Two attacks, and one defense, of classical liberal ideas appeared over the weekend. “War and Pandemic Highlight Shortcomings of the Free-Market Consensus” announces Patricia Cohen on p.1 of the New York Times news section. As if the Times had ever been part of such a “consensus.” And Deirdre McCloskey reviews Simon Johnson and Daron Acemoglu’s “Power and Progress,” whose central argument is, per Deirdre, “The state, they argue, can do a better job than the market of selecting technologies and making investments to implement them.” (I have not yet read the book. This is a review of the review only.)
I’ll give away the punchline. The case for free markets never was their perfection. The case for free markets always was centuries of experience with the failures of the only alternative, state control. Free markets are, as the saying goes, the worst system; except for all the others.
In this sense the classic teaching of economics does a disservice. We start with the theorem that free competitive markets can equal — only equal — the allocation of an omniscient benevolent planner. But then from week 2 on we study market imperfections — externalities, increasing returns, asymmetric information — under which markets are imperfect, and the hypothetical planner can do better. Regulate, it follows. Except econ 101 spends zero time on our extensive experience with just how well — how badly — actual planners and regulators do. That messy experience underlies our prosperity, and prospects for its continuance.
Starting with Ms. Cohen at the Times,
The economic conventions that policymakers had relied on since the Berlin Wall fell more than 30 years ago — the unfailing superiority of open markets, liberalized trade and maximum efficiency — look to be running off the rails.
During the Covid-19 pandemic, the ceaseless drive to integrate the global economy and reduce costs left health care workers without face masks and medical gloves, carmakers without semiconductors, sawmills without lumber and sneaker buyers without Nikes.
That there ever was a “consensus” in favor of “the unfailing superiority of open markets, liberalized trade and maximum efficiency” seems a mighty strange memory. But if the Times wants to think now that’s what they thought then, I’m happy to rewrite a little history.
Face masks? The face mask snafu in the pandemic is now, in the Times’ rather hilarious memory, the prime example of how a free and unfettered market fails. It was a result of “the ceaseless drive to integrate the global economy and reduce costs?”
(Here, I have a second complaint — the ceaseless drive to remove subjects from sentences. Who is doing this “ceaseless drive?” Where is the great conspiracy, the secret meeting of old white men “driving” the economy? Nowhere. That’s the point of free markets.)
The free market has a plan, imperfect as it might be, for masks in a pandemic. Prices rise. People who really want and need masks — doctors, nurses, police — pay what it takes to get them. People who don’t really need them — nursery schools — look at the price, think about the benefit, and say, “maybe not,” or take other measures. People reuse masks. Producers, seeing high prices, work day and night to produce more masks. Others, knowing that every 10 years there is a spike in prices, pay the costs of storing masks to make great profits when the time comes.
The actual story of masks in the pandemic is the exact opposite. Price controls, of course. Instantly, governments started prosecuting businesses for “price gouging” who dared to raise the price of toilet paper. Governments redistribute income; markets allocate resources efficiently. As usual, the desire to redistribute tiny amounts of income to those willing to stand in line to get toilet paper won out. An entrepreneur tried to start producing masks. The FDA shut him down. (I hope I recall that story right, send comments if not.) China wanted to ship us masks. Yes, China the new villain of globalization gone mad. But their masks were certified and labeled by EU rules, not US rules, so like baby formula they couldn’t be imported and sold.
More deeply, even I, devoted free-marketer; even at the late night beer sessions at the CATO institute, nobody puts mask distribution in a pandemic as the first job of free markets. There is supposed to be a public health function of government; infectuous diseases are something of an externality; safety protocols in government labs doing government funded research are not a free-market function. As we look at the covid catastrophe, do we not see failures of government all over the place, not failures of some hypothetical free market? California even had mobile hospitals after H1N1. Governor Brown shut them down to save money for his high speed train. We might as well blame free markets for the lines at the DMV.
The idea that trade and shared economic interests would prevent military conflicts was trampled last year under the boots of Russian soldiers in Ukraine.
Does anyone think a prime function of free market economics is to stops wars, usually prosecuted by, eh, governments? The standard history of WWI is enough. We do allege that free markets, and free markets alone, make a country wealthy enough to fight and win wars, if the country has the will and desire to do so. The US and NATO military budget vs. Russia’s, larger by a factor of 10 at least, seems to bear that out, along with the much greater quality of our weapons. Heaven help us militarily once the protectionists lead us to state-directed penury.
inflation, thought to be safely stored away with disco album collections, returned with a vengeance.
Did anyone every vaguely hint that inflation control is a function of free markets? Inflation comes from government monetary and fiscal policy.
And increasing bouts of extreme weather that destroyed crops, forced migrations and halted power plants has illustrated that the market’s invisible hand was not protecting the planet.
Doe the Times even vaguely think of news as fact not narrative? There have been a lot of migrations. “Forced?” Many due to violence, poverty, ill government. None due to temperature. Halted power plants (more passive voice)? Yes, it was that pesky unfettered free market that shut down power plants…
The favored economic road map helped produce fabulous wealth, lift hundreds of millions of people out of poverty and spur wondrous technological advances.
Well, a peek of sunlight, an actual correct fact!
But there were stunning failures as well. Globalization hastened climate change and deepened inequalities.
More fact free narrative spinning. How are “inequalities” plural? Globalization brought the sharpest decline in global inequality in the history of our species. Perhaps it “hastened climate change” in that if China had stayed desperately poor they wouldn’t be building a new coal fired power plant a week. US emissions went down because of… choose 1: enlightened policy 2: fracking, a shift to natural gas made only possible by the curious US property rights system absent in Europe, and pretty much over the dead body of the entire energy regulatory apparatus.
Meanwhile over at WSJ, Deirdre is in classic form. (Again, I have not read the book, so this is Deirdre coverage.) The paragraph that caught my attention and demanded a blog post:
We need [according to Acemoglu and Johnson] … the legislation currently being pushed by left and right to try again the policies of antitrust, trade protection, minimum wage and, above all, subsidy for certain technologies. Messrs. Acemoglu and Johnson are especially eager to regulate digital technologies such as artificial intelligence. “Technology should be steered in a direction that best uses a workforce’s skills,” they write, “and education should . . . adapt to new skill requirements.” How the administrators of the Economic Development Administration at the Department of Commerce would know the new direction to steer, or the new skills required, remains a sacred mystery.
“Technology should be steered.” There it is, the full glory of the regulatory passive voice. Steered by who? Deirdre answers the question with that gem of rhetoric, specificity. “Administrators of the Economic Development Administration at the Department of Commerce” for example.
The theme uniting the two essays: If there is one lesson of the last 20 years it is this: The catastrophic failure of our government institutions. From bungled wars, a snafu of financial regulation in 2008 just now repeated in FTX, SVB, and inflation the evident collapse of the FDA CDC and plain commonsense in the pandemic, the free market is bravely forestalling a collapse of government (and associated, i.e. universities) institutions.
we need the state to use its powers “to induce the private sector to move away from excessive automation and surveillance, and toward more worker-friendly technologies.” Fear of surveillance is a major theme of the book; therefore “antitrust should be considered as a complementary tool to the more fundamental aim of redirecting technology away from automation, surveillance, data collection, and digital advertising.”
The question what institution has the technical competence to do this seems to be begging.
“Government subsidies for developing more socially beneficial technologies,” the authors declare, “are one of the most powerful means of redirecting technology in a market economy.”
Well, interpreting the sentence literally, you have to give it to them. Government subsidies are powerful means of “redirecting technology.” Usually to ratholes.
Messrs. Acemoglu and Johnson warmly admire the U.S. Progressive Movement of the late 19th century as a model for their statism: experts taking child-citizens in hand.
Their chapters then skip briskly through history…seeking to show how at each turn new innovations tended to empower certain sections of society at the expense of others. The “power” that concerns them, in other words, is private power.
This is, in fact, the central question dividing free-marketers and others. Private power being subject to competition, we worry more about state power. The essence of state power is monopoly, and a monopoly of coercion, fundamentally violence.
The heart of the book is that technological gains create winners and losers, and Acemoglu and Johnson want that directed by a nebulous bureaucracy. Which will somehow never be infected by, oh, Republicans, or turn in to the endless stagnation of most of the last millennium which actually did pursue policies that forbade technological improvement in order to sustain the incomes of incumbents. Deirdre, who coined the lovely phrase “trade tested betterment” takes it on.
During the past two centuries, the world has become radically better off, by fully 3,000% inflation adjusted. Even over the past two decades the lives of the poor have improved. The “great enrichment” after 1800 and its resulting superabundance has brought us out of misery. Even the poor workers who did not benefit in the short run have done so enormously in the long run. In 1960, 4 billion of the 5 billion people on the planet lived on $2 a day. Now it’s fallen to 1 billion out of 8, and the income average is $50 a day. The state didn’t do it, and forcing short-run egalitarianism or handing power to the Office of Economic Development can kill it, as it regularly has. Messrs. Acemoglu and Johnson see great imperfections in the overwhelmingly private sources of the enrichment. With such imperfections, who needs perfection?
Another way to see the problem is to remember the common sense, refined in Economics 101 and Biology 101, of entry at the smell of profit. …The great fortunes they deprecate have the economic function of encouraging entry into the economy by other entrepreneurs who want to get rich. This competition cheapens goods and services, which then accrues to the poor as immense increases in real income.
Many fortunes, for instance, were made by the invention of the downtown department store. The profit attracted suburban competitors, and at the mall the department-store model began to fail. Jeff Bezos reinvented the mail-order catalog. He is imitated, and the fortunes are dissipated in enormous benefit to consumers called workers.
…. It’s what happened and happens in a liberal economy.
The book uses a lot of history, surveyed by McCloskey. As before, it’s criticized a bit as history lite. The history Deirdre covers has the usual imperfections of the free market.
I wonder if the book has any history of success of this plan, of governments successfully guiding technological transformations to protect the rights and incomes of incumbents, without in the process killing technical change. Governments habitually screw up basics like rent control. Figuring out what new technology will do is pretty much beyond the capacity of private investors and book-writing economists. The idea that bureaucracy has the capacity to figure out not just what new technology will work, but to guide its social and distributional consequences seems… far beyond the historical record of bureaucratic accomplishment. But I am straying beyond my promise to review the review, not the book, before reading the latter.
I recognize the desire on both sides. Partisan politics needs “new” ideas and a “new” propaganda. In particular, the right is aching for something shiny and new that it can sell to voters, which it regards with the same sort of noblesse-oblige intellectual disdain as the left does. Mind the store, mend the institutions, freedom, rights, opportunity and make your own prosperity are, apparently, not sexy enough. So both sides need new initiatives, expanded governments, to excite the rabble. But we’re not here to supply that demand, merely to meditate on actual cause-and-effect truth of what works. Beware the temptation.
Update: In retrospect, perhaps the issue is much simpler. The bulk of economic regulation serves exactly the purpose McCloskey basically alleges of Acemoglu and Johnson: Preserve rents of incumbents against the threats of technological improvements. From medieval guilds to trade protection to taxis vs. Ubers, that is really its main function. So we have an extensive bureaucracy that is very good at it, and extensive experience of just how well it works. Which is, very well, at protecting rents and stifling growth.