Hayek and Business Management

Tuesday, April 28th, 2015

Arnold Kling cannot emphasize enough how much he agrees with this:

If extensive knowledge is possible, then bosses might be able to manage big companies well. If not, then centrally planned companies will be inefficient. Sure, perhaps competition will eventually weed out egregious incompetence, but market forces might not grind so finely as to eliminate all inefficiency.

Kling explains:

Because I spent 15 years in business, I got an opportunity to see large organizations close up. I saw that in a large business, the top management cannot keep track of more than about three major initiatives at a time. I saw that compensation systems have to be frequently overhauled, because employees learn to game any system that stays in place for more than a couple of years. I saw the “suits vs. geeks” divide, as specialists in information technology or financial modeling had difficulty communicating with executives who had only general knowledge.

The notion of large, efficient organization is an oxymoron. If you think that large corporations have overwhelming advantages, then you have explained why IBM still dominates the computer industry, while Microsoft and Apple never really got amounted to much of anything. I like to say that if you are afraid of large corporations then you have never worked for one.

Of course, large corporations do exist. That is because as clumsy as they are, they can still be less clumsy than the alternative, which is to break a corporation into a network of contractually related divisions.

Community College: What is the Right Price?

Thursday, January 15th, 2015

Arnold Kling is skeptical about free community college:

Just based on my gut feeling, I think that the vast majority of students attending community college do not have favorable outcomes. [...] I am not even sure that students in the lower tier of four-year colleges have favorable outcomes. Instead, the true cost, including what the students pay out of pocket plus subsidies plus opportunity cost, exceeds the benefit for many who attend college. In contrast, President Obama seems to endorse the fairy-dust model of college, where you can sprinkle it on anyone to produce affluence.

Politicians and policy wonks face different incentives:

If I were President Obama, of course, I would champion universal “free” community college. Worst case, my proposal becomes law. A lot of money gets wasted, but it’s not my money. Best case, the Republicans vote it down and I call them anti-opportunity meanies.

How Civilizations Die

Sunday, September 28th, 2014

Arnold Kling describes David P. Goldman’s How Civilizations Die as very anti-Islam, very pro-Jewish and pro-Christian, very heavy on the civilization-barbarism axis and shares this representative sample:

Wherever Muslim countries have invested heavily in secondary and university education, they have wrenched their young people out of the constraints of traditional society without, however, providing them with the skills to succeed in modernity. An entire generation of young Muslims has lost its traditional roots without finding new roots in the modern world. The main consequence of more education appears to be a plunge in fertility rates within a single generation, from the very large families associated with traditional society to the depopulation levels observed in Western Europe. Suspended between the traditional world and modernity, impoverished and humiliated, the mass of educated young Muslims have little to hope for and every reason to be enraged.

He thinks that recent events will lead people to give more consideration to such darker outlooks — and notices a change in the Zeitgeist:

By the way, my Facebook feed has changed radically in recent months, with much less political snark and a surfeit of cute animal videos. Part of me wonders if something like that happened in Britain when Hitler took power in 1933. Was politics just too unpleasant to contemplate at that point?

The Unintended Consequences of God

Sunday, March 17th, 2013

This year, a Super Bowl ad stated that God created a farmer. God created a money-lender, too:

In The Chosen Few, Maristella Botticini and Zvi Eckstein offer an explanation for how Jews wound up in high-skilled, urban occupations. They argue (p. 95) that between 200 and 650 AD,

world Jewry became a small population of literate individuals (“the chosen few”). The unintended consequences of the religious ruling that required Jewish fathers to invest in their sons’ literacy and education fully displayed themselves.

Jews became much more literate than other populations, but at a cost of numbers, as those who could not afford to educate their sons converted to other religions. Over this time period (p. 113)

the general population decreased by about 12 percent, whereas the Jewish population collapsed by roughly two-thirds.

In those days, most people were farmers, for whom literacy’s costs generally outweighed its benefits. However, in an urbanized society with skilled occupations, literacy pays off. As urbanization gradually increased in the late Middle Ages, Jews came to fill high-skilled occupations. Botticini and Eckstein argue that literacy, rather than persecution, is what led Jews into these occupations.

Thoughts on the New Commanding Heights

Monday, September 12th, 2011

Arnold Kling shares some thoughts on the new Commanding Heights of our economy, education and health care.

From Paul Howard:

Government policy both encourages consumer spending in health and education and protects providers in those industries through licensing requirements that reduce competition from lower-cost or higher-quality providers (charter schools, retail clinics, etc.).

From John Goodman:

We are living in a world in which entrepreneurs are encouraged to make unlimited amounts of money exploiting reimbursement formulas, but are not allowed to make any extra money making the formulas better and more effective.

Insiders and Outsiders

Wednesday, December 22nd, 2010

Arnold Kling just got around to reading the book that has been his strongest intellectual influence, The Symbolic Uses of Politics, by Murray Edelman:

The book (or, more specifically, chapter 2) has a long and deep influence on me because it was perhaps the favorite political theory of my father Merle Kling, a political scientist who earned a mention in the acknowledgments. My father constantly invoked the terms “symbolic reassurance” and “political quiescence” in commenting on political events. He would have immediately understood and appreciated my application of the terms to Elizabeth Warren and her role in the nascent financial consumer protection agency.

Imagine you are a 1950′s intellectual, Kling suggests:

To put the book in perspective, I think it helps to try to recreate the intellectual atmosphere of the 1950′s, the milieu that produced Alfred Hitchcock and J.D. Salinger. In five-factor personality jargon, the Fifties stand out for strong Neuroticism. Symbolic Uses was published in 1964, which was a few years before the phrase “Do Your Own Thing” was coined, marking the true onset of the Sixties and its Openness. The book had been in gestation for a long time — the interaction with my father would have taken place in 1961, when I was seven years old. We spent a semester in Champagne-Urbana, when my father took a sabbatical at the University of Illinois, where Edelman was a colleague.

To an intellectual of the 1950′s, the human psyche is dark. Freud’s shadow looms large over all discussion pertaining to human nature. You take it as given that terrible demons lurk in both the individual and collective unconscious. All About Eve could be the story of any one of us. The phenomenon of Adolf Hitler is most easily understood as having sprung out of the collective unconscious of the German people. Suspicious that a similar phenomenon could occur anywhere, you scan the American scene for signs of impending fascist tendencies. Edelman will cite Adorno, The Authoritarian Personality (1950) as well as Lipset on “The Sources of the Radical Right” (1955) and “working class authoritarianism” (Political Man, 1960).

You see the ordinary social interactions of American life as ritualized, superficial, and inauthentic. People are playing games (although Berne’s book will not appear until 1967) and engaging in dramaturgy — I think of Goffman (1959), but Edelman cites Kenneth Burke.

The lack of authenticity is typified by the United States position vis-a-vis China. We insist that one of the five seats on the Security Council is to be occupied by Taiwan, while refusing to recognize Red China. How can this be explained other than as a need to use a charade in order to mollify a public’s deep-seated, irrational fears? (If you are inclined to believe that the relationship between the public and the government has matured in the last fifty years, I have two words for you: airport security)

It is in this Fifties context that you should place the terms “symbols” and “quiescence.” The term “symbol” is meant to suggest the essential phoniness of politics, just as The Catcher in the Rye was meant to expose the phoniness of middle-class society. And the term “quiescence” suggests a mass populace with a rage that has been quelled, like a formerly vicious dog rendered meek by Pavlov-Skinner conditioning or a Randle McMurphy lobotomized by Nurse Ratched.

Kling summarizes Edelman’s view by saying that the political world is divided into Insiders and Outsiders:

Given these differences, the Insiders use overt political dramas as symbols that placate the masses while using covert political activity to plunder them. What we would now call rent-seeking succeeds because Outsiders are dazzled by the symbols while Insiders grab the substance.

In other words, expect the banks to be able to do a more efficient job of rent extraction with Elizabeth Warren in place than before.

Edelman thought of insiders as exploiting outsiders, in almost a Marxist sense. For Edelman, symbolic reassurance and political quiescence were somewhat troubling phenomena. The masses were being lulled by symbolic gestures into accepting adverse political outcomes.

What Franklin Roosevelt Accomplished

Tuesday, December 21st, 2010

In “The Achievement of the New Deal,” William E. Leuchtenburg defends FDR against left-wing academics, who deplore the president’s long reign as insufficiently revolutionary and anti-capitalist:

Before 1933 the government had paid heed primarily to a single group — white Anglo-Saxon Protestant males. The Roosevelt administration, however, recruited from a more ethnically diverse medley, symbolized by Ben Cohen and Tommy Corcoran, the Jew and the Irish Catholic… though, in the entire history of the republic of nearly a century and a half before 1933 only four Catholics had ever served in a cabinet, FDR, in choosing his first cabinet, named two.

That is what Franklin Roosevelt accomplished, Arnold Kling reminds us:

I think that if you want to understand why Roosevelt won such a landslide in 1936 and why the “Roosevelt coalition” was a significant force in American politics at least until the 1970′s, the Masonomics concept of group status is key. The biggest surge in population in the 1920′s had been among non-Protestants — the “hyphenated Americans” from Ireland, Italy, and Eastern Europe. Roosevelt gave them unprecedented status recognition. On rights for African-Americans, he moved forward just enough to earn the gratitude and loyalty of blacks in the North (where they could vote), while not moving forward fast enough to lose the racists of the Solid South. (The racists stuck with Roosevelt in part because they had nowhere else to go. Even as late as the 1960′s, Republicans were not willing to be as racially regressive as southern Democrats. In 1948, for example, when Strom Thurmond ran against Truman, instead of joining the Republicans Thurmond formed the Dixiecrats.)

Budget Puzzle

Tuesday, November 16th, 2010

The New York Timesbudget puzzle certainly makes fixing the budget seem easy enough. (Like Arnold Kling, I love the way they let you simply choose to cap Medicare spending growth. How hard could it be?)

Math Mastery

Monday, August 30th, 2010

Aretae remarks that Arnold Kling only thinks that he’s talking about economics, when he’s really describing many fields:

I suspect that a big reason that mathematics took over economics is that it gives you a sense of mastery. Indeed, it may give you a false sense of mastery. As you learn mathematical economics, you realize that you are getting really good at doing something that only a small group of people is able to master. And you get the sense that because you completed a mathematical proof that you accomplished something. It is very seductive.

The Spirit of Independence

Wednesday, July 7th, 2010

Intellectuals tend to believe that ideas cause attitudes, Lee Harris says, though it is far more often the other way around:

Several years ago, while attending a street festival in the small town of Tucker, Georgia, I came across a booth sponsored by the local libertarian society. At the time, I did not realize that my encounter would generate my next book. I only remember being struck by the question asked of everyone who visited the booth that day: “So who owns you?”
To most of [those who wandered into the booth that day], the question “So who owns you?” seemed to come with the force of a revelation, and they responded with a decided and often emphatic, “Nobody owns me.” Which is to say, someone may own other people, but certainly does not own me.

Lee Harris sees this as evidence that many people are natural libertarians. Arnold Kling does not; he emphasizes the last bit of that excerpt:

I think that most people resent being told what to do, and yet such people are not libertarians when it comes to other people being told what to do.

I have a stronger criterion for natural libertarianism. When you see other people doing something that really offends you, are you willing to see the state allow that behavior to continue? Only if you can answer “yes” are you a natural libertarian. I think that there are very few natural libertarians.

The McCarthy Era Never Ended

Wednesday, April 28th, 2010

The McCarthy era never ended, Arnold Kling notes; Congressional hearings are still all about self-promotion:

The objective of every Congressperson at every hearing is to get on the evening news by bullying a witness. The only question I have is whether McCarthy is the one who started it, or whether he happened to be the one guy who got called out on it.

Too bad somebody at Goldman could not have called out a Senator. It must have been tempting to say, “Look. You can’t make a market by bending over backwards giving buyers every reason not to buy and sellers every reason not to sell. Sophisticated investors understand how we operate. Just like everybody who goes to play blackjack understands that some of the cards are dealt face down. You can complain that you think all the cards should be face up, but that would totally change the game. Do you hold to such high standards in your election campaigns? Do you think your disclosure of the consequences of your votes is honest? Do you disclose how lobbyists told you to vote? Do you go out of the way in your campaigns to give people all the possible reasons not to vote for you? You want to tell me about my responsibility to my clients? How would you like to hear my opinion about your responsibility to your constituents?”

Blame deflection. That is what this whole financial “reform” theater is all about.

The Looting Scenario

Tuesday, April 13th, 2010

A few years ago, Arnold Kling saw a great race between Medicare spending and technological progress (“Moore’s Law”):

Four Scenarios Moore’s Law Fails Moore’s Law Succeeds
Medicare is Reformed Low Gear Capitalist Utopia
Medicare is Not Reformed Economic Implosion Affordable Welfare State

The Singularity is behind schedule and the ruling class doesn’t seem to know what it’s doing, which could lead to an economic implosion or looting scenario:

Douglass North famously said that when the institutions of a society reward piracy, ambitious people become pirates. When the institutions reward wealth creation, people create wealth. In finance, our institutions did much to reward piracy in the past decade.

In the Looting Scenario, what is going to be rewarded is what we call rent-seeking. Basically, over the next twenty years, wealth transfer by government will be much more important than wealth creation — and the amount available for transfer could actually decline. For example, I expect that benefits for the elderly will become increasingly means-tested and savings will be increasingly taxed, to the point where the marginal return to saving will approach zero. If the marginal return to saving is low, and government deficits are high, then capital formation is going to be low. It’s hard to see how you get rapid innovation in that kind of world.

The Looting Scenario is one in which public employees and pensioners have the incentive to just take as much as they can while they can get it. It is a scenario in which people talk about the deficit, and wise heads say we must do something about it, but the only politically feasible approach is to raise taxes. Even so, it turns out that higher tax rates bring in less revenue than projected, because of the incentives to consume leisure and engage in black-market activity.

Seven years ago, it would not have occurred to me that our ruling class would be so bad that the Looting Scenario would be likely. My guess is that, even among libertarians, just about everyone else still has faith that our ruling class will not let the Looting Scenario take place. However, I think it is one of the higher-probability scenarios out there. Where others think of the upper bound of incompetence as, say, Jimmy Carter or George Bush, I think about truly historic blunders that make Carter and Bush seem brilliant. I see our current economic strategy as comparable in folly to the “search and destroy” strategy in Vietnam or the mass offensives of World War I. So, if I sound crazy on this blog, that is where I am coming from.

Western markets are like Western medicine

Wednesday, March 10th, 2010

What suffered most in the Great Depression, John Nye says, was trust — impersonal social trust:

The idea of impersonal social trust was the most dramatic accomplishment of industrial civilization’s rise from the 18th to the early 20th century. The greatest achievement of early modern economic growth was not the Industrial Revolution itself, but the way in which the leading Western economies began to move away from highly parochial, narrow networks of personal exchange and came to rest instead on increasingly complex national and international commercial networks of impersonal exchange. The networks were mediated by competition, but also by an Adam Smithian understanding that strangers’ seeking their own gain amongst each other could lead to universal benefit. Praxis and theory reinforced each other.
In some ways, FDR did not so much break from normalcy as return to it. It helps to recall that large-scale systems based on anonymous exchange were a recent phenomenon. The system of orderly, global trade developed in the 19th century under the financial and political leadership of the United Kingdom, and backed by the gold standard, produced growth and prosperity. But it also produced plenty of social disruption and downward as well as upward mobility. It certainly never inspired the kind of devotion that nationalist and communal ideology more readily induce, as suggested by the rise of fascism during the interwar period. The world’s experience with democracy and market capitalism was limited. The more common experience by far consisted of political systems that allowed limited access to property rights and trade, reserving the most exalted benefits for elites who treated control of the political economy as their reward for preserving peace.

This older, more organic order, which even today represents the default for most nations, has the advantage of being both stable and intuitively natural. So thoroughly has the West taken for granted the triumph of the more abstract liberal nation-state that its denizens must remind themselves how fragile its origins were and how little emotional loyalty it has commanded. Indeed, the evidence suggests that few people trust large-scale systems of commerce. It is much easier to focus on political economy as a system of extended associations in which successes or failures can be attributed to individuals or groups for whom we feel either loyalty or loathing. Despite the prevalence of market behavior throughout history, it has rarely trumped communal corporate identity, especially in hard or frightening times. Abstractions do not generally prevail over concrete social relations because personal trust is more readily attained and maintained than impersonal trust.
Seen as a reversion to older habits, the odd mix of regulation, make-work, intervention, protectionism, nationalism and (as in Germany and elsewhere) anti-Semitism that characterized the Western policy response to the Depression suddenly seems less like an incoherent flaying in all directions and more like elements of a uniform retrenchment in social relations. What all these habits had in common, in all the countries in which they loomed large, was their role in spurning the system of abstract, anonymous and international exchange for more parochial, inward-looking responses to danger. So afraid of the new were they that some national elites followed this path of retrenchment to the point of utter self-destruction. Indeed, the severity with which people rose to tear up or overturn that still new system, despite the unprecedented prosperity it had wrought, seems indisputable testimony to how paper thin support for liberal trading regimes truly was.
In a sense, Western markets are like Western medicine: Just as an outbreak of incurable plague would lead to both a renewed search for sound cures and an atavistic appeal to folk remedies, so the Depression stimulated both productive thinking about the sources of business instability as well as destructive appeals to extreme nationalism, protectionism and military aggression.

As Arnold Kling adds, it is more natural to live in a world of Mafia Godfathers than one with fair, open, competitive markets.

Opting for Enslavement

Wednesday, March 3rd, 2010

One chapter in Africa: A Biography of the Continent is about slavery within Africa:

A history of slavery in Africa claims that between 30 and 60 percent of the entire population were slaves during historical times. If this is correct, then the number of people enslaved in Africa far exceeded the number taken from the continent by the slave trade.
In this part of Africa [Mozambique] famines were frequent and made terrible depredations, but occurred in some areas more than in others, and people from the affected lands would crowd into unaffected areas where food was to be found. They bought food with anything they possessed, including their own freedom, voluntarily making themselves the slaves of those who would give them sustenance. Desperate individuals would even destroy an item of value belonging to a wealthier neighbor, knowing that the punishment for this symbolic act would be enslavement.

This leads Arnold Kling to think about those opting for enslavement:

1. One of the most potent ways to accumulate wealth and power is to have other people work for you. Karl Marx was not wrong on this. It was true in Classical times, it is true for the owners and managers of large firms, and it is true for politicians, for whom all of us labor in order to pay taxes. Indeed, in Unchecked and Unbalanced I offer calculations which suggest that some relatively ordinary politicians have power that is greater than that of leading billionaires.

2. The ideal of freedom and equality may be unrealistic, with only rare exceptions. It could be that the most natural human condition is one of dominance and submission. You can start from a different equilibrium, but somehow you end up with a few people in dominant positions and most people submitting, some quite willingly, to domination.

3. Markets can offer freedom and equality when the option for exit is viable. Instead, if I am totally dependent on my employer for a job (that is, my next best alternative is something with a much lower wage rate), then I must behave very submissively toward my employer. How many people are in such a position? Government workers strike me as an obvious example — many of them would be unable to earn as much in the private sector, particularly now. So they would tend to be highly submissive. In fact, nowadays a lot of people would go nearly to the lengths of described in the last sentence quoted above if it would allow them to be employed by (enslaved by?) the government.
6. Today, we think of Marxists as authoritarian. An alternative view is that at least some Marxists sincerely wanted freedom and equality, but that dominance-submission is such a natural equilibrium that the only way to replace the capitalist version of dominance and submission was with a statist-authoritarian version.

7. For libertarians, the outlook is always going to be precarious. It is not just that there are people who desire to enslave others. It may be very natural for most people to opt for enslavement.

The Right of Exit

Wednesday, February 24th, 2010

Arnold Kling argues that the right of exit is important in order to limit government power:

I sometimes think that what kept the U.S. government small in the early 19th century was not so much the Constitution as the fact that people kept leaving the then-current United States for adjacent territories. The option to exit would have made it quite difficult for government to grow large and intrusive.