Arnold Kling  

The Best Thing I've Read Recently

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It's the essay "Capitalism and the Jewish Intellectuals," by Jeffrey and Shterna Friedman. It's in the same issue of Critical Review as my essay "Macroeconometrics: The Science of Hubris." I recommend subscribing to Critical Review, even though the publisher maintains one of the most user-hostile web sites I have ever encountered.

If asked to explain economics standing on one foot, many of us would say "Incentives matter." F&F say that is a bad move.

They take as their starting point Jerry Muller's book, Capitalism and the Jews. I can sketch their essay as a Q&A. The answers are F&F's, in my words.

Q: Why are so many Jews hostile to capitalism when, as Milton Friedman argued, it is the one system that breaks down discrimination against Jews and allows them to thrive?

A: Because many Jews, particularly the ones we hear from, are intellectuals, and intellectuals are hostile to capitalism.

Q: Why are so many intellectuals hostile to capitalism?

A: Because many intellectuals do not have first-hand knowledge of economics. They have heard that "incentives matter," and this confirms their impression that capitalism is based on greed. Even intellectuals with training in economics take away from "incentives matter" the message that "we" (meaning intellectuals making policy) should manage, or at least tweak, everyone else's incentives.

Q: How would you break down that hostility to capitalism?

A: By de-emphasizing "Incentives matter" and instead emphasizing that "unintended consequences matter." That is the message of Adam Smith. It is the message of Hayek. Once we embed people in complex economic and political systems, selfish intentions can turn out well (because of competition), and good intentions can turn out badly (because of imperfect knowledge).

There are too many excellent passages in the F&F essay to quote here. But I cannot resist quoting this, from late in the essay:


if we tried to understand Hayek by reading Marcuse, we would get nowhere...if we try to understand Marcuse and his fellow left-wing intellectuals without reading them, we also get nowhere...Free-market economists tend to be as uneducated in the views of anticapitalists as anticapitalists are in the views of free-market economists. The mutual misunderstanding can be reduced only through sympathetic attempts to understand "the other." This requires gaining distance from one's own assumptions, theories, and intellectual tradition.

Of course, the law of asymmetric insight says that we think we know the other side's point of view (even better than the other side knows its own!). So we easily rationalize not having to read the other side's position sympathetically.

But my main take-away from F&F is that when we emphasize "incentives matter," people on the left hear that as confirmation of their arguments for the need to regulate and control capitalism. Hence, we ought to change our message.


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CATEGORIES: Political Economy



COMMENTS (19 to date)
Daniel Kuehn writes:

But unintended consequences matter because incentives matter! Unintended consequences usually happen because they either distort incentives or the remove incentives from the equation.

I don't know - I'd rather try to convince someone (I'm not sure why you reference the left here) that incentives are different from "greed" and "greed" is a moral spin on things that isn't all that relevant than have them thinking unintended consequences matter and greed still rules.

When you tell someone preoccupied with the notion of greed that the real point is the unintended consequences, then all they see is a world where greed and unintended consequences reinforce each other - and they still miss the key point about incentives. You get a world full of people like Dennis Kucinich, Ron Paul, Noam Chomsky, and Alex Jones. That's not exactly an economically enlightened foursome.

Dr. Liberty writes:

If "unintended consequences matter" is stressed, isn't it possible that people on the left will hear that "we" need to regulate people to limit THEIR unintended consequences?

People who think in terms of "we" will distort any economic idea. The most important thing is to get rid of the "we", not to stress one great economic insight over another.

fundamentalist writes:

Capitalists do need to understand socialists better, but I don’t think socialists the problem with socialists is that they are merely ignorant or misunderstand capitalism. My experience of many years has been that they don’t want to learn anything.

Socialists use every sophist trick in the book and spend most of their time ridiculing the opposition. And that’s what Marx taught them to do. Marx couldn’t stand up to the reasoning of economists, so invented the idea of polylogic, which is the idea that every class has its own logic. That logic makes sense within a class but not to other classes. That makes it impossible for classes to understand or even discuss anything.

Marx protected his weaker followers by convincing them that it was impossible for capitalists to understand Marxist logic. So it’s best to just ridicule them because they only way you can change them is by force.

I have never found a socialist that will actually discuss anything. Ridicule and sophist fallacies are their coin. They are not only anti-economics, but anti-reason as well.

Grant Gould writes:

I agree that the focus on incentives is a problem, but "unintended consequences matter" gives away the farm. It invites people to redefine any outcome supported by incentives as intended (by whom? doesn't matter!) and thus "greedy" or "immoral" or otherwise beyond polite consideration.

"Consequences matter" is shorter, simpler, and avoids the ridiculous game of redefining things between intended and unintended to gain moral leverage.

N. writes:

In my own discussions with socialists I have used this tact and had it turned around and used against me.

My argument is typically that consequences are more important than intentions. Their response is that every action causes unintended consequences which are ultimately unknowable, thus we cannot control the end result of our actions. We can, however, control our intentions -- indeed that is ultimately all we can control. Thus it is better to attempt good -- to "try" -- than it is to do nothing and despair. Who knows, the unintended consequences may be positive.

I think this rebuttal is actually less facile than it first appears for two reasons. First, if you subscribe to a belief system that emphasizes correct practice, the consequences are sublimely irrelevant (i.e., "give to the poor and you will get into heaven"). Secondly, and much more importantly, I think that signaling and identity politics are far more crucial in these discussions than actual policy analysis. Most socialists (in my experience) are far less interested in seeing the consequences of the policies they purport to advocate than they are increasing the number of like-minded individuals and expanding the influence of their in-group.

This is no great revelation, but I do think it bears mentioning in relation to this post. Politics is seldom about policy. Instead, politics is mostly about identity.

Norman writes:

In my introductory econ courses I've shifted over time from "incentives matter" to "prices are information." Thus distorting prices means destroying knowledge, which even the most ardent left-winger hesitates to do without a pretty good understanding of why and what we'll do to replace it.

Of course, I favor more government intervention than the average reader here, so I might be giving away the farm, too.

Publius The Lesser writes:

I don't think the hostility many intellectuals have towards capitalism stems primarily from a lack of understanding of economics. Succeeding at business and succeeding as an intellectual require different kinds of intelligence. Succeeding at business requires a lot of social intelligence: understanding what people need and how to mobilize groups of people and capital to meet those needs at a price people are willing to pay. Succeeding as an intellectual requires the kind of intelligence that can readily understand and manipulate complex abstract concepts. These two kinds of intelligence don't necessarily overlap, and one can be "commercially smart" while also being "intellectually dumb" or vice-versa. Intellectuals like to place themselves near the top of the social hierarchy, and it's pretty galling for some intellectuals to see someone whom that intellectual considers to be a crude dummy make more money and acquire a higher social standing than they have themselves.
In addition, capitalism builds society's preferences from the bottom up, and probably doesn't give as much prominence to the intellectual's chosen field as the intellectual feels it should. Hence, some intellectuals prefer a system where their fields of expertise are valued, and they can act as gatekeepers on who is allowed to succeed.

fundamentalist writes:

Norman, I have done something similar. In addition, I have trained myself over the years to always frame every economic issue in terms of the poor and the best way to help the poor.

Socialists think that because they talk about the poor endlessly that their talk is actually helping. We have overwhelming evidence that free markets have lifted more people out of starvation poverty than all of the charity and government redistribution in history.

Socialists talk about the poor; capitalists actually do something to help them.

fundamentalist writes:
If asked to explain economics standing on one foot, many of us would say "Incentives matter."

I have learned to respond that economics is about lifting people out of poverty. It takes practice, but forget about liberty, rights, incentives, efficiency, growth, etc., and always respond with how it helps the poor.

Hasrrubal writes:
"Consequences matter" is shorter, simpler, and avoids the ridiculous game of redefining things between intended and unintended to gain moral leverage.

I think this is on track.

Also, it seems to me that many confuse "incentives matter" for "intentions matter." Look at the arguments against privatizing parks: "Those greedy capitalists will put a Taco Bell in front of Old Faithful!" The assumption is that the intention to make money drive all decisions without regard to the actual impact of those decisions, even if the impact would be to reduce total profits.

On the other hand, the world is full of examples of people doing just that. The market punishes them and drives them out of business, but not always before permanent damage is done. I think this is a much more powerful argument against an unrestrained free market, and it might even be the argument that most of those on the left want to make, just not all of them are able to articulate it well enough for those on the right to hear.

Seth writes:
...selfish intentions can turn out well (because of competition)

How about "self-interested intentions can turn out well..." instead?

david nh writes:

I think one of the problems with the consequentialist view is that it excludes a natural rights defense of capitalism, i.e., that coercion is wrong and freedom is good, not only with respect to their consequences but for their own sake. Equating individual initiative, self-realization and acting in one's own interests, rather than being forced to act in the interest of whatever set of "others" happens to control the reins of power, with greed betrays a flawed ethical system and rather uncharitable of humanity.

Ethics is the problem here, not economics.

steve writes:

I think Publius has a point and it doesn't just apply to intellectuals. It is called rent seeking.

Roger writes:

Rather than focus on incentives or unintended results, I recommend focusing on the voluntary win/win nature of free enterprise.

Voluntary trade/employment/investment are constructive, positive sum processes. They by definition add (expected) value to all participants. All other economic systems are based upon zero sum win/lose interaction and coercion.

If someone has to coerce me to do something, that means that I would rather do something else. I am being forced to take a suboptimal and possibly negative course according to my values, needs and particular circumstances.

Free enterprise is the only reliable route to achieve self amplifying, positive sum results.

The other problem intellectuals have with free enterprise is that they have trouble seeing that there are two ways to solve problems. They believe problems need to be solved rationally in a pre-planned, top down, centralized, coercive hierarchy fashion. They are blind to bottoms up experimentation, and the type of evolutionary learning that is capable through constructive competition. Indeed, they can't even conceive that competition can be constructive. It just gets in the way of their master plan.

JKB writes:

How about:

Individual initiative and enterprise driven by diverse incentives

as opposed to socialism which is:

Government mandated activity driven by the interests of the powerful and connected


I believe the key is to not treat it as a dichotomy. Many people support socialistic measures, such as public education, libraries, etc., without being socialists. The distinction is in where the line is drawn.


I found this definition from a 1886 article on Socialism to be much better than how people define socialism today:

The Socialist, under this definition, would be the man who, in general, distrusts the effects of individual initiative and individual enterprise ; who is easily convinced of the utility of an assumption, by the State, of functions which have hitherto been left to personal choices and personal aims ; and who, in fact, supports and advocates many and large schemes of this character.
Dain writes:

Critical Review doesn't do the outreach it needs to garner a greater readership IMHO.

Disclosure: I do interviews for the journal, so greater recognition would be good for me :)

Steve Sailer writes:

I'd recommend Berkeley historian Yuri Slezkine's 2004 book "The Jewish Century" for explaining why so many Jews, such as his mother's side of the family, became ardent leftists. It received excellent reviews in the Jewish press, but was largely ignored in the mainstream press because you aren't supposed to notice stuff.

Lori writes:

Is it also true that good intentions can turn out well and bad intentions can turn out badly, or is there some Iron Law of Existence to the effect that goodness of outcomes is invariably inversely proportional to goodness of intentions? At any rate, it seems that according to capitalism, incentives matter a hell of a lot more than intentions. If intentions are powerless then are we not automata? Or at best rats in a Skinner box?

fundamentalist writes:

JKB, that's a great quote from 1886. Do you have a reference?

How you talk about economics should depend on to whom you're talking. Different audiences are interested in different things.

Socialists want to talk about the poor. They think talking about the poor substitutes for action. They are not interested in any other aspect related to economics.

So when talking economics with a socialist, always frame the discussion on the effects on the poor.

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