Why Error Correction is the Most Important Feature of a Political Economy

On Cafe Hayek, Don Boudreaux quotes from Arnold Kling’s new book, Specialization and Trade: A Re-Introduction to Economics. The quote:

What we should be comparing is not the existing market configuration with an ideal based on a simple model but the market process of error correction with the political process of error correction.

Yes, I agree.

Kling says well in one sentence what took me a couple hundred words.

Also, in my original Bottom-Up vs. Top-Down post, I used the terms “Power of Voice” and “Power of Exit.” I learned those from Arnold Kling.

I think the error correction process is the most important facet of a system. It’s typically ignored.  Discussions/arguments about public vs. private become a debate over semantics and nuance, much like many discussions over what communism, socialism, fascism and capitalism is.

The question shouldn’t be whether it’s public or private, or whether it’s communist or capitalist?

The question should be how well does the system correct for errors/failures?

Often, the answer is how much power of voice and power of exit the participants in the system have.

This week, David Legates wrote a piece worth reading, The Experiment: Capitalism vs Socialism. In it, he compares one of the best A/B tests on the subject ever — West and East Germany post World War II until reunification.

The improvement in the standard of living in East Germany’s socialist/communist state over the life of the separated country paled in comparison to West Germany’s capitalism.

Why? West German’s had more freedom, including power of voice and power of exit. East Germans did not. An example of East German’s low power of exit, from Legate’s column:

A wall of concrete, barbed wire and guard towers was built to separate the two halves of Berlin – and keep disgruntled Eastern citizens from defecting to the West. Many who tried to leave were shot.

Former British Prime Minister, Tony Blair famously said:

A simple way to take measure of a country is to look at how many want in. And how many want out.

In other words, watching how people exercise their power of exit can be telling.

If I could choose one subject for students to learn regarding political and economic systems, it would be how does it correct for errors and how to analyze that by considering the powers of voice and exit.

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One thought on “Why Error Correction is the Most Important Feature of a Political Economy

  1. Pingback: Power of Exit: Corporate Tax Inversions | Our Dinner Table

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