David R. Henderson  

Garett Jones and Charles Tiebout

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I haven't read Garett Jones's book Hive Mind yet and so what I'm about to write is based on my trusting Scott Alexander to accurately characterize Garett's argument.

In his review of Garett's book, Alexander summarizes part of Garett's argument as follows:

High-IQ people don't cooperate because they're nicer (which, indeed, personality tests for niceness do not show). They cooperate because they're smarter and so they know cooperation really is a better and more win-win way to do things.

This is part of Garett's explanation for why countries with higher-IQ people will, all else equal, do better.

But Scott Alexander has a devastating criticism, writing:

He returns to this theme a few times. High-IQ people don't cooperate because they're nicer (which, indeed, personality tests for niceness do not show). They cooperate because they're smarter and so they know cooperation really is a better and more win-win way to do things.

This is 100% true in an iterated prisoners' dilemma, but not necessarily true in a country. Suppose you're a president with a four year term. You can either pillage the country as best you can and take whatever bribes you can get, or invest in genuinely building a better country for your descendents. Assuming you are merely the sort of shrewd cooperator who cooperates on iterated prisoners' dilemmas but defects on one-shots, you'll pillage the country - it probably has term limits and you only need to pillage once to get very rich.

Likewise, suppose you're a mid-level bureaucrat in Washington, of the type that there are tens of thousands of. If you behave dishonorably, you can amass a small empire and make some money. If you behave honorably, then maybe America does very well as a country down the line, but that effect is aggregated over thousands of bureaucrats, so it's not like you're really growing the pot that much. Once again, if you are merely shrewd and not genuinely altruistic, you'll defect.


It reminds me of the problem I have always had with the model of local government produced by the late Charles Tiebout. Sure, people can vote with their feet when a local government gets out of line by, say, taxing too much or giving large benefits to concentrated interest groups, and the result is that the town or city will lose in an aggregate sense. But so what? The city fathers (the late George Stigler would call them stepfathers) will bear their pro rata share of the costs and so have only a very weak self-interest incentive to make good decisions.

We saw this in my city of Pacific Grove, where the city manager, Thomas Frutchey, seemed to do almost everything he could to blunt the efforts of a citizens' group that was trying to rein in the 3-at-30 pension scheme for firemen and policemen. Under such a scheme, firemen and policemen can work for 30 years and then qualify for a lifetime pension that pays them 90% of their top pay inflation-adjusted. Frutchey is now leaving Pacific Grove for a higher-paying job as city manager of Paso Robles. So, unless Frutchey bought a house in Pacific Grove while here (whose value is presumably lower because of the anticipated higher taxes to pay for these pensions), he leaves without having borne any cost for his efforts on behalf of the police and firemen.

Co-blogger Bryan Caplan pointed out the same criticism of the Tiebout model three years ago, writing:

Tiebout implicitly assumes that non-profit competition works the same way as for-profit competition. It doesn't. If a business owner figures out how to produce the same good at a lower cost, he pockets all of the savings. If the CEO of a publicly-held corporation figures out how to produce the same good at a lower cost, he pockets a lot of the savings. But if the mayor of a city figures out how to deliver the same government services for lower taxes, he pockets none of the savings. That's how non-profits "work."

With non-profit incentives, neither the number of local governments nor the ease of exit lead to anything resembling perfectly competitive results. The "competitors" simply have little incentive to do a good job, so they all tend to perform poorly.


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COMMENTS (9 to date)
Foobarista writes:

My crazy ideas:

1. Draft citizens to the city council (from a list of people who've chosen to opt-in to the draft).

2. Terms of office should be fairly long and decently paid.

3. All forms of deferred salaries should be banned. Have fully-funded 401Ks, but no pensions.

4. Any debt agreements should be subject to both a council vote and a public vote.

David R. Henderson writes:

I like 3 and 4 a lot. Indeed, an economist friend made the pitch for 3 to some of the city officials. Got nowhere. Of course, my post explains why.

Tom West writes:

Oddly enough, I've seen people work very hard indeed to further the interests of the company they were working for when they owned 0% of the shares, and were not were getting an annual bonus.

Indeed, our esteemed Prof. Henderson no doubt also works very hard when he sees no extra profit from it, and not likely any career advancement.

I think we discount the fact that the strong majority of people derive a great deal of happiness from being decent, helpful, and hardworking.

Incentives no doubt improve things on the margin, but assuming that most people require direct incentives beyond a paycheck and some recognition in order to do their job well is belied the reality of what we see all around us.

J Storrs Hall writes:

Everybody seems to be missing the point here. Smarter people are not going to be more honest and cooperative all else -- their social environment -- being equal. Rather, people are going to be more honest because their social environment consists of smarter people, and thus cheating is harder and riskier.
Your high IQ doesn't make you more honest; it makes me more honest. And vice versa.

Floccina writes:

I agree. Even the Sailorites do not contend that Italy has a lower average IQ than the Northern Europeans but that they are more cooperative for some other reason.

Phil writes:

David - I understand your economic arguments why government is inefficient, but I have never seen your explanation why you work for the government.

If Bryan Caplan is correct, you have no incentive to do excellent work in your government job, yet you do.

Are you an anomaly? How do we create more David Hendersons and fewer Thomas Frutcheys?

RPLong writes:

There is some evidence out there that motivation matters more to personal outcomes than IQ, and can in fact influence the IQ score itself. That's evidence in favor of Caplan's point that the situations (situational incentives?) matter.

That evidence is also consistent with some of Jones' claims about improving national IQ through institutional improvements. Maybe it's not high-IQ societies producing good institutions, it's good institutions producing high-IQ societies.

I'm sure we've all seen the same person be cooperative in one situation and noncooperative in another. I'm sure we've all seen the same person be nice in one situation and not-so-nice in another. It seems to me that seeking to explain social psychology by referring to inert dispositions is not as reliable as situational analysis.

Swami writes:

"Sure, people can vote with their feet when a local government gets out of line by, say, taxing too much or giving large benefits to concentrated interest groups, and the result is that the town or city will lose in an aggregate sense. But so what?"

The so what is that the exploitative towns shrivel up and die and the more cooperative towns gain population, employers, and so on and thrive. It is an evolutionary or creative destruction argument. Over time, exit options evolve into fairer societies. Yes, some towns go down in flames, hopefully sending a signal to higher IQ residents elsewhere to learn from failure.

AS writes:

I don't think anyone will ever find a general solution to democratic corruption, which is why the only real solution I think is to limit the scope of politics through a constitutionally limited government. Then when government does make blunders, the damage is small and easily ignored.

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