The Austrian Economists

The BBC is Biased… It’s Official

The BBC recently held an “impartiality summit” that revealed how biased its journalists are—in their reporting and their culture (see article from the Daily Mail here). In the words of one of the participants: “The BBC is not impartial or neutral. It's a publicly funded, urban organisation with an  abnormally large number of young people, ethnic minorities and gay people. It has a liberal bias not so much a party-political bias. It is better expressed as a cultural liberal bias.”

There are at least two issues here. The first one is the public funding of media companies. The BBC is a dinosaur from days when governments in Europe controlled the radio and TV. Many other European countries had (and still have) the same sort of media funding. Officially, governments provide independence allowing journalists to do their work unencumbered. In practice, they often interfere in what is being said and by whom, thereby controlling (to some extent at least) news content. Instead, and as Christopher Coyne and Peter Leeson have shown in their research on the role of media, private media very often play a greater role in broadcasting the truth about government, markets, and democracy (see here).

The second issue is that of media bias. Is there a bias in the media in one direction or another? Even private media in Europe and in the US often seem to have a left-leaning bias for instance. Some economists have looked at the issue. One of the best works I know on the subject is in French: “L’attitude des médias de masse à l’égard du libéralisme économique” by my former professor Alain Wolfelsperger (published in Le Journal des Economistes et des Etudes Humaines, 2002). But mass media will always be biased in one way or another as they cater to the median audience—which in most Western countries oscillates around the center-left. And media bias disappears with specialization.

In any case, the goal of having state-funded media that purely reflect the opinion of the masses is hopeless. It is a waste of tax-payers’ money and it has opened the door to lobbying and government favors. Unfortunately, it won’t stop any time soon (e.g., the French government is soon launching a state-owned 24 hour information channel, when such a media already exists in France).

On a Recent Trip to Kuala Lumpur

I saw the biggest externality in the world… or so it seemed. While in Kuala Lumpur (Malaysia) last week, I didn’t see much blue sky. As an article in The Economist recently explained (see here), loggers and farmers on the islands of Sumatra and Borneo take advantage of the dry season to clear new land by burning the vegetation. This creates a huge haze (which is really smog) that crosses the Malacca Strait into Malaysia and which can last for weeks (of course, now that I have left, the haze is gone). An unintended  consequence is the KL towers shrouded in a mist that makes them glow at night. The haze has a cost, e.g., some of my friends who live in KL have had mild respiratory problems and many people around the region have been hospitalized.

Clearing land by burning it is illegal in Indonesia, but enforcing that rule has not been successful. There exists a “trans-boundary haze pollution” agreement under which countries that are part of the Association of South-East Asian Nations can call for help in case of major fire. However, Indonesia has not yet ratified it. Moreover, some people in KL were telling me that some foreign firms in Indonesia may have an interest in seeing the land cleared…

It was my first visit in KL and I really enjoyed the place. It is pretty vibrant. Malaysia ranks 25 in the Doing Business ’07 database, which is above places such as Israel (26), Austria (30), France (35), and Italy (82). Singapore, its nearest neighbor is No. 1. The goal is for Malaysia to become fully developed by year 2020. This plan includes a lot of government-led infrastructure development but also improvements in regulation and the environment for business. While the Malaysian government would never (officially) take Singapore as a model of economic development, it may be inspired by its successful neighbor. Malaysia is a Muslim nation where people of different ethnic and religious backgrounds cohabit reasonably well, even if the ethnic divide is perhaps sometimes too big for the country’s own good (according to some locals that I spoke to). Malaysia has the potential to become an economic success and should be watched.

Entrepreneur in Sneakers: RIP Arnold "Red" Auerbach

The great basketball coach of the Boston Celtics Red Auerbach passed away on Saturday October 28th at the age of 89.  John Feinstein's Let Me Tell You a Story is one of the best reads one can find on Auerbach.

Auerbach orchestrated the Celtics dynasty in the 1950s and 1960s and in the process took the NBA from being a sort of side-show act in professional sports to one of the most popular sports in the world today.

He constantly innovated throughout his career as a coach and team president in terms of coaching, scouting and drafting players, and spreading the game through camps and clinics world wide.

The overriding theme of his career in basketball is excellence.  He demanded excellence of himself and of all those around him.

The World’s Worst Polluted Places

If you are interested in knowing what the top ten most polluted places are according to the Blacksmith Institute, click here. These places are located in Ukraine (1), Russia (3), Dominican Republic (1), Zambia (1), Peru (1), China (1), Kyrgyzstan (1), and India (1). Some of these places, such as Chernobyl, have been polluted for decades. None of these countries are in the OECD.

To some extent, this reflects the idea of an environmental Kuznet curve. Poor countries are polluted because a clean environment is a superior good that people desire once they have enough food on the table and they can produce a surplus fund. So as poor countries become richer, pollution increases until it reverses. Although the idea that there is an immutable relationship between income and the environment is most likely specious, for there isn’t any such thing in economics. It is however, possible that historically many countries have seen such a relationship at work. See the Wikipedia entry on the subject.

Is there a unique LSE school of political economy?

Ricardo Puglisi has an essay in the 2005 STICERD Review which argues that the LSE approach to political economy sits between the grand theorizing (but non-empirical) public choice tradition of James Buchanan and Gordon Tullock, and the macro-empirical political economics of Persson and Tabellini.

The LSE approach, Puglisi tell his reader, is characterized by four distinctive traits in resarch: (1) combine theory and evidence; (2) focus on small, self-contained, and meaningful objects within a given set of political institutions rather than all-encompassing political institutions; (3) sound empirical methods as exemplified by panel data analysis as opposed to cross country analyses that intrinsically suffer from omitted variables and problems of heterogeneity, and (4) a search for black holes in the existing literature that might be filled in a manner similar to the Becker inspired Chicago approach.

Puglisi argues that the LSE approach to political economy results in politically feasible political economy.  This LSE approach to political economy is most closely identified with Tim Besley.  But does it really represent a separate school of thought in political economy as Puglisi suggests?  Follow this link to a list of papers in political economy and public policy.

While I was here at the LSE I read closely Tim Besley's Principled Agents?: The Political Economy of Good Government (Oxford University Press, 2006).  Besley seeks to place his contribution between the social welfare function tradition of public economics associated with traditional economics from Pigou through Samuelson up to Stiglitz, and the public choice tradition of public finance identified with Buchanan, Buchanan and Tullock, and Brennan and Buchanan.  Standard social choice theory is judged to be naively optimistic about government's ability to introduce public policy as if it is being done by a benevolent social planner, but standard public choice is too pessimistic with its assumption that all men are knaves.  Besley, instead, wants to focus on how political institutions can be set up to select political leaders that reflect the virtues and talents required to rule in the public interest.  Thus the title of his book.

It is a powerful book and reflects one of the most informed challenges to standard public choice yet written.  The older criticisms of public choice found in Green and Shapiro's The Pathologies of Rational Choice (which was empirical in nature) and Wittman's The Myth of Democratic Failure (which was theoretical in nature) both falter as criticisms of the work of Buchanan et.al., in the Virginia school of political economy.  But Besley's book is fundamentally different and constitutes both an internal critique of the Virginia School and a transcendent one that examines how the political structure can also feedback on to character traits of political actors (echoing in this regard the very insiightful paper by Brennan and Pettit the theme of how while power can corrupt political office can ennoble).  Besley's book gives the reader from within the Virigina School of Political Economy a lot to think about.

But it is not clear to me that Besley's work represents a different tradition in political economy any more than the William Riker inspired group of rational choice politics in the hands of Barry Weingast constitutes a significant break from the public choice economics of Buchanan and Tullock.  There are no doubt differences in the different approaches to public choice (Virginia, Rochester, Chicago and Bloomington were the traditional dividing lines).  But there are also common themes that unite political economists.  Also, even in a strict rendering of Virginia School Political Economy, this issue of political selection and character was not completely ignored in that literature.  As mentioned Geoff Brennan has looked at how office can ennoble man as well as how we must guard against politics corrupting them.  David Levy, Tyler Cowen, and Dan Klein have all written extensively on issues of approbation in politics and other non-market settings.  Gordon Tullock's work on bureaucracy deals at length with the principal-agent issue and the mechanisms constructed to attempt to cope with the problems identified.

There are problems with the standard public choice literature and Besley addresses a behavioral one (though as he notes this problem depends on the purpose for which the behavioral assumptions are being deployed), but there are also issues of the epistemic environment of politics which are not adequately addressed in imperfect information models of political processes.  My colleague Bryan Caplan has tackled one side of this issue with his work on rational irrationality in the context of politics.  But another approach could be in the application of Hayek's notion of the contextual nature of knowledge to the realm of politics.  If the work of Buchanan is pessimestic about government as a corrective device because of incentive issues, then Hayek inspired work in political economy would be pessimistic because of structural ignorance.  See my paper on Hayek's contributions to public choice theory in The Road to Serfdom and also my paper with Pete Leeson on Hayek and Arrow on democracy.

But admittedly a lot of analytical and empirical work must be done from within these different approaches, and Besley's book could be a great stimulus for research in the Virginia tradition--- especially on the issue of the selection mechanisms of politics and the principal agent problems that must be confronted.  I am going to organize a symposium on the book for the Review of Austrian Economics and also use the book next fal in my Constitutional Political Economy class.  I found this book by Besley much more challenging and satisfying than Daron Acemoglu and James Robinson's Economic Origins of Dictatorship and Democracy (see review below).

Last night I gave my last talk on my "2006 European tour" --- a talk to the Hayek Society at the LSE on Liberty and Power in the 20th and 21st Century in Economics and Public Policy.  Thanks to Dominique Lazanski for all her work with the Hayek Society and for organizing both my discussion group and my public lecture.

I return to the US on Friday morning.  I have had a very productive time here at the LSE.  Here are some of the reviews and papers I wrote while in residence here at the LSE.

Download daron_acemoglu_and_james_robinson.pdf

Download review_of_deirdre_n_mccloskey_bourgeois_virtues.pdf

Download from_approximate_value_neutrality_to_real_value_relevant_political_economy.pdf

Download richard_parker_john_kenneth_galbraith.pdf

Download comparative_historical_political_economy_101306.pdf

Download intro_to_the_economic_point_of_view.pdf

Comments and criticisms are of course welcomed.

I want to thank Tim Besley of STICERD and Toby Baxendale for giving me this opportunity to be the 2006 Hayek Fellow and visit the LSE for a second time in this capacity.  I also want to thank Angela Swain and also Sue Coles for making the environment at the LSE so comfortable and friendly for visitors.

Lord Harris, IEA and the Place of the Economist in Public Discourse

Lord Ralph Harris, one of the founders of the Institute for Economic Affairs, passed away last week at the age of 81.

I first met Lord Harris about 15 years ago at a Mont Pelerin Society meeting. He was gracious and encouraging to me as a young scholar studying market economics and particular the thought of F. A. Hayek.  We, in fact, raised a glass and gave a toast to Hayek.

I had met Arthur Seldon earlier and he also was intellectual alive and pushed young scholars to think seriously about market ideas.

Harris and Seldon are among the best examples of how ideas can change the world. The founding of the IEA was a pivotal moment in the revival of the classical liberal argument in the English speaking world. Hayek, Friedman, Buchanan, and Coase all have ties to IEA—Hayek and Buchanan especially have deep ties.

I just spoke at IEA last night (Tuesday 24th of October) on the work that I am directing at the Mercatus Center on post-Katrina response and recovery effort.  John and Christine Blundell were excellent hosts as usual and the room was full of students from the London area.

The passing of these great men such as Seldon and Harris who had the courage of their convictions, and more importantly the courage to withstand the critique of their convictions in public debate, is always a sad moment. But the best way to honor these men is to work hard in refining the craft of writing and speaking sensible economics and providing sound public policy statements.

So lets raise a glass "To Lord Ralph Harris".

How Cool is Cambridge?

Extremely cool.

I get asked a lot by family and friends about what would be my favorite place to teach if I could pick anyplace in the world.  I spent a little over a year at Stanford, and the combination of beautiful weather, California life style and the intellectual vibrancy and resources at Stanford are hard to beat. I was at NYU for 8 years, and the village is amazing and NYC is the greatest city in the world.  However, I usually suprise people because I am a New Jersey boy at heart and so my standard answer is Oxford University provided it was at the NJ shore.  Unfortunately, Monmouth University hasn't developed into Oxford, and Oxford hasn't got any relocation plans. (If plans are made on either front please contact me immediately!!!) 

So I remain for the time being content at GMU in Northern Virginia.  You know we do have our Nobel Prize winners in econmics, and a great basketball coach and team, and people on the faculty don't consider me insane for my Austrian and libertarian dispositions (it is always a good thing to not being considered insane by your colleagues).  GMU is an excellent environment filled with interesting students and colleagues.

But after visiting Cambridge, I'd consider that as well if a geographic switch to the Atlantic Highlands in NJ were ever in the offering.  Cambridge is an amazing environment for learning with its beautiful buildings and lush lawns.  I might still prefer Oxford, but certainly you cannot go wrong with Cambridge.  And certainly the intellectual atmosphere for economics and the social sciences is more dynamic in Cambridge than in Oxford --- though the PPE program at Oxford is a desirable model.

I have given talks at Cambridge twice. The first time in 2004 to the Faculty of Political and Social Sciences, and on this past Monday October 23, 2006 to the Critical Realism Workshop in the Center for the Arts, Social Sciences and Humanites.  The Critical Realism Workshop is directed by Tony Lawson -- one of the most creative and dynamic voices among heterodox economists in the world.  I gave my paper "Comparative Historical Political Economy: An Old Research Program for a Modern Age" (co-authored with Pete Leeson and Chris Coyne) to an audience of over 30 of faculty and graduate students and I got great critical feedback and encouragament on how to improve the paper. (this paper will be available for distribution shortly) It was a great experience.

But how could it not be great?  Lawson is someone who thinks seriously about foundational issues, and so do his colleagues and students, and we were at Cambridge University, the intellectual home of: Marshall, Keynes, Robinson, Sraffa and Wittgenstein.

     

Any economist interested in the philosophical foundations of the discipline of political economy must visit Cambridge at least once. They will not find the great figures above walking the lawns but their tradition of thinking seriously about politics, philosophy, economics and the history of ideas is alive and well at the Tony Lawson workshop on Critical Realism and his study group on social ontology.  It was a great privilege for me to speak to this group and to witness the intellectual vibrancy that is evident with this research group.

Was Hayek Wrong?

Or, alternatively is Jeff Sachs right on the success of welfare states?  In Scientific America, Sachs looks at the Nordic welfare states as compared to the English-speaking market economies and finds that the welfare states outperform on basic economic measures the market economies.

I am going to be looking into this a lot more closely, but my priors on any of these sort of comparative analysis is that aggregate measures both underestimate and overestimate the situation.  They overstate the extent of state interference in the welfare states due to the extent of tax evasion and underground market activity, and they understate the true extent of state interference in so-called market economies.

Regardless, Sachs raises an important empirical puzzle that we must explain.  I believe that his analytical perspective does not lend itself to addressing the puzzle effectively (and certainly his claim to be non-ideological is an act of self-delusion).  But we cannot answer this question with analytical debate only, but must dig deep into the historical record to get at the details of economic life in both the Nordic welfare states and the market economies of the US, UK, Australia and NZ.

What would be your alternative explanation for the "facts" that Sachs reports?

Read Sach's full article from his web-ste for the Earth Institute at Columbia.

Download ScientificAmericanNovember2006-WelfareStatesBeyondIdeology.pdf

Thanks to Mark Skousen for bringing this article to my attention.

10/24  -- UPDATE:

Thanks for the comments they point in a variety of interesting directions for further research.  I should point, however, that Sachs is also misreading Hayek's Road to Serfdom thesis --- a point which Samuelson did as well and had to eventually send Hayek a letter of apology and retraction for what he had written in his textbook.  Hayek has his own discussion of Sweden in the preface to the 1976 edition of The Road to Serfdom, and Ulrich Witt has a quite fascinating paper in Public Choice on the role of the endogenous public choice theorist in public choice analysis.  I have a paper which touches on these issues as well in the European Journal of Political Economy.

But lets take the challenge from Sachs head on.  Bob Subrick over at Stationary Bandit has looked at the numbers and raises some great points on Sachs's own terms which question his conclusion.

Is the Future of Europe One of Freedom?

At a graduation ceremony at Charles University several summers ago, Maart Lar of Estonia addressed this question and answered that the future of Europe depended on whether the direction of change was toward the New Europe or the Old Europe.  The New Europe offered freedom and new possibilities, the Old Europe alternatively offered protectionism and bureaucracy.  Unfortunately, France and Germany pull the EU toward the Old Europe and not the New Europe.

Last Thursday night Anthony Evans and I attended Timothy Garton Ash's talk on Europe and Freedom.  I have been reading Ash with great benefits since the 1980s and find his intellectual project of writing the "history of the present" to be inspiring.  When I first read him I had the experience of wishing I could possess his skill with the written word and his insight into the revolutionary changes we all witnessed in 1989 and 1991.

Garton Ash is now a professor at Oxford and a well known political journalist.  His talk reflected his latest project which is to persuade his audience (whether through spoken or written word) of the powerful role that Europe could play in the world-wide battle for freedom.  Europe, he contends, must replace the US as the beacon of freedom. At the LSE talk he gave the following core claims of the European freedom project:

1. rule of law
2. religious toleration
3. independent media
4. agenda for development assistance to the 3rd world
5. cannot separate the means of attaining freedom from the ends of freedom; as the polish dissident Adam Michnik said during the Solidarity movement -- 'Those who start the revolution by storming the  bastile, will end up being hung at the bastile.'
6. No stable democracies go to war with one another --- support stable democracies
7. Humility -- find value in alternative civilizations

The challenge for Europe with regard to freedom is how to move from the politics of invitation, induction and inclusion, to a politics of dealing with neighbors who are not members of the EU and who will not be offered membership to the EU.

This is especially important for Europe's dealings with Turkey and Russia --- which are in a fundamental sense the two countries in Europe where Europe fades away as one moves further into the respective countries.  The freedom story of Europe, Garton Ash insisted, is one of peace and reconcillation.  In telling this story, there will be a variety of stories that must be told and numerous sins that must be forgiven.

It is not clear to me that Garton Ash has a compelling story to tell.  The concerns of Maart Lar are very real.

My favorite part of Garton Ash's talk was in the remarks leading up to his talk when he was explaining the task of the historian of the present.  He argued that when a politician speaks we expect him to tell stories, but we neither expect these stories to be factual or true.  When a novelist writes, when they are a good novelists, they tell us stories that are true, but we don't expect them to be factual.  But when we read a historian of the present, we expect that historian to be factual, and if he/she is a good historian the stories will be both factual and true.

Story-telling is what we do in the human sciences, but Garton Ash hit the nail right on the head in stating that our stories must be factual and if we are good social scientists they will also be true.

Unfortunately for Garton Ash -- who is an outstanding historian and writer -- his story about Europe and Freedom might string together facts, but it doesn't ring true.

Is Corruption Bad for the Soul?

Corruption can be due to greed, or it can be due to need.  But pervasive corruption does distort our environment for living in a free and prosperous manner.  In a world where everyone must become a criminal to satisfy their daily needs, the social order will be one that disrespects the law in general and social cooperation under an extensive division of labor will be increasingly difficult to achieve.  Time horizons of investment will shorten, the span of the extended order will be reduced, and many mutually beneficial opportunities will be foregone.

Corruption is caused by government regulations over the choices of individuals -- a fact that must be stressed at all times in these discussions.  It is when people use their position in office to extract personal benefits to themselves that otherwise would not be forthcoming.  A customs agent or passport control official, for example, who accepts money to look the other way, is only able to do so because of government restrictions on the free flow of goods and services.  The Enron accounting fiasco, or the misuse of funds by the head of Red Cross is not corruption.  It is undesirable behavior, it is behavior which violates a fiduciary duty, but it should not be labeled as corruption.  No, corruption holds a special place in our language (and history) and that is reserved for the use of positions of governmental power to extract resources from individuals due specifically to their unique position of power over the life choices of those individuals.

John Wallis wrote a paper in 2005 on the concept of systemic corruption and one way to read that paper is that when economic resources are used to influence politics or get a regulator to look the other way (venal corruption) the negative consequences are minimal, but when political resources are employed to influence economic life the negative consequences are pervasive and severe.  Wallis's paper is part of an NBER project and is part of a stream of very powerful papers --- several of which contain vital themes that will appear in his forthcoming book with Barry Weingast and Douglass North.

But there is something about expansive interventionist environments, even those where we can utilize our economic resources to minimize the negative consequences of overregulation that are undesirable from the point of view of societal progress.  Wallis, in other words, may be underestimating the cumulative erosion that is set in motion by corruption (even of the relatively beneign nature of paying off a building inspector to overlook some ridiculous regulation).  Free individuals just should not have to deal with the burden of meddlesome government in their day to day decisions on how to spend their time, money, and talents.

The study of corruption has taken off over the past 20 years, and Transparency International is at the forefront of this effort among international policy agencies, NGOs, and academics.  On Wednesday October 18th I saw David Nussbaum talk on the theme "Money versus Morality: Is Corruption Just a Matter of Mis-Aligned Incentives?"  It was a solid talk, though not a talk that said anything really new.

He started out by simply pointing out the sheer magnitude of the problem, and then he sought to explain how we have tried to study and address the problem, and then discussed the new avenues of research that are currently being explored.  The original approach focused on politics, economics and law, and how incentive alignment through policy, finance and regulation might address the problem of corruption.  He then argued that more recently research has also focused on religion and beliefs, psychology and behavior, and anthropology and group pressures.

The first question from the audience raised the general point I alluded to in the first paragraph.  Namely, what is more vital to addressing the problem of corruption --- dealing with the everyday expectations of individuals in a bribe based society, or focusing on the higher officials who use their office to extract rents.  The women from the audience used the example of a woman she knew from India who was poor enough to qualify for public assistance, but too poor to actually get public assistance beecause she couldn't afford the bribe to the official.

Nussbaum addressed the question by pointing out that "fish rot from the head down."  Have to go after those in high office, and the rest of society will follow.  Or at least that is the practical policy to be pursued.

BTW, a recent creative study looked at traffic violations in NYC by members of the UN and found that representatives of the countries with the worst corruption scores from Transparency International also had the highest incidence of violations.  This was taken to suggest that a general disrepect for law by those in positions of privilege translate across country borders.