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Worst Argument Ever?
Dani Rodrik points out that government interventions in areas such as "education, health, social insurance, and macroeconomic stabilization" are
"targeted on a loosely-defined set of market imperfections that are rarely observed directly, implemented by bureaucrats who have little capacity to identify where the imperfections are or how large they may be, and overseen by politicians who are prone to corruption and rent-seeking by powerful groups and lobbies."
Absolutely correct. The obvious conclusion? Industrial policy is a good idea. I kid you not.
Posted by Alex Tabarrok on August 8, 2007 at 11:36 AM in Economics | Permalink
Comments
Did someone sleep through the '70s and '80s?
Posted by: Dave at Aug 8, 2007 11:55:46 AM
I kid you not, I have been staring at that exact quote and chewing on it for the entire morning. Now, boom! It's here.
Posted by: Yan Li at Aug 8, 2007 12:16:06 PM
I've read similar from Paul Krugman. It's as if Tulloch and Buchanan never existed.
Here's a good antidote from Tom Sowell:
when there is a complete turnover in political leaders over time, the same problem will remain because the same incentives will remain when new leaders take over.Some people claim that the problem is how much money it would take to properly maintain bridges, highways, dams and other infrastructure. But money is found for other things, including things far less urgent and some things that are even counterproductive.
The real problem is that the political incentives are to spend the taxpayers' money on things that will enhance politicians' chances of getting re-elected.
There may be enough money available to maintain bridges and other infrastructure but that same money can have a bigger political pay-off if spent building something new instead of maintaining and repairing existing structures.
When money is spent building a new community center, a golf course, or anything that will be newsworthy, there will be ribbon-cutting ceremonies and the politicians who cut the ribbons can expect to see their pictures in the newspapers and on TV.
All that keeps their name before the public in a positive role and therefore enhances their prospects of being re-elected.
But there are no ribbon-cutting ceremonies when bridges are being repaired or pot-holes are being filled in. These latter activities may be more valuable than a community center or a golf course, but they are not nearly as photogenic.
Posted by: Patrick R. Sullivan at Aug 8, 2007 12:19:07 PM
How does stupid in one area translate into brilliant another? Not obvious!
Posted by: David Zetland at Aug 8, 2007 12:44:55 PM
Tyler Cowen just discarded equilibrium in favor of Hayekian spontaneity, and now you insist that market failure be measured? When did the category of "market failures" proceed away from: "possible theoretical reasons why there may never be a theoretical general equilibrium and so no theoretical allocative efficiency," to: "real reasons why real things don't look right?" Does any economist have a leg to stand on?
Posted by: Lee A. Arnold at Aug 8, 2007 12:46:54 PM
"A key point of the paper is that the shortcomings of governments should not be taken as a given. Just as economists think about how to improve market institutions, they can devote their talent to improving the institutions of government. The informational and rent-seeking costs of government intervention can be ameliorated through appropriate institutional design."
Talent. Consider that word in that phrase. I, Harvard Professor at the KENNEDY SCHOOL, can build it better than millions of other people who've tried for thousands of years. Never thought I'd hear that from the Kennedy School. Would someone send him Calculus of Consent or maybe the Federalist Papers?????
Posted by: Pat Lynch at Aug 8, 2007 1:03:12 PM
Right. But if Rodrik thought he had a way to run a business better, that would be totally reasonable. Because the business world is very competitive. Right.
Posted by: Barbar at Aug 8, 2007 1:16:31 PM
Worst headline ever. You don't kid us; you mislead us. No fair-minded reader could interpret Rodrik's article in the way set out here. I am very disappointed in you. Seriously.
Posted by: Fergus O'Rourke at Aug 8, 2007 1:19:39 PM
Fergus: since when has Alex struck as "fair-minded". Here's a quotation that Alex should have also included:
"A key point of the paper is that the shortcomings of governments should not be taken as a given. Just as economists think about how to improve market institutions, they can devote their talent to improving the institutions of government. The informational and rent-seeking costs of government intervention can be ameliorated through appropriate institutional design."
Posted by: Samson at Aug 8, 2007 1:28:11 PM
Fergus you obviously did not read Rodrik's argument. I quoted him exactly and presented the argument just as he makes it.
Posted by: Alex Tabarrok at Aug 8, 2007 1:42:45 PM
Barbar
Yep - although the competitive nature of markets is only one part of the problem with comparing markets and government.
Regarding Alex's characterization of Rodrik, I'm not sure how it can be misleading. He says, plainly, that industrial policy can be constructed and managed by the political process. He and Fergus may differ in their world views concerning the feasibility of such an endeavor, but surely not on the interpretation. As we say here in the U.S., let's "go to the video tape!"
From page 2 of his paper he notes that anyone who believes that the state shouldn't be involved areas such as education or pension plans (his examples, not mine) are termed "ideologues." After dismissing these folks as unreasonable, he goes onto to say that folks who agree on some form of intervention in these areas, but debate the scale are "well-informed." On page three, he proposes applying these same principles to industrial policy. What exactly is unclear here?
Posted by: Pat Lynch at Aug 8, 2007 2:05:07 PM
Who does he talk with? If I read him correctly, he's saying there are people who admit the government screws up industrial policy, but do not think it screws up health and education, even though he admits it is screwing them up just as badly:
And powerful groups and lobbies typically exert significant influence on the policy process. In education, teachers’ unions have a loud voice on what should be done (or cannot be done). In health policy, it is often insurance firms and the medical doctors’ association who get their say. Tax and spend decisions are similarly subject to influence from organized lobbies. All these shortcomings notwithstanding, the debates in these policy areas are rarely ever about whether the government should be involved; they are about how the government should go
about running its policies. It’s not about whether, but about how.
I think Rodrik is right if he's making a political argument. Voters let government mess up healthcare, education, and the macroeconomy, but they stop with industrial policy. The socialist sees that and says, why don't voters treat industrial policy like everything else? The capitalist see that and says, why don't voters treat everything like industrial policy? Maybe the average voter thinks they know something about their own health, education, and even the economy, but with specialized industry they are unwilling to make the leap to something the admit they do not understand. Voter overestimate their knowledge or the knowledge of politicians and regulators, and the result is bad policy.
Posted by: 8 at Aug 8, 2007 2:11:13 PM
Rodrik's issue setup is head on. Whether industrial policy is the right prescription is up for debate. I do not think it should be instantly dismissed. The issue Rodrik raised, less the aspect of interest groups and lobbies, is especially relevant to China. There is this “black box,” you could leave it to sort out internally while knowing it may never work out because market only operates in disjointed patches of the society, and bureaucracy is prone to all sorts of troubles, would you take an engineering approach to at least deliver some “desired” results? I am not sure the answer is “yes.” But it is worthwhile pondering.
I echo Rodrik’s emphasis on appropriate institutional design, and also like his observations (2004) on China’s institutions. My question is how far policy fixes on the margin can go before the system is trapped in another set of, potentially bigger, troubles.
I kid you not, I like the paper.
Posted by: Yan Li at Aug 8, 2007 2:47:27 PM
Shinanigans!
I think you are deliberately misreading Rodrik’s argument. I see him as saying that many economists dismiss industrial policy out of hand for reasons he describes. Yet, we find that the same problems exist for government programs that are not usually questioned on those grounds. Therefore, industrial policy is no more or less discredited for suffering from these flaws than education, social insurance, etc.
No where in this post does Rodrik claim that industrial policy is good simply because it suffers from the same problems as other more popular policies. Instead, he seems to be saying that we can no more dismiss it for having these problems than we can dismiss government supported educational programs for having the same problems. That seems like a fair argument to me. Maybe you re-read his post and this time hold onto your libertarian knee so it doesn’t jerk out of socket.
Posted by: Student at Aug 8, 2007 2:58:17 PM
I think Rodrik's setup, itself, is deficient. He describes government intervention as bad, then tells us he was describing education and healthcare, not industrial policy. Well, I would have read his setup and thought he was talking about education and healthcare.
Posted by: Yancey Ward at Aug 8, 2007 3:28:59 PM
This shows that Alex isn't a 2nd best economist.
Rodrik cleverly laid a trap to expose fallaceous 1st best thinking. No matter if you think education and health care would be better if the market ran them: you'd still have to face serious market failures in them, requiring 2nd best economics thinking for serious analysis.
Posted by: Mike Huben at Aug 8, 2007 5:03:46 PM
Nice to see you and Tyler really banging the hammer for basic economic literacy and public choice thinking over the past week or so. For the libertarian-minded it's all familiar and obvious stuff, but there is a large population of leftist bloggers and blog readers who really need to hear this message and start thinking about it. They will get mad at first, but after a while the ideas start to permeate and it becomes clear that bigger government is not the solution for every problem. Keep it up.
Posted by: Matthew C. at Aug 8, 2007 5:41:27 PM
Isn't it the socialists who typically bang the hammer (and sickle)?
Posted by: fustercluck at Aug 8, 2007 5:54:43 PM
"education, health, social insurance, and macroeconomic stabilization". Could the military be added to this laundry list? Trying to determine if this is foil-seeking as seems to be implied by Matthew C.'s response, or if these are the programs that make the most sense on a list together to think about the utility of govt. funding.
Posted by: Hopefully Anonymous at Aug 8, 2007 7:22:27 PM
Basically, as societies have become more wealthy, interest groups have been able to increase spending in all the areas mentioned. Because of the small number of societal evolution histories we have [one in time, and a few that are relevant cross-sectionally], the data cannot statistically determine that spending on any of these is a good, or bad, idea in any compelling way.
But let's take education on a forward-going basis. For something that receives so much lip service about importance, is it really so crucial for the state to supply it in expensive doses today when self-education is essentially free and information costs are near zero? If so, why are [grade school] teacher salaries around the same or lower than garbage men? Could it be that basic education is really only effective in the instances when it is unnecessary?
Posted by: JPC at Aug 8, 2007 10:18:58 PM
And a point to some of the other commenters here:
Rodrik's point is absolutely summarized as:
"Government has taken over education, health care, the global economy and private insurance with little evidence that the private markets could not do a better job. Why not the central planning of the direction of all other businesses as well?"
I guess everyone has a bad day, but it's kind of his job to understand this better than that. And if he didn't really absorb the economic reasons this is the worst argument ever as a graduate student or professor, he should walk down the hall and sit in on an undergraduate history class or two.
Posted by: JPC at Aug 8, 2007 10:32:17 PM
"Rodrik cleverly laid a trap to expose fallaceous 1st best thinking. No matter if you think education and health care would be better if the market ran them: you'd still have to face serious market failures in them, requiring 2nd best economics thinking for serious analysis."
C'mon, Mike, Tyler already pointed out that anyone satisfied with 2nd best thinking assumes, without examination or evidence, that government intervention is 2nd best and not 3rd or lower. Vulgar Second Best theory at its best.
Posted by: Eric H at Aug 9, 2007 12:30:10 AM
The existance of serious market failure does not imply that successful government intervention is possible. Sometimes a hard problem is simply a hard problem. Sometimes a screw is a screw, and it doesn't matter which hammer you're trying to use to get it into the wood.
Posted by: Russell Nelson at Aug 9, 2007 2:02:18 AM
Alex,
I think you are stretching a bit to claim Rodrik's argument is 'Industrial policy is a good idea.'
His trailing statement "Why can't industrial policy be the same? It's beyond me." seems to chiefly relate to the cited sentence at the end of the second paragraph:
"curiously in light of the skepticism that attaches to industrial policy, almost no-one questions whether they [the other interventions] properly belong in the government’s arsenal."
For mine, that does not amount to an endorsement of industrial policy.
Rather, it is a mere observation that available evidence suggests society could have been expected to be equally sceptical of industrial policy and the other interventions, or willing to embrace industrial policy on the same terms it embraces the other interventions.
Still, he overlooks obvious reasons why we tend to be more sceptical of industrial policy: there are few equitable justifications for industrial policy, certainly this is so in economies at or close to full employment; and the instruments of industrial policy tend to be highly selective in their coverage compared to the social policy interventions listed.
Posted by: Brendan at Aug 9, 2007 4:06:52 AM
I suppose if you live inside a conservative bubble where health and education are synonymous with failures you might have the sort of response tabarrok has here. On the other hand, most people tend to think of government health and education programs quite positively. Hundreds of millions of kids were given a free education over the past century; and millions of people who cannot afford healthcare get it through medicaid.
Of course, maybe it could have been done better otherwise - with more market-oriented methods. Or maybe not. The point is, this is something to be argued about, rather than just assumed. Someone needs to get of his bubble.
Posted by: a different alex at Aug 9, 2007 7:36:33 AM
