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Paul Krugman and Brad DeLong's "Reality-Based" Economics

Dr. Paul Krugman is a respected professor of economics -- one who has a column my country's most prestigious newspaper. J. Bradford DeLong has a Ph.D. in the same. And both of them apparently believe that "Communism failed as an economic system because people stopped believing in it"! In other words, central planning works just fine, as long as the people are enthusiastic enough.

Astounding.

Why Communism Failed

In the most general sense, it's true Marx's central tenant ("From each according to his abilities, to each according to his needs") misunderstands human nature: people tend be selfish, and want to consume as much as possible and give as little as possible. However, with the state in the picture, having power to threaten the person with death or imprisonment, this barrier can be overcome. It happens in the Chinese Laogai prisons all the time: People work very hard for most the day, producing (for example) many toys for our children, being fed only a near-starvation ration. Such people give far more than they take because, of course, they'll be killed if they don't. (And, contra Krugman, it doesn't take a whole lot of "belief" for their masters to set such quotas.)

The real reason central planning fails, and failed even under Stalin (who Krugman depicts as a kind of Bill Gates of the industrial age), is because the central planners never have enough information.

Consider a very simple example: a farmer's field. What is the best crop to grow there this year? What technique works best on that particular land? When is the best time to plant and harvest? The farmer, whose family may have lived with that land for a generation or more, has learned this because his ability to eat depends upon it. But some bureaucracy in a far-away city (often appointed politically, not based on farming expertise) will have no clue regarding these many variables, which may differ for every single plot of land.

And what about innovation? Innovation happens because one farmer does something in a completely different manner than all the others -- and it works. In contrast, all bureaucracies are inherently risk averse. Those under them are judged by how closely they follow the rules; deviation is anathema. Even here in the US, the FHA dictates narrow guidelines to the farmers over which it has control (I know this firsthand, having dated the proverbial farmer's daughter). If the Farmer does better by breaking the rules, he is upstaging his alleged "betters" in the bureau.

Of course, farming a field is nothing compared to the complexity of, say, making a pencil. How many pencils will we need? (How is pencil demand being impacted by, say, printers or pens?) How much graphite, rubber, wood, paint, and steel will pencil production require next year? And what about paperclips?

In a free market, these questions are answered by price signals. If some raw material becomes rare (say, rubber) the cost of the erasers go up, and then the cost of pencils will also increase. This causes people to cut back on pencils, or gives someone else (who specializes in innovative thinking) an incentive to now think about how to replace the eraser (or pencil) with something which doesn't use rubber. Or tells someone else to switch from growing another crop and choose rubber plants instead, because they're getting scarcer and thus more expensive. This level of organization is only possible when each participant is able to make an informed choice about how best to use their own resources based on the price signals being sent by the market.

When a centralized committee takes control, these "signals" are entirely lost. Really, how will committee members actually know if people need more or fewer pencils next year? Normally, the stores or manufacturers notice scarcity almost immediately and adjust prices upward. This, in turns, creates an incentive for more pencil production. When producers are only allowed to sell for one price, this entire set of incentives and signals disappears. Pencil production quotas will remain static*, whether people need more pencils or fewer, and innovation will be stifled entirely.

(* And if they do attempt to update pencil quotas, it will be on a yearly, or 5-yearly basis -- whenever the committee can get around to arguing about the matter. And all sorts of other incentives will be in play at said meeting, besides just doing what's best. And, of course, there are THOUSANDS or even MILLIONS of such products: every last gear, every type of paper, each shoestring of a given length, every fiber crop, type of manure, brick style, light bulb, ice cream flavor, floor wax type, dessert topping, food preservative, etc. Good luck centrally setting sensible production quotas on all those, and finding the most innovative way to get each sub-product to each factory which needs it.)

Indeed, a friend tells me, when the USSR fell and we were able to examine their government documents, we learned they did pretty much everything by copying the West. Since they had no idea how many pencils to make, they'd look at last year's US or European pencil production as a guideline. Since there was no internal source of innovation, they'd copy evolving US production techniques. In a way, you might say that Communism hung itself with a rope it had to buy from capitalism.

You understand this now. So do I. Paul Krugman and J. Bradford DeLong, two "reality-based" economists, apparently don't.

Capitalism: "Robust to Cynicism"?

In the "reality-based" world of Krugman, DeLong, and their followers, things -- including even corporations -- apparently work or don't primarily because of how people feel about them.

The market does not require people to believe in it; but the centrally planned economies that live inside a market economy, known as corporations, do. Everybody knows that financial incentives alone are not enough to make a company succeed; it must also build morale, a sense of mission, which makes people work at least somewhat for the good of the company rather than think only of what is good for them.... In the end, then, capitalism triumphed because it is a system that is robust to cynicism.

Well, it's true that capitalism is "robust to cynicism" -- it works as long as you need to eat, whether you believe in it or not. I have friends who earn their living right alongside me, who believe that government control is the answer to many things. Their work doesn't suffer simply because they believe central planning is superior to what we're doing.

But conversely, central planning fails for technical reasons, not simply because people ended up having bad feelings. Even when people mean well and believe in it, price-setting committees will lack sufficient information.

Some of the sympathetic comments are hilarious:

So Capitalism will work better longer because economic (and maybe other) power is more broadly distributed, so cynicism is held in check by market forces? I can see conservative heads nodding to that.

Many liberals see conservatives as carbon copies of themselves (values-wise), only with fewer morals or more "love" of markets. This woman thinks we conservatives must also believe things work or not mostly based on our feelings.

So does this fellow:

What happens to the US capitalist system when the prospects for the future generation are worse than the present generation? Will capitalism be robust to that cynicism? Can unfulfilled dreams sustain the system? ... technolgical change and globalism will play a part in its downfall, no question about it, Dr. Pangloss.

When people stop "believing" in capitalism, it will fall. Of course, that's possible in a sense: if people start voting for socialist policies (the kind actually favored by this fellow, no doubt), capitalism will be restricted or prevented and will appear to "stop working" as it did during FDR's depression. As this whole debate shows, nobody will learn from that -- leftist policies are never, never blamed.

And notice that "technological change" is something happening outside of capitalism, to which it must react. In reality, our ability to work and trade freely is what drives technological change, and markets have been quite adept at responding to that for well over a thousand years.

So the direct reason for USSR's fall is the nation-wide corruption which discouraged the productive and creative behavior and finally killed the economy. Nah, it was the plummeting price of oil - thanks Saudis! - and imperial overstretch in Afghanistan. And Perestroika.

The USSR would have been just fine it hadn't started acting like the US by invading other nations and allowing criticism of the government. Scary.

All *large corporations* survive on two basics: brain washing proporganda and strict control of people's life. The combination of the two powerful tools could create huge energy but won't last long as you could imagine. *Corporations* also do not have good legal system. The social orders are based on authority. The authority of *executives* is above any kind of *internal* law. Abosolute power creates absolute corruption *like, say, parties in Sardinia and buy Picassos and what-not*. As consequence, every one in the society is pursuing the *corporate* posts which could bring them lucritive *(and similar) power*. People's creativity is greatly reduced or eliminated. Finally, the *corporation* stops growing.

Another "reality-based" diatribe: people only work for companies because the company exerts mind control powers on us, similar to the way the KGB treated dissenters. The epitome of corruption is when a CEO buys artwork. Markets don't foster creativity or innovation. (Perhaps it comes from the government, and corporations just STEAL it.)

Is this person aware that if you don't like a company, you can quit or start your own?

The motivational theory of laissez faire capitalism is that the guys at the top are out for themselves and everyone underneath them is an altruist. This works for quite a while, but it is no more able to reproduce itself in the long term than the moral universe of 1920s Bolshevism. When the people underneath look out for themselves rather than the organization, things fall apart.

Workers are not greedy at all. They never want as much money as possible for their labor -- only CEOs act that way. Yup, that's the basic theory of capitalism. (Again, these are college-educated people!)

When people underneath look out for themselves, they either stay at the same place and work hard (because they like how things are going) or switch jobs (when they think another company is more likely to be profitable).


Anyway, you can see what we're up against here. Systems work or fail because of feelings, practical or logistical considerations have little or nothing to do with it. And the guy at the top (say, Krugman) is using his status and PhD to convince people of this, and the media is helping him.

Thus people have NO IDEA what the right policies are, and are willing to support a demagogic leader as long as he makes them feel good -- because positive feelings, after all, matter much more than whether something actually works. Better to live through an FDR-style depression, but be in love with our leader (as many Democrats were and still are, concerning FDR) than have enough food clothing and shelter, but allow free markets and trade to continue.

Comments

It has always struck me as a funny irony that Progressives have absolute faith in the "Invisible Hand" of a Nature when it comes to Darwinism, yet reject completely the notion that an economic system left to its own devices can organize itself far more quickly and with far more agility than an economic system that is heavily regulated by an uber-powerful government body. I suppose you could say that its just another of example of the Progressive movement's desire to replace God with a deific like Government.

Posted by: on March 2, 2008 05:28 PM

I think you misunderstood the context of the statement. There is a very real similarity to the concept of natural selection, evolution, "survival of the fittest", whatever you wish to call it, and the "invisible hand" of Adam Smith. The idea that a given system (in this case nature and free market economies) by their very nature are self-regulatory.

It seems you mistook the comparison. I'm not comparing evolution to God, but God to Government and Darwinian evolution to free market economies.

God Government

Darwinian Evolution Free Market Economics

I'm saying that the idea of some outside force influencing nature is anathema to Darwinians, for them nature regulates itself just fine, but for many of these same people the idea that free markets operate in the same way is unthinkable and they INSIST on the outside force as a necessity. I just personally find it the irony in it all very amusing.

Posted by: on March 2, 2008 09:49 PM


The idea that a given system (in this case nature and free market economies) by their very nature are self-regulatory.

Well, I think that there are some very crucial differences that break the analogy.


Darwinian Evolution Free Market Economics

First off, free market economics works best when it's constrained by certain laws. Otherwise, you get a system like in modern Russia where you "have to enforce a contract with a contract." That situation is even more 'Darwinian'. Free market economics is not lawless anarchy and is only Darwinian in a very limited way. A free market economy is a "planned" economy, but it is planned much more diffusely and based on price signals (and other indicators of cost/value).

for them nature regulates itself just fine

But the process by which nature regulates itself is not moral and is sometimes catastrophic. It involves accepting numerous creatures being killed off and sometimes the extinction of whole species. It involves controlling population levels with starvation. It involves seeing murder and predation as morally neutral or even beneficial. It only regulates itself in that life continues to exist and adapt, but without particular regard for the individual.

It is for this reason that I've heard a number of leftists call free market economics "Darwinian" and mean it as an insult. They were not saying that such policies do not work, but that such policies were immoral. Which is why I'm a bit edgy about the term being used to describe free market economics.

Nature only regulates itself "just fine" if tragedies are morally acceptable. The majority of people, both "left" and "right", probably do not believe this.

Posted by: Ryan W. on March 3, 2008 11:12 PM

Various responses...

Anonymous: There is a very real similarity to the concept of natural selection, evolution, "survival of the fittest", whatever you wish to call it, and the "invisible hand" of Adam Smith.

In fact, I'd argue that corporate life is the one of the few places we can clearly demonstrate "natural" (well, it wouldn't be natural, then, would it?) selection operating in a positive, Darwinian sense.

(I've been reading David Stove's critique of Darwinism -- he argues persuasively that many or even most species aren't at all involved in, nor regulated by, a fierce competition for food. Take humans: those with the most access to food often reproduce least. It seems to have been that way in other societies and times, as well. But apparently we're not alone in this regard.)


First off, free market economics works best when it's constrained by certain laws. Otherwise, you get a system like in modern Russia where you "have to enforce a contract with a contract."

I'm not sure that's always true, Ryan. If you read the bible or documents from other similarly-organized cultures, one of the things which comes through, culturally, is the importance of a good "name" (that is, reputation) and the importance of keeping oaths and vows. For example, in the story of Ester, even Xerxes cannot directly overturn his own decree (Ester 8:8) indicating the importance of keeping a king's word and thus reputation.* (And look at all the "face-saving" which is required in many other cultures, which is an indirect reference to this notion of a sort of "moral currency".)

(* Contrast this with modern Presidential candidates who consider all national treaties and promises to allies made under predecessors (NAFTA, promises to the Iraqi people, support for Taiwan) null and void once they take office. They do not care in the slightest for the overall reputation of trustworthiness of the US. Other nations will come to understand that our most solemn vows are only reliably valid for an average of half a presidential term -- or perhaps less, consider the way George HW Bush screwed the Iraqis previously.)

In such a system, people only choose to do business with reputable persons, and when word gets out that a person isn't reputable, their business prospects are severely diminished. This can work even in loosely-organized societies which afford no enforcement of contract law.

(I would point to the American West as another example: the majority of the people were generally personally moral, and there were enough guns to keep the peace otherwise.)

(I'm not saying man in his natural state is at peace. I don't believe that. I'm only saying that meaningful contracts can be made and effectively enforced in certain places and times even without a strong government to maintain property rights and contract law.)

Russia does not represent the behavior of capitalism in the absence of government. It represents the behavior of "capitalism" within a kleptocracy. Perverse incentives abounded.

For example, the Russian GOVERNMENT had created a number of monopolies and then handed them to rent-seekers -- and used the resources of the state to protect those favored sons. The GOVERNMENT presented the appearance of a system of property rights, which it selectively enforced or broke. The Russian GOVERNMENT required Western investors to have a "Russian partner" in every investment, and then repeatedly actively worked to screw Westerner investors out of their assets.

Had it been simple anarchy, Western investors would have been far more wary, and would have been able to protect their business assets in the usual way*: with guns (infrequently, at last resort) and a distrust of those with bad reputations (more often). Instead, the false appearance of a system of law and order made things far worse.

(* Look, lots of oil companies set up business with Sheiks and Sultans in the Mideast -- and generally kept their word and also made a profit.)


But the process by which nature regulates itself is not moral and is sometimes catastrophic. It involves accepting numerous creatures being killed off and sometimes the extinction of whole species.... Nature only regulates itself "just fine" if tragedies are morally acceptable.

I hate to break PC, but what's necessarily immoral or tragic about the loss of a species? True, no dinosaurs exist today, and it would certainly be fun, from our point of view, to see one. (And yes, we humans might feel "regret" that we'll never be able to see one, while not considering the trade-offs.)

But was it really immoral or bad for them to go out of existence and be replaced by, say, wolves, bears, people, badgers, and elephants? Do the souls of animals which never were protest this injustice? What could have been a dinosaur is now a lynx or prairie dog -- is that somehow tragic or regrettable?

And what's immoral (or even seemingly-immoral) about the sudden death of a species, even considering the impact of the extinction event itself? Doesn't every animal die in some fashion anyway? What makes one mode of death more "moral" than another, from our point of view? Is it more tragic to be killed by a meteorite blast, die slowly and painfully of old age, starve, or be eaten by a predator? Does it matter, really, if the animal is the last of it's kind or not -- if it's going to replaced by the same kind of animal or a different one? Is a gazelle which dies at the mouth of a tiger, as part of a stable predator/prey relationship, really happier somehow than the last triceratops to die by predation?

Look, if God doesn't exist, then we can't actually say nature (or anything, really) is moral or immoral -- it would be a bit like an artist trying to say a volcano or rock was pretty or not pretty. Stuff merely does what it does. Yeah, you can draw the judgment anyway, on aesthetic-like grounds (I like this, I don't like that), but it doesn't really ultimately mean anything. It's just your preference.

(In that case, my preference would be for all nature to serve humanity -- or at least me -- so I would be quite glad other species died out if it meant I could be here, but be sad if ours did. Or at least sad if the parts of it I loved did, while I was still alive. Explain why this wouldn't be a completely rational view, given that scenario.)

And if God does exist, then we have a number of other options.

In one view, animals are simply machines -- transient things with no souls. Do I cry if my PC malfunctions, even if it appears to "suffer" as it tries to read its crashed hard drive, over and over, in vain? Sure, it looks painful, but it's just a machine. (Likewise, someone recently discussed how unnerving it was that they could "torture" a popular dinosaur-robot toy (Pleo). But it's just an example of how convincing the illusion of mechanical suffering can be. Who hasn't mourned the "death" of a beloved automobile? My family sometimes did, even though we knew it was silly. My mom still remembers "Betsy", her '57 Chevy, quite fondly and wistfully.)

On the other hand, if we think some or all animals have some sort of "soul", something which makes at least some of them (and us) more than just meat-machines, then we also have to ask other religious questions. Who put the soul there? Why? Is there an afterlife for that soul?

If animals do have a soul, the question of suffering is not necessarily different for them than for us. If human suffer, and we believe suffering is immoral, one can pose the possibility of an afterlife to "balance the books". One dies and is judged and rewarded or punished in a fashion which makes things even. (Did you suffer unjustly? It will be made up to you.)

I don't see any reason ensouled animals couldn't be dealt with similarly.

So I don't really see a moral problem in any scenario: if animals are mere machines, their suffering is no different than the "suffering" of a paper shredder which no longer works. If animals have a "higher" existence, then "higher" forms of justice could, in theory, compensate or judge them just as humans are compensated or judged.

We could allege that God exists, but is just a wicked bastard (or would necessarily be, if he did exist) -- but there's no particular evidence for that view of which I'm aware. Suffering in nature? Again, that's only "wicked" if animals not machines, or if God doesn't make it up to them somehow. But to assume God doesn't make it up to them, as proof of one's argument that God is immoral, is circular.

(It would be equally circular to assume God DOES make it up to them in order to PROVE his goodness. But only atheists offer "suffering" as a PROOF of some sort. For a theist to make the same mistake, he'd have to offer a few instances of justice as an absolute non-inductive PROOF, or the alleged surety of justice in the afterlife, as a similar kind of proof. Which we don't. We just suggest that the atheist is overlooking a possibility, which he or she certainly is.)

So, yeah, that was a great discussion about capitalism. And while we're sticking rigorously with the subject: what kind ice cream do Random Observations readers like? ;-)

Posted by: Tim (Random Observations) on March 4, 2008 11:18 AM

Russian Ice Cream anyone?

link

Note the last sentence in the article...hmmm supply and demand rearing it's 'ugly' /sarcasm on/ head again!

;)

Posted by: don on March 4, 2008 03:39 PM

I hate to break PC, but what's necessarily immoral or tragic about the loss of a species?

Well, my point was not that species dying off is immoral. My point was that Darwinian processes involve blithe acceptance of catastrophes or lawlessness that we may not tolerate if applied analogously to a human society. A society can operate perfectly well while tolerating slavery, for instance. (Granted, there's been some argument that slavery is sub-optimal economically. But I haven't had the chance to read into it yet.)

Why not invade some weaker country and steal their resources or colonize them? Is the disapproval of other countries (or the inefficiency of that approach) a sufficient deterant?

he argues persuasively that many or even most species aren't at all involved in, nor regulated by, a fierce competition for food.

Raup supported a similar assertion in "Extinction" at the species level, where he sought to demonstrate that the number of species competing for food on land masses that had split from the main land mass was not a good indicator of which would still exist millenia later.

But then, what regulates population densities among animals? Disease? Predator populations? Something has to.

I know that extremely cramped rodents will stop breeding 'voluntarily', but they would have to be crawling over the forests to reach that density in nature.


one of the things which comes through, culturally, is the importance of a good "name"

I agree, it's possible to have a great deal of social stability with a sort of 'rule of honor.'

But then, you also have Pharoh sending out armies to prevent slaves from escaping after promising to free them, or China marching into Tibet, or American treatment of Native Americans (which didn't seem to affect their relationship with Europe after the French and Indian war, unless I'm mistaken) or all kinds of class hierarchies ingrained virtually into law by rules of 'honor'. I'm sure we could point to a wealth of them in traditional (Asian)Indian society.

I'm only saying that meaningful contracts can be made and effectively enforced in certain places and times even without a strong government to maintain property rights and contract law.

I agree entirely, people can make agreements without a government to back them up or come to an understanding of what is considered their fair lot within a particular group. I think that setup requires some 'balance of power' though. People avoid conflict if it might hurt them. If one person has his foot too firmly on another's throat, whether through the government or outside of it, that kind of moral balance seems less likely. Unless there's a chance the agressor could lose face somehow in front of his other allies.

Regardless of the source of the rules, I don't think that animals have a notion of 'fairness,' whether legal or instinctual, in the same way that people do.

Posted by: Ryan W. on March 4, 2008 07:41 PM

Russian Ice Cream anyone?

The article notes that declining birth rates means fewer Russian children to enjoy the ice cream.


Well, my point was not that species dying off is immoral.

I was reacting to your opening statement that nature "is not moral", and then mentioning extinctions. So maybe you can see how I got the idea you were saying it was, um, immoral, and echoing the standard Darwinian arguments about nature progressing only through starvation, etc.

I agree entirely that we can't use nature as a model for human morals. As I've said before, people will argue: "Well, apes and mice practice homosexuality, therefore it's natural..." But that's silly: what happens in nature isn't a pattern for us. Male bears wouldn't hesitate to devour their own young, so should we apply the same argument? I hear pot is "natural" -- hey, it's a plant -- but I could also point out that so is hemlock and poison ivy. It's okay to sleep around promiscuously because, hey bonobo chimps do. But then we could point out that some geese mate for life. Whatever we think of these arguments, it's not enough simply to point out some animal does something, so we can or should too.

But, except in cases where someone or something I love is killed (this includes the Tsunami, as I care about such people, or ought to) I don't generally see nature so much as "tragic" or "not moral" as much as simply something which happens. Specific events aside, I would no more try to call nature itself "moral" or "not moral" then I would discuss the morality of the laws of physics. Attempting to graft a moral judgment onto natural laws makes no sense to me, except perhaps, in an explicitly religious context.

That said, I don't think nature is nearly as awful as Darwinist polemicists like to present it. Yes, it's true, gazelles die of predation. (Though is that worse than dying of old age?) And yet they generally live many relatively carefree years before that point. (I'm always told that human have much more stress than animals do in nature.) Yes, the occasional caterpillar serves as a living host to a wasp. But no, for each case like that, there are a thousand or more ants and flies who live and die a relatively disease-free life. (Or perhaps merely relatively pain-free, given their simplicity, even if they have some disability.) They just don't get as much camera time and sympathy, since they don't make the right philosophical/theological case.

Finally, it isn't at all clear to me that nature really moves ahead primarily (or much at all) though starvation, predation, etc. Did the trilobites and other forms appear as a result of starvation or predation? Or humans? It's true that species can become extinct through what we'd see as "tragedy", but extinction doesn't create new species. It doesn't create progress.

The Darwinian argument is always that nature progresses though "immoral" means, though suffering and tragedy and pain. That these processes are crucial, not incidental.

Yet this is the core of the blasphemy I am toying with these days: Perhaps a different mechanism entirely produces new species, and extinction at most clears a bit of a niche for the expansion for new ones. (And perhaps not even as often as we'd think -- perhaps it's often the other way around, with the humans more often eating the mastodons out of existence, rather than surviving only because something else starved and died.)

Again, the Darwinian view is that a slight modification occurs, and then this changed gene allows it's host to "starve out" (in terms of food and/or mates) the other members of its same species. So progress occurs basically by constantly screwing members of your peer group. Without the continuing ability to starve or otherwise prevent the breeding of those having less successful genes, each new minor modification would never achieve genetic prevalence in your group.

(Hence the linkage between the "progressives" and eugenics.)

Yet if large, more radical changes occur -- and if specie-producing changes could catch on by normal mating, being dominant, not recessive* or other means than competition -- this changes the picture considerably. (* This can apply to even smaller mutations too, though I increasingly suspect such changes cannot, even via aggregation, cannot produce new species.)

Americans are becoming, for example, darker-skinned and -eyed, but it's not because Nordics and Anglos are being eaten or starved to death by Hispanics and Africans. And it's certainly not because blondes can't attract sexual partners. It's because dark hair and brown eyes are dominant over (naturally) blond hair and blue eyes. The same might apply to certain sorts of larger-scale mutations.

If new species spring up though a short series of radical changes, that produces an entirely different philosophical picture of nature than a system which moves ahead though an endless series of minuscule changes which can propagate only via death, starvation, predation, and preventing otherwise-normal peers from mating.

I'm not saying this because I first object to the philosophical implications of Darwinism, and then am trying to tailor the mechanism to fit my morals. (I've already rejected such thinking above -- though perhaps, at its inception, Darwin and his disciples did. They certainly liked Malthus.) I'm just realizing that there are a lot of very serious holes, and the facts seem to fit much more closely to an alternative.

One, incidentally, that seems to tell another story, morally.

Posted by: Tim (Random Observations) on March 7, 2008 10:12 AM

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