Arnold Kling  

Nobel Laureates speak

Double-Counted Jobs?... Measuring Labor Income...

The Wall Street Journal asks a series of questions to a number of Nobel Laureates in economics. On one question, whether the global income distribution will be more equal 50 years from now, several of them say "yes," because they are optimistic about China and India. I guess they model the future by extrapolating the last ten years forward.

UPDATE: He's not a Nobel Laureate, but Brad DeLong does some arithmetic and projects out growth rates for China and India.

China's labor productivity is now growing at roughly 6% per year. If that rate can be sustained - and if the Chinese economy becomes and remains integrated enough for us to be able to speak of it as a single entity - China's labor productivity will be comparable to today's America sometime before 2050. And India? If the growth rates of the past 15 years continue, and if India remains united, its labor productivity in 2050 will be comparable to that of Spain today.

However, many of those same economists see poverty in the underdeveloped world as the biggest economic challenge.

On the question of which sphere of life requires the most limitations on market forces, Kenneth Arrow says,

because of both quantitative importance and depth of implication, the field of health policy requires (and gets) the most limitation of market forces.

On the other hand, Vernon Smith answers,

None, because "markets" are about recognizing that information is dispersed in all social systems, and that the problem of society is to find, devise and discover institutions that incentivize and enable people to make the right decisions without anyone having to tell them what to do. The idea that market forces should be limited stems from a fundamental error in beliefs about markets. This is the wrong question.

Thanks to Cafe Hayek for the pointer. Don Boudreaux says, "Note the concern with income distribution." I pointed this out as a characteristic of Saltwater Economics in Sweetwater vs. Saltwater.

For Discussion. Can you explain what Smith means?

COMMENTS (3 to date)
Brad Hutchings writes:

I don't get economists' fixation with income distribution, as it seems like a poor proxy for what one might identify as the "problem". A better proxy would be wealth distribution, and it would be especially better if it could capture things like education and civil liberties. "Give a man a fish, and he has a meal. Teach a man to fish, and he has meals for life." These are the precursors of income.

To explain Smith... each of us ought not be so conceited as to think we can centrally plan and manage large systems of people to be more productive than they would on their own. Perhaps we can succeed in making things appear more fair at the expense of total output (or obscured unfairness, etc.). We also ought to distrust anyone who says s/he can do it.

Here's a very recent example... Price gouging in a hurricane is illegal and Florida's AG is all over TV saying he's on the lookout for gougers. So no surprise that as 2 million people were leaving the east coast of Florida, they couldn't find any gas. Had station owners on the coast been allowed to raise prices and realize windfall profits, customers may have tempered their demand until they could get to inland areas where gas was more plentiful. Instead, they ran out of gas long before the hurricane reached land. Just lovely. Maybe next time, the problem can be solved with rationing and of course, all the gas consumers will abide by the rationing law.

Lawrance George Lux writes:

Smith is saying markets should be freed of limitations, instead of curtailed. His belief is that markets will work best in any situation, over any planned structure. I concur, if pure market conditions are maintained. There lies the rub! Can multi-Billion dollar multinationals sell to Individuals making less than $100,000 per year, without maximizing their own Profits by dictating Sale price? Where is the input of the Buyer when the Supplier so monopolizes the market? This is not a market scenerio. lgl

Mats writes:

"Can you explain what Smith means?" Smith thinks that "institutions that incentivize and enable people to make the right decisions" are marketplaces with no or little regulation. Others may think that government supplied social security, healthcare and education could function as such.

I don't really think that nor Smith neither Arrow has studied what makes people able to make "right decisions without anyone having to tell them what to do." In fact we're all heavily influenced by others in most of our decisions.

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