Knowledge Problem

Lynne Kiesling

Tom Friedman and Don Boudreaux are making different, but complementary, arguments against the auto bailout.

If you think that you recognize Tom Friedman’s argument in his most recent NYT column, you should: he is analyzing Better Place and its business model, which I did in this post from December 5. One important point from Friedman’s column:

What I find exciting about Better Place is that it is building a car company off the new industrial platform of the 21st century, not the one from the 20th — the exact same way that Steve Jobs did to overturn the music business. What did Apple understand first? One, that today’s technology platform would allow anyone with a computer to record music. Two, that the Internet and MP3 players would allow anyone to transfer music in digital form to anyone else. You wouldn’t need CDs or record companies anymore. Apple simply took all those innovations and integrated them into a single music-generating, purchasing and listening system that completely disrupted the music business.

What Agassi, the founder of Better Place, is saying is that there is a new way to generate mobility, not just music, using the same platform. It just takes the right kind of auto battery — the iPod in this story — and the right kind of national plug-in network — the iTunes store — to make the business model work for electric cars at six cents a mile. The average American is paying today around 12 cents a mile for gasoline transportation, which also adds to global warming and strengthens petro-dictators.

Do not expect this innovation to come out of Detroit. Remember, in 1908, the Ford Model-T got better mileage — 25 miles per gallon — than many Ford, G.M. and Chrysler models made in 2008. But don’t be surprised when it comes out of somewhere else. It can be done. It will be done. If we miss the chance to win the race for Car 2.0 because we keep mindlessly bailing out Car 1.0, there will be no one to blame more than Detroit’s new shareholders: we the taxpayers.

[I love being able to say this!] Advantage: Knowledge Problem!

Sure, Friedman says it better and to a larger audience, but hopefully if enough of us are piling on to the same message, the point will get across.

Similarly, Don Boudreaux has a commentary in today’s Wall Street Journal on why auto company bankruptcy is not the catastrophic idea that the “Big Three” and some members of Congress would have us believe:

Bankruptcy doesn’t make assets — such as factories, machines, contractual options to buy raw materials, workers’ skills — disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout’s cheerleaders. …

A government bailout of the Big Three keeps huge amounts of productive inputs in firms that can’t use them efficiently. Forcing taxpayers to subsidize the continued employment of gargantuan quantities of raw materials, labor and capital goods in unproductive pursuits is a recipe for economic stagnation. The popular and politically convenient myth has matters backwards: The bigger the unprofitable firm, the more vital it is that it be allowed to fail.

Note the similarity of conclusion in the Friedman and Boudreaux arguments: the artificial perpetuation of obsolete and unprofitable business models stifles the development of better, more innovative uses of those resources.

Lynne Kiesling

Yesterday when I was channeling my inner Jenny Holzer on the relationship between political power and corruption, I quoted James Madison in the comments:

In framing a government which is to be administered by men over men you must first enable the government to control the governed; and in the next place oblige it to control itself.

Not surprisingly, since we share many perspectives, Ed Lopez used the same quote to illustrate his comment about corruption and public choice in his post on the Blagoevich matter on Tuesday. Ed’s post is very thoughtful and insightful, and I encourage you to read it.

Will Wilkinson read Ed’s post too, and Mike Munger’s, and Steve Horwitz’s that I linked to in my original post. Will is splitting a very fine hair among positions that are in substantial agreement:

Look at Blago! He’s a politician! They’re all alike. Neener! Except, they aren’t. And some places are better governed than others, with less incompetence, waste, and corruption. …

Generally, we’re more likely to get relatively good government in a cultural climate that encourages good government. Ridiculing as naive norms of anti-corruption and civic responsibility doesn’t undermine belief in the efficacy of government so much as expose the one who ridicules as a defector in a crucial cooperative game, undermining his reputation as a sincere advocate of the public interest. It is valuable and necessary to point out that certain institutional arrangements are unstable and invite corruption, and should therefore be reformed. But people are more likely to listen to you if they believe you believe reform is possible.

I largely agree with Ed, Will, Mike, and Steve, but I do think Will is creating a false dichotomy in his fine-hair-splitting. “Norms of anti-corruption and civic responsibility” are not substitutes for institutions, like a constitution, that recognize the inducement to corruption that is inescapable when some subset of a population has legal power to determine outcomes. The point that I think Will is missing is that the incentive is inescapable, even if the actual corruption does not occur.

Put another way: institutions matter. Formal and informal institutions matter. Constitutions that define and limit the role of government and norms of civic virtue are institutional complements in creating relatively better government than we would have in the absence of these institutions. But the reason that we need the formal institutions, and particularly formal institutions that define the scope and limit of government power and action, is that civic virtue is often insufficient to deter elected representatives from following the lure of the ever-present corruption incentive.

And I still think that the difference between graft and special interest lobbying is one of degree and not of kind.