Rodrik vs GMU

It’s game on between Dani Rodrik and the GMU crowd at Marginal Revolution and EconLog these days. Rodrik made a very interesting post about the different types of economists, saying that:

I think the best way to understand the source of [economists] disagreements is to recognize that there are two genres of economists. I call them “first-best economists” and “second-best economists.”…The first group’s instinct is always to apply the first-best reasoning to the case, ignoring market imperfections in related markets, while the second group almost always presumes some market imperfections in the system.

I think we at this blog fall squarely in the second camp, as economists who feel that the government has an essential role to play in correcting market imperfections.

Arnold Kling took exception to being placed in the first category, but he often seems to fall into the trap Rodrik describes of leaving the method of achieving first-best outcomes to others. Witness his post on healthcare provision, where he claims that he doesn’t have the answer but is confident that government coverage isn’t it. Can someone who criticises others’ support of government intervention but fails to provide alternatives really claim that their position is more than an ideological one?

Porn and manipulation

I was reading a post on how advertising manipulates preferences, or in other words it gives us mis-information, leading us to make the wrong choices.  At the same time I was thinking about porn, and that lead me to tie the two together and discuss how porn may lead to manipulation.

Now in the advertising case, the manipulation was caused by mis-information, which made us make the wrong choice even when the ‘right’ choice was avaliable.  The manipulation of people in the porn industry is very different.  People who are manipulated into a life of making porn movies may not be mis-informed, they may well be making the best choice of their avaliable options.  However, some of these individuals may be making this choice because all other reasonable alternatives have been closed off to them.

So we have two different types of manipulation.  Type 1 manipulation is where someone has a full choice set, but some other player influences their belief structure in such a way, so that they make a sub-optimal choice.  Type 2 manipulation is where someone is unfairly constraining this persons choice set, and the persons’ choice is is constrained by action.  These two types of manipulation are completely different, the Type 1 manipulation does not seem as serious to me, as with research a person could overcome it.  Type 2 manipulation does concern me, I don’t like to see people choice sets too heavily constrained.

Government policy help solve both these types of market failure.  The government tries to prevent mis-information and provide informationk.  Furthermore, the idea of the welfare state and universal education help expand peoples choice sets, while police try to prevent one person limitting anothers choice set unfairly.  Another awesome score for our hypothetical, normative, and imaginary government.

Economics fiction writing

It’s about a virtual world, similar to our own but slightly removed from it. It purports to have a set of rules that are internally consistent but has to constantly resort to ad hoc explanations for unusual behaviour. Yet, still, there is a lot of stuff that happens that is inexplicable within the rules of the universe and the powers that be tell us that we just have to accept that that’s the way it is.

So runs Megan McArdle’s critique of the new Harry Potter book. I agree with her but it didn’t spoil the book for me. Frankly, critiquing the economics of a book for essentially resembling the current state of the economics profession seems a bit rich to me.

Objective of the blog

The main aim of this blog is to discuss areas where government involvement makes sense. While we agree that the free and unfettered market often provides the most effective way of allocating resources, we also believe that thinking the free market can solve every economic problem is naive and even dangerous.

With our writing we wish to impress upon you the important role that the government can play in the economy. The most obvious role of government is to circumvent market failures, which are usually derived from externalities or excessive market power. Beyond this, the government has a structural role. Government regulation and investment can be used to change the structure of the game that firms compete in, to the detriment or the benefit of society.

We also believe that government failure exists. Governments may have less information then other market players, and so might make the wrong choice. Furthermore, governments may come under the control of interest groups or ideology, and may no longer follow the objective of maximizing the true social welfare function. While we may mention this type of failure, it will not be our primary focus.

It is also important to note that we do not necessarily support the current scope and role of government. We are merely stating how certain government choices could improve social outcomes. The set of policies we would support is likely to be very different then those established under any nations government.