Noah Smith and the Panglossian Fallacy

Over the past few months, I've spent some time pushing back against what I believe are poor arguments made by professional economists who oppose market direction of resources. The "arguments" I want to examine this time aren't really arguments. They're really just bald assertions with nothing to back them up. I suppose this makes my job easy, so I'll try to be brief.

Noah Smith's recent Bloomberg View piece makes the case that Berkeley is, in fact, the #1 economics department in the U.S. Chicago, he claims, has lost its luster and M.I.T. plays second fiddle to Berkeley in its ability to "influence" the profession.

While Smith makes some good points about the intellectual diversity and pioneering work by Berkeley faculty, his derision of Chicago borders on childish. Here's Smith:

... the Chicago school is a term used to refer to free-market fundamentalism and the belief that economic actors are always rational ...

and

The Chicago School was Panglossian in its belief that markets work well; the Berkeley Reformation showed deep, fundamental reasons that they break down.

This is a recurring theme in Noah Smith's writing: he paints his intellectual opponents as idiots or religious zealots who unthinkingly spout discredited theories about markets and government action. While this is true about a lot of non-economists on the internet, it doesn't properly characterize professional economists who favor markets. Further, as usual, Smith offers no evidence to back up his extreme claims.

Potpourri

Jayson Lusk gives his thoughts on a (relatively) recent book that points out some flaws in the "conventional wisdom" regarding saturated fat and other food no-nos. This one is definitely going on my reading list.

I agree with a lot of what Arnold Kling says about open-access versus limited-access orders. The idea that a country can only be one or the other seems patently false.

Bob Murphy discusses the predictive failure of the Keynesian model regarding the 2013 sequester.

Steve Horwitz identifies three regulatory barriers to upward income mobility.

Krugman and Friends Don't Get Uber

Krugman's recent blog post on Uber and progressive politics is revealing. Progressives like Krugman want Uber and other players in the sharing economy under the control of bureaucratic regulation that ostensibly solves the problems of unfair employee treatment. The problem is that Krugman and other progressives seem unable or unwilling to explain what problems exist and how centralized, bureaucratic regulation will help. Krugman is in block quotes, I'm not.

You might not have thought that a taxi service would move onto center stage in our great political debates. But Uber actually is looking like a surprisingly important political issue. Why?

Well, Uber actually brings two things to the taxi market. One is the smartphone revolution, letting you tap a screen instead of standing out in the rain waving your arm, and cursing the guy who darts out half a block from you and snags the cab you were trying to hail.

The other is the company whose workers supposedly are free contractors, not employees, exempting the company from most of the regulations designed to protect employee interests. And it’s the second aspect that brings us into divisive politics.

Krugman clearly sees the advantages Uber provides its customers but goes straight for the regulatory playbook when it comes to the benefits employees reap from the sharing economy.

On one side, Republicans are eager to dismantle as many worker protections as they can. So from their point of view Uber’s not-our-problem approach to workers would be desirable independent of the technology.

On the other side, we’re recently seen the emergence of the “new liberal consensus“, which argues (based on a lot of evidence) that wages are much less rigidly determined by supply and demand than previously thought, and that public policy can and should nudge employers into paying more. If that’s your policy plan, you really don’t want to see employers undermine it by declaring that they aren’t really employers.

The link Krugrman provides says very little about evidence, relying instead on the supposed "superior" rhetoric of progressives. If people don't want to join unions, should they be forced to? If price floors create excess supply in other markets, why not in labor markets? Keep in mind, if labor markets are characterized by monopoly, an exploitable profit opportunity exists. What is keeping entrepreneurs from making money hiring underpaid workers?

It’s surely possible to separate these two issues, to promote the use of new technology without prejudicing the interests of workers. But progressives need to work on doing that, and not let themselves get painted as enemies of innovation.

 Krugman doesn't let us in on how this separation of the two issues can be accomplished. If firms like Uber are treated as traditional employers, rather than facilitators of mutually beneficial trade, the inefficiencies plaguing traditional providers of transportation and lodging services will rear their ugly heads. Air BnB will just be a cell-phone-enabled hotel service. Uber will be taxi service with an app.

The reality is that the firms that make up the sharing economy are successful precisely because they avoid the inefficiencies of progressives' pet regulations and provide a platform for mutually beneficial exchange between parties. These incredibly efficient electronic middle men allow providers of services to decide when, where, and how they work on a minute-by-minute basis. Krugman and other progressives need to spell out precisely how the regulations of yesteryear can improve this situation.

Confusion on GMOs from Financial Heavyweights

Mark Spitznagel and Nassim Taleb have an interesting article in the NYT attempting to draw an analogy between systemic financial vulnerability and alleged problems with GMOs. They start off by describing some ways in which the financial system was vulnerable leading up to the crash.

I find a lot I can agree with in that section, but my agreement stops in the second half where they attempt to convince the reader that alleged problems with GMOs fit the same patterns. I'll give my thoughts on each of these 5 issues.

First, there has been a tendency to label anyone who dislikes G.M.O.s as anti-science — and put them in the anti-antibiotics, antivaccine, even Luddite category. There is, of course, nothing scientific about the comparison. Nor is the scholastic invocation of a “consensus” a valid scientific argument. 

Interestingly, there are similarities between arguments that are pro-G.M.O. and snake oil, the latter having relied on a cosmetic definition of science. The charge of “therapeutic nihilism” was leveled at people who contested snake oil medicine at the turn of the 20th century. (At that time, anything with the appearance of sophistication was considered “progress.”)

None of this should be convincing to anyone, as it doesn't have a shred of logic to it. The first paragraph has nothing to do with the usefulness or safety of GMOs, but it does reveal the authors' experience with other people who disagree with them. In the same way, the second paragraph fails to make their point. Just because some of the name calling that exists now is similar to the name calling surrounding snake oil salesmen doesn't mean GMOs are like snake oil in any other way. I would have expected more from both of these men, as they're clearly very intelligent.

Blackboard Theory Versus the Reality of Markets

Mark Thoma's recent article in the Fiscal Times does a great job of laying out the typical case most undergraduate economics majors hear for government intervention in markets. Undergrads are taught the requirements for perfect competition in markets: an infinite number of buyers and sellers, perfect information, price-taking behavior by firms, etc. Thoma is quick to point out that these conditions are not often found in real-world markets, thus government intervention is necessary to correct the failures of real-world markets to live up to these ideals.

As Farmer Hayek readers might expect, I didn't find his arguments terribly convincing. First, this is a classic case of the Nirvana fallacy. The real world will never live up to any perfect ideal. The policy-relevant comparisons are thus not between this impossible ideal and real-world markets, but between alternative policy regimes that actually exist or could exist.

Big Data and Hayek

A recent post by Matt Bogard drew my attention to a Forbes article entitled "Big Data Versus Hayek." Both Matt's post and the article are interesting, and I recommend reading both (they're short), but I want to pick a few nits with the Forbes article.

The authors mention a few examples of firms using big data methods to "set prices" and note that

What’s interesting about such centralized, algorithmic approach to price setting is how un-Hayekian it is.

This is an interesting point as far as it goes, but a couple of things should be noted. Hayek's point about centralized decision making was about markets, not firms. If complete decentralization were optimal, then no firm need exist. Of course, such an absurd conclusion can't be drawn from Hayek's work.

Firms are obviously necessary (and Matt makes some good points about this in relation to Coase), but Hayek's point is about the markets in which firms operate. Decentralized markets generate prices that reflect the availability of resources needed for production and the tastes and preferences of consumers; these prices allow firms to provide what consumers want. The USSR was (largely) without the coordinating effect of prices, a key cause of its demise.

The second problem is the idea that these firms are "setting prices." Surely a price tag or the rate offered on the Uber app will in some sense be "set" by the firm. However, the firm has very little control over the price they receive because ultimately the consumer determines the equilibrium price to which actual prices continually move. The influence of regulations, competitors, and (perhaps most powerfully) the preferences of consumers will decide what price the firm receives. The firm can "set" any price it likes, but decentralized free markets ensure that these prices come to closely approximate the value consumers place on the product.

Do Supermarkets Have Market Power?

Back in 2013, a former graduate school colleague of mine at K-State, Veronica Pozo (now at Utah State) presented a paper on price transmission along the beef supply chain (retail, wholesale, and farm prices). The authors used data from the BLS and retail scanner data to look for asymmetries in the price adjustment process.

On the issue of BLS and scanner data, the authors note some problems with BLS data:

Evidence suggests that the BLS retail price data may be biased. Hausman (2003) showed that the methodology BLS uses to calculate the food Consumer Price Index (CPI) may overestimate the price of food. The omission of random-weight food items (BLS collects only price data, but does not collect quantity data) and supercenter purchases (reflecting shifts in shopping patterns to lower-priced stores) may cause a significant upward bias on price estimates. In addition, BLS data do not account for large volumes sold at discounted prices during retail specials (Rojas et al., 2008; Lensing and Purcell, 2006). Therefore, this issue raises the question of whether findings from previous studies that have used BLS retail price data are reliable.