David R. Henderson  

Noah Smith on Wealth and Efficiency

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In a recent post on how "normal people" think about economics, Noah Smith writes something that I strongly disagree with:

In a certain sense, the normal people's approach makes more sense than that of the economists. We are an incredibly rich economy - the world's richest large economy by far. This means there are relatively few efficiency gains to be had, but the impact of any redistribution of our titanic wealth will be enormous.

Can you guess which part I disagree with? I won't create suspense. It's the first clause of the last sentence. That we have an incredibly rich economy in the United States, something that I do agree with, does not at all imply that there are relatively few efficiency gains to be had.

There are inefficiencies all over the place, many of them large. FDA regulation kills people, the drug war kills people and puts hundreds of thousands of black men in prison, and immigration restrictions prevent a huge increase in world GDP and U.S. GDP. I would take time to give links to all my assertions but all you need to do, if you want to see the backing is to do a search on Econlog and find multiple entries on these issues, mainly by Bryan Caplan and me.

UPDATE: Don Boudreaux weighs in and somewhat defends kebko's comment below.



COMMENTS (21 to date)
kebko writes:

What a strange thing for him to say. You could have said that about some place in the world at any time over the past 200 years. If you had applied his logic to some country 50 years ago and redirected that country from seeking efficiency to redistribution, we would pity them today, and regard them as third world.

So many goods and services we consider to be part of basic social safety net are products of very recent efficiency gains.

This is an ironic reason why it is so hard to get public support for markets - the one thing that markets are uniquely able to provide us with is precisely that thing that we could not have imagined.

In 30 years, when he is penning essays about how every citizen deserves free access to nano-bots and anti-aging treatments, can someone please glove-slap him for me. ;-)

kebko writes:

In other words, the answer to the layman's question he is pondering in the linked post, "What is new efficiency going to gain me?" is "I don't know, and that's why we should have it."

That's a hard sell.

But, he seems to be saying, "I don't know, so it's probably not important."

RPLong writes:

It seems to me that the second clause of that sentence is equally objectionable. I don't know of a single redistribution scheme that measures its success by any metric other than the number of its recipients. (And I would expect that a large and growing number of redistribution recipients is evidence against the policy, not evidence in favor of it.) Unfortunately, Smith does not give us any indication as to why the available gains from redistribution might be large.

But is this just the "economist" in me talking? Is his point rather that "normal people" don't ask follow up questions when they think about redistribution?

Delphin writes:
puts hundreds of thousands of black men in prison
Hundreds of thousands of 'white hispanics' would be better. Or so I read.
David R. Henderson writes:

@kebko,
I think you're missing Noah's point. He's not saying that there's no future growth possible. He's saying that there aren't major efficiency gains possible. He's using the term "efficiency" the way most economists use it. No economist I know of says it was inefficient that we didn't have cars in 1700. But, to use the car analogy, I say it is inefficient to have CAFE (corporate average fuel economy) laws.

Ken P writes:

I would say that it is inefficient to have "maximum profit to medical expense ratios" for insurance companies.

Silas Barta writes:

Noah Smith's post is a perspicuous example of failing to appreciate "seen vs unseen": "we're doing well, so this must be the best it can get."

Noah Smith writes:

Sure they exist, they're just a lot smaller relative to the overall wealth level than in poor countries. A poor country can grow by 10 or even 15 percent if it does the right policies. Could we boost our growth by more than a couple percentage points even if we cleaned up a lot of our inefficiencies? I guess I can't rule it out, but it seems like it would be a LOT harder than in a poor country.

Mark V Anderson writes:

Noah, there are two points you seem to be missing:

1) 2 percentage points is an enormous difference over a number of years. Over 50 years, the economy with a 2% higher growth will be 2.7 times as big as the slower one. This will bring more benefits to the poor than any redistribution plan.

2) You have to take into account decreases in growth also. Increasing redistribution would likely result in less growth than we have now. So the difference might instead be a loss of efficiency of 2-4%, leaving this country with flat or negative growth. That would be a disaster for the poor.

lwaaks writes:

Why is capital consumption by the state not featured prominently in this discussion? Surely that puts a break on productivity. Granted that many poor folks would enjoy -- at least temporarily -- a redistribution of wealth, but what happens when the consumption binge is over? I have in mind the analysis presented by George Reisman in his book,Capitalism, pp.300ff.

Steve Z writes:

My problem with the passage is not with the proposition that there are relatively few efficiency gains to be had -- although I doubt it is true -- but rather with the fact that this proposition does not follow from the premise that we are one of the richest large economies. The unstated premise that would be needed to make the argument work is that the richest large economy at any given time -- or in this particular time -- must not have many efficiency gains available. This is a bold proposition that should be argued for explicitly, not assumed.

ryan p writes:

Given the prominent use of the word "relatively", I honestly can't understand how anyone disagrees. It's not enough to say there are big efficiency gains to be had - you have to say the potential gains are bigger here than in Congo or China. It's hard to imagine thinking that.

Steve Z writes:

Ryan P: I thought about that, and although it is trivially true, it makes the argument nonsensical: because there are fewer efficiency gains in the United States than in a third world country, redistribution makes more sense than increasing efficiency. This can't be what people are meant to come away with. So I humbly suspect that Smith is not only arguing from a disguised premise, but also equivocating.

kebko writes:

Thanks, David. I can see how I technically misused the term. But, interpreted correctly, small increases in efficiency would still lead to higher levels and growth rates of economic production, wouldn't they?

kebko writes:

You know, thinking of it more after reading Deirdre McCloskey's comment at cafehayek, it occurs to me that if we do think of the range of outcomes stemming from efficiency, we can imagine a completely inefficient society, which would be at subsistence, or a perfectly efficient society, which might look something like Robin Hanson's futurescape where a world of ems doubles the standard of living every few days, we might imagine how efficiency really does overwhelm any other growth factor. So, in addition to Deirdre's contention that factors outside the standard features of economic models are largely responsible for the miracle of the last couple of centuries, we can imagine how much more room for improvement there is. If efficiency still looks like small potatoes compared to other sources of growth, that would be a sign, contra Noah, that we haven't even begun to capture the advantages of efficiency gains.

WW writes:

A week or so ago Noah had a very good blog post listing some of the classic papers in behavioral finance. The gist of these papers is that there are a variety of inefficiencies in financial markets. This week, Noah evidently thinks that those inefficiencies are not all that important.

ThomasH writes:

I take Noah's remark not about whether there are inefficiencies to be gained in general -- the war on drugs and the per capita cost for our average health outcomes are good examples that there are, but rather inefficiencies that are the result of "economic" policies. Even something as large as agricultural subsidies are more redistribution than dead weight loss. Maybe the failure to tax the carbon emission externality might be considered a really large static inefficiency.

MikeDC writes:

Common people and economics who argue for the "redistribution of wealth" systematically underestimate how intangible much of the nominal wealth around us is.

Like, someone asked me why China doesn't just take all those dollars they get from the US and, say, buy Exxon Mobile. They pointed out it's market cap was at the time about the same as the Chinese war chest of "dollar reserves". I pointed out that only 2-3% of Exxon shares are sold on a given day. If China attempted to buy them all, the price would skyrocket and they'd no longer be able to.

Ultimately, our nominal wealth is just as ephemeral as the value of our fiat currency. If we drastically change our expectations of the future (say, by massive redistribution), it will drastically reduce our wealth levels. Even leaving aside the efficiency issues, the very act of taking from A and giving to B will result in a change in the value of what's given.

ryan p writes:

Steve Z,
I don't understand why it's nonsensical. If I'm very far from the current PPF (i.e., given current tech), there's much more room for large, strictly Pareto gains from increasing efficiency and so relatively less need for redistribution insofar as I'm a weighted utilitarian who cares particularly about the welfare of the poorest people in my society. The more efficient my society is, the harder it becomes in relative terms to argue "there's no need to redistribute when the poor can be made better off with more efficiency".

Deirdre McCloskey writes:

Dears,

Dealing with inefficiencies of an ordinary sort---David speaks correctly of the absurdities of the FDA, for example---are not the stuff of the Great Enrichment, 1800 to the present. I'm an economist, and I certainly do recommend that we abolish the FDA, and stop the War on Drugs, and so forth. But all modern economies have crazy inefficiencies. The Japanese protect agriculture even more than the USA and the EU do. The Italians tolerate a comical level of corruption. And yet they both earn over $80 a day, as against the $3 a day that the world earned in 1800. The Usual Suspects can't drive a modern economy back to 1800---you have to have a Robert Mugabe in charge to accomplish such a level of inefficiency.

So it's innovation, invention, ingenuity, the human spirit, what the blessed Julian Simon called The Ultimate Resource. Not incentives, chiefly, not Doug-Northian institutionalism, which attributes factors of 30 or 100 in economic growth to improved matching of marginal cost and marginal benefit.

And let me, as a Chicago economist (I can show you my union card), correct Mark Anderson, who makes the common mistake of thinking that a 2% Harberger triangle to be achieved by eliminating, say, the FDA is "cumulative." No, it's not. It's once for all. It's not 2% every year from now on. It's 2% one time, from eliminating the inefficiencies of not approving Europe-approved drugs quickly.

Regards,

Deirdre McCloskey

David R. Henderson writes:

@Deirdre McCloskey,
Good points, but you got Mark V. Anderson wrong. He was responding to Noah's comment just above his. And his response was correct. He made no mistake, common or otherwise.

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