Arnold Kling  

The P-I-E Model

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Jens Erik Gould reports in the New York Times,


Years of rampant violent crime is not only robbing Latin America of significant private investment, but in some cases is stealing up to 8 percent from national economic growth, economists and World Bank officials say.

...“You have money spent on guarding stuff rather than making stuff,” said Michael Hood, Latin America economist for Barclays Capital. “There’s a large population standing around in blue blazers rather than engaged in more productive activities.”


As E. Frank Stephenson points out, Nobel Laureate Douglass North understood this clearly.

I call it the P-I-E model. If you have secure property rights, you are in P mode (productive). If you do not have secure property rights, because criminals and/or government threaten them, you are in I mode (insecure, or operating underground in the informal economy). If you are one of the criminals or bribe-taking officials, you are in the E mode (for expropriation). When the P mode dominates, people are less likely to enter the E mode (because crime doesn't pay) or the I mode (because it is more profitable to operate a legal business). On the other hand, when the P mode does not dominate, it is difficult to operate a legal business profitably, because you get either robbed by gangs or heavily taxes by government.


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COMMENTS (8 to date)
Dan Landau writes:

It is hard to measure how much investment does not take place due to crime or government expropriation. My guess is that the true loss is much much higher than 8%.

Ragerz writes:

And who should protect private property? Why should X pay taxes to protect the property of Y?? Didn't you say in your last TCS article that private institutions are better at making "good choices?" If this is so, shouldn't private institutions decide how to allocate resources protecting private property, since they make "better decisions." Barclay's Bank has enough money to protect itself. To suggest that lack of government protection from crime is slowing economic growth suggests that, in this context, government can better problem-solve than private institutions. And that, according to your TCS article, goes against libertarianism. ("The libertarian view is that private institutions, both for-profit and non-profit, are better at problem-solving than government institutions.")

Maybe what people in Latin America should do is focus on "damage control". Rather than have the government step forth and combat crime and enforce the law aggressively, they should ensure it does no harm. *sarcasm*

- Ragerz, the ex-libertarian

Bill Conerly writes:

On a recent trip in Guatemala, I saw people living in poverty. More saddening, the first thing people buy when they get ahead seems to be bars for their windows. They still have an outhouse, cook outside, live in a small unpainted house, but they have bars on their windows. These were rural people, not city dwellers. How much more progress they would make if the common ethic were to not steal from one's neighbors.

Cyrus writes:

Private security decision-making becomes counterproductive when private security becomes a positional good, either in the situation where private security does not reduce total crime but merely influences who is the victim of criminals, or worse, when other people's private security forces are among the threats you need private security to protect you from.

Sarcasm Master writes:

I agree with Comrade Ragerz!!!

Ragerz writes:

I never knew that comrade was spelled with an e. Learn something new everyday.

- Ragerz, the ex-libertarian

John Konop writes:

Economists Are Destroying America

October 25th, 2006 by JohnKonop

Economists, politicians, and executives from both parties have promised American families that “free” trade policies like NAFTA, CAFTA, and WTO/CHINA would accomplish three things:

• Increase wages
• Create trade surpluses (for the US)
• Reduce illegal immigration

Well, their trade policies have been in effect for about 15 years. Let’s review the results:

• Declining real wages for 80% of working Americans (while healthcare, education, and childcare costs skyrocket)
• A record-high 46 million Americans who don’t have health insurance (due in part to declining wages and benefits)
• Illegal immigration out of control
• Soaring trade deficits, much with countries that use slave and child labor
• Personal and national debt both out-of-control
• Global environments threatened by lax trade deal enforcement

Economists Keep Advocating Policies That Aren’t Working

Upon seeing incontrovertible evidence of these negative trade agreement results, economists continue with Pollyannish blather. Some say, “Cheer up! GDP is up and the stock market’s doing fine.” Others say, “Be patient. Stay the course. Free trade will raise all ships.”

Even those economists who acknowledge problems with trade agreements offer us only half-measures—adjusting exchange rates, improving safety nets, and providing better job retraining. None of these will close the wage gap in America—and economists know it.

Why Aren’t American Economists Shouting From Street Corners?

America needs trade deals that support American families and businesses in terms of wage, environmental, and intellectual property abuses. Why aren’t economists demanding renegotiation of our trade deals? There are three primary reasons:

• Economists are too beholden to corporations and special interests that provide them with research grants.
• Economists believe—but refuse to admit—that sacrificing the American middle class is necessary and appropriate to generate gains in third world economies.
• Economists refuse to admit they make mistakes.

Economic Ambulance Chasers

Now more than ever, Americans need their economists to speak truth and stand up to their big business clients. Instead, economists sound like lawyers caught chasing ambulances: they claim they’re “doing it for our benefit”.

[Note: This article has been posted verbatim more than once on EconLog by this same commenter. It does not appear to be relevant to the entries. Subsequent re-postings have been removed from EconLog.--Econlib Ed.]

Matt writes:

Ragerz has my vote, in general.

In Latin America,however, the problem is generally not to little government; it is too much government doing the wrong things.

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