Worst Argument Ever?

by on August 8, 2007 at 11:36 am in Economics | Permalink

Dani Rodrik points out that government interventions in areas such as "education, health, social insurance, and macroeconomic
stabilization" are

"targeted on a loosely-defined set of market imperfections that are rarely
observed directly, implemented by bureaucrats who have little capacity to
identify where the imperfections are or how large they may be, and overseen by
politicians who are prone to corruption and rent-seeking by powerful groups and
lobbies."

Absolutely correct.   The obvious conclusion?  Industrial policy is a good idea.  I kid you not.

Dave August 8, 2007 at 11:55 am

Did someone sleep through the ’70s and ’80s?

Patrick R. Sullivan August 8, 2007 at 12:19 pm

I’ve read similar from Paul Krugman. It’s as if Tulloch and Buchanan never existed.

Here’s a good antidote from Tom Sowell:

when there is a complete turnover in political leaders over time, the same problem will remain because the same incentives will remain when new leaders take over.

Some people claim that the problem is how much money it would take to properly maintain bridges, highways, dams and other infrastructure. But money is found for other things, including things far less urgent and some things that are even counterproductive.

The real problem is that the political incentives are to spend the taxpayers’ money on things that will enhance politicians’ chances of getting re-elected.

There may be enough money available to maintain bridges and other infrastructure but that same money can have a bigger political pay-off if spent building something new instead of maintaining and repairing existing structures.

When money is spent building a new community center, a golf course, or anything that will be newsworthy, there will be ribbon-cutting ceremonies and the politicians who cut the ribbons can expect to see their pictures in the newspapers and on TV.

All that keeps their name before the public in a positive role and therefore enhances their prospects of being re-elected.

But there are no ribbon-cutting ceremonies when bridges are being repaired or pot-holes are being filled in. These latter activities may be more valuable than a community center or a golf course, but they are not nearly as photogenic.

Lee A. Arnold August 8, 2007 at 12:46 pm

Tyler Cowen just discarded equilibrium in favor of Hayekian spontaneity, and now you insist that market failure be measured? When did the category of “market failures” proceed away from: “possible theoretical reasons why there may never be a theoretical general equilibrium and so no theoretical allocative efficiency,” to: “real reasons why real things don’t look right?” Does any economist have a leg to stand on?

Barbar August 8, 2007 at 1:16 pm

Right. But if Rodrik thought he had a way to run a business better, that would be totally reasonable. Because the business world is very competitive. Right.

Samson August 8, 2007 at 1:28 pm

Fergus: since when has Alex struck as “fair-minded”. Here’s a quotation that Alex should have also included:
“A key point of the paper is that the shortcomings of governments should not be taken as a given. Just as economists think about how to improve market institutions, they can devote their talent to improving the institutions of government. The informational and rent-seeking costs of government intervention can be ameliorated through appropriate institutional design.”

Pat Lynch August 8, 2007 at 2:05 pm

Barbar

Yep – although the competitive nature of markets is only one part of the problem with comparing markets and government.

Regarding Alex’s characterization of Rodrik, I’m not sure how it can be misleading. He says, plainly, that industrial policy can be constructed and managed by the political process. He and Fergus may differ in their world views concerning the feasibility of such an endeavor, but surely not on the interpretation. As we say here in the U.S., let’s “go to the video tape!”

From page 2 of his paper he notes that anyone who believes that the state shouldn’t be involved areas such as education or pension plans (his examples, not mine) are termed “ideologues.” After dismissing these folks as unreasonable, he goes onto to say that folks who agree on some form of intervention in these areas, but debate the scale are “well-informed.” On page three, he proposes applying these same principles to industrial policy. What exactly is unclear here?

Yan Li August 8, 2007 at 2:47 pm

Rodrik’s issue setup is head on. Whether industrial policy is the right prescription is up for debate. I do not think it should be instantly dismissed. The issue Rodrik raised, less the aspect of interest groups and lobbies, is especially relevant to China. There is this “black box,† you could leave it to sort out internally while knowing it may never work out because market only operates in disjointed patches of the society, and bureaucracy is prone to all sorts of troubles, would you take an engineering approach to at least deliver some “desired† results? I am not sure the answer is “yes.† But it is worthwhile pondering.

I echo Rodrik’s emphasis on appropriate institutional design, and also like his observations (2004) on China’s institutions. My question is how far policy fixes on the margin can go before the system is trapped in another set of, potentially bigger, troubles.

I kid you not, I like the paper.

Yancey Ward August 8, 2007 at 3:28 pm

I think Rodrik’s setup, itself, is deficient. He describes government intervention as bad, then tells us he was describing education and healthcare, not industrial policy. Well, I would have read his setup and thought he was talking about education and healthcare.

Matthew C. August 8, 2007 at 5:41 pm

Nice to see you and Tyler really banging the hammer for basic economic literacy and public choice thinking over the past week or so. For the libertarian-minded it’s all familiar and obvious stuff, but there is a large population of leftist bloggers and blog readers who really need to hear this message and start thinking about it. They will get mad at first, but after a while the ideas start to permeate and it becomes clear that bigger government is not the solution for every problem. Keep it up.

Hopefully Anonymous August 8, 2007 at 7:22 pm

“education, health, social insurance, and macroeconomic stabilization”. Could the military be added to this laundry list? Trying to determine if this is foil-seeking as seems to be implied by Matthew C.’s response, or if these are the programs that make the most sense on a list together to think about the utility of govt. funding.

JPC August 8, 2007 at 10:32 pm

And a point to some of the other commenters here:

Rodrik’s point is absolutely summarized as:

“Government has taken over education, health care, the global economy and private insurance with little evidence that the private markets could not do a better job. Why not the central planning of the direction of all other businesses as well?”

I guess everyone has a bad day, but it’s kind of his job to understand this better than that. And if he didn’t really absorb the economic reasons this is the worst argument ever as a graduate student or professor, he should walk down the hall and sit in on an undergraduate history class or two.

Russell Nelson August 9, 2007 at 2:02 am

The existance of serious market failure does not imply that successful government intervention is possible. Sometimes a hard problem is simply a hard problem. Sometimes a screw is a screw, and it doesn’t matter which hammer you’re trying to use to get it into the wood.

a different alex August 9, 2007 at 7:36 am

I suppose if you live inside a conservative bubble where health and education are synonymous with failures you might have the sort of response tabarrok has here. On the other hand, most people tend to think of government health and education programs quite positively. Hundreds of millions of kids were given a free education over the past century; and millions of people who cannot afford healthcare get it through medicaid.

Of course, maybe it could have been done better otherwise – with more market-oriented methods. Or maybe not. The point is, this is something to be argued about, rather than just assumed. Someone needs to get of his bubble.

Quotes August 9, 2007 at 8:01 am

Remember what J.K. Galbraith said?

“You will find that the State is the kind of organization which, though it does big things badly, does small things badly, too.”

Russell Nelson August 10, 2007 at 1:32 am

a different alex: education and health care are failures relative to what would have happened if it had been less socialist. On an absolute scale, of course they can be perceived as successes. But then, so can anything if you don’t compare it to something better.

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鑽石 April 2, 2008 at 9:36 pm

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