Arnold Kling  


Lecture on Mechanism Design... Doctors' Statistical Ignorance...

I try to explain what George Mason economics is all about.

If you want to be a Masonomist, you have to lose the we. When people use we in today's politics , they are doing two things.

1. Appealing to a moral entity that stands apart from and above John, Mary, or any other individual
2. Treating government as the embodiment of that higher moral entity

You can be a Masonomist and believe (1). It is a good thing to have a conscience and moral standards. It is a good thing to engage in volunteer work, to form organizations that address the needs of others, and to act unselfishly toward family and others in your community.

...However, Masonomics is unrelenting in its rejection of (2). For many years, George Mason has been the home of Public Choice Theory

Read the whole thing.

I can just see some Masonomist objecting to my characterization of Masonomics and saying, "Arnold, lose the we."

UPDATE: A commenter links to a paper by Joseph Stiglitz as representing a different view. That it does, but it shows how MIT economics and Masonomics talk past one another.

I would say Joe, fine, there are many examples of market failure. And maybe you can do things to reduce government failure. But in the end, there is the issue of dynamics. Market failure tends to be self-correcting, because entrepreneurs have incentive to fix things. For government failure to be corrected, somebody needs the insight to know how to correct it and they need to overcome the political opposition to changing the system. In practice, the change does not happen. You cannot get rid of the mohair subsidy.

To me, the problem with the Stiglitz-MIT view is that they do not share the Masonomics view of the real nature of government failure. It is not just that special interests can gum things up. It is that however things get gummed up, they are persistently gummed up in an institution that is insulated from market competition.

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CATEGORIES: Economic Philosophy

COMMENTS (20 to date)
Student writes:

Your definition of "Masonomics" makes it seem more like a set of political beliefs than any particular approach to economic research.

Even Joe Stiglitz (the acme of the "MIT economist") acknowledges public choice considerations when he's talking about public policy. It just so happens that he believes there are times when "government failure" can be mitigated and that in those cases governments can be used to correct "market failure". He does not think this is always the case, but that when it is the case we need to recognize it (Note: this is not my interprutation of Stiglitz, this is exactly what he says in the link at the bottom of this post).

Of course, you can argue whether he's right or wrong on a case by case basis, but the question itself is not new or unique to GMU. You really make it sound like a "Masoneconomist" is just someone with a political axe to grind. I hope this isn't true of the actual GMU faculty.

Bruce G Charlton writes:

As so often, Thomas Sowell has perfectly encapsulated this issue: (quoted from interview in WSJ):

'The notion of a self-equilibrating system - the market economy - meant a reduced role for intellectuals and politicians, he says. "And even today many still haven't accepted that their superior wisdom might be superfluous, if not damaging.'"

General Specific writes:

"the problem with the Stiglitz-MIT view is that they do not share the Masonomics view of the real nature of government failure"

I sense unnecessary either/or reasoning in this argument, telling me I have to accept either a Mason view "I" or an MIT view "we."

And might you not mischaracterize MIT? Do they really not understand that government can be gummed up?

Seems to me MIT considers both "we" and "I," and tries to balance the two, arguing for "we" but certainly not in some collectivist utopian communistic sense. And on the other hand, Mason, an I-centric there-is-no-we institution, seems utopian.

What I'm hearing is a comparison between pragmatists versus utopians. I'll take pragmatists any old day. Utopians scare me, whether on the right or the left--or those of the anarchic libertarian bent.

David N. Welton writes:
Market failure tends to be self-correcting, because entrepreneurs have incentive to fix things.

Isn't the definition of market failure something that can't be accounted for by the market? For instance, someone dumping toxic waste in a stream is acting "rationally" in that he's disposing of it cheaply. What's the entrepreneur going to do about that?

That's not to argue for government involvement in everything. I think the rational approach is to look at things technically, on a case by case basis, see what the market failure is, see what regulations would look like, and see on the other hand, how the externalities of the market failure could be internalized. Emissions trading was a clever solution to one market failure, for instance. Dr. Mankiw argues convincingly for carbon taxes as a way to internalize another failure with the least amount of government involvement (compare them, for instance, to silly mandates about gas mileage).

fling93 writes:

The dumping in the stream creates a situation that the nearby residents are unhappy about. Therefore, this is a problem that, if solved, provides a profit opportunity for the entrepreneur who came up with the solution. That nobody has come up with the solution does not mean that one does not exist. It could just mean that the technology isn't there yet. Private roads don't sound so far-fetched now that we see Fast-Trak systems.

But the important thing is that there are incentives to solve the problem, which typically isn't the case for government failures.

Student writes:


The actual act of collecting tolls on a private road has become easier due to Fast-Track, but that doesn't mean there are not still problems. For example, what about concerns of geographic locations with limited road access. Couldn't company's charge monopoloy prices in this situations without fear of competition?

It seems like you're essentially suggesting that we ignore problems of transaction costs, barriers to entry, and imperfect information and hope a "private" solution is found. This may make sense in some cases (I don't think the government should sell used cars), but in others it seems totally reasonable (river dumping).

N. writes:

From the essay:

But there is no moral significance to a border.

Ah, but therein lies the rub. A number of the opponents to free trade that I have argued with do believe that there is a moral significance to a border, and that belief is deep-rooted. To loosely quote one of my frequent verbal sparring partners (my barber):

I believe that you should stick by whatever group you are born into, and you should only act in a way that is beneficial to those in your 'tribe' and, conversely, detrimental to those outside your 'tribe.' Other tribes should behave the same way.

One of his chief objections to free trade is that it benefits people outside of his group. Case closed.

Is this position immoral? It is to us. To him, 'beggar thy neighbor' is the height of morality.

Furthermore, when I suggest that if 'tribes' around us engage in trade to their mutual benefit, and our 'tribe' refrains from doing so, it puts us at a disadvantage by comparison, his thinking is,

I am not willing to create 'losers' in my tribe (by outsourcing jobs, for instance), not even in the short term, not even for promises of long-term growth, not even out of necessity. My tribe is my people, and win or lose, we will have solidarity, all of us, together. I won't 'sell anybody out.'

To us this position is immoral and irrational. To him it is exceedingly moral and supremely rational.

My point, I guess, is to suggest that when you make the assertion that what basically amounts to 'tribal loyalty' is immoral, you aren't making any friends.

There has to be a way to re-frame the argument to make it more palatable to those who think in these terms. I haven't hit on it yet. Maybe someone here can figure it out.

Matt writes:

If government has no competition, then government does not obey linear market law, then Arnold is stuck with something like game theory or mechanism design to predict government actions.

Government does have competition, it is just that the competition cannot compete all the time at all price ranges with government. Their ability to participate with government is partial, and out of phase. The phase difference is approximated by the market share difference in markets where they compete with government. The effect of this pahse difference is a long cycle of variability in markets where government participates.

Our Mechanism Design is the constitution, design to force the non-competiveness of government into fair market rules. The long government update cycles are a combinatorial result of the position of government in the income distribution and the effects of the constitution.

The best mechanism design for government is one that has few rules but can be efficiently updated.

8 writes:

The American government is designed to change very slowly and only when a large majority of people agree (President, 50%+1 of the House, 60% of the Senate if they agree. If they disagree, they need 2/3rd's of the House & Senate). Anything that benefits a large enough minority of Americans becomes entrenched, which is why we are stuck with a pension and healthcare system designed for the 1930's world. Every industry with a similar pension system went bankrupt or may soon be, including steel, airlines, and autos. The market has adapted, the government is unchanged. The system works well for freedom, but for anything the market can provide it's a really bad tool.

MT57 writes:

Loved the post and the links. Yes, I believe you are on to something. But avoid doctrinnaire positions and binary presentation of issues; either/or positions in a complex world are ultimately impossible to defend in the commons. FWIW, I think a bigger revolution of political and economic thought in the rest of my lifetime will be driven by neuroscientists who, I expect, may ultimately define what moral thinking is from a completely new, empirical perspective with consequences that will upend much of what has passed for moral reasoning in the past millenium.

For N, consider the hypothetical of a mercenary from your adversary's tribe flying into a foreign land and assisting a government commit genocide, taking booty and pictures, and returning home to sell them. Would your adversary say that is not to be criticized morally? It's possible he/she would. Obviously at one point in human history that was the norm. And if so he/she may not only be logical and consistent but if we ever are reduced to such a state again, will probably survive the resulting struggles. But it is unlikely to be a widely shared view in 2007 and you could take comfort in exposing its extremism.

Nathan Smith writes:

This essay is close to my heart. I studied for a couple of years at Harvard under guys like Dani Rodrik. "Lose the we." Yeah, that's the problem: they're constantly thinking about policy, policy, policy. Their raison d'etre is to be advisors to governments, so they have to assume that the government is an entity amenable to the kind of advice they can give. There's something Sisyphean about it: we know that governments aren't the sorts of entities that our models need to be, but we have to keep trying, have to keep rolling the stone up the mountain even though we know it will roll back down again. I'm not saying it's not worthwhile to some extent. But you get this sense, there has to be a better way.

Now I'm a graduate student at George Mason, and I find something very liberating about the unique approaches here. I hope Arnold is right that Masonomics will set a trend in the discipline, partly for self-interested reasons of course-- it'll make it easier for me to get a job, to get published, etc.-- but partly because I think there are diminishing returns to the Harvard approach (and the Chicago approach, perhaps, for different reasons).

Barkley Rosser writes:

A lot of people are using the term "Masonite" for you guys.

Troy Camplin writes:

I'm still waiting for people to join me in the Complex Systems with Emergent Properties school of Economics so we can finally supply the scientific proof that free markets are the best form of economic system -- precisely because nobody devised it, but because we stumbled upon it. Or, more percisely, it emerged from us.

Tom Church writes:

Warren Buffett has warned against the trade deficit in his annual letters to stockholders. But I wonder if it is similar in nature to goodwill on a balance sheet (which Buffett disregards): frequently without economic basis, placed there when a company buys another for more than its book value. (It is with economic basis when it is a direct source of revenue, e.g. a copyright claiming royalties.)

I've been wondering when we'd get a name for the type of economics coming out of GMU. I'd like to get reactions (clarifications?) from Bryan, Robin, Alex, and Tyler on Masonomics.

Bill Stepp writes:

Isn't the definition of market failure something that can't be accounted for by the market? For instance, someone dumping toxic waste in a stream is acting "rationally" in that he's disposing of it cheaply. What's the entrepreneur going to do about that?

Firms such as Waste Management are on the case.
And anyway this is government failure, not market failure. There are no property rights in most streams thanks to government.

Jason Briggeman writes:

Yes, I would, as a GMU economics graduate student, encourage you to lose the "we" (though I do like that line!), at least as concerns the following claims:

"Governments do not face competitive pressure. They are immune from the 'creative destruction' of entrepreneurial innovation."

Governments are not monoliths; read GMU's Richard Wagner on this. Persons and organizations within "government" assuredly do face competitive pressures, from both within and without, and yes, also from the "market" space. They are decidedly not immune from entrepreneurial innovation; political entrepreneurship is entrepreneurship too.

I will admit that there are probably two or three GMU econ profs who might sign on to that, but I can't imagine you would find many others. All-or-nothing statements about "government" or "free individuals" are libertarian political slogans that (should) have little to do with a program in political economy that counts James Buchanan and Gordon Tullock as its founders. Buchanan sees politics as deeply involved with gains from trade; Tullock is even less likely to be mistaken for a libertarian. Obviously they aren't the only key guys to ever walk the Fairfax campus, but I think they do remain the leading influences.

UConn Student - Nicholas writes:

Dr. Roth's study of repugnance is important here. In the absence of market guidelines, will societal repugnance be respected? Prostitution and the Drug Trade are economic transactions in which there is mutual benefit. It seems to me that Masonomics would want the vice laws outlawing such activities to be rescinded.

PrestoPundit writes:

Fashions in economics are driven by status in the "I'm smart" game and in the "I'm academically powerful" game. The easiest game in town here is the formal puzzle game done at a top 10 school -- it doesn't matter if this produces good science or sound explanations or useful "empirical" work, it simply makes for the most efficient path to power and status in the profession. I don't see how the George Mason economics department really competes in this the most central "fashion" game in the economics profession.

fling93 writes:

Student: It seems like you're essentially suggesting that we ignore problems of transaction costs, barriers to entry, and imperfect information and hope a "private" solution is found.

No, I am not suggesting that. I am supporting the statement, "Market failure tends to be self-correcting, because entrepreneurs have incentive to fix things." Which is in contrast to government failure, which is self-perpetuating.

in others it seems totally reasonable (river dumping).

As I understand it, the solution is to assign private property rights to the river. Then the polluter and the river-owner will transact to find a solution.

jaim klein writes:

I would like you people from the ivory tower to use examples more attuned to real life. Toxic dumping? Have you ever tried to dump some toxic material into a river? Thousands of small green bastards are on the watch to catch one of those eeeeeevil industrial polluters and hundreds of famined lawyers are ready to jump on cases where big monies can be blackmailed from industry AND be proclaimed the angelic Saviour of Earth. Try to dump in open ocean and most probably your own secretary (you forgot to say Good Morning) will sell you out. Try to sign a contract with an African tribal chief to store some drums and soon you will be crucified in the New York Times and awaiting your trial at the Hague Court of Justice. As Arnold has mentioned, instruments like those against monopolies are being used to maintain monopolies, meaning that no matter the intention, if an instrument is available it will be always used in the way that it benefits somebody. And no, Sir, real life entrepreneurs have no incentive to fix thing. They have incentive to make money. If it fixes things, good for you, if not, I didnt break it.

Regarding free trade, it is so obvious that it is bad for the weak and good for the strong. Why dont you get it? Say my tribe lives in this our island and we have those cannibals owning the next island. It is in those abominable cannibals' nature that to raid neighboring islands and kill the males and divide up the girls among the best fighters. Those cannibals say they are the Sons of the Light and we are the Sons of Darkness. Ha! We know that free trade will surely benefit both tribes, but asymetrically. It will benefit a little bit the stronger party. This tiny differential benefit will add up exponentially with the years, till a point is reached where raids are unnecessary and relics of a barbarian past, the weaker's girls will crowd to the wealthier boys's BMWs and yachts. fre end ends very badly for the weaker party. Because, Sir, absolute economic status is irrelevant in these islands, since we are engaged in a deadly competition with those cannibals and the relatively stronger gets the girl in the end. Thats all folks!

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