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. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

In the neoclassical economic model, agents are assumed to act in pursuit of maximum utility—to know their preferences and some of the constraints they face—and to effectively satisfy their economic needs by means of market exchanges. In contrast, behavioral economists claim that individual judgments tend to be cognitively conditioned by biases such as overconfidence, lack of self-control, framing and loss aversion, and that consequently neoclassical theory fails to predict actual economic behavior in the market. They propose instead that people should be oriented by experts so that they choose what some economists consider to be the right decision. In the field of public policy, for example, Richard Thaler and Cass Sunstein1 defend the stance of steering individuals into making choices that benefit their own long-term self-interest. People would retain the possibility of declining (opting out of) any state-mandated directive. Under such an arrangement, they write, “the goal should be to avoid arbitrary and harmful random effects and to produce a situation that tends to promote the well-being of people properly defined” (179, emphasis added). The crucial question, of course, is who defines the well-being of people, and on what grounds. Classical liberals think that it must be a matter of free individual choices, while behavioral economists attribute the task to experts and public planners who allegedly know better what an objective measure of well-being is and how to achieve it. We will not pursue the comparison between the two approaches extensively. The purpose here is only to point out some methodological and normative issues with behavioral economics, and their implications for public policy design, by looking at a text by one of its founders: Richard Thaler. Thaler’s presidential address2 given at the American Economic Association in 2016 synthetizes his perspective on behavioral economics. There are several methodological aspects in the text that merit attention, namely, the reconstruction of neoclassical thought, the consideration of costs, the analysis of how markets work, and the interplay between the descriptive and normative approaches. The reconstruction of neoclassical thought: cognition In the neoclassical model of Homo Economicus, Thaler includes the following assumptions: well-defined preferences, unbiased beliefs and expectations, and “infinite cognitive abilities” and “infinite willpower” to make “optimal choices” (1578), and adds that in neoclassical theories agents act as if they understood the model (1593). He considers that model to be highly implausible given that optimization is a difficult task (1579). Following Amos Tversky and Daniel Kahneman’s experiments, he holds that “humans make judgments that are systematically biased” (1581) and that markets exacerbate those biases. For that reason, he endorses a theory of engineering, that is, a “set of practical enhancements” to better predict behavior and to correct such biases (1586, 1592). Thaler partially misconstrues the cognitive premises of neoclassical authors. In The Economic Approach to Human Behavior, Gary Becker writes that “the economic approach does not assume that all participants in any market necessarily have complete information [nor that] decisions units are necessarily conscious of their efforts to maximize” (6-7). That said, participants do have an optimal amount of information to engage in market transactions on the basis of a calculus of utility, and they seek to minimize costs “that may not be easily ‘seen’ by outside observers” (Ibid. 14, 112). Thus, cognition is not perfect nor infinite but it is strong enough to allow market actors to find ways to choose the proper means to achieve competing ends. “Thaler seems to believe that either we are perfect rational maximizers or we are inclined to make cognitively-biased decisions mostly leading to undesired economic choices. But dichotomous approaches may be unfit logical instruments to explain reality.” Thaler seems to believe that either we are perfect rational maximizers or we are inclined to make cognitively-biased decisions mostly leading to undesired economic choices. But dichotomous approaches may be unfit logical instruments to explain reality. A model based on the premises of incomplete information, limited rationality, and unarticulated ways of doing economic calculations seems more adjusted to explain why free markets have worked better than all the engineering alternatives. There has been a steady global growth in wealth in the past 250 years, as pointed out by Deirdre McCloskey3. The history of wealth shows that rationality in free markets—albeit a limited, fragile, and tacit rationality—has prevailed over cognitive biases and has led thousands of millions of people to more prosperous and fulfilling standards of life. The consideration of costs Thaler also addresses neoclassical views on costs. He casts doubts about firms’ ability to optimally calculate marginal costs and revenues (1580); he relates the notion of opportunity cost to rational choice models only (1584), and he writes that “unless the transaction costs can be measured the use of the concept is undisciplined” (1594). In other words, in his view firms seem to be quite unintelligent when it comes to calculating costs; the appeal to opportunity costs is limited to a single economic model, and the notion of transaction costs comes across as almost metaphysical. Such an understanding of costs is derived from his reconstruction of neoclassical cognitive premises. He infers that, because there is no such thing as perfect rationality, there can be no adequate calculation of costs. However, Thaler does not offer his own account of the calculation of costs in order to justify the possibility of engineering” individual economic decisions. Other perspectives on costs can help us assess that possibility. As James M. Buchanan points out in Cost and Choice4, costs represent the “anticipated utility loss upon the sacrifice of a rejected alternative” (p.41). Costs are subjectively assessed by the agents involved in the particular economic exchanges, on the basis of information only they can possess and of their own values (Ibid. 25,44,76). This subjective approach to costs refutes the idea of a successful “engineering” of any individual decision when it comes to a cost-benefit calculus. Along similar lines, Rosolino Candela points out that transaction costs are the costs of engaging in economic calculation,5 a crucial element to understanding how the market economy works. From this perspective, it seems equivocal to limit the concept of transaction costs to a unique and correct standard of measure, as Thaler suggests, since the costs of participating in market transactions can only be estimated by individual agents based on a diversity of factors that can never be detected by the engineers. Last, and perhaps most importantly, Buchanan6 also calls attention to the concept of unintended consequences as the most distinctive characteristic of the social scientist (57). Applied to the subject under analysis, the unintended costs of economic choices must also be taken into account when proposing to regulate, steer, or engineer the economy. Economic analysis cannot be impervious to costs. Yet Thaler overlooks these considerations. Take, for example, his proposal, “Save More Tomorrow,” which defends workers’ mandatory enrollment in retirement plans and the option to increase the proportion of pension contributions as their salaries rise (1596). Several questions arise in the face of such a proposal. Why induce people to save more and not buy more property or invest in business ventures? Who should estimate the opportunity costs and the unintended consequences of each decision? The answers to these questions require an overall cost-benefit analysis that can only be done by market agents. But Thaler assumes that higher levels of savings are better than investment alternatives. He does not weigh the transaction costs, opportunity costs, and unintended or unanticipated consequences associated with the Save More Tomorrow proposal. How markets work The core idea of behavioral economics is that individual economic choices in markets tend to fail in securing desired ends due to a number of cognitive biases. With regard to consumers, Thaler finds that learning is complex and people err at making important decisions (such as saving for retirement). Therefore, he infers, people need steering by experts and public planners. With regard to producers, Thaler holds that markets exploit generalized cognitive biases in order for firms to increase profits (1585). To illustrate this point, he examines the case of the 2008 financial crisis and posits that housing markets exacerbated behavioral biases and price bubbles created a global recession. He mentions that prior to the crisis the “lending requirements were unusually lax” and that borrowers were fooled by lenders (1586-89). However, Thaler does not take into consideration the political and financial mechanisms behind the crisis, fueled by the Federal Reserve’s cheap-credit monetary policy that led to a housing-building and lending bubble. Several scholars have pointed out that an active federal housing subsidy policy helped weaken the standards and encouraged a mortgage scheme based on high-risk loans. The federal backing sent signals to the financial executives, who assumed the government’s implicit guarantee if something went wrong, thereby encouraging irresponsible behavior and neglecting precautions and controls to prevent it from happening.7 In his analysis, Thaler overlooks the arguments and evidence that might refute his reading, which attributes the causes of the crisis to foolish people and unprincipled lenders only and omits any critical reference to government regulations and subsidies. This is a partial examination of the real causes and consequences of the crisis, perhaps due to a bias against markets. Consequently, it weakens the case that experts are supposedly less exposed to the type of biases ascribed to the rest of the people. Descriptive, predictive, and normative approaches A few behavioral economists8 invoke Adam Smith’s ideas on the sentiments and thoughts that drive people in social interactions. Thaler sees in Smith the father of empirical economics; he proposes to stop arguing about theoretical principles or predictive approaches and turn to evidence-based economics (1597). The analysis of his methodological stance requires that we revisit the relation of theory to empirical observation, and the work of Karl Popper9 may be useful for such a task. Popper finds that: 1) empirical observation alone is incomplete and subject to the dangers of misinterpretation if it is not guided by theories (which is “why induction doesn’t work” 41-42n8); 2) the rationality of science lies “solely in the critical approach—in an attitude which, of course, involves the critical use, among other arguments, of empirical evidence” (228-29), and 3) the theoretical social sciences should be mainly concerned with tracing “the unintended social repercussions of intentional human actions” (342). Popper’s recommendations are useful for understanding some of the shortcomings of the behavioral economic methodology. First, the treatment of the 2008 crisis does not take into account all available factors and therefore shows an uncritical attitude that taints any observation with regard to the causes of the crisis, in particular, and to the dynamics of markets more generally. Second, as mentioned earlier, by skirting the consideration of the costs of economic engineering behavioral economics may be eluding a scientific responsibility as understood by Buchanan and Popper. Last, Thaler assumes there is a unique right measure for economic indicators (such as the level of individual savings for retirement), that experts know what that measure is, and that it is legitimate for the government to induce people to adopt it. The latter is a judgment of value implicitly slid in an approach that claims to be only descriptive, which suggests that evidence-based economics is guided by an implicit normative theory after all. From Method to Norms and Policy The analysis of Thaler’s proposal to steer individuals into making the right choices must take into consideration questions about its normative value and its policy recommendations. From the normative point of view, should the people be oriented by the government, or rather should they be left free to make individual economic decisions? According to Adam Smith, individual liberty, security, and justice should never be obstructed nor destroyed by governments (An Inquiry into the Nature and Causes of the Wealth of Nations, 66410). This normative focus in Smith is highlighted by Ronald Coase in “Adam Smith’s View of Man”11: “It is because markets are thought to embody ideal justice, and not because they promote interests, that Smith relies on them” (57n70). Along similar lines, in Economic Enquiry and its Logic,12 Buchanan defends the Smithean policy position that seeks to shrink political intervention in the economy and widen the [individuals’] range for potential choice (15-16). From a classical liberal stance, the proper business of government is not to nudge or steer individuals but to protect their rights. If behavioral economics finds it acceptable to restrict the range of individual liberty for the sake of policy goals, despite its claims to the contrary, it is an anti-liberal normative theory. On the public policy front, some of the questions to address include the following: what design helps better mitigate the cognitive problems of the people, the experts, and the public planners? How are their cognitive biases different? What are the resulting costs of their decisions and who bears them? Behavioral economics presumes that politically-mandated solutions that deal with the consequences and biases of individual choices will be successful. But technocrats are also subject to overconfidence, miscalculation, preference for short-run results, errors in forecasting, and discretional decisions that they observe in the people. Behavioral economics tends to overlook these issues. Bryan Caplan13 points out that out of 67 articles in behavioral economics with policy recommendations, 65 fail to assess the cognitive ability of policymakers and the unintended consequences of the proposed policies. This is problematic, for policymakers and regulators may believe that they are exempt from cognitive biases, or that they can predict the magnitude of the impact of regulations. Several other authors warn against the experts’ cognitive biases. For Kurt Weyland,14 “even well-trained, highly competent specialists are compelled to apply cognitive heuristics—and to incur the corresponding risks of distortions and biases,” and Slavisa Tasic15 observes that “the possibility of regulatory error is not seriously considered in policy formulation, and the concept of unanticipated negative ramifications is largely absent from policy analysis” (429). See also Roger Koppl16 on the bounded rationality of experts (167-168). Conclusion: Back to Smith Behavioral economists such as Thaler think that experts and planners can know what an objective measure of economic well-being is and how to achieve it by means of public policies. However, they overestimate their cognitive capacities to do so, and they tend to ignore the negative costs of those policies and the responsibilities that go with them. Thus, they fail to consider all the cognitive and moral aspects associated with their policy prescriptions. Some behavioral economists (Thaler included) admire Adam Smith. The founder of modern economics sought to explain the dynamics of a complex reality, and he found in the system of natural liberty the best possible arrangement for the social order. He arrived at two conclusions worth highlighting here. First, “not only the prejudices of the publick, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose [freedom of trade]” (An Inquiry into the Nature and Causes of the Wealth of Nations, 471). Second, he preferred the man of public spirit, who acknowledges the people’s common prejudices and errors and yet hopes to correct them with patience and persuasion, to the man of the system, who intends to manage people as if they were inert pieces on a chessboard (The Theory of Moral Sentiments,17 233). For more on these topics, see “Behavioral Versus Free Market Economics,” by Leonidas Zelmanovitz. Library of Economics and Liberty, Jan. 2, 2023. Behavioral Economics, by Sendhil Mullainathan and Richard H. Thaler. Concise Encyclopedia of Economics. “Predictably Irrational or Predictably Rational?,” by Richard B. McKenzie. Library of Economics and Liberty, Jan. 4, 2010. Because Smith was more worried about the harmful actions of special interests and presumptuous bureaucrats than about the effects of people’s biases, he wrote in defense of a limited government and a free market economy. It seems that those behavioral economists who find a source of inspiration in Smith should look again at his recommendations. Footnotes [1] Thaler, Richard H. and Cass R. Sunstein. “Libertarian Paternalism.” The American Economic Review 93, no. 2 (May 2003): 175-179. [2] Thaler, Richard. Misbehaving: The Making of Behavioral Economics. New York: W. W. Norton & Co., 2015. [3] Interview with Deirdre McCloskey. By Marian L. Tupy. Human Progress (November 4, 2022). [4] Buchanan, James M. Cost and Choice: An Inquiry in Economic Theory. Available online as Volume 6 of The Collected Works of James M. Buchanan at https://www.econlib.org/library/Buchanan/buchCv6.html, Library of Economics and Liberty. [5] Candela, Rosolino. “Transaction Costs are the Costs of Engaging in Economic Calculation.” EconLog (June 3, 2020). [6] Buchanan, James M. The Collected Works of James M. Buchanan, Volume 17: Moral Science and Moral Order. Indianapolis: Liberty Fund, Inc., 2001. [7] See the analysis by R. G. Holcombe and B. Powell (comp.), Housing America: Building Out of a Crisis, New York and London: Routledge, 2017 [2009], pp. 6-7; L. White, “Fannie Mae, Freddie Mac, and Housing Finance: Why True Privatization Is Good Public Policy,” Policy Analysis, Cato Institute, No. 528, 2004, and Arnold King, “The 2008 Financial Crisis,” The Concise Encyclopedia of Economics. [8] Ashraf, Nava, Colin F. Camerer, and George Loewenstein. 2005. “Adam Smith, Behavioral Economist.” Journal of Economic Perspectives, 19 (3): 131-145. [9] Popper, Karl. Conjectures and Refutations: The Growth of Scientific Knowledge. New York: Routledge Classics, 2002. [10] Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, Volume I. Edited by R. H. Campbell and A. S. Skinner. Indianapolis: Liberty Fund, Inc., 1982. Available online at https://www.econlib.org/library/Smith/smWN.html, Library of Economics and Liberty. [11] Coase, R. H. “Adam Smith’s View of Man.” The University of Chicago, Graduate School of Business, Selected Papers No. 50. [12] Buchanan, James M. The Collected Works of James M. Buchanan, Volume 12: Economic Inquiry and Its Logic. Indianapolis: Liberty Fund, Inc., 2000. [13] Caplan, Bryan. “Biased Behavioral Econ.” EconLog (April 14, 2016). [14] Weyland, Kurt. Bounded Rationality and Policy Diffusion: Social Sector Reform in Latin America. Princeton: Princeton University Press, 2007. [15] Tasic, Slavisa. “The Illusion of Regulatory Competence.” Critical Review, 21:4, 423-436. [16] Koppl, R. (2018). “Expert Failure.” In Expert Failure (Cambridge Studies in Economics, Choice, and Society, p. i). Cambridge: Cambridge University Press. [17] Smith, Adam. The Theory of Moral Sentiments. Edited by D. D. Raphael and A. L. Macfie. Indianapolis: Liberty Classics; Liberty Fund (Glasgow Edition), 1982. Available online at https://www.econlib.org/library/Smith/smMS.html, Library of Economics and Liberty. *Alejandra Salinas is a Professor at UNTREF and UCA in Buenos Aires, whose focus is on contemporary political philosophy, comparative political theory, social theory, democratic institutions and literature and politics. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

“Liberty and responsibility,” according to F. A. Hayek in The Constitution of Liberty, “are inseparable. A free society will not function or maintain itself unless its members regard it as right that each individual occupy the position that results from his action and accept it as due to his own action” (1960, p. 71). The critical lynchpin that ties an individual’s freedom of action to the consequences of an individual’s action is the institution of private property. Without private property, neither liberty nor individual responsibility is possible. However, private property rights are not abstractions that are created independent of the particular circumstances of time and place. Rather, “when we recognize that transaction costs do exist,” according to Armen Alchian, “it seems clear that the partitioned rights will be reaggregated into more convenient clusters of rights” (1965, p. 820). As profound and important as these insights may be, they require frequent reiteration and illustrations to realize their importance, both in the classroom and for the general public. Yet, I would never have suspected that I could find such an interesting example to illustrate (1) how property rights tie consequences to one’s actions, (2) how property rights affect relative pricing, and (3) how transaction costs affect the allocation of property rights in pricing goods and services, from none other than Arnold Schwarzenegger. Among those of us who grew up watching Conan the Barbarian, The Terminator, Commando, Predator, True Lies, Eraser (the list can go on), Arnold Schwarzenegger is among the most iconic action stars of all time. However, one of my favorite Schwarzenegger films (co-starring Danny DeVito) is his 1988 blockbuster Twins. The relevance of that film for my point here comes not from the movie itself, but in an interview held by Graham Bensinger with Schwarzenegger,1 in which Schwarzenegger recounts the deals he had to make with the studio in order to be cast for the film. The story of Schwarzenegger being cast for Twins, in so many ways, illustrates the three points I’ve outlined above. Although the director Ivan Reitman had wanted to work on a project with Schwarzenegger and to cast him in a comedy, the studio was highly reluctant to take the risk of Schwarzenegger starring in a comedy given his status as an action star. Stated in economic terms, over the course of the previous decade, Schwarzenegger had accumulated a valuable stock of asset-specific human capital as an action star, and the transaction costs of transferring such capital toward the production of another consumer service (in this case filming a comedy) seemed prohibitively high. In effect, there was a problem due to the high transaction costs of defining property rights between Schwarzenegger and the studio, specifically regarding the costs “of obtaining the information necessary to enter into and complete bargaining negotiations” (Kirzner, 1973, p. 227). Who would make the final choice about casting? Who would bear responsibility if the movie turned out to be a box-office bomb? Could Schwarzenegger reallocate his human capital as an actor toward producing a comedy? And, how would the contract be structured, between Schwarzenegger and the studio, to determine freedom of choice in casting, responsibility over the consequences of the film, and therefore residual payment for eventual profits or losses? Fundamentally, all of these questions illustrate that property rights pertain to defining a set of social relations, or defining rights over action (not defining rights over an object) regarding the expected ability to exercise choices over a good or service, including one’s own human or physical capital (see Furubotn and Pejovich 1972). A clue to answer these questions can be found in Yoram Barzel’s Economic Analysis of Property Rights, in which he states the following: “The allocation of variability which maximizes the contractor’s wealth is the one wherein the ability of a contractor to affect the value of the mean outcome of the transaction is positively related to the share of variability he or she will assume” ([1989] 1997, p. 149).” Therefore, “if the party that will be more inclined to affect the outcome by varying the level of an attribute is put in control of that attribute, thereby becoming the residual claimant of its variability, losses will be minimized” ([1989] 1997, pp. 47-48). The unspecified “attribute” in this case that could vary the outcome of the film (in terms of its profitability), of which Schwarzenegger had particular knowledge (but the studio was unaware of) was his comedic ability. As he recounts in the interview, Schwarzenegger was so convinced of his comedic talent that he made an historic deal: he took no payment for his labor services as an actor in terms of a salary, thereby minimizing potential losses to the studio. Instead, he structured his contract with the studio in a manner that would assign him residual claimancy to any eventual profits. In effect, the uncertainty over the film’s success led Schwarzenegger to literally “take ownership of the situation” (to use an old phrase). Ownership in this case was defined not by a right to an object, but in the appropriate sense in which property rights are understood, namely as a social relationship regarding who has the right to exercise choice and who bears the responsibility for such a choice. In effect, the presence of transaction costs, which could have otherwise prohibited a deal between Schwarzenegger and the movie studio, become an entrepreneurial profit opportunity that was monetized by Schwarzenegger by realizing an opportunity to restructure the allocation of property rights in a manner that was mutually beneficial not only between Schwarzenegger and the studio, but also director Ivan Reitman and co-star Danny DeVito. “To be both free and responsible, therefore, requires knowledge that is context-specific to private property rights.” More importantly, the lesson illustrated here has implications for understanding productive specialization under the division of labor. There is no inherently “exploitative” basis that predetermines the owner-laborer relationship, and therefore the structure of property rights. Rather, who is an “owner” and who is a “laborer” is a consequence of the manner in which property rights are structured. Rather than Schwarzenegger selling labor services to the studio, in which case the studio is the “owner” of the film, he instead became the “owner” by “selling” his property right to a salary from the studio for a share of potential profits (or potential losses) in the film. To be both free and responsible, therefore, requires knowledge that is context-specific to private property rights. In order to know whether an individual is responsible for an outcome (in this case attributing the success of Twins to Schwarzenegger), we must first know that he or she was free to exercise the choice that resulted in that outcome. For more on these topics, see “Transaction Costs are the Costs of Engaging in Economic Calculation,” by Rosolino Candela. Library of Economics and Liberty, Jun. 3, 2020. Property Rights, by Armen Alchian. Concise Encyclopedia of Economics. “How Property Rights Solve Problems,” by David R. Henderson. Library of Economics and Liberty, Apr. 2, 2012. Property rights are the institutional lynchpin in a free society that creates such context-specific knowledge, which is essential in order for individuals to learn and harness the potential of their creative powers through productive specialization under the division of labor. The point here is not that property rights were necessary for Schwarzenegger to be a comedic actor, but that property rights were necessary to learn if Schwarzenegger could become a successful comedic actor on the big screen. If he were not free to renegotiate property rights with the studio and put “skin in the game” in the manner he did, it would have been less likely (or perhaps taken longer) for both him and the movie industry to learn if he had what it takes. The realization of an extensive division of labor, one that facilitates wide-scale exchange, ultimately implies that individuals must also be free to divide and reshuffle property rights in a manner consistent with their particularized knowledge of time and place. Interestingly enough, that’s something that we can all learn from Arnold Schwarzenegger’s experience! References Alchian, Armen A. 1965. “Some Economics of Property Rights.” Il Politico 30 (4): 816-829. Barzel, Yoram. ([1989] 1997). Economic Analysis of Property Rights, 2nd ed. New York: Cambridge University Press. Furubotn, Eirik G., and Svetozar Pejovich. (1972). “Property rights and Economic Theory: A Survey of Recent Literature.” Journal of Economic Literature 10(4): 1137-1162. Hayek, F.A. (1960). The Constitution of Liberty. Chicago: University of Chicago Press. Kirzner, Israel M. (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press. Footnotes [1] Bensinger, Graham. Interview with Arnold Schwarzenegger. YouTube (September 14, 2016). * Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)