Isegoria

The recent not-quite-Nobel prize in economics went to Elinor Ostrom and Oliver Williamson for their respective work in institutional economics. Ostrom studied how private individuals cooperate to avoid the tragedy of the commons, and Williamson studied the boundaries of the firm — which Arnold Kling sees through a Hayekian lens:

For example, in health care delivery, I think we need more central planning. Not by government, but by corporations competing to offer better quality and efficiency. The problem is that the corporate model threatens the status of doctors. However, as Michael Cannon and I argued here, when a patient has a complex set of problems, the model of doctor autonomy can work very poorly. In Williamson’s terms, the corporate model can resolve the conflicts that arise between different doctors more effectively than our existing model. For example, when my father was moved to eight different hospital units in fourteen days, a new doctor was in charge of him at each unit. The priorities and treatment plan changed each time. In my opinion, these autonomous hospital units should have been replaced by a hierarchy, in which care is directed by a project manager accountable to the patient.

I prefer a more Hayekian take on industrial organization. That is, I think that industrial organization ought to be aligned with knowledge. Decentralization of power makes sense when information is decentralized. When information can be usefully concentrated, then concentration of power can be efficient. In my forthcoming Unchecked and Unbalanced, I argue that knowledge is becoming more specialized and decentralized, and that this conflicts with the trend for political power to become more concentrated.

I’m afraid I merely skimmed EconLog today and didn’t dive into Arnold Kling’s latest piece, Recalculation and State and Local Relief, until Aretae cited it for his quote of the weekend:

For those of you who do not know, Wesley Mouch is a fictional character in Atlas Shrugged who increases government control over the economy. Herbert Hoover is also a fictional character, whose policies are laissez faire and balanced budgets.

Arnold Kling finds that financial “reform,” like health “reform,” is so focused on entrenching the status quo that his views are beyond the pale. A commenter named George quips:

The status quo wasn’t working, so we need to reform it with a bold two-pronged plan:

1. Add more status.
2. Add more quo.

(Any similarities to cowbell are purely coincidental.)

Arnold Kling shares some shocking views on health policy from Richard Cooper:

Orszag has argued that if Medicare spending could be as low in Newark as it is at Mayo, the nation could save billions. But this theory doesn’t hold up in practice. Consider: One-fourth of the folks in Newark live in poverty, compared with less than 10 percent of those in Rochester. And national surveys show that poor people consume more health-care resources — 50 to 75 percent more than average. They are sicker and they stay sicker, despite the best efforts of physicians and hospitals. Mayo is a fine institution, but it isn’t more cost-effective than other hospitals in its home region, nor are its operations in Jacksonville, Fla., and Phoenix more cost-efficient than other hospitals in those cities. So why would it be more cost-effective in Newark?

Cooper has more to say:

Regional variation is a product of regional differences in wealth, overlaid with differences in poverty. It’s not generally appreciated that health care expenditures for people in the lowest 15% of income are 50% to 100% greater than for people of average income. There’s also a difference at the high end. The wealthiest 15% also consume more, but only about 20% more. So there’s greater utilization at both ends of the income spectrum, but for different reasons and with different outcomes.

More spending at the high end improves outcomes, not simply for a specific condition but across the board, because the care consists of a broader spectrum of beneficial services. More yields more. But among the low-income patients, outcomes are poor despite the added spending. In fact, the added spending is because of poor outcomes — more readmissions, more care for disease that’s out of control.
[...]
The Dartmouth folks say that Mayo is more “efficient” in resources used per patient or in number of doctors devoted per unit of patient care than in LA, Philadelphia, Miami, Chicago, and New York City.

But the so-called “inefficient” hospitals are all in dense urban centers, while “efficient” hospitals are all in smaller cities, often college towns liked Madison, Wisconsin or Columbia, Missouri, or in places like Rochester, Minnesota, where Mayo is located. Rochester is 90% Caucasian with low poverty. But in fact, Mayo is the most resource intensive center in the upper Midwest. Among peer institutions in similar socio-demographic environments, Mayo actually uses more resources. But you can’t compare Mayo to Los Angeles, where only 30% of the population is non-Hispanic white and where you have tremendous pockets of poverty.

Will Wilkinson prefers seasteads to charter cities, because he prefers real freedom:

What the example of Hong Kong communicates is that authoritarian, illiberal, undemocratic regimes need not feel threatened by semi-independent city states with working “liberal” market institutions. It says to rulers that their countries can get rich without granting their subjects real freedom.

This leads Arnold Kling to ask, what is real freedom?

Consider the following definition of freedom: the absence of monopoly.

The absence of monopoly means that you can exercise exit, even if you cannot exercise voice. The presence of monopoly means that, at most, you can exercise voice.

Neither my local supermarket nor any of its suppliers has a way for me to exercise voice. They don’t hold elections. They don’t have town-hall meetings where they explain their plans for what will be in the store. By democratic standards, I am powerless in the supermarket.

And yet, I feel much freer in the supermarket than I do with respect to my county, state, or federal government. For each item in the supermarket, I can choose whether to put it into my cart and pay for it or leave it on the shelf. I can walk out of the supermarket at any time and go to a competing grocery.

The exercise of voice, including the right to vote, is not the ultimate expression of freedom. Rather, it is the last refuge of those who suffer under a monopoly. If we take it as given that the political jurisdiction where I reside is a monopoly, then perhaps I will have more influence over that monopoly if I have a right to vote and a right to organize opposition than if I do not. However, as my forthcoming Unchecked and Unbalanced argues, the reality is that the amount of influence I have is shrinking while the scope of the monopolist is growing.

The idea of charter cities (or seasteading) will be a success to the extent that it creates a viable exit option vis-a-vis government. Suppose that the Chinese government loses its monopoly power, because it becomes easy for people residing in China to choose to live under alternative governments. In that hypothetical case, I would argue that those residents are free, even if those who choose the Chinese government are not allowed to vote in contested elections or to freely criticize their government. If you lived in North Korea, which would you rather have–the right to vote or the right to leave?

In fact, if we had real competitive government, then we would be no more interested in elections and speaking out to government officials than we are in holding elections and town-hall meetings at the supermarket. I repeat: real freedom is the absence of monopoly.

Arnold Kling pits Bruno Leoni vs. Paul Romer. First, Leoni:

In reality, the law is something which is not pre-fabricated in some specially-designated place, by some specially-designated producer and with some pre-established technique. In much the same way, no followers of the artificial languages such as Esperanto and Volapuk have yet succeeded in finding a substitute for the language that we speak every day, which also is not pre-fabricated. The law is in the last analysis something which everyone makes every day with his behavior, his spontaneous acceptance and observance of the rules that everyone helps to establish, and finally, even if it seems paradoxical, with the disagreements themselves which eventually arise among the various individuals on the observance of these rules.

Then he summarizes Romer:

Paul Romer, in presenting his idea for charter cities, makes it sound as though we can take rules “manufactured” in, say, Canada, and export them anywhere in the world. Leoni would say that instead most law is embedded in social customs In fact, my daughter who just spent the summer in Tanzania, says that the custom of seeing law as something that ought to be obeyed is not nearly as natural there as it is here.

I suspect there’s a difference between exporting Canadian rules to Tanzania and exporting Canadian rules to a city-state along the coast of Tanzania, full of Canadian merchants and self-selected Tanzanians looking to work for and with those Canadians.

Will Chamberlain seems to agree:

Romer seems quite cognizant of the fact that you can’t just take Senegal’s legal code, replace it with Canada’s, and expect things to be peachy. If you’ve watched Romer’s TED talk, you’ll recall the image of those African students, all of whom probably have cell phones, studying under streetlights. The reason these students don’t have power in their homes is because of price controls that disincentivize power companies from supplying more people with power . And Romer notes that the political class in these countries is aware that these laws suck, but can’t change them because there are existing, entrenched interests that benefit from the existence of these laws.

Deng Xiaoping was facing the same situation. He went to places like Singapore, and saw that Communism didn’t work. But rather than replace communism with another system in one fell swoop, he created special economic zones where people could self-select to try a new system, and over time, there was incremental reform throughout the country in the direction of more economic freedom and respect for private property. Customs may not interchangeable, but they can evolve over time.

Romer wants charter cities to be built on uninhabited land for a number of very good reasons. One of them is that he sees them as a kind of intentional community – a city in which people self-select to try and live under a new set of rules. It’s because laws cannot be easily exported that Romer is trying to create new jurisdictions to experiment with new laws, rather than trying to convince leaders in established jurisdictions to adopt better laws.

Paul Romer presents A Theory of History, with an Application to the Long Now Foundation:

Go ahead and skip the intro, but watch the whole video. Enjoy the iconic graphics. I’ll wait.

His first point is that the relationship between people and physical property like land is almost the exact opposite of the relationship between people and ideas.

Adding more people adds no more land, so we have less land per person — but adding more people does add more ideas, and ideas are easy to share, so we have more ideas per person.

His second point is that technical ideas aren’t the only ideas that matter for economic progress. Institutional ideas matter at least as much, and the two interact. Sometimes technical innovations lead to new rules, and sometimes rules lead to new technologies.

And this brings us to what Will Chamberlain calls bloodless instability — the ability to create new countries without resorting to conquest — because institutional innovation is crucial to economic growth. As Romer says, imagine a world with no new companies — and realize that we live in a world with no new countries. Where is the innovation going to come from?

Romer doesn’t explicitly mention Mancur Olson, but it wouldn’t be surprising to find out that he has read him. At the end of the talk, Romer cites Cardwell’s law, which states that ” every society, when left on its own, will be technologically creative for only short periods.” In The Rise And Decline Of Nations, Olson provides an excellent explanation for Cardwell’s law, which is that as time goes on, distributional coalitions form and squelch technological innovation and economic growth, by perverting specific rules so that they gain at the expense of the broader public.

(Hat tip to Arnold Kling.)

Robert Solow and Douglass North present what Arnold Kling calls the dark view, that free markets are not natural. As North puts it:

The economic interests are the elites that produce economic activity. But they tend to support political groups that, in turn, will protect them from too much competition. The interplay is the elites in the political world protecting the economic elites from too much competition and giving them monopolies, while on the other hand the economic elites provide the funds that support the political elites. And the interplay is all over Latin America. It’s a disease, but it’s a disease that is a natural thing and it’s very hard to get rid of.

Everyone should read Thomas Sowell’s A Conflict of Visions, Arnold Kling believes, but few will, so he summarizes its key points:

One is that the right thinks that social problems primarily reflect basic constraints, while the left thinks that they reflect the failure of good to triumph over evil.

For example, on health care, I will say that as individuals we want unlimited access to medical services without having to pay for them, but that this desire faces the constraint that it is economically unsustainable. On the left, it is an article of faith that the main problem is, as someone once said to me in a Q&A session, a lack of political will.

The other difference is the left’s belief in what Sowell calls the “surrogate decision-maker”:

For the left, “society” should make decisions, and proper experts should make decisions for society. That is why Thaler is happy that the Obama Administration is going to dictate more strictly the types of mortgages people can have.
Those of us on the right think that knowledge is embedded in systems that evolve over time. The experts are not really smarter than markets.

The left believes that wise and moral experts could solve problems if not for their evil opponents. The right believes that the so-called experts do not have nearly enough knowledge to be dictating to everyone else. Think of the late William F. Buckley’s remark that he would rather be ruled by a set of people randomly chosen from the Boston phone directory than by the Harvard faculty.

Kling is not optimistic:

From their point of view, it would be immoral for me to secede from their utopia. If Patri Friedman ever creates a seastead, its inhabitants will be imprisoned for tax evasion, treason against the planet, or somesuch.