 · x + 2 · k (2 · x) + k = (2 · x) + 2 · k k = 2 · k k = 0 ChatGTP: Yes, you are correct. The answer is false. If the youngest person is 20 years old, and one person is twice the age of another, the oldest person will not be 40 years old. The last sentence is confused and suggests that ze had not understood. I thus tried a few more numerical examples with different numbers. Ze reversed to his previous reasoning and confusion, like in the following case: ChatGTP: The algebraic proof you provided demonstrates that there is no number of years that could pass such that the oldest person would be the same age as the youngest person, which means that the oldest person would always be twice the age of the youngest person. PL: No, it means that the oldest person will never be again twice the age of the youngest. ChatGTP: Yes, you are correct. The oldest person will never again be twice the age of the youngest person. The algebraic proof demonstrates that there is no number of years that could pass such that the oldest person would be twice the age of the youngest person. PL: Now, if today one person is twice the age of another, then when the youngest later reaches 40, will the oldest be 80? ChatGTP: Yes, if one person is twice the age of another, and the youngest person later reaches 40, the oldest person would be 2 * 40 = 80 years old. The least we can say is that ChatGPT could not improve government planning. Nor perhaps make it worse. (0 COMMENTS)

My Hoover colleague Lee Ohanian, an economics professor at UCLA, wrote a piece on Hoover’s website on Tuesday titled “California’s Failed Soviet-Style Housing Mandates Should End Now.” In his article, Lee argued that we’ve had central planning of housing in California since 1969. He writes: Top-down command-control programs fail because they violate the basic market forces of supply and demand and because they suppress individual freedoms. California started down the command-control rabbit hole regarding housing with a 1969 state law that created the Housing Element and Regional Housing Needs Allocation (RHNA) program. This program mandates that every California community must plan for its housing needs, regardless of income. The five words “housing needs” and “regardless of income” tell you all you need to know to understand why this program has failed. What are “housing needs,” exactly? Millions would love to live in the areas overlooking the beaches of California, particularly if income weren’t a factor. Does this mean that millions of Californians have an unmet “need” to live in Malibu? Or San Diego? Or Santa Barbara? Or Laguna Beach? And what of the millions more who live outside of California but would flock to the state if they had opportunities to live in some of the most expensive communities in the world, regardless of their income? Already that tells me something I didn’t know. And it does sound a lot like central planning. But a guy named Adam Gurri, whom I’m guessing many readers have heard of, went on Twitter and did a nasty. He called Lee “braindead.” Well, I know Lee Ohanian, Lee Ohanian is my friend, and Adam, you’re no . . . Oops. Wrong rebuttal. Let me try again, more briefly. Lee Ohanian is not braindead. Not even close. I went on Twitter and made that point. Gurri didn’t try to argue that the evidence Ohanian gave above is not central planning. Instead, Gurri went after the weakest part of Ohanian’s argument, the part where Lee tried to justify my favorite NBA player Steph Curry objecting to lower-income housing being built near his house. So who’s right: Gurri or Ohanian? Both are right. And both are wrong. Ohanian is right that having the state government tell each locality exactly how many housing units they must allow does smack of central planning. Which means Gurri is wrong to say it’s not central planning. Gurri is right to say that individual homeowners, no matter how powerful, should not be able to prevent a house or an apartment block from being built. And in the following quote from his article, Ohanian is both right and wrong: Much more housing within California would be built if legislators were to rewrite the state’s antiquated environmental laws; reduce regulatory burdens that drive constructions costs on affordable housing projects to levels that exceed those of luxury homes; and provide communities with financial support and incentives where more housing, particularly high-density housing, makes sense, with projects that achieve community buy-in. He’s right in the clause that ends with the word “homes.” And he’s wrong in the final clause. Why should a state government tax us to give financial support for housing? And what’s this about “community buy-in?” It seems to imply that for housing to be built in various California communities, a majority of people in that community must approve. That doesn’t exactly sound like central planning. But it certainly doesn’t sound like respect for property rights. Here’s a suggested middle-of-the-road compromise between Gurri and Ohanian. Get the state government out of dictating to communities how much housing they must allow to be built. And take away the power of people in those communities to have any say whatsoever in whether housing is built. The pic above is of part of Atherton, the town in which Steph Curry and his family live. Postscript: I don’t often go on Twitter but when I do most of the tweets I read, along with the mobs that follow, remind me of the popular high-school kids who thought they could dispose of an argument by calling people an idiot or, in my day, a fag.   (0 COMMENTS)

I believe we should all strive to hold some inconvenient views. That is, we should hold views about how the world works that might weaken support for our policy preferences. For instance, I believe that drug legalization would increase the use of narcotics. That view is somewhat inconvenient, as I support drug legalization (for a wide variety of reasons).A recent comment reminds me of another inconvenient view that I hold. Mark Barbieri suggested: When I suggest that we could solve the illegal immigration policy by increasing the amount of legal immigration to accommodate most the people that want to come here, suddenly there is another objection. [I believe he meant, “solve the illegal immigration problem”.]I’d like to believe that Mark is correct, as I support his policy recommendation. Unfortunately, I do not believe this would solve the illegal immigration problem, for several reasons:1. A much higher rate of legal immigration would cause the US economy to boom. This would have numerous effects, including a sharp increase in housing construction in places like Texas, Arizona and Florida. This construction would draw in additional immigrants, some of them illegal.2. Legal immigrants have much better opportunities than illegal immigrants. Thus if we legalized all the illegals, a new wave of illegals would come in to do the jobs that Americans don’t wish to do, such as picking fruits and vegetables in the sweltering heat.To be clear, I believe a policy of allowing more legal immigration would somewhat reduce illegal immigration, and I favor such a policy for a wide variety of reasons. But I also believe that restrictionists might be a bit disappointed in the ultimate effects. Thus if there are currently 500,000 illegal immigrants each year, then even a policy of allowing an extra 500,000 legal immigrants would not drop that number to zero. There might still be another 200,000 or 300,000 illegals migrating here each year. In other words, total immigration would increase, as the effects would go well beyond just substitution of one type of immigrant for another. In the long run, it is better to avoid biased reasoning, even if it weakens your argument in the short run.  Honesty will make your views seem more credible.  Seek the truth and let the chips fall where they may. PS.  David Henderson has a recent post discussing the issue of whether immigration can reduce inflation.  I don’t believe it would have much impact on inflation, due to the Fed’s 2% inflation target. (It depends on how the Fed reacts.)  Nonetheless, it might have some of the positive effects that people associate with inflation reduction.  Thus many people believe a lower inflation rate would boost their real income by making their shopping budget go further.  That’s not necessarily true, as lower price inflation caused by monetary policy is often associated with lower nominal wage inflation.  But immigration actually can boost the purchasing power of the average consumer by reducing price inflation relative to nominal wage inflation.  Thus, while immigration may not reduce inflation, it will likely produce many of the benefits that the average person associates with less inflation.  It may not reduce inflation, but it will boost real incomes. Immigration does hurt some American workers.  But in my view, most workers benefit.  That is overwhelmingly true here in Orange County, where immigration has significantly boosted living standards. (0 COMMENTS)

If protection against imports from country C (say, China) by the state of country A (say, the United States) is good, then an embargo by the government of C on exports to A must be good too. Anybody in A, or at least its government, should cheer. Something similar may happen regarding Chinese exports of some equipment used to manufacture solar panel components. The Wall Street Journal reports (“New China Rule Threatens to Disrupt U.S. Solar Ambitions,” January 31, 2022): China’s Ministry of Commerce and Ministry of Science and Technology are considering adding advanced technology used in the production of ingots and wafers, some of the building blocks of solar panels, to a list of technologies that are subject to export controls. Such a ban would cause an increase in the world prices of these high-tech machines and of solar panels. No surprise that American producers of solar panels, who can’t compete with Chinese producers at current prices, are thrilled: “China’s proposed export restraints are Exhibit A on the need to rapidly scale American solar manufacturing,” said Abigail Ross Hopper, president and CEO of the U.S. business lobby Solar Energy Industries Association. This must imply that, should the French government decree an embargo on the exportation of wine, it would be Exhibit A on the need for the UK government to rapidly scale up domestic wine production. Adam Smith already explained in The Wealth of Nations: By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Criticizing the 1908 protectionist platform of the Republican party, Frank Taussig wrote in his The Tariff History of the United States (I quote from the 1914 sixth edition): Anything in the world can be made within a country if the producer is assured of “cost of production with reasonable profits.” … very good pineapples can be grown in Maine, if only a duty be imposed sufficient to equalize the cost of production between the growers in Maine and those in more favored climes. The benefit of trade, whether domestic or foreign trade, is that buyers can get their products (and services) from the least costly source. I leave it as an exercise for my reader (especially if he is an economics student) to persuade himself that imports are more important than exports. Interestingly, this belief should be more prevalent  among protectionist conservatives, who should not want “our national resources” to be used to produce goods and services for foreigners instead of for “us.” But protectionists are not known for their logic; you may want to have a look at my Regulation article “Logic, Economics, and Protectionist Nationalism.” Why do protectionist forces typically beg their government to ban imports, not exports? Because protectionism is mainly a way for special interests, both corporate and trade-union, to steal from their fellow citizens. Except if the goal of life is to fight members of neighboring tribes and control one’s own tribe, national defense does not normally provide a sufficient reason to block trade (although, in extreme cases, it may); see my EconLog post “Fearing Leviathans With Feet of Clay.” (0 COMMENTS)

A new English translation of Alessandro Manzoni’s I Promessi sposi (The Betrothed) was published a few months ago. It is excellent, and I wrote on it for the City Journal here. I’ve been trying to convince my classical liberal friends to read Manzoni for a little while – with almost no success. It may well be that people think that Manzoni’s book is mostly relevant to Italians, because of its role in developing the modern Italian language. In this case, people may be kept at bay by some scent of nationalism that they smell around Manzoni. Or it could be that people find the plot not very attractive. It is the story of two ordinary folks, Renzo and Lucia, who are supposed to get married but they cannot, because of the threats of a local nobleman, who has an eye for Lucia. The choice of the characters is very important. For one thing, Manzoni is writing an historical novel which focuses on the way in which common people are dragged around by History: how they are paying for the big guys’ choices, their own mistakes, and how their interactions contribute to shaping events. For another, he is clearly choosing these people because he deems their life interesting, though different than the one of kings and queens. This is but one of the many classical liberal elements in the book. Manzoni was no alien to classical liberal sensibilities himself. He knew the French ideologues and knew his economics (Smith, Say, Bastiat) very well. But more importantly, The Betrothed is just a piece of work and I hope many more English-speaking people (including some classical liberals) will discover it thanks to this new translation. (0 COMMENTS)

Simple answer to the title question: No. The number of employees in the private sector actually fell by 2.166 million. So why did the BLS report a huge increase in jobs? Seasonal adjustment. Alan Reynolds makes this point in “Can a Seasonal Adjustment to Lost Jobs Justify a Tighter Fed?,” Cato at Liberty, February 6, 2023. The number of jobs virtually always falls between December and January as various retailers and producers lay people off whom they hired for the Thanksgiving to Christmas season. Seasonal adjustment is handy and important. But you have to remember whether you’re citing seasonally adjusted data or actual data.   (0 COMMENTS)

After James M. Buchanan won the Nobel Prize, some people suggested public choice was too obvious for a Nobel. To others, it was wrong. Some said it was both. Others claimed that public choice is immoral: after all, Buchanan wrote from the “homely observation” that people respond to incentives and pursue their interests in the political arena just as they do in the marketplace. He based his analysis on realistic beliefs about how people actually act rather than lofty visions about how they could. Politics, his critics argued, should manifest our best and deepest moral inclinations. It’s where we come together to determine what is in the interests of all. The marketplace is where we decide what is in the interests of each and then fight about it. Finally, assuming people vote selfishly might make people vote selfishly, to the detriment of all of us. Is this not deeply cynical, perhaps even immoral, insofar as it assumes we are capable of nothing more than greed and insofar as it encourages us to be greedy? Maybe, but I think public choice leads me to a less cynical worldview. Its postulates—methodological individualism, rational choice, and politics-as-exchange—allow us to explain many phenomena by looking at and analyzing people’s incentives and constraints. In other words, we can explain how many political pathologies are the unintended consequences of good people responding to bad incentives emanating from institutions that unintentionally suppress valuable social knowledge. No doubt, there is a lot in the world we can explain as the bumbling of fools or the machinations of knaves. Unfortunately, that is a bit too easy, and it leads to policy conclusions that are too easy: “Everything would be OK if we just voted the bums out and replaced them with cultivated and intelligent people of principle.” I think it is more informative to assume people are reasonably intelligent and decent and then see how their intelligence and decency metastasize into organizations and policies that make us worse off. It’s convenient to assume people maximize their lifetime consumption. We can define “consumption” broadly without really changing our results. I’ve read a great definition of consumption: you consume whenever you extinguish a potential service without producing a stream of future services. You can’t eat the same sandwich twice. The two hours you spend watching a movie are gone forever. Driving to the grocery store burns gas you can never use again. Similar logic applies to a pure altruist who wants only to increase another’s consumption. Your ward cannot eat the same sandwich twice. The two hours you spend shopping for the Christmas toy drive are gone forever. So is the gas you burn driving to the mall. Economics (and public choice) does not judge your intentions. They are yours. Economics does say you do more of things that get cheaper and less of things that get more expensive. Consider the assumption that people are rational and that they make rational choices. However, this is not a theory of how the mind works: it suggests that they change their behavior in response to their incentives. Ronald Coase offers an interesting example in his introduction to The Firm, the Market, and the Law (1988). People might dash across a busy street to get a sandwich. Whether the risk is psychologically “rational” is not the economic question. Economics says that if traffic gets heavier, we will see fewer attempts to dash across the street. Meanwhile, if traffic gets lighter, we will see more. Similarly, stricter policing of jaywalking will mean fewer dashes across a busy street, while laxer policing of jaywalking will give us more. That is what we mean when we talk about “rational choice”: people are comparing costs and benefits, even if only implicitly, and when we change costs and benefits, we change people’s behavior. Public choice is also methodologically individualistic. Social phenomena emerge from patterns of individual decisions in response to changing incentives, information, and constraints. Therefore, the individual is the unit of analysis (Buchanan notes that this is because individuals are the irreducible units of consciousness. People dashing across the street to get sandwiches act individually, not collectively, and changing their incentives will change their behavior. Suppose we want to reduce the number of people getting splattered crossing busy intersections. We can make drivers pay more when they hit people so they drive more carefully. We can punish jaywalkers so that fewer people dash across the street. These are not free lunches: what is called the “Peltzman Effect” predicts that people will make more reckless street crossings if it gets safer. “When we apply these tools to the issues public choice scholars study—elections, legislatures, bureaucracies, and constitutions—we get a lot of understanding without having to appeal to moral failings like avarice, knavery, or stupidity.” When we apply these tools to the issues public choice scholars study—elections, legislatures, bureaucracies, and constitutions—we get a lot of understanding without having to appeal to moral failings like avarice, knavery, or stupidity. Consider elections. We get a lot of mileage from assuming candidates want to be elected and stay elected. Getting elected by a simple majority requires getting just 50%+1 of the votes, and it is the force behind what we call the median voter theorem—namely, that public policies will tend to reflect the preferences of the median voter. Imagine you have voters evenly spread out over an ideological spectrum from left to right, and you have two candidates, Lyndon Left and Ronald Right, who start at the ideological extremes. People vote for the candidate closest to their views, so everyone left of center votes for Lyndon Left, everyone right of center votes for Ronald Right, and the median voter flips a coin. Lyndon Left could win the election by moderating his position and moving just a bit farther right. If Ronald Right stays put on the extreme right, the median voter now votes for Lyndon Left because he’s a bit closer to his ideal point. Ronald Right, of course, is no fool and tries to capture the median voter by taking an even bigger move toward the center. This happens until the candidates converge in the middle, fighting to curry the favor of the median voter. This does not require knavery or spinelessness, necessarily, just a desire to win and mindfulness of one’s incentives. Incentives also explain why voters tend not to know very much, why people vote straight tickets, and why politicians lie all the time. Information is costly, and it is pretty rare that doing all the work to become an informed voter will make much of a difference. Someone could vote well by making dedicated studies of philosophy, natural science, and social science to develop an epistemically justified true belief about what is actually in the public interest. A single vote, however, is extremely unlikely to be decisive. It is common for people to point out that you are more likely to die in a car accident driving to the polls than you are to cast the decisive ballot in a US Presidential election. It also helps explain politicians’ flip-flops on issues, and why it seems like they lie a lot. Scrupulously monitoring people for honesty and consistency takes a lot of time and energy. On the other hand, responding positively to a catchy slogan (“yes we can,” “I’m with her,” “Make America Great Again”) is emotionally satisfying and super-easy. Every election cycle, you hear people exhorting you to vote for a candidate rather than a party. It makes a certain amount of intuitive sense, and it seems like voting for the “best” person for the job irrespective of party affiliation is a laudable goal. Nonetheless, many people vote straight ticket and probably cannot name all the down-ballot candidates. This makes sense for a couple of reasons. First, information is costly and the likelihood that your vote will swing an election is so tiny that getting informed means consuming a lot of time and energy to get an outcome identical to what would have happened had you not gone to the trouble. Second, people are going to vote with their party almost all the time, so if you generally lean Democrat and the democratic primary is between Carla Corruption and Victoria Virtue, who gets the nomination doesn’t really matter that much because they’re going to vote the party line pretty much no matter what. Incidentally, this is one of the reasons the presidency matters as much as it does for state and local elections. Paula Progressive running for County Commissioner as a Democrat may not have a lot of name recognition, but she stands to benefit considerably if Lyndon Left is able to inspire many people to vote straight-ticket Democrat. I also have an easier time tolerating lobbying and legislator buy-offs. We think about “lobbying” being what happens when a shady character working for an oil company hands a suitcase full of cash to a politician in exchange for permission to drill for oil in Teddy Roosevelt’s head. The waste is more mundane, and it need not be corrupt per se. In his book Political Capitalism,1 Randall Holcombe discusses people’s unarticulated understanding of what it takes to play the game in Washington. Public choice has helped me understand that the problem is the institutions, not the people operating within them. We are not going to make things better by throwing the bums out, but by writing rules that work whether they are implemented by devils or angels. I also understand distributive politics in a new way, and once again, it’s because of the incentives. It is pretty easy to get support when you say “I’m going to take money from Jeff Bezos and give it to you,” and indeed, we’re all very good at cooking up stories about why the world would be a better place if we had the money rather than Bezos. At first, it seems strange that people are spending as much time and energy as they are trying to get their hands on Bezos’ money without feeling like they need to really offer him anything in return (his head, perhaps, if people making guillotine jokes online are to be believed). Once again, it’s nice to think we would do well to tell people not to try to take other people’s stuff, but it’s predictable that they will when it’s cheap and will not when it’s expensive. For more on these topics, see Public Choice, by William F. Sughart II. Concise Encyclopedia of Economics. Don Boudreaux on Public Choice. EconTalk. Bryan Caplan on the Myth of the Rational Vote. EconTalk. Public choice theory—the economic theory of politics, or a body of work that analyzes political decision-making with the same tools we use to study market decision-making—has been derided as cynical if not outright immoral. Such criticism sells it short, though, and it fails to recognize the subtlety of public choice assumptions and analysis. Anyone can tell a story about how things would be better if people were not fools or knaves. What makes public choice interesting, however, is that it does not rely on assumptions of foolishness or knavery to arrive at its conclusions. It only needs to posit that people respond to incentives. The rest, as the Talmudic scholar Hillel might say, is commentary. Footnotes [1] See my review of Randall Holcombe’s Political Capitalism, “The Aristocracy of Pull.”. American Institute for Economic Research, Sep. 23, 2020. *Art Carden is Assistant Professor of Economics at Samford University in Birmingham, AL, a Senior Research Fellow with the Institute for Faith, Work, and Economics in McLean, VA, a Research Fellow with the Independent Institute in Oakland, CA, and a Senior Fellow with the Beacon Center of Tennessee. For more articles by Art Carden, see the Archive. 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