Jul 27, 2023·edited Jul 27, 2023Liked by Arnold Kling
Re: "Akerlof himself, although he used equations to express his ideas, went down a different path, incorporating psychology and sociology. "
To my mind, 2 articles about social norms stand out. I count them as classics of cultural analysis by economists; on a par, say, with Thomas C. Schelling's article about tipping points.
One article explains how community norms of fairness shape strategic interactions among police, gangs, and neighborhood residents:
This article is a useful, partial corrective to Gary Becker's "bricks & sticks" (prisons and police) policy to reduce crime. (The full article can be downloaded from the target webpage at the link above.)
The other article is about disruption of social norms by new technology:
Who would have guessed that new, affordable contraception technologies — the pill and safe, legal abortion — would cause a great increase in out-of-wedlock births?!
Akerlof and co-authors have a sharp eye for social mechanisms. They strike a smart balance of fullness and parsimony (explanatory scope and explanatory power), twin ideals of science. Their solutions to puzzles of social behavior now seem obvious — but eluded other fine minds.
Recently, I participated in an international conference about the Scottish enlightenment (Adam Smith etc). There was an emphasis on interpretations of Smith as a proponent, avant la lettre, of the welfare state. The line was: Markets fail, use government. During plenary discussion, I counterposed the GMU line: Markets fail, use markets. I noted that most markets have problems, and so do most government remedies (e.g., rent-seeking, entrenchment, corruption). And I asked: What if the remedy is worse than the disease? Is there a principle — e.g., comparative advantage — that would reasonably limit government intervention? Awkward! Deflection ensued.
Afterwards, a British scholar took pity on my ignorance. He explained:
(a) Interpretations of Adam Smith as a proponent of small government are so yesterday, a Margaret Thatcher fad.
(b) Gordon Brown is where it's at. Markets fail, use government. Experts will sort it.
(c) Experts know to limit the welfare state *when it stifles economic growth.*
I pointed out that we never observe the counterfactual: We don't know how much economic growth we've missed out on due to big government. If stagnation is the constraint, we're very far from optimizing.
A question arises: Why do classical liberals (or libertarians) and social-democrats enlist Adam Smith in their rivalries, instead of making their policy cases squarely on the merits?
Seems like we have information relevant to the counterfactual, there are ways of estimating where you are on the Laffer curve even though they're imperfect.
Re "use markets," there's a definitional question here. Government sets rules for how property rights are enforced, etc, creating the conditions necessary for markets to exist. This means there's a gray area between what counts as using markets and what counts as using government.
> what most often comes next is that the professor teaching the lemons model says “This is what happens when people don’t have perfect information. The market breaks down. That is why we need government.”
Economics teaching must have changed a lot since I was an undergraduate (40 years ago). I read the "Lemons" paper in my 300-level micro course, and don't remember any conclusion that government intervention could help. The conclusion was Akerlof's: that imperfect information can prevent a market from developing at all, even in cases where there are both buyers and sellers who would benefit from trading.
For anyone who jumps to the "government" conclusion, I'd ask "What could the government do that the parties in the market couldn't do on their own?
"MIT economists were known for their faith in mathematics."
I have to chuckle at this masterpiece of understatement. MIT economists, the home of Course 14 and lectures in 10-250, like math. Ask me how surprised I am :).
Re: "Akerlof himself, although he used equations to express his ideas, went down a different path, incorporating psychology and sociology. "
To my mind, 2 articles about social norms stand out. I count them as classics of cultural analysis by economists; on a par, say, with Thomas C. Schelling's article about tipping points.
One article explains how community norms of fairness shape strategic interactions among police, gangs, and neighborhood residents:
https://www.brookings.edu/articles/gang-behavior-law-enforcement-and-community-values/
This article is a useful, partial corrective to Gary Becker's "bricks & sticks" (prisons and police) policy to reduce crime. (The full article can be downloaded from the target webpage at the link above.)
The other article is about disruption of social norms by new technology:
https://www.brookings.edu/articles/new-mothers-not-married-technology-shock-the-demise-of-shotgun-marriage-and-the-increase-in-out-of-wedlock-births/
Who would have guessed that new, affordable contraception technologies — the pill and safe, legal abortion — would cause a great increase in out-of-wedlock births?!
Akerlof and co-authors have a sharp eye for social mechanisms. They strike a smart balance of fullness and parsimony (explanatory scope and explanatory power), twin ideals of science. Their solutions to puzzles of social behavior now seem obvious — but eluded other fine minds.
Re: "markets fail, use markets."
Recently, I participated in an international conference about the Scottish enlightenment (Adam Smith etc). There was an emphasis on interpretations of Smith as a proponent, avant la lettre, of the welfare state. The line was: Markets fail, use government. During plenary discussion, I counterposed the GMU line: Markets fail, use markets. I noted that most markets have problems, and so do most government remedies (e.g., rent-seeking, entrenchment, corruption). And I asked: What if the remedy is worse than the disease? Is there a principle — e.g., comparative advantage — that would reasonably limit government intervention? Awkward! Deflection ensued.
Afterwards, a British scholar took pity on my ignorance. He explained:
(a) Interpretations of Adam Smith as a proponent of small government are so yesterday, a Margaret Thatcher fad.
(b) Gordon Brown is where it's at. Markets fail, use government. Experts will sort it.
(c) Experts know to limit the welfare state *when it stifles economic growth.*
I pointed out that we never observe the counterfactual: We don't know how much economic growth we've missed out on due to big government. If stagnation is the constraint, we're very far from optimizing.
A question arises: Why do classical liberals (or libertarians) and social-democrats enlist Adam Smith in their rivalries, instead of making their policy cases squarely on the merits?
Seems like we have information relevant to the counterfactual, there are ways of estimating where you are on the Laffer curve even though they're imperfect.
Re "use markets," there's a definitional question here. Government sets rules for how property rights are enforced, etc, creating the conditions necessary for markets to exist. This means there's a gray area between what counts as using markets and what counts as using government.
Thanks for the review. I won’t waste my time reading “Yellen.”
> what most often comes next is that the professor teaching the lemons model says “This is what happens when people don’t have perfect information. The market breaks down. That is why we need government.”
Economics teaching must have changed a lot since I was an undergraduate (40 years ago). I read the "Lemons" paper in my 300-level micro course, and don't remember any conclusion that government intervention could help. The conclusion was Akerlof's: that imperfect information can prevent a market from developing at all, even in cases where there are both buyers and sellers who would benefit from trading.
For anyone who jumps to the "government" conclusion, I'd ask "What could the government do that the parties in the market couldn't do on their own?
"MIT economists were known for their faith in mathematics."
I have to chuckle at this masterpiece of understatement. MIT economists, the home of Course 14 and lectures in 10-250, like math. Ask me how surprised I am :).