Why does government work so well? Huh?

In this post on EconLog, Bryan Caplan explores why government enterprises work so well.

He makes a good point.

I think the small-government types (like myself) can overplay disasters of government involvement and we lose credibility when we do so. So, I do think its helpful to recognize when government seems to be doing, at worst, okay.

On the flip-side, I think big-government types can overplay the successes of government enterprises.

But, I think much of this is explained to the extent of what level of government we are talking about and the dynamics of that level, to what extent it is bottom-up or top-down.

I discussed this in more detail in this post back in 2013. I think government enterprises that work pretty well are more bottom-up and the ones that don’t work so well are top-down.

That post was inspired by an apples-and-oranges comparison often made by government-types.  They say that fire and police departments are government, and work pretty good. Then they make the logical leap to use this to support that some Federal government enterprise will work.

The lapse in that logic is that fire and police departments, while government enterprises, operate at the local level. There are thousands of these departments, that operate rather independently of one another, across our country. This makes these enterprises operate much more like a bottom-up organization, than top-down. This allows these enterprises to benefit from the same dynamics of innovationism as businesses.

Important Words

Don Boudreaux posts an important Quotation of the Day from Deirdre McCloskey (see Don’s post for full cite):

Unlike stealing or taxing or highhandedly appropriating, exchange is a positive – not a zero- or negative-sum game.  If Sir Botany must tempt the peasants with offers of educational services or consultation on interior decorating in order to get the barley, both he and the peasants are better off.  If he just grabs it, only he is better off and they are worse off.  If I buy low and sell high, I am doing both of the people with whom I deal a favor.  That’s three favors done – to the seller, the buyer, and me in the middle and no one hurt except by envy’s sting.  The seller and buyer didn’t have to enter the deal, and by their willingness they show they are made better off.  One can say it stronger.  Only such deals are just.

I was exposed to the idea of that voluntary trade is a win-win much too late in life. This is the foundation upon which we can credit our superb standard of living, but we all too often are taught to despise rather than celebrate it. We should despise, or at the very least, be more cautious of the unjust transactions.

A very important fact, indeed

I agree with Yuval Levin, from his EconTalk podcast, about a simple point and an important fact:

I think Conservatives today don’t often enough make the simple point: that, when it comes to economics the market system that we are advocating has been the best thing that has ever happened to the poor in human history. And has dramatically reduced extreme poverty around the world and is still doing it right now; has been the way in which the needy and the vulnerable have been lifted up. It’s worked far better than anything else we’ve every tried, far better than anything the Left has tried to do economically. And that should matter. That’s a very important fact.

I hear this point made on occasion in left/right debates by the right. I find it interesting at how quickly it gets swept under the rug by the left. It’s usually with a red herring like, “but capitalism has its problems, too.” What I find interesting is how uninterested the left is in examining this important fact.

It goes back to the Levin quote in the previous post, “…the left takes for granted a thriving economy that just comes in the background…

This very important fact, in fact, was key in dislodging my liberal thinking. Before it was pointed out to me, I too, took the thriving economy for granted.

But, when it was pointed out to me, it was eye opening. Rather than sweeping it under the rug, I went silent and thought, if that’s right, how could I be against it? Isn’t it achieving the very thing that I say I want?

Levin went on to say:

Beyond that, the kind of society we are arguing for is a society that for very solid reasons we believe is grounded in a way of life that helps advance the moral good. A way of life that helps people build the sort of lives they want. That makes government more effective at solving problems that people confront. That gives people the room to build the lives they want and protects them from the worst risks that they might confront in modern life, rather than a society that says: This is the way, and you have to do it. Which, again and again, this is how the Left approaches the life of our society: centralize, consolidate, exercise authority to push people into the right grooves.

I couldn’t help to think of this quote when I read this Wall Street Journal op-ed on the politics around the federal nutrition standards for school cafeterias.

The nutrition mandates from 2010 First Lady bill centralizes nutritional choices for school lunches to “push people into the right grooves.”

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Party Planning vs. Raising Kids

Lant Pritchett uses a starfish/spider analogy to illustrate differences between bottom-up/top-down systems.

Steve Landsburg explained that people mistake central planning as being something like planning a birthday party. Based on this vision, they think it can work well. You just need good planners. Landsburg says that folks who make such mistakes simply can’t imagine the complexities involved when hundreds of millions of people are added to the mix, so even good planners won’t do well.

Russ Roberts recently distinguished between engineering and economics problems in a post on Cafe Hayek, building off the following Soviet joke:

Yuri Gagarin’s daughter answers the phone.  ‘No, mummy and daddy are out,’ she says.  ‘Daddy’s orbiting the earth, and he’ll be back tonight at 7 o’clock.  But mummy’s gone shopping for groceries, so who knows when she’ll be home.’

Of course, her Mom may be an avid shopper. But, the joke was meant to convey that centrally planning something as mundane as producing products that people want, at reasonable prices and making them available in nearby stores is a much more vexing problem than sending man into orbit. Prices do a better job of coordinating that effort.

I made a similar point in a follow-up to the Landsburg post, because I’ve heard too many people use the “If we can send a man to the moon, then we can do anything” fallacy.

Though, I didn’t distinguish it then as an engineering problem. That is an important observation. It’s also a good question to keep in mind when people start using the man on the moon fallacy, are we solving an engineering or economics problem?

But, I still think some folks may have a difficult time understanding exactly how an economics problem differs from an engineering problem. For many, both fall into one category: complicated. So, if we can solve one complicated problem, why not another?

I think it might help to go back to Landsburg’s party planning analogy. An engineering problem is like planning your kid’s birthday party. It’s straightforward (place, invites, plates, cake, fun, done) and it’s a relatively short time commitment. The short time commitment is important. Any longer and it might be harder to get grandparents to help clean up or for guests to come.

An economics problem is more (though still not quite) like raising kids. That’s much more complex than planning a two-hour party. It doesn’t end. It’s not easy.

Just when you think you figure it out, it changes. Why? Because kids are human and they go through phase. They have preferences. They respond to rewards and punishments — differently to different ones. They make decisions. They like what they like. They change. They will fight you. They won’t always do what you tell them. You need to let them make mistakes and learn for themselves, even though it is painful to do so.

Now, I say it’s not quite like an economics problem because people can do a good job of raising kids. Though, there aren’t many truth-telling parents who will say that it’s easy.

So, an economics problem is much more like being tasked with raising all of the kids in your town, or maybe your state, or more.

Multiply the frustrations, the reactions, the support, attention and love required by a thousand or a million kids.

We’re all smart enough to know that’s impossible. We would never sign up for it because we know we’d do those kids a major disservice. Hmmm…..

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We win with markets

Paul Rubin made a great point in his Wall Street Journal op-ed (thanks to Don Boudreaux, Cafe Hayek, for pointing to it).

Economists should point out that what makes markets thrive is cooperation, while competition plays a supporting role. This might help the perception of markets. As an example:

…we might say that a poor person has been outcompeted in the market. Or we might say that a poor person cannot successfully cooperate with others because he lacks valuable skills and has little to sell.

Again, the words matter because viewing the circumstance in terms of competition could lead to penalizing those who are viewed as outcompeting him, even though they did nothing wrong. It might even lead to banning certain terms in transactions—with minimum-wage laws, for instance—that make it even more difficult for the poor person to cooperate. The cooperative metaphor, by contrast, would suggest that the solution is increasing the skills of the poor person, giving him something to sell on the market.

Unfortunately, Rubin would still need to convince many other economists that minimum wage laws make it more difficult for the poor person to cooperate.

Greed is not unique to capitalism

A discussion I heard on the radio today between a self-described socialist and a radio talk show host reminded me of this post about greed.

It also brought into a focus an important point that many people miss and may even be a source of dislike or distrust for capitalism.

The point is that greed is not unique to capitalism. Many people seem to think it is. Or maybe they mistake any money-making endeavor for capitalism.

There are greedy politicians, greedy not-for-profit chairmen, greedy welfare recipients and greedy welfare administrators. There were greedy kings, greedy socialists, greedy communists and greedy fascists.

When a corrupt politician sells his vote, that’s not capitalism. That’s corruption. And it’s greed.

What is unique to capitalism is its ability to harness greed for the greater good, as Walter Williams discusses in the post I linked to.

It does this by encouraging people to produce something of value — using what is rightfully theirs’ — for others to satisfy their greed.

One reason bottom-up does better: Try, try, try again

In this post, I wrote that bottom-up systems tend to do better than top-down systems. In the following post, I expand on the #1 reason why I think that is.

I use to think feedbacks were the most important difference between productive and unproductive organizations or systems.

I don’t anymore.

I still think feedbacks are important and much can be gained from addressing feedback problems. But, I think something else makes the difference between good and bad: The number of trials.

I credit Nassim Taleb for planting this thought in my head. In one of his books he said something like capitalism doesn’t work because of profits and losses [feedbacks], it works because it induces a lot of trials and some of those happen to work.

I think Jeff Bezos understands this idea about trials. But, I don’t think many others do.

We see success stories after the fact and credit visionary leadership, brilliant insights and clever innovations, but this is too simple of a view of what really happened.

Since Taleb planted this idea I started noticing other things about success stories.

I noticed that for every success, there were dozens or more failures. Successful people are often brilliant. We conclude that to be the cause of their success, but that doesn’t account for the failures that are often led by equally bright people. Why did one succeed while the others didn’t? That gets tougher to distinguish.

A story Taleb tells about dolphins illustrates this well. We hear about dolphins pushing to shore people who are stranded at sea and conclude dolphins know what they’re doing and are kind and gentle. Maybe that’s true. But, we don’t hear from the folks when the dolphins took them the other way. Maybe the dolphins that pushed to shore just got lucky.

I also started noticing that success stories often includes information about how the discoveries were not planned, but were accidentally stumbled upon while the great leaders were trying to do something else. Sometimes these leaders even resisted going the direction the discovery led them because it didn’t fit their original vision.

Finally, I started seeing the dumb luck that is a part of almost every success.

When I look at success, I try to remember its causes can be elusive and that the easy explanations are usually incomplete.

Capitalism works well for us because it encourages a lot of trials.

I believe organizations can improve (not guarantee) chances of long-term success by employing the same incentives as capitalism. Encourage a lot of trials. Let failures fail and reward success.

We even have evidence of this respect for trials embedded in common, inspirational phrases like:

  • If at first you don’t succeed, try, try, try again
  • Fail often to succeed sooner
  • If you fall off the horse, get back on

But, perhaps one quality of the successful that I may have overlooked is that they aren’t afraid to fail.

You miss 100 percent of the shots you never take. – Wayne Gretzky

I didn’t fail the test, I just found a 100 ways to do it wrong. -Ben Franklin

I’ve never been afraid to fail. -Michael Jordan