QOTD: Politics Is Process

I really like the opening paragraph to Buchanan's The Limits of Liberty :

Those who seek specific descriptions of the "good society" will not find them here. A listing of my own private preferences would be both unproductive and uninteresting. I claim no rights to impose these preferences on others, even within the limits of persuasion. In these introductory sentences, I have by implication expressed my disagreement with those who retain a Platonic faith that there is "truth" in politics, remaining only to be discovered and, once discovered, capable of being explained to reasonable men. We live together because social organization provides the efficient means of achieving our individual objectives and not because society offers us a means of arriving at some transcendental common bliss. Politics is a process of compromising our differences, and we differ as to the desired collective objectives just as we do over baskets of ordinary consumption goods. In a truth-judgment conception of politics, there might be some merit in an attempt to lay down precepts for a good society. Some professional search for quasi-objective standards might be legitimate. In sharp contrast, when we view politics as process, as means through which group differences are reconciled, any attempt to lay down standards becomes effort largely wasted at best and pernicious at worst, even for the man who qualifies himself as expert.

Certainly seeing politics as a process of reconciling group differences seems better than seeing politics as a search for truth. As a young economist I saw myself as an expert who could guide government and public policy toward the standard of an efficient allocation of resources by correcting the "market failures" I and my colleagues had discovered. Today these earlier efforts do seem to me largely wasted and pernicious, and as work in my classrooms that was best, not at correcting market failure, but at inculcating a spirit of controlling others through the force of government to a particular version of the "good society," i.e., the "efficient allocative society."

Hayek On Social Justice

Here are a few insightful and interesting quotations that I think are relevant to understanding "social justice" from Hayek's The Mirage of Social Justice:

. . . the importance for the functioning of the market order of particular prices or wages, and therefore of the incomes of the different groups and individuals, is not due chiefly to the effects of the prices on all of those who receive them, but to the effects of the prices on those for whom they act as signals to change the direction of their efforts.  Their function is not so much to reward people for what they have done as to tell them what in their own as well as in general interest they ought to do. [pp. 71-72]

It is not good intentions or needs but doing what in fact most benefits others, irrespective of motive, which will secure the best reward. [p. 72] 

The most common attempts to give meaning to the concept of 'social justice' resort to egalitarian considerations and argue that every departure from equality of material benefits enjoyed has to be justified by some recognizable common interest which they differences serve.  This is based on a specious analogy with the situation in which some human agency has to distribute rewards, in which case indeed justice would require that theses reward be determined in accordance with some recognizable rule of general applicability.  But earnings in a market system, though people tend to regard them as rewards, do not serve such a function.  Their rationale (if one may use this term for a role which was not designed but developed because it assisted human endeavour without people understanding how), is rather to indicate to people what they ought to do if the order is to be maintained on which they all rely.  The prices which must be paid in a market economy for different kinds of labour and other factors of production if individual efforts are to match, although they will be affected by effort, diligence, skill, need, etc., cannot conform to any one of these magnitudes; and considerations of justice just do not make sense with respect to the determination of a magnitude which does not depend on anyone's will or desire, but on circumstances which nobody know in their totality. [p. 80] 

I think it is very important to understand that the prices that emerge in the world of voluntary exchange (or, we might say, in The Political Order of a Free People) are signals that can be useful  with respect to choices about future individual human actions as well as future social interactions.  The world of human action is dynamic and evolving, and the prices that emerge with the market process are signals that help people figure out effective ways of adapting to ever changing conditions.  Thus government actions in the name of social justice will amount to introducing force into the political order in a way which necessarily interrupts the function of prices as such signals.

Selection and Society

Hayek:

It is simply not true that our actions owe their effectiveness solely or chiefly to knowledge which we can state in words and which can therefore constitute the explicit premises of a syllogism.  Many of the institutions of society which are indispensable conditions for the successful pursuit of our conscious aims are in fact the result of customs, habits or practices which have been neither invented nor are observed with any such purpose in view.  We live in a society in which we can successfully orientate ourselves, and in which our actions have a good chance of achieving their aims, not only because our fellows are governed by known aims or known connections between means and ends, but because they are also confined by rules whose purposes or origin we often do not know and of whose very existence we are often not aware.   

Man is as much a rule-following animal as a purpose-seeking one.  And he is successful not because he knows why he ought to observe the rules which he does observe, or is even capable of stating all these rules in words, but because his thinking and acting are governed by rules which have by a process of selection been evolved in the society in which he lives, and which are thus the product of the experience of generations. [Rules and Order, p. 11]

Prices

Ludwig von Mises:

He who believes the formation of prices to be arbitrary easily arrives at the demand that they should be fixed by external regulation. [A Critique of Interventionism, p. 97]

The Economist's Toolbox

PETER BOETTKE:

"Kirzner in that 1963 work, and then again in his more developed theoretical exposition in Competition and Entrepreneurship (1973), was trying to intellectually square his understanding of mainstream neoclassical price theory, and his understanding of Misesian price theory. In short, he did not reject mainstream price theory, he accepted it but also accepted its own internal critique (provided by Arrow, but also pointed out earlier by individuals such as Joan Robinson) and sought to salvage the theory by way of Mises. Arrow had asked how can price ever change to clear markets when all the actors are themselves price takers; and Robinson years earlier had pointed out that they only to get into equilibrium under standard assumptions was to already be in equilibrium. Kirzner provides an answer with only slight modification of the assumptions to the neoclassical model."

Boettke's summary of the critiques of Arrow and of Robinson may help some of my students, especially those in Intermediate Microeconomics last semester, understand my discussions of the equilibrium nature of demand and supply, why I emphasized the nature of comparative static analysis, and why I ended the semester with a discussion of entrepreneurship as a significant missing link in understanding the real and emergent economy.

What Do Inequality Data Mean?

Steven Horwitz has an interesting post on inequality data. Here is the way he understands what the data means:

Carroll uses a nice analogy from Schumpeter that I'd never heard before: the distribution of income is like a hotel with some really fancy rooms on the top floors and some very basic ones on the bottom. All the rooms are always full, but who occupies which rooms changes from year to year.

If one wants to stretch the analogy a bit more, it's also the case that each year brings a new upgrade to every room. What constitutes a "basic" room gets slightly more luxurious each year as standards of living rise, and the same is true on other floors. It might be the case that the upgrades to the top floor rooms are proportionally greater than those to the basic and middle floor rooms, but given that the occupants of the rooms switch around from year to year, those greater improvements at the top are still consistent with improvements in the absolute standard of living for many.

And to take the analogy even further: if we account for immigration and other new entrants to the labor force, it's as if the hotel keeps adding rooms/floors on each year at the lower/basic level, enabling everyone else to potentially keep moving up (assuming that some occupants die or leave the country!).

I've often noted in my courses that aggregate data hide a large amount of important information. In the case of the static aggregate income distribution data, we cannot see what happens over time and within each income quintile.

It seems that many people assume a person who is in the lowest income quintile in any year will also be in the lowest income quintile 5 years and 10 years later. It also seems many assume that a person in the top income quintile in one year will still be in that top income quintile 5 years and 10 years later. If you check out Mr. Horwitz's post you can learn that such conclusions are not well-founded. For example:

Of those taxpayer households in the lowest quintile of income in 1999, 57.5% had moved up at least one quintile by 2007 and over 30% jumped two quintiles or more.

Of those in the top 1% in 1999, only 44.6% were still there in 2007.

The Real City

SANDY IKEDA:

"A city is not a man-made thing. Rather, it emerges from the actions of its inhabitants, who interact in unpredictable yet orderly ways. Under the right conditions – the right “rules of the game” – what arises is vital, creative, radically unpredictable, and profitable: the living city.

The modern demand to rationalize the city and to make it “more efficient” is misplaced. A living city cannot be efficient. Efficiency, in the economic sense, presupposes an overarching plan against which measured outcomes can be evaluated. A living city, however, follows no such plan. It is itself the unplanned, collective result of the countless individual plans executed continuously in it, day after day.

[ . . . ]

Earnest attempts to preserve large parts of the city or to consciously direct its evolution, like trying to preserve or control any complex living thing, will drain the life from it."

Ikeda is one of my economist heroes.