Why we shouldn’t rely on the regulators

I sometimes get asked why economists spend so much time thinking about incentives in situations which the government regulates anyway. Why do we care about what firms want to do when there’s only one course of action legally available to them? Here’s one reason why we care: the economy might operate in a far more laissez-faire fashion than a reading of the law would lead us to believe. Read more

Good question!

Over at Econlog Bryan Caplan asks a good question – he asks why economists who often rail against the free market will also often state that they strongly support civil liberties. Fundamentally he is asking, why do these people not support freedom to trade but do support freedom of expression.

Now I agree with Dr Caplan that economists should use the same tools to discuss civil issues as they do trade issues – any limits on civil liberties should be the result of externalities, asymmetric information on the value or relevance of ideas, or the undue power of an idea which in turn reduces social welfare (in the same way that in trade, people will rally against externalities, asymmetric information, and undue market power).

However, this does not suddenly imply that I am a stanch supporter of a completely free market – in the same way that I am not a stanch support of blanket calls to remove regulations that reduce civil liberties. Ultimately, in both cases there are trade-offs, and our ultimate goal is to maximise social welfare.

Lets discuss the “social-democrat economist’s bias” a bit more below the flap:

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Specialization: Policy and morality

Philosophy et certa links to an interesting paper by Richard Sharvy titled “Who’s to say what’s right or wrong?  People who have PHDs in philosophy, that’s who”.

At some level this makes sense – philosophers (can) specialise in the study of ethics and morality, and as a result of this training they will have a better idea of what is “right or wrong”, and why it is so, then other people.  My impression of “rightness” and “wrongness” is that it is subjective – deciding what is wrong involves making moral judgments.

As a result, if we accept this, then when forming policy it is Philosophers that should be the ones forming the subjective value judgments required to qualify what the appropriate policy is.

The job of economists is to describe – we have to objectively describe what happens to a bunch of variables in society when one of them is moved.  However, if Philosophers are the experts when in comes to value judgments – they should be the ones that place a values on different variables, so when the economists model moves it can come to some sort of conclusion.

What do you guys think?  How do other disciplines fit into the policy creation process?

A very inconvenient question

Over at Econlog they mention a uncomfortable question that is asked at Instapundit:

If somebody offered us our current income tax system for the first time, would we buy it?

Now when we have defended progressive taxes on this blog we have often assumed that it is a revealed preference for society – in fact this is a favored measure we have for actually revealing (to some degree) what is optimal (here, here, can’t actually find any of the tax posts 🙂 ).

How could this work? How could we have a system that is not optimal.
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All men are born free, but everywhere they are in chains

My favourite quote by Rousseau is the title of this post “men are born free, but everywhere they are in chains.

When I was a young boy of 16 I interpreted this with predetermined judgments, namely freedom is good and chains are bad. As a result my feeling was that I should try to break these “chains” and rediscover the freedom I was born with.

In this quote it seemed implicit that chains where the restrictions place on us by society (rather than the physical restrictions in nature – if we included these then freedom truly would be an illusion), while freedom was the absence of these chains.

However, as I grew older I came to realise that not all “chains” are bad and “freedom” in this sense (the absense of chains) may not be good. Read more

The value of value

One of the major questions I face when discussing economics is:

Why do we feel that prices are the appropriate measure for illustrating the value someone receives from a product?

Now I only have a limited understanding of welfare economics, but I am going to attempt to discuss the issue anyway 😉 . If anyone more knowledgeable would like to correct me I would be happy to hear from them.

In a micro sense this idea could be criticised insofar as one person may have a lower “willingness to pay” for a product which may stem from having a higher opportunity cost (as they have a lower wealth level then other people) rather than truly receiving less value from the consumption of the good/service. If this is the case we may feel that we should re-distribute the resource from the wealth to the poor in order to increase the level of aggregate welfare.

Now accepting this relative ranking of preferences and the given endowment in the market this could be a suboptimal situation in terms of welfare. After all, we know that the poor person values both of these goods more than the wealthy person (assuming no linkages between them) so “total satisfaction” in society will be maximized by this implicit “redistribution” resources. However, this does not make the price mechanism pointless, let me attempt to explain.

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