David R. Henderson  

Do Steps Toward Freedom Create Net Benefits?

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Noah Smith recently wrote a piece titled "Being an Ideologue Means Never Having to Say You're Wrong."

It starts out well. He writes:

"Communism would have worked, if the Soviet Union had only tried it for real." I must have heard this argument a dozen times from die-hard leftist friends. Marxist economists such as Richard Wolff and Stephen Resnick even wrote a book making exactly this claim.

No doubt, true believers will be just as unwavering in the face of Venezuela's collapse. That country, which embarked on a misguided "Bolivarian revolution" under Hugo Chavez and his successors, has imploded almost as spectacularly as the USSR -- the country is in such dire straits that the government is now calling for forced labor. Yet there will be many who claim that the dramatic reversal of what some on the left hailed as an economic miracle just a few years ago tells us nothing about the efficacy of socialist revolutions.


Then Smith writes:
This demonstrates that for any political-economic ideology, there is always a hard core of believers who will never waver in their conviction that if only the program were tried in its pure form, it would succeed. Any failures -- even debacles on a grand scale, including the fiasco of 20th century communism -- will be chalked up to ideological impurity and improper application.

See what Smith did? He took two examples from the left and then concluded that this applies to "any political-economic ideology." It may well apply to any political-economic ideology. But he doesn't demonstrate that. He demonstrates it only for the left.

He then writes:

In economists' models, humans are a rational bunch, willing to change their beliefs as soon as new evidence presents itself.

Actually, and, admittedly, this is a detour, that's not totally true. Especially within Public Choice models, we often talk about rational ignorance. And co-blogger Bryan Caplan goes further, talking about rational irrationality.The point is that unless you have a strong incentive to change your mind, you tend not to, no matter how strong the evidence. Because your individual vote doesn't matter, you lack the incentive to change your mind when presented with new evidence about the effects of various government policies.

But Smith tries to apply his idea, well-backed about the left, to people who are strong believers in free markets. How does he do it?

Here's how. He writes:

The tendency toward ideological commitment is now being tested in the U.S., as free-market dogma -- sometimes known as neoliberalism -- is coming under increasing attack. Bernie Sanders's presidential campaign gained a surprising amount of support from young people. Economists, both in the public eye and out of it, are focusing more on inequality and embracing a more activist role for the state. Business professors are starting to question the short-termism of financial markets and shareholder control. Some researchers at right-leaning think tanks are saying that Republicans need to move away from Reaganomics and its mix of tax cuts and deregulation.

Notice his introduction of the word "dogma." Also notice something else. Although Smith points out correctly that many young people voted for Bernie Sanders, that many economists are embracing more government intervention, that some business professors are claiming that financial markets are too short-term, and that some researchers "at right-leaning think tanks are saying that Republicans need to move away from Reaganomics and its mix of tax cuts and deregulation," none of this is evidence of free-market failures. At most it's evidence that some people believe free-markets have failed. It's not even close to being in the same league as the evidence on Communism and socialism.

So how will Smith make his case, which he hasn't made yet: his case that believers in free markets are ideologues who don't change their views with the evidence? Here's how he tries. He writes:

Certainly, free markets haven't produced dramatic failures on the level of the USSR or Venezuela, but "not as bad as communism" is a fairly low bar to clear, and there's a definite sense that the reigning economic policies have run out of steam.

It's true that "not as bad as communism" is a low bar. Perhaps then he will show us where free markets have failed. Can it be that his evidence is that "there's a definite sense that the reigning economic policies have run out of steam." Actually, yes, that's about it. There are three problems with this:
(1) His passive "there's a sense" doesn't tell us who has this sense and what they base it on.
(2) The "reigning economic policies" are not free-market policies--they are a mix of free market policies, subsidies (would Smith say that subsidies to agriculture are "free market policies?), and heavy regulation (The FDA's new regulations of e-cigarettes are an example; heavy state regulation in the form of occupational licensure that prevents various people from getting various jobs is another example), and a very distorting system of taxation. The White House recently published an excellent critique of occupational licensure. It wrote:
"There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines."
That is a critique of a subset of "reigning economic policies." Is it a critique of the free market? Obviously not.
(3) He still hasn't given evidence. Which free-market policies have failed? Smith doesn't tell us.

Smith continues:

In the face of this wave of attacks, many proponents of free-market ideology will be tempted to double down. If we had only tried real laissez-faire, they will say, we wouldn't be experiencing problems like declining median income, decreased economic dynamism and excessive health care costs. On Twitter, my friend Russ Roberts, host of the EconTalk podcast and a staunch free-marketer, opined that we should "actually try" free markets, "instead of just talking about it."

I encounter sentiments like Roberts's on a regular basis, when I call for a more activist government. Many people bought into the laissez-faire idea very strongly over the past few decades, and are not prepared to abandon it just because a socialist candidate wins some votes or an economist writes a paper suggesting we need higher taxes. They will chalk up our problems to insufficient rather than excessive free-marketism.


This is as close as Smith gets to making his case. He criticizes Russ Roberts for calling for more economic freedom but doesn't actually show that the problems we have come from the economic freedom we have. So Russ Roberts is wrong in calling for more economic freedom only if the problems we have are due to too much economic freedom. Again, zero evidence from Smith.

Smith finally gets to something I agree with, writing:

That's why I think there's very little hope for political-economic programs whose benefits only become apparent after a very large dose. For an ideology to be successful, a moderate amount of it has to do a moderate amount of good. Relatively few nations have the unity and commitment to push through the doldrums in search of some grander success that's just over the next hill.

He's right. People want to see that a little more economic freedom leads to more net benefit. And that's exactly what we can show and have shown. Take airline regulation. Please. When Fred Kahn took over the Civil Aeronautics Board in 1977, he started de facto deregulating airline fares and routes. Result: more competition and lower fares. Then Congress stepped in and deregulated further. Result: even more competition and lower fares. The next step would be "open skies," whereby any airline in the world could compete in the U.S. market. The result would be even lower fares.

Or consider deregulation of surface transportation, particularly trucks and railroads. That deregulation, that happened in the late 1970s and early 1980s, brought more competition and lower rates to those sectors.

Deregulation of oil prices under Carter in his last year in office and Reagan in his first month in office undercut OPEC's power and helped bring down world oil prices.

Freer trade in textiles has made clothing substantially cheaper for 300 million residents of America.

So the evidence that steps toward more freedom do bring more net benefits is strong.


Comments and Sharing






COMMENTS (25 to date)
Matthew Moore writes:

There's a weird 'split the difference' need that people seem to have. On one extreme is communism and fascism (but I repeat myself), the other is libertarianism. Therefore, reasonable people assume the truth is in the middle.

Personally, I observe communism and just run full-tilt in the opposite direction.

People don't consider flat earth and spherical earth theories and conclude the world is oblong.

James writes:

[Comment removed. Please consult our comment policies and check your email for explanation.--Econlib Ed.]

jc writes:

Yep, people's actions are guided by a mix of very real forces: rational utility maximization, cognitive biases, ideology, etc.

And, yes, what often seems irrational is actually (though not always) more rational than one's first glance suggests. For example, (a) my odds of winning the lottery are low but where else can I purchase such happy daydreams for a week for a dollar (the ticket makes these dreams salient and it's a hell of a return on that dollar!), (b) my odds of having my vote matter are almost as low as winning that lottery, but I sure do feel good about expressing my opinion, (c) the world is a complex system and sometimes doing something that seems irrational on the surface (like formally expressing tribal loyalty) provides me (and perhaps society) with more important, longer-term, bigger-picture benefits than a simplistic, short-term, rational weighing of outcomes might, (d) if you give some credence to Alex's quote about bets being a tax on BS, and apply it to a real life opponent, you laugh at how often irrationality withers away once being irrational has a cost, (e) etc.

And, yep, we're probably flawed creatures whose natures may or may not be benevolent enough, whose brains may or may not be smart enough, etc.

Perhaps "true" communism will never be tried on a large scale. Perhaps the same is true for a "true" market-based system. Perhaps the best attempts we'll ever get are imperfect mixes, executed by agents who are not always as smart, honest, benevolent, etc. as we might prefer.

In this imperfect world - while cultural values can change, human nature isn't going to markedly change anytime soon - the success of one system's flawed application over the other's flawed application has been demonstrated by an order of magnitude.

True, that doesn't, in and of itself, mean that tweaking this system in one direction or the other might not bring about superior results. But it should mean that: (a) we know which system should be the base system, and possibly (b) if we do make changes, the default position, until a net balance of evidence seems to suggest otherwise, should be positions that are aligned with the base, and/or (c) if we don't heed (b), then perhaps changes in the contrary direction should be made at the local level, w/ the results of those experiments used to help tip the balance one way or the other.

Daniel Klein writes:

Nice.

We may also propose that Noah Smith consider the Economic Freedom results.

David R. Henderson writes:

@Matthew Moore,
People don't consider flat earth and spherical earth theories and conclude the world is oblong.
Well said.
@Daniel Klein,
We may also propose that Noah Smith consider the Economic Freedom results.
Yes.

Pajser writes:

I must defend planned economy again.

In period 1913-90 Soviet GDP(PPP)/capita increased from 92% to 134% of world average; In 1990, USSR had higher literacy (99% vs 75%), lower child (younger than 5) mortality (26 vs 91), longer life expectancy (69 vs 65), better dietary energy supply (3380 vs 2671); data: FAO, World Bank, Maddison project.

Yugoslavia was even better. In period 1938-90, it developed from 60% to 110% of world average GDP(PPP)/capita. Its growth (100%->452%) was almost twice faster than world average (100%->236%) and significantly faster than Western Europe average (100%->360%). In period 1939-80, it was the second fastest growing economy in the world, only behind Japan.

Some people attempted to explain it through convergence, i.e. poorer countries grow faster than wealthier; convergence on the world level didn't existed in 20th century - look above for progress of Western Europe and world average.

How can one claim that all attempts of planned economy were "dramatic failure?" If I am benevolent, only explanation is that they are under false impression from public media, and never bothered to actually check the data.

ThaomasH writes:

This leads me to wonder why Libertarians seem (maybe a failed or biased perception on my part) to spend so much time on what's wrong with regulation or proposed regulation and so little on how to make marginal improvements. (Alex Taborrok in discussing FDA regulation is a wonderful exception.) Fleshing out how carbon taxes instead of command and control measures on CO2 emissions, gasoline mileage rules, green energy set asides; a higher EITC or wage subsidies or elimination of wage tax financing of SS-Medicare instead of raising minimum wages; progressive consumption taxes instead of taxes on business income; ways to use markets to create incentives for lower cost health care, or compensating losers from freer trade might work would seem to be high priorities.

Jon Murphy writes:

@Thomas

I think, if you peruse the writings here, Cafe Hayek, AEI, CATO, and many other places, you'll get the answer to your question. We see free markets as the solution to these problems and thinks like carbon taxes etc have downsides that will make the issue(s) worse.

Glen Smith writes:

A market based economy is not an ideology in the same way socialism is an ideology. One thing that market based economies allow is for many economic ideologies to exist and see the best system survive (I can run a socialist commune in a true market economy but I can't run a market system in a true socialist system). Market economies allow me to be wrong without hurting the hundreds who do not agree with me. It may even offer me a way to minimize damage to me and my supporters.

Cliff writes:

Pajser,

Your data is wrong. I have personally read a very persuasive debunking of the calorie (dietary energy supply) claim. It's quite clear that your claim in that regard at least is incorrect.

Aaron McNay writes:

I personally find Noah's articles on this subject to be hilarious.

He regularly accuses pro-market supporters of being fundamentalists and ideologues. In almost every case, he simply says that pro-market people base their conclusions based on strong beliefs. At the same time, he claims that he is a pragmatist (http://www.econtalk.org/archives/2015/12/noah_smith_on_w.html). Yet, he almost never supports either assertion. As David points out, this is almost always derp.
(http://noahpinionblog.blogspot.com/2013/06/what-is-derp-answer-is-technical.html)

What I find so funny, is that he constantly criticizes pro-market people for engaging in the repetition of what he considers derp on his blog and his Bloomberg articles. Yet, he is perhaps one of the most proficient repeaters of derp that I know of, at least when it comes to the reasoning of pro-market people.

After reading the types of articles David linked to, I usually wonder if Noah even realizes he is doing the very thing he attempts to critique others of doing.

Colin writes:

Great piece -- I especially liked the last part. What's funny is that I suspect Noah himself would actually support further steps towards deregulation such as the repeal of the Jones Act.

One other thing I think you neglected, however, are Noah's straw man tactics, particularly in this bit:

Maybe broader deregulation, the end of the Environmental Protection Agency, full privatization of public schools and even deeper tax cuts would supercharge productivity growth, boost median income and make people forget about inequality and insecurity.

How many people are seriously proposing abolishing the EPA and public schools? I think the margin where the debate is taking place is over things like the Jones Act, or repealing Davis-Bacon, or school choice, expanded free trade (TPP & TTIP), etc. Maybe we could even talk about privatizing the USPS or further deregulating airlines (such as allowing majority foreign ownership and cabotage). But by picking such extreme examples of the neoliberal agenda that few are pushing for he is more able to dismiss it as unreasonable and avoid engaging whether steps towards increased economic freedom would be worthwhile or not.

Jay writes:

@ Pajser

I agree with Cliff, the data don't look anything close to resembling reality and I assume the data came directly from government reports? Could you really look at the USSR in the shape it was in in 1990 and claim they had a 99% literacy rate?

Mark Michael writes:

I just read Sebastian Junger's latest book, Tribe: On Homecoming & Belonging (May 2016). It has an interesting discussion of early American society and relationships with American Indians of that day. He notes that Ben Franklin said that those early settlers who were captured by American Indians often did not want to return to their Christian colonist's communities - if they were freed or were to be exchanged after some battle. They seemed to really like the hunter-gatherer tribal communal life! He cites examples from 1953 up thru the mid-1800s.

Claims almost none who were held more than a short time wanted to return! They seemed to prefer the tight-knit, property-sharing, "it takes a village" strategy for child-rearing, food-sharing, hardship-sharing in a group of 50 to 150 sized tribe. No "alpha" male types who defended the tribe also could accumulate huge amounts of material wealth. (There wasn't any! Not an issue!)

I'll get to another point - eventually! I wonder if our DNA is such that we subconsciously are more comfortable with more socialist economic ideas than lassez-faire markets. Those are more rational "head" concepts rather than "heart" concepts.

Example. Even Libertarians accept a government-established monopoly fiat currency for a very important thing: an efficient medium of exchange. For other very important items, we accept the idea of multiple choices for consumers among products that are on a level playing field. Why not the same for forms of money? Say a gold-based private currency, a silver-based one, a bitcoin-like one. Let groups of private banks print script for a selected one and let people decide. Maybe the government has a national bureau of weights, measures, & standards that could certify the quality of a handful of such currencies. (Like the U.S. Constitution envisions! Oh, yeah, we do have one!)

When I wrote this, I thought, "Good grief! How messy. People would prefer to have just one currency with a constant value." But when you think about the international monetary situation since Nixon closed the gold window in 1971, one wonders if it wouldn't be better than we've seen - at least since, say, 1995 or so.

A counter viewpoint is Alexis de Tocqueville's visit to the US between 1835 and 1840 and his seminal Democracy In America volumes. He was very impressed with the limited-government, mostly voluntary private associations that Americans formed and disbanded to tackle some communal problem. Government back then only took a tiny share of our GDP - I think it's accurate to say. That period seemed to come close to true lassez-faire economic society.

Noah Smith writes:

Hi, David! Your question is absolutely a good one. See my response here: http://noahpinionblog.blogspot.com/2016/08/free-market-ideology-reply-to-some.html

Pajser writes:

Jay, oh yes, Soviets proclaimed "likbez" (liquidation of illiteracy) campaign in 1919. Officially, they reached 99% in 1959. CIA World Factbook claim 99% in 1990 and 98.5% in 1982. I am not aware of any source that denies it. As curiosity, Soviets even published one alphabet in 1931 designed to attract adult citizens.

GDP(PPP)/cap data is from Maddison project, which is, I think, currently the most reputable source. They took into account everything published about USSR, and believe that CIA had best estimations. They also believe that it is now known so much about Soviet economy that only small corrections can be expected in future.

Dietary energy supply is from FAO and CIA, supported by some most current scientific works. Soviet official estimations were lower because Soviets believed that there is less energy in grain than western experts did (or something like that.)

http://bturn.com/10286/soviet-erotic-alphabet

http://www.theodora.com/wfb1990/soviet_union/soviet_union_people.html

http://www.geographic.org/wfb1982/worldfactbook82natiilli.pdf

Boris N. Mironov, The Development of Literacy in Russia and the USSR from the Tenth to the Twentieth Centuries History of Education Quarterly, Vol. 31, No. 2 (Summer, 1991), pp. 229-252,
http://www.jstor.org/stable/368437

 Maddison, Measuring the performances of command economy, An assesment of the CIA estimates for USSR,
http://www.ggdc.net/maddison./ARTICLES/USSR,RIW,1998.pdf

David R. Henderson writes:

@Noah Smith,
You have a tin ear. You write:
"He [David R. Henderson] challenges the idea that free-market ideology has demonstrated any failures at all.”
I did not challenge that at all. I challenged the idea that you had demonstrated any market failures. I hope you see the difference.
I’m busy with a deadline, but I’ll look at the rest of your response later.

David R. Henderson writes:

@Colin,
Great piece -- I especially liked the last part. What's funny is that I suspect Noah himself would actually support further steps towards deregulation such as the repeal of the Jones Act.
Thank you and good point.
But by picking such extreme examples of the neoliberal agenda that few are pushing for he is more able to dismiss it as unreasonable and avoid engaging whether steps towards increased economic freedom would be worthwhile or not.
Exactly. The fact is that we can demonstrate that small and medium moves to deregulation do have good effects. You name some very good ones that could be ripe for picking. Now, as it happens, I do advocate the more extreme measures, with the exception that I want to pare the powers of the EPA and change its incentive structure, rather than eliminate it.
And you’re right that I didn’t respond to this. My response would have been very similar to yours, but my post was becoming overly long. So many mistaken thoughts; so little time. :-)

David R. Henderson writes:

@Mark Michael,
Example. Even Libertarians accept a government-established monopoly fiat currency for a very important thing: an efficient medium of exchange. For other very important items, we accept the idea of multiple choices for consumers among products that are on a level playing field. Why not the same for forms of money? Say a gold-based private currency, a silver-based one, a bitcoin-like one. Let groups of private banks print script for a selected one and let people decide. Maybe the government has a national bureau of weights, measures, & standards that could certify the quality of a handful of such currencies. (Like the U.S. Constitution envisions! Oh, yeah, we do have one!)
Actually, many libertarians (notice the small “l”; I use the big “L” when I refer to members of the Libertarian Party and I’m not one) do advocate no government currency. Among them are Jeff Hummel, George Selgin, Lawrence H. White, and me. But there are many more.

Roger McKinney writes:

@Pajser,

The USSR was far behind the industrialized west. Acemoglu and Robinson show in their book Why Nations Fail that it's easy for any nation to import western technology and thereby boost GDP. But economists have shown that such nations hit the same brick wall as the USSR did. The USSR collapsed because it could not feed its people even though it could send astronauts to the moon.

Roger McKinney writes:

Smith wrote in his response blog This is pretty much exactly the attitude I described in my post! "Of course neoliberalism hasn't failed; we just never really tried it."

When I first started studying econ in the late 80s no self-respecting economist claimed that the US had a free market. It was at best a mixed economy. Smith has become a sucker for the socialist propaganda that Reagan instantiated wild west free markets.

Reagan, Bush I and Clinton all raised taxes, each in its turn setting a record for tax increases. The federal register of new regulations have increased on average by 100,000 pages ever year since 1970. That's ver 3 million pages of new regulations. And yet somehow Smith sees those as free market policies.

I guess the problem is that only Smith has the right to define what is free market and what isn't. That makes discussing the topic with him impossible. He can merely assert that we have free markets and we're wrong if we disagree.

andy writes:

@Pajser : I'd agree with the literacy rate; I'm not sure about the calorie data, you seem to silently ignore the Ukrainian famine... (and, btw, don't you have data for China's Great Leap Forward? seems to me quite a spectacular example of another way to plan economy). It seems to me that there was enough food to be eaten, let's say 1950-1990, though the choice was very limited (i.e. think long queues and almost no choice).

However, I'd totally disagree with the GDP figures. GDP doesn't make any sense in planned economy; the reason being that you are very likely producing something people don't wont. These things do not show up in GDP. I have lived through the transition of communist country to a capitalistic one and you could see:

- production of goods nobody wanted
- insufficient production of goods that were demanded
- lack of investment; you could see original machines from 1930's still being used to produce goods

You cannot compare a totally unsustainable economy with a market-price normally working one. Yes, the former can have higher GDP for some time.

BTW: I very much liked what Samuelson did in his textbook. He cited these statistics and commented like 'it seems that planned economies can work better than capitialist ones'. In the 1990's edition, a notice like 'the statistics data is being disuputed' appeared. The whole idea disappeared in future editions.

Pajser writes:

Andy - The results are given only for 1990. That's final year of USSR, when both best and worst periods were behind. If you're interested, I wrote about Great Famine recently

http://econlog.econlib.org/archives/2016/07/maos_murderousn.html#359615

GDP calculating - I have no other choice than to believe to the most reputable sources. It seems they took these problems seriously. If they are wrong, I'm wrong too.

http://ggdc.net/maddison./ARTICLES/USSR,RIW,1998.pdf

I also lived in Eastern Bloc country. I didn't got an impression that economics was unsustainable. I think that problems were political in nature.

Gil writes:

- That whitehouse report seems to simply advocate allowing felons to enter occupations, and also substituting state licensing requirements with federal ones which would allow people to gross state lines. This sounds amenable to federal bureaucrats but obviously not so to state bureaucrats.

- I'm not entirely sure what value GDP has as a concept in a centrally planned economy, except to measure perhaps industrial size and technology level.

LD Bottorff writes:

Great examples of incremental increases in economic freedom. We should also look at China. That is a country still ranked as Mostly Unfree, but obviously they are considerably more free than they were in the 1960s. For all their economic problems, they are so much better off than they were 50 years ago.

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