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Pennington on Political Economy

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A reader recommends Mark Pennington talking about his book Robust Political Economy. The talk is very well organized and concise, and I recommend it (I didn't stick with it through the Q&A). He says that one has to keep in mind two facts:

1. Humans have limited knowledge (he calls it "limited rationality," which I am not sure is the best choice of terms here).

2. Incentives matter.

What follows from those facts are two important conclusions.

1. Societies benefit from continual experimentation. Since no one knows enough to design a perfect system, more experimentation is better.

2. Exits works better than voice. The incentive for consumers to make good choices in the market and for the market to respond to those choices is pretty much always going to be better than the incentive for voters to make good choices and for politicians to respond to those choices.

He then proceeds to demolish a number of rationales for government intervention, based on that straightforward logic.


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COMMENTS (9 to date)
david writes:

The state of nature is pretty bad at encouraging continual experimentation or a market ecosystem that has numerous alternatives to exit to. Markets are political institutions, regrettably; you cannot get away from politicians.

It is non-obvious that 1 and 2 work together; Xerox PARC would have had less freedom to experiment had Xerox been under greater competitive pressure. Blue sky research inherently requires supernormal profit (or, identically, tax revenue) to be lent to its pursuit.

Don Boudreaux writes:

Mark is an under-appreciated scholar and thinker. I'm reading his book now and learning much from it.

Gian writes:

Why isn't a conservative attitude the first response to Limited Knowledge problem?

J Storrs Hall writes:

"Limited rationality" has a long history in economics and AI since Herb Simon. Cf also Russell and Wefald.

Marcus writes:

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roystgnr writes:
Why isn't a conservative attitude the first response to Limited Knowledge problem?

Because humanity is currently highly unstable. That's not necessarily a bad thing, but it is a hard thing to deal with.

"Make only gradual changes, observing which ones turn out to be improvements and reverting the others" is a fine local optimization strategy for problems of limited knowledge, in conditions where it's possible.

But "make only gradual changes" isn't compatible with "every year, increase the population by a hundred million people, invent a couple new world-changing technologies, use a wide variety of finite and/or non-renewable resources, and overthrow a couple governments". It doesn't always help to know of conservative, tried-and-true solutions to an older version of an ever-changing problem. And the level of authoritarianism which would be required to prevent the world from changing so fast would itself be a non-conservative idea.

ThomasL writes:

@Gian

It is one of the responses. That is the basis for Hayek warning about tinkering with emergent systems. Since they were not rationally designed--and are beyond rational capabilities--it would be wisest to tread softly when attempting to change them.

That is an essentially conservative standpoint.

Evan writes:

@Gian

Why isn't a conservative attitude the first response to Limited Knowledge problem?

The problem with a conservative attitude is that it sometimes conflicts with Pennington's other conclusion:
1. Societies benefit from continual experimentation. Since no one knows enough to design a perfect system, more experimentation is better.

Many conservatives, especially social conservatives, not only refuse wholesale change to society, they also try to disallow any experimentation whatsoever. Hence we have protectionist conservatives stopping experiments in international division of labor, religious conservatives trying to stop experiments in personal lifestyles, etc.

I think there are actually two types of conservatives "reactionary conservatives" who oppose social change for purely emotional reasons, and "Burkean conservatives" who oppose social change for Hayekian, Knowledge Problem-type reasons. Burkean conservatives are the type most likely to comment on Econlog, obviously.

David Boaz writes:

Find a partial transcript in the latest issue of Cato's Letter:

http://www.cato.org/pubs/catosletter/subscribe.html

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