Irreconcilable differences?

The best classroom teacher I ever had is Avinash Dixit (whom I was lucky to have as dissertation adviser as well). One of his remarkable traits as a teacher was that he would never treat silly or obvious questions as such. No matter how stupid a question seemed, he would stop, raise his hand to his chin, narrow his eyes, and think a long time about it, while the rest of us in the classroom would roll our eyes at the stupidity of the questioner. Then he would say: "Ah, I see what you have in mind..." and he would roll out an answer to a deep and interesting question the student had no idea he had asked. 

It is in that spirit that I have been mulling about the derision and incredulity with which my recent post on industrial policy was met among some libertarian bloggers. (See sample.) I had argued in that post that industrial policy is not unlike many other areas of government responsibility, such as education or health. My rhetoric was meant to entrap middle-of-the road economists, who see nothing wrong with governments playing a significant role in these other areas, but have an instinctive aversion to industrial policy. I had not counted on the reaction from the libertarians (whom I didn't think I would be convincing anyhow), which was: ok, now that we have shot ourselves in one foot, you think we should shoot the other foot as well?

So what are the deeper lessons?  First, I am not as unconventional as I sometimes think I am. The real revolutionaries here are the libertarians. They envisage a real good world out there that looks like nothing we have now (or have ever had), and they want us to get there. Second, there are really deep philosophical differences here that have nothing to do with economics per se. Most importantly, I believe government can be a force for good; they do not. But third, libertarians hold on to their priors so strongly that they seem impervious to evidence. They shrug off the fact that there is more freedom and more wealth in those parts of the world where the government is stronger, not weaker. With respect to industrial policy proper, they refuse to engage with the fact that every nation that has grown rapidly has made use of it.

I look at the world and see some government programs that work and others that fail. I want to understand what determines these outcomes, and to know how we can improve the ratio of the first to the second. When libertarians look at the same programs, they see one wreck after another. 

It is genuinely hard to see how we can carry out a fruitful discussion when we observe the world through such different glasses. (But I am always game when there is a substantive, empirically-based argument to respond to.)

Comments

[aje]

They envisage a real good world out there that looks like nothing we have now (or have ever had), and they want us to get there

Could you expand on what you mean by a "real good world"?

there are really deep philosophical differences here that have nothing to do with economics

The fact that philosophy appears to be tied to economic insight might seem like a disadvantage, but I think libertarians would argue that this is always the case, regardless of how explicit. For example in your recent post on "Where do economists disagree" you made a distinction between "first-best" and "second-best". But both of these "types" only make sense within a neoclassical general equilibrium framework. There's an implicit philosophical argument in there.

libertarians hold on to their priors so strongly that they seem impervious to evidence

And to carry on the previous point, that implicit philosophical argument includes the methodology that is required to settle disagreements.

You're quite right that it can be hard to have a fruitful interdisciplinary discussion with such different visions, but you seem to be explicitly referring to libertarianism - a political science. Wouldn't it be more fruitful to stick to the discipline of economics, and rather than critique people based on their politics, confront the economic reasoning behind that?

It seems unfair to lump together people who take a policy position based on a natural rights argument, and those who do so out of the logic of economic reasoning.

They shrug off the fact that there is more freedom and more wealth in those parts of the world where the government is stronger, not weaker

I don't find this argument convincing, because it doesn't deny that government is a normal good (and demand for it rises as income does) - i.e. that the causality is the other way; and also because you seem to be conflating "strong" government with "big" government, and there's an important difference.

Finally, I was interested in your response to Leeson - you seem to accept that anarchy (as he defines it) is possible, but is impractical because it's costly to scale up. Do you find it odd that the economics profession devotes so much time to finding ways to make socialism more efficient (despite the fact that it's a utopian theory, and impossible to implement in practice), whilst anarchy (a possible alternative) receives virtually no attention at all?

[hari]

I find this subject not economic but fundamentally political in context. Because what we see, in EU today, is that Liberal political parties (libertarian gang) have seen their mortality rate increase geometrically! There's hardly any left even in Holland. What does it tell us about "libertarian" philosophy. In my opinion, the bulk of the general public are unable to follow what politics has to deliver in this day-and--age. Either govt is getting more complex or structural developments make governing rather esoteric for the public at-large. Politicians, in Sweden, therefore have to find leaders in their 30s and 40s to manage huge bureaucracy simply because they can relate to the public better than grand-old politicians. In a small country like Sweden, these types of developments have been taking place since 1960s (when I first came there as a student from Calif).
Moreover, anarchy is repellent to democratic tradition of European culture and history. So, I'm afraid, even something as anarchic as the Red Brigade (Germany) did not last long before they're eradicated. Same will apply across the board in EU-27 today.
To be an armchair libertarian is ok, for me, if you also take responsibility for what you say and do. Too often I've seen so-called libertarian movements as anarchic as Bukarian was in his prime! Adieu to anarchy!
Welcome therefore to NGOs who can spend time and energy to elucidate what's wrong in society and govt and demand or provide for corrective measures.
Don't forget there's what Marx called social contradictions - which move and transform society incessantly (irrespective of GWB and his gang).

[Dani Rodrik]

aje says:

"I don't find this argument convincing, because it doesn't deny that government is a normal good (and demand for it rises as income does) - i.e. that the causality is the other way..."

This counter-argument seems to me to be dangerous for libertarians to make. Leaving aside the methodological issues about reverse causality, if indeed it is the case that people want more government as they get richer, who is to say that this is bad or wrong? So, let's live with it! After all, libertarians would be the last people to argue with individual preferences.

[Tim Worstall]

"I look at the world and see some government programs that work and others that fail. I want to understand what determines these outcomes, and to know how we can improve the ratio of the first to the second. When libertarians look at the same programs, they see one wreck after another. "

Well, quite. Making sure that the law protects property rights, allows the creation of limited liability companies, these are good things to have, excellent parts of an industrial policy (without them, you're not going to get all that much industry, after all).
The Minister for Textile Trade being (successfully) lobbied by his brother in law to increase tariffs on imported fabrics, in order to aid said brother in law's fabric production factory, is not generally regarded as a wanted nor effective industrial policy.
The argument is indeed all about how we have more of the first, useful, things and fewer of the second, undesirable things.
That, in just about every political system yet invented, power over tariffs is wielded in the second manner, (oooh, steel tariffs to aid West Virginia, EU sugar tariffs to protect sugar beet farmers, ad infinitum) leads to the conclusion that we should allow politicians to have that power.

[Tim Worstall]

Aaargh. "should not allow".

Grr.

[Tyler Cowen]

I agree with much of what you say in this post, but not with the empirical claim: "every nation that has grown rapidly has made use of it [industrial policy]." That's true if we define industrial policy very broadly, but not true under standard definitions. It is even less true if we require that the industrial policy be responsible for the growth. Wade's book makes a good case for parts of Asia, but a great deal of industrial policy simply has been harmful, even if it users did grow rapidly at various points in time. See also Doug Irwin's paper on how little protectionism boosted 19th century American growth, or consider Hong Kong, or Chile. Industrial policy nearly ruined New Zealand in the 1970s, and so on.

[aje]

Dani, thanks for the response.

"This counter-argument seems to me to be dangerous for libertarians to make."

Just to be clear - I'm not making the counter-argument, I'm just saying that you haven't demonstrated causality and so I don't find the correlation convincing

"After all, libertarians would be the last people to argue with individual preferences."

I think that's a pretty bizarre understanding of libertarianism - they'd be the *first* people to argue with individual preferences, if those preferences are for coercion, violation of property rights, state intervention etc.

But I find it interesting that you're still targeting libertarians in this. Do you feel that it's possible to pursue a market-process view of economics (and therefore fall outside your first-best second-best distinction) and be an economist? If so can't you view these critics as fellow economists, rather than mere ideologues?

[Dani Rodrik]

Tyler--

My claim about industrial policy was phrased very carefully, and is true as it stands. The point that the actual contribution of IP needs careful analysis, including an explicit counterfactual, if of course also correct. I talk about it at great length in my paper. But the examples you cite don't make it. The U.S., just like every other country that caught up with economic leaders, used a lot of trade protection in the second half of the 19th century, and the Irwin-type arguments about how it would have grown even faster are as convincing as the argument that China would have grown faster if it had opened its economy to imports in 1978. As for Chile, it is just a myth that industrial policy did not play a role there. Name me one major Chilean export where IP did not play a role, and I will buy five copies of your book... Hong Kong is the sole exception that I know, and it not quite a "nation" and benefited from special circumstances.

[Kenji]

"It is genuinely hard to see how we can carry out a fruitful discussion when we observe the world through such different glasses."

I hear you--I've had many similarly unfruitful discussions with libertarians. These discussions are analogous to discussions between believers and nonbelievers trying to convince the other side of the existence or nonexistence of God.

At the end of the day, though, I am optimistic. Real lives are at stake, and people whose lives are at stake (i.e., not American academics) are increasingly seeing how disastrous unfettered market economics can be to development. The Washington consensus is dead---It's a good start.

[robertdfeinman]

Dani you have been the object of an onslaught by "Right Wing Authoritarians". Without any prior psychological training you have successfully managed to identify their chief behavioral characteristics.
1. A desire for a strong, authoritarian leader that they can follow blindly (let's call it Ayn Rand, but there are many others).
2. The ability to hold contradictory beliefs at the same time.
3. An unwillingness or inability to have their ideas influenced by new information, usually coupled with a superficial knowledge of the beliefs they profess to hold.

I think you will find it useful to read the book by psychologist Robert Altemeyer who has spent the past 40+ years studying this personality type. He has published a book summarizing his work and put it online for free:
The Authoritarians:
http://home.cc.umanitoba.ca/%7Ealtemey/

His work was the basis for John Dean's recent book.

Understanding this personality type won't help you win any arguments, but it will help you understand the mindset of those you have encountered better.

[hari]

Dani-this not a bad discussion with whatever "libertarianism" means. In my dictionary it's an outgrowth of 19th century Liberalism in Europe. By now, if I may be arrogant enough to suggest, it's a dead letter! That's my reading...(I'm +70!)

Let's look at it in perspective; ie. over time scale. It's obvious to me what we see/observe now as IP, here in EU, is a reflection of development in european society with its inherent advanced priorities;ie. healthcare, pension, and employment as paramount; industrial development policy has moved on to focus on its comparative advantage, as China and India takeover - more and more - global industrial production (based on their comparative advanatage).

Next, compare EU economic history on a historical perspective. EU and US national priorities lag due principally to historical developments and economic circumstances. In other words, there's ALWAYS a time lag scale involved in any realistic comparative study of IP.
EU-27(new members) are required by law(!) to adopt ALL existing EU legislation and policies (since Rome Treaty) called ACQUIS, in order to qualify as paying members. [A lot of IP across national boundaries!].

In a way, EU negotiations with new/potential members also means stadardization of industrial and other framework of policy under ACQUIS.

Libertarians will surely find Acquis as a monstrous intervention in their so-called freedom of market economy. In fact, they're wrong, if they come to that foolish conclusion.

Now, take China and India and their respective framework of IP and development. For Americans it may be difficult to accept that China is ruled under "democratic centralism". Even if Chinese "capitalism" develops into a new form of state capitalism, as a contrast to US/EU, China will be constraint to adopt market economic forces under democratic centralism.

India, on the other hand, is decades behind China in terms of development. There's no guarantee India will eventually adopt free market economic principles given its historical development perspective.

In conclusion, neither China nor India will be able to forego state intervention in IP. In fact, they have no other choice, in my view.

[Hermenauta]

For a somewhat different argument, the fact that the industrial policy of some unnamed third nations does a better job when we factor the number of cannons they use more than the import or export tariffs they set pays a tribute to
the happy coincidence that Saudi Arabia sits over a sea of oil and Chile sits over a mountain of copper.

[henry evans]

Industrial policy is really not much like education or healthcare. These are goods that can be provided through market processes, socialistically, or by some combination.

Industrial policy really can only be made by government. In this sense it is closer to things like property rights and criminal courts than to goods like health care or education.

Whether government should produce industrial policy (or, in a constitutional context, should be empowered to produce industrial policy) is a different question. But since it's something that the market can't produce, it shouldn't be analogized to healthcare and education.

[TGGP]

robertdfeinman, don't you find it odd that some of these "right-wing authoritarians" are advocating anarchy and removing power (tarrifs or industrial policy) from the most powerful autority? Ayn Rand is dead, and I was unaware if Alex or some of these others are Randians. So which supreme leader do libertarians want?

[Will Chamberlain]

"They envisage a real good world out there that looks like nothing we have now (or have ever had), and they want us to get there."

I detect some snark here...and I think it's at least a little unjustified. This was a country founded on the principles of extremely limited government, and many libertarians would advocate the return to the political structure post-revolution - a weak federal government, with decentralized, local control, and spending by governments very low relative to overall GDP.

"But third, libertarians hold on to their priors so strongly that they seem impervious to evidence. They shrug off the fact that there is more freedom and more wealth in those parts of the world where the government is stronger, not weaker."

Holy cow is this ever a correlation != causation fallacy. The causation is the other way around. The more wealth in a society, the more wealth a government can confiscate, so the stronger the government.

Indeed, to sidetrack for a moment, one of the reasons that democracy has "succeeded" here and failed in Africa is because democracy here had the wealth created by 150 years of essentially unfettered capitalism, where as democracies in Africa were starting with almost no wealth to appropriate.

"With respect to industrial policy proper, they refuse to engage with the fact that every nation that has grown rapidly has made use of it."

I think this is also a serious misconstruing of the historical record. Certainly Britain during the industrial revolution had one of the most spectacular periods of growth in history, largely due to the abandonment of industrial policy - of protective tariffs and barriers to entry.

"I look at the world and see some government programs that work and others that fail. I want to understand what determines these outcomes, and to know how we can improve the ratio of the first to the second. When libertarians look at the same programs, they see one wreck after another. "

I think the solution here is for us to go over the programs that you think are good and we think our wrecks, one at a time. Education, et al.

[Will Chamberlain]

"They envisage a real good world out there that looks like nothing we have now (or have ever had), and they want us to get there."

I detect some snark here...and I think it's at least a little unjustified. This was a country founded on the principles of extremely limited government, and many libertarians would advocate the return to the political structure post-revolution - a weak federal government, with decentralized, local control, and spending by governments very low relative to overall GDP.

"But third, libertarians hold on to their priors so strongly that they seem impervious to evidence. They shrug off the fact that there is more freedom and more wealth in those parts of the world where the government is stronger, not weaker."

Holy cow is this ever a correlation != causation fallacy. The causation is the other way around. The more wealth in a society, the more wealth a government can confiscate, so the stronger the government.

Indeed, to sidetrack for a moment, one of the reasons that democracy has "succeeded" here and failed in Africa is because democracy here had the wealth created by 150 years of essentially unfettered capitalism, where as democracies in Africa were starting with almost no wealth to appropriate.

"With respect to industrial policy proper, they refuse to engage with the fact that every nation that has grown rapidly has made use of it."

I think this is also a serious misconstruing of the historical record. Certainly Britain during the industrial revolution had one of the most spectacular periods of growth in history, largely due to the abandonment of industrial policy - of protective tariffs and barriers to entry.

"I look at the world and see some government programs that work and others that fail. I want to understand what determines these outcomes, and to know how we can improve the ratio of the first to the second. When libertarians look at the same programs, they see one wreck after another. "

I think the solution here is for us to go over the programs that you think are good and we think our wrecks, one at a time. Education, et al.

[robertdfeinman]

TGGP:
I only mentioned Rand as an example, I can't take the time to sort out all the factions in the libertarian/objectivist world. I had enough of a headache trying to understand what the feud between Marx and Bakunin was all about.

Perhaps you might like to read Altemeyer's book. He has postulated that people with your outlook will decline to do so. If you do, I'm sure you will disagree with his findings, but it would be nice to hear what you have to say _after_ you have read it.

[Joseph]

I'm a bit lost, but I'll take a stab at it. I don’t think your depiction of libertarians to be accurate (maybe b/c I consider myself one). Even confined w/i reality, I don't see anything wrong w/ the assertion that the government's involvement in health care or education may not lead to optimal results. A single payer system is not the magical cure ppl are hoping for; it probably does have some advantages though. A realistic and fair, imo, argument from a libertarian would be that is that there could be more market mechanisms and we should use a federal approach and let the states experiment on it before we implement it on a national level. On education, school vouchers would probably improve the overall quality of education and while there are positive externalities to having more kids go to school, there's no reason why we wouldn't eventually use private based student loans.

In my opinion, it's not so much that government can do thing's right. Rather, it's that government policies often end up going awry and are ineffectual. Having a strong government is important, but it is important for said government not to over-extend itself.

As for industrial policy, I think it probably works better for developing countries than more developed countries.

[Will Chamberlain]

"This counter-argument seems to me to be dangerous for libertarians to make. Leaving aside the methodological issues about reverse causality, if indeed it is the case that people want more government as they get richer, who is to say that this is bad or wrong? So, let's live with it! After all, libertarians would be the last people to argue with individual preferences."

It's not that people want more government. It's that as the level of wealth in a society grows, a government can confiscate more and more of that wealth without breaking the whole system. And governments will grow if they can...the incentives of the bureaucrats (maintaining their job, increasing their power) ensure that this will be the case.

[Joseph]

"After all, libertarians would be the last people to argue with individual preferences."

I think the foremost concern would be that against coercion.

[Lee A. Arnold]

Sometimes it seems to me that libertarians are depending upon, and hoping to inculcate by "incentivization," the fixed values and virtues of a "New Capitalist Man," --much in the same way that the communists were depending upon the arising of a "New Communist Man" to take society into their own utopia. Both paths are equally dangerous, because of course self-interest is only a part of human psychology. Perhaps the real problem is the early Enlightenment's intellectual displacement, and near forgetting, of transcendent religious experience and its various positive emotional precursors and concomitants. It is hard to know what else it could be, because it has curtailed the development of a proper understanding in a proper language. Right now we see the economists twisting themselves into pretzels to define an "altruism" component out of deeper "self-interest" that shows up in experimental games.

In the same vein -- and again just like the communists --the libertarians tend to argue by presuming that an idea or institution (whether they are for or against it) has fixed and certain consequences, no matter what the larger circumstance or historical time that it occurred in, or is applied to. It's a sort of misplaced concreteness in functionality. This is doubly curious, because surely they otherwise acknowledge that the ruling center of any institution is an emergent property, and unforecasted. (They will direct you to Hayek, who says as much.) But how else are we to take their dismissal of the corrections that can be made by transparency and elections in democracies? If an Administration is crooked, you throw them out. The argument that this can never work, or that we will always get another bunch of bums, consists entirely of shaky syllogisms about "self-interest", mixed with selective episodes from history. The argument that bigger governments must be sue to confiscations ignores that "transactions costs" and "externalities" increase, as "network effects" do also, with the size of systems.

[Lee A. Arnold]

The argument that bigger governments must be DUE to confiscations ignores that "transactions costs" and "externalities" increase, as "network effects" do also, with the size of systems.

[PJ]

"I look at the world and see some government programs that work and others that fail. I want to understand what determines these outcomes, and to know how we can improve the ratio of the first to the second."

Agreed.

Libertarians want to achieve this improved ratio by cutting the number of failed government programs. What's wrong with that?

[Captain Hook]

RobertD,

After you tried to persuade everyone over at MR that Caplan's book was wrong WITHOUT actually reading it, it is hard to take any of your reading recommendations or insults based on a lack of foundation for an argument seriously.

And please quit categorizing libertarians as authoritarians. You tried to do the same thing during the Caplan thread and it wasn't any more convincing then. It is an ideological leap for which only you have the necessary jumping abilities.

And Dani, you are one of the most arrogant econobloggers in the blogosphere (Mr. Tabarrok must be close to the top as well). By the end of the first sentence of the second paragraph, I almost gagged. Regardless of what you think of your opinion, there is no need to frame it in such a manner.

[Joshua Holmes]

They shrug off the fact that there is more freedom and more wealth in those parts of the world where the government is stronger, not weaker.

Which is why North Korea is the wealthiest country in the world, and Nazi Germany and the Soviet Union had far higher standards of living than the United States did.

Oh wait, that's not true at all.

With the end of Somalia's government in 1991, your prediction would be the end of civilization. Yet, Somalia's standard of living and development index continue to improve, and it's arguably better than a lot of the rest of Africa. Nor are many poor governments weak. They're unjust, but they're not powerless.

With respect to industrial policy proper, they refuse to engage with the fact that every nation that has grown rapidly has made use of it.

You could say the same about slavery, genocide, or land enclosures.