David R. Henderson  

Robin Hanson's Call for Empirical Research

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UPDATE BELOW: Robin Hanson responds.

On November 21, Robin Hanson wrote a piece misleadingly titled "Imagine Libertopia." I say "misleadingly" because he's actually calling on libertarians to do less imagining and more empirical research. It's excellent. I'm posting about it on this late date because November 21 was my birthday, and not just any birthday, but the one that the Beatles celebrated in this song. So I decided not to post that day.

Back to Hanson. His post makes some very good points. In fact, it reminds me of George Stigler's plea to his fellow economists in his 1964 Presidential Address to the American Economics Association. Stigler argued that we shouldn't keep addressing issues of government and regulation at the theoretical level, but, instead, should get our hands dirty by looking at the data. Here's what I wrote about that speech in my bio of Stigler:

"The economic role of the state," he said, "has managed to hold the attention of scholars for over two centuries without arousing their curiosity." Stigler added, "Economists have refused either to leave the problem alone or to work on it."

That is so George.

Back to Robin, who makes the same point in his piece. Now, the reality is that after Stigler's speech, many economists did look more at the data and the data tended to show that the free market and economic freedom work better than government control. But Robin is not satisfied. There is more to be done, he says, and he's right. Here's a key excerpt:

On reflection, I realize that when I try to imagine more liberty, I mostly draw on a limited set of iconic comparisons, such as comparing airlines, trucks, and phones before and after US deregulation, or comparing public to private schools and mail in the US. Alas, we and our audiences should worry that we cherry-pick such examples to support conclusions we like.

We should be able to do much better than this. By now there are vast literatures discussing many industries in many places before and after regulation or deregulation, and describing specific times and places where certain products and services provided directly by governments, or provided privately. From this vast literature we should be able to identify many concrete patterns and "stylized facts" about how government-provision and heavy-regulation tends to change products and services.

I recall these suggestions for typical features of industries with more liberty:

Less "gold-plating" in materials and methods
More product variety, including more low quality versions
Faster innovation and product cycles
Fewer guarantees to workers or customers
Price, features vary more with customer features
Workers have less school and seniority
Less overhead spend [sic] on paperwork

What should be done? Robin writes:
Some people should work to extract patterns like these from our vast related literatures - I've looked, and there just aren't many such summaries today. With such patterns in hand, we would be in a much better position to credibly describe how familiar products and services would concretely change if we were to provide them privately, or to regulate them less. And such credible concrete descriptions might allow many more people to become comfortable with endorsing such expansions of liberty.

Who should do this research? Robin has an answer there too:
This sort of project seems well within the abilities of the median grad student. It doesn't require great creativity or technical skills. Instead, it just requires methodically surveying and summarizing related literatures. Perhaps some libertarian students should shy away from it in hopes of impressing via more difficult methods. But surely there must be other students for which this sort of project is a good match.

Of course, it's not all or nothing. One of my favorite books, that does a lot of what Hanson is calling for, is Steven Rhoads, The Economist's View of the World. In the 1990s, when I taught a special economics course for Operations Research students, I used it as one of the textbooks, with excellent results. (How do I know the results were excellent? The understanding they showed in in-class timed exams and comments like this from one of the students: "OK, professor, we get it. We're all committed marginalists.")

I do have one main criticism of Robin's post. He writes:
When libertarians do focus on data, they tend to be very broad, or randomly specific. That is, they talk about how West Germany is better than East Germany, or South Korea better than North Korea. Or they pick on very specific examples, like regulations limiting eyeglass ads, and leave audiences wondering how cherry-picked are such examples.

Robin's criticism here is not completely unjustified. If it were unjustified, I wouldn't be bothering to highlight his post. It's the West/East Germany and the South/North Korea comparisons that I want to defend. With all the variables that could affect economic growth, think about how hard it is to know what some of the most important factors are. After I commissioned a piece by Kevin Grier on the empirics of economic growth for The Concise Encyclopedia of Economics, I was surprised by how little we could say, compared to my priors. But even Kevin pointed out the stark contrast between those two pairs of countries and what that said about some economic freedom versus harsh totalitarianism. I elaborated on this theme in a sidebar that I wrote to go along with his article. (Scroll down to the bottom of the article.) Here's the opening paragraph of my short piece:
Economists have great difficulty determining the factors that can be shown, empirically, to affect economic growth. Many factors--economic policy, starting point, culture, and climate--can matter. So when nature presents us with experiments that are as close to laboratory experiments as we are likely to get, we should pay attention. Two such "experiments" have appeared in the last sixty years: North and South Korea and East and West Germany.

UPDATE: Robin Hanson responds civilly, something that is always refreshing on the Web. Robin writes:
I very much agree that those nation pairs make very useful comparisons; sorry that what I wrote could mislead on that point. These comparisons do indeed suggest that "some freedom" is better than "harsh totalitarianism", and they are good data-points on which to base stylized facts on the general effects of more liberty. Their main limitations are that they don't say much directly about the effects of a lot more liberty than is found in West Germany or South Korea. To imagine even more liberty, we need those stylized facts.

I agree with Robin.

Comments and Sharing

COMMENTS (5 to date)
Daniel Kuehn writes:

I for one am always baffled when libertarians use West Germany/East Germany or South Korea/North Korea to justify libertarianism.

Precisely who is arguing the East German or North Korean case?

Aren't all non-libertarians worth spending time talking to going to be on the West German/South Korean side of this equation?

I don't get it. It's like some libertarians think they're the only people that think freedom is good for economic performance - as if there isn't a much bigger classical liberal tradition out there.

If you are not using it to defend libertarianism, of course all's well.

Tom West writes:

I think most people would say that the relationship between freedom and economic performance (and general social welfare) is likely to be Laffer-like curve, with total freedom (anarchy) and no freedom producing bad economic performance and low social welfare.

In both NK/SK and EG/WG examples, I think everyone agrees that East Germany and North Korea are definitely in the low freedom/low performance part of the graph. But it doesn't tell us whether West Germany/South Korea are simply higher up the curve and thus would benefit from more freedom, or over "the hump" and now in the "more freedom = less economic performance/social welfare" part of the curve.

Roger McKinney writes:

Tom, I agree. Most people think of the market like those who created the two statues of great draft horses restrained by men called Man Controlling Trade that are in DC.

The problem with empirical data is that most of the time the data we need simply doesn't exist, as Hayek mentioned in his Nobel speech.

Another problem is interactions and spurious correlations. It's virtually impossible to separate out the effects.

Another problem is the lag time it takes good or bad policies to show an effect large enough to measure.

Finally, it's easy to see the effects of extremes. That's why in design of experiments the designer chooses data points that are opposites, +1 and -1 if possible. If you choose small differences in the inputs the results won't be significant enough to worry about.

Comparisons of East and West Germany, or North and South Korea are like choosing +1 and -1 in DOE. The logic behind it is to draw a straight line between the extremes that shows the effects of smaller changes. The slope of that line tells us that as we move away from tyranny toward freedom we get greater economic growth. The implication from the logic is that even greater freedom than what West Germany or South Korea enjoy will produce even more growth.

However, most people don't see the issue as linear but as a nonlinear optimization problem. But to do DOE optimization you have to have at least three data points. The problem is that the best data goes back only to WWII and most of the world has been either very socialist or very primitive since then so almost no data on free markets exists.

I have sometimes criticized the measures of economic freedom because they were calibrated only recently at a time when most of the developed world is heavily socialist. They need to calibrate the measures to pre-1929 in the US or mid-19th century UK.

The solution to the data problems is to use reason and our knowledge of human nature, as Mises and Hayek argued. But scientism has boxed us into an obsession with data.

As a result, we have logical answers that few will accept and no answers from the data that people claim they would accept, but I doubt they would.

Daniel Kuehn asks:

Precisely who is arguing the East German or North Korean case?
Overall, considering whole states, I agree that few people could be found who would argue for what is obviously the poorer choice. But issue-by-issue I suppose most leftists living in a relatively free nation will favor each proposed expansion of state regulation of economic activity. For example: leftists in America favored passage of Obamacare.

I suggest the difference between North and South Korea may be seen as 30 acts like Obamacare. A free nation could become a communist nation in 30 such steps, it seems to me. I have the impression that leftists favor such steps without seeing that these are steps toward communism.

But perhaps my experience is limited and robs me of seeing two-sidedness in non-libertarians. The non-libertarians I see in argument are always arguing for expansion of state power — because that is the only way that they could argue with my libertarian position. So I may err in thinking that non-libertarians are uniformly in favor of more government, so long as the increments are small and sugar-coated.

Do you, Daniel, sometimes argue with people left of you, argue in favor of deregulation?

Tom West writes:

The non-libertarians I see in argument are always arguing for expansion of state power

If we assume that most leftists are motivated by "reduce (first-order) harm", then it's pretty hard not to see a crisis and demand a (government) resolution.

The trouble is that the second-order harm caused by the solution is often less obvious, and thus easier to ignore.

It's why as someone to the left of most here, I am happy to see Libertarians doing their best to make it clear the costs of more government to all and sundry. It helps counter-balance the natural but occasionally over-all counter-productive tendency to act to prevent every first-order harm.

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