Arnold Kling  

Sentences that should be questioned

Hooper and Henderson on Out-of... A Macroeconomic Puzzle...

In his semi-farewell column, David Leonhardt writes,

we know that a market economy with a significant government role is the only proven model of success

I think that the growth of the Internet since 1994 (when the U.S. government turned it over to the private sector) is a counterexample worth examining. The government's role in setting standards and promulgating regulations with regard to the Internet has been minimal (certainly in comparison with what it does off the Internet), and yet the Internet has done better than the more heavily governed economies around the world.

Those of you who know the history of telecom know that as of the 1990s there were top-down models. France's Minitel was perhaps the most well known. The decentralized, lightly governed Internet crushed Minitel and other competitors.

I think there is a lesson here that more people ought to think about.

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CATEGORIES: Political Economy

COMMENTS (20 to date)
E. Barandiaran writes:

In his column DL attempts to highlight what he has learnt and others can learn from economics and other disciplines. As a progressive journalist, working as a typical NYT accessory to dem politicians, he prefers not to mention anything he may have learnt about governments and public policies. Progressives should be reminded of what governments do in the U.S. and everywhere. Hope your colleagues invite DL to attend Public Choice seminars at GMU, so at least he can learn something new during his stay at DC.

Noah Yetter writes:

Never mind Hong Kong, Singapore, and pre-Great Depression United States. Of course he doesn't define "significant" so his claim is not really falsifiable.

His claim that we "know" how wonderful and how necessary formal education is will surely ruffle Bryan's feathers as well.

kurt writes:
On the other hand, unencumbered market forces often lead to disaster, as 1929 and 2008 made clear.
It worries me that this is still a standard meme for progressive columnists. But NYT readers will no doubt feel comforted by it.
Dan writes:

The internet could not survive as a private market place without government supported patents and copyrights that create artificial scarcity.

Huge financial windfalls to private corporations are made possible by a significant government role.

Perry writes:

Dan's claim about the internet requiring either copyrights or patents to be successful is false on its face. If you simply look at the revenue from the IP industries vs. the revenue from companies that have no significant revenue specifically from IP (say, Google or the average ISP or what have you), you quickly see that the IP related income is infinitesimal by comparison.

Don't let reality stop a good unsupported claim though, Dan.

BTW, I'm surprised no one has mentioned Hong Kong yet.

kurt writes:

I don't think that's a fair comparison, since HK only has a population of 7 million.

jc writes:

Yes, the definition of 'significant' matters. Some might say that establishing rule of law and property rights and then getting out of the way, e.g., Friedman's cops and courts scenario, is 'significant'. Many, if not most, however (including Doug North), might say that's just a start.

The economic freedom and institutions literature sometimes suggests a curvilinear relationship b/w freedom (more than merely govt spending/GDP ratio) and growth. My guess is that many would prefer that we be well to the right of the inflection point.

(What I've personally found is that if they accept and admit that we're probably past the inflection point, they often also switch arguments, e.g., it's not material wealth that's important but equitable outcomes, happiness, etc. And these arguments may be fine, mind you; but why weren't you arguing them in the first place?)

@Kurt: I attended a globalization conference in 2009 and the host was downright giddy that a financial crisis had popped up, "Free markets...oops! We tried to tell you...". I've never seen such euphoria at a conference. I'd say that for some, it goes beyond simply being a comforting meme; it's more intense than mere comfort.

Ryan Vann writes:

I agree wholeheartedly with David. One only need look at the USA and most of Europe today to see this axiom in action.

Floccina writes:

A counter example is the healthy market for illegal recreational drugs.

Seth writes:

I like your counterexample.

I see this as a common bias for folks to assign much credit to the aggregate mix of free markets and "significant" government (sometimes even emphasizing the latter), rather than considering that a free market with limited government produces most of the benefits and the "significant" government is just a tapeworm. They mistake the cause and effect. The significant government is enabled by the wealth created in the free market, rather than the other way around.

I think they may even make that mistake with your counterexample, by assuming that since the Internet was hatched by government (although it was not a top-down project, was it?), it is successful because of the government.

Perhaps the better distinction is to remove the word government and view things as top-down or bottoms-up. I've seen private organizations suffer from becoming too top-down. Local governments are generally better than the Federal government because they face more direct competition for citizens and can adopt innovations from that spring from the labs of their competition. Big city and big state governments are the exception, because they have turned top-down, fueled from the wealth created in their bottoms-up stages.

Wayne writes:

I like Seth's framework. "Government" and "free-market" are concepts that we, humans, have trouble even agreeing on their definitions. We should try to talk about these social phenomenon in terms of their real-life processes.

The Engineer writes:

For those of you who have not seen it, the blogger Half Sigma has done unauthorized biographies of Times reporters, including Leohardt.

They are very interesting. He has found that the typical Times reporter is a trust funder or offspring of seriously elite people (White House cabinet members and such). They have elite educations at places like Exeter and Andover, not to mention Yale and Harvard.

These are the people that set the news agenda, and there isn't a "normal" person among them.

Sorry if this is an ad-homenem argument against Leohardt, but once I learned his background I just can't read his stuff anymore.

Like "what we all know" is really known by all. Is it, or is it just assumed by people of Leohardt's ilk?

Lewis writes:

@The Engineer

After reading that halfsigma piece, I really have no idea what you're talking about. All the author manages to 'dig up' is that Leonhardt is from an upper middle class family of highly educated people. Why would you discount someone's opinion because their family members are moderately successful? Intelligent people with self-control tend to pass those qualities onto their children. It's not a conspiracy.

How did he become such an elite reporter? Umm, how about majoring in applied math at a difficult school and then working in journalism for over a decade, writing articles that many readers enjoy, and winning the field's top prize? It's called education + hard work + talent.

Evan Gould writes:

I'm a little lamb, that's lost in the woods. I'm so glad that Leonhardt has decided what "we know" is "the only proven model". Also, a model is only a tool used to represent something else. As such, we must never focus on our model, but instead should always look to the reality-based object; in this case a "market economy with a significant government role". Were he to look at the reality of the current market, he may find that it is not a proven success. But then, he might have to question the "significant government role"...

frankcross writes:

The internet is definitely governed by groups like ICANN. Of course, this is private. Is the argument that private governments can and should take the place of public governments?

andy writes:

Another counterexample: the "grey" economy - illegal workers, out-of-tax-accounting transactions. Given how much of GDP is estimated this economy produces, I would call it a 'success'.

Another one: illegal drugs. Would anyone suggest that if the state simply stopped fighting against drugs and let the drug market function with zero government intervention - that the drug market wouldn't celebrate 'success'?

postlibertarian writes:

I've always known the Internet was fascinating from a political philosophy sense (started as a government project and now it's a home for free-market libertarians!) but I'm not very educated about the particulars. The government turning it into private hands circa 1994 sounds incredibly important. What some good resources on the political history of the Internet? (besides of course Wikipedia)

steve writes:

Whats proven is that free markets work and that governments grow in power and authority over time.

A market economy with a significant government role may well be the longest lasting form of organization given these assertions.

andy writes:

postlibertarian: the problem with government-started-theory of the internet (i.e. without government, there would be no internet) is, that technically there is nothing difficult in creating the protocols internet was built with. Yes, TCP/IP is a well-designed protocol that works surprisingly well; however, there were competing protocols at that time, and it is really not that difficult to design a protocol that would work reasonably well. So what did government do that private sector couldn't do - even in terms of investment?

Now look at the other protocols we have - DNS POP, IMAP, SMTP, HTTP, iSCSI, FC, SSH, FTP, NTP, SNMP, IRC, SCTP, RTSP, LDAP, RSYNC,... I mean, anyone seriously believes that if government-financed people didn't come with TCP/UDP/IP/ARP, we wouldn't have internet? Actually, there was a dial-up world-wide amateur network called FidoNet - the reason private individuals didn't start something like internet was because the fixed-lines you need for the internet were horribly expensive. When the infrastructure got better, computers got cheaper, internet started becoming mainstream.

Douglass Holmes writes:

I do know something about the history of the telephone network, at least in this country. The Internet is far less regulated and provides a lot more opportunities for service creation.
In addition, and more to Arnold's point, the cellular phone companies are substantially less regulated than the old land-line network. Features come faster, service is great, and prices are low enough that many people are abandoning land-lines and using cell phones as their primary phone number. This is one example where a less significant government role has resulted in a better outcome.

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