Corporate & Securities Law

Three from Brad DeLong

Yesterday I criticized Brad DeLong for, essentially, acting like a child. Today I want to draw attention to three posts from Brad DeLong–in none of which does he act like a child.

The first is this post, correcting his mistaken ad hominem attack on Glen Weyl.  The apology is well-taken.  I only wonder where the apology is for calling Mike Cannon, Mike Sykuta and Steve Horwitz Republicans, as well (and probably others on the list whom I don’t know). I’m guessing it won’t be forthcoming any time soon.

The second is this post (and see his blog for a couple of others in the same vein) responding to the Fama post I mentioned yesterday.  I have little expertise in this area, but DeLong’s criticisms of Fama are clearly important.  In fairness to Fama, however, I think even if Brad’s criticism is correct, there is a weak form of his (Fama’s) argument that must hold:  We do not know if reallocating resources by fiat will be worth the cost we incur to pay for it.  Most of the strong Keyensian claims we hear today simply assume that the reallocation will be worth it, without offering concrete calculations to permit the cost/benefit analysis.  I understand the urge to “do something.”  And maybe there would be a worthwhile stimulus, maybe a worthwhile redistribution to people in need, maybe a valuable shot of confidence.  But isn’t the burden on those who would have us spend an additional few trillion dollars or so to justify the expenditure by looking seriously at the cost side of the ledger?

The third post is this one on the liberal critique of libertarianism. The key line:

The modern Ametican liberal economist’s view of libertarianism is much the same: libertarianism is false in theory, but it is very much worth figuring out a set of limited, strategic interventions that will make the libertarian promises roughly true in practice.

The post highlights the reasons why liberals don’t trust markets to work on their own.  It is a somewhat interesting post, but in the end a useless one. Most important, it falls prey to the same problem I mention above: A disregard for the cost side of the ledger.  Here what that means is that the liberal claims that there are problems and imperfections in the market such that government interventions are warranted can only be true–can only be reasonably evaluated–if one looks at the costs, and especially the error costs, of government intervention: Institutions matter.  DeLong does no such thing.  He cites the problems, but simply waves his hands in the direction of the solutions.  This is hubris at its finest.  “There are problems.  I can fix them with ‘limited, strategic interventions.’  Trust me; I’m from the government.”

The fact that markets are imperfect is a necessary but not sifficient condition for government interventions to correct these imperfections.  It must also be the case that the interventions will a) in fact correct the problems and b) do so at low enough cost that the intervention is justified.  The firt point is the error cost point:  sometimes governments get it wrong, even when well-meaning.  The economy is kinda complex and rather large. Expensive attempts to manage it from the top down have, in the past, often failed completely to acheive their intended goals and, at the same time, have also led to unintended and costly consequences.  Which is the second point. Even if effective, interventions may have enormous direct costs and have costly ancillary effects.  For one thing, they may reallocate power more generally from individuals to government in undesirable ways; interventions are frequently not very strategic or limited. For another thing, as with the stimulus proposals (does spending $1 trillion on various construction projects that won’t begin for several years count as limited and strategic?), it is rare to see a full accounting of costs, in no small part becase indirect effects can be difficult to identify, let alone quantify, until after the fact.

To my mind, our past experience with systematic public choice problems, misguided if good intentions, unintended consequences and high error costs suggest that DeLong’s liberal critique of libertarianism is incomplete, to say the least.

Full post as published by Truth on the Market on January 15, 2009 (boomark / email).