Y’all have a happy holiday!

Michael Giberson

The KP Texas office is alive and functional, I am relieved to discover, just recently emerged from the end of semester rush and not yet enveloped in the holiday rush. So I’ll try to rediscover my internet legs, re-raise the Jolly Blogger flag, and set sail in search of curious, erroneous, surprising or provoking energy policy and/or economics stories.

Yo-ho-ho and happy holidays to all!

David Henderson on crony capitalism

The KP Chicago contingent is still on vacation, barely recovered from the end-of-term rush and grading, and the KP Texas contingent is still head-down-pen-moving over the aforementioned grading; thus the relative calm here.

In the interim, I cannot recommend highly enough David Henderson’s recounting of his talk at Occupy Monterey. David’s notes contain substantive and rhetorically valuable arguments defining crony capitalism, differentiating it from true market exchange, and debunking the history of the “robber barons”. He sets a great example for teaching, for persuasion, and for open-minded conversation to discover where people who disagree may find common ground. Thank you, David; I am looking forward to part 2.

Happy birthday, Bill of Rights; you will be missed

Yesterday was the anniversary of the original signing of the Bill of Rights to the U.S. Constitution. Congress commemorated that birthday by passing the National Defense Authorization Act, which still leaves interpretive room for detention of U.S. citizens without due process even after the word smithing that left President Obama the executive power he wants, thus neutering the hoped-for veto. Congress also moved forward with the Stop Online Piracy Act, an abomination of Internet censoring, regulation, and monitoring.

In combination these two laws gut the already-trimmed Bill of Rights; all of the amendments have been under threat since its birth, the 9th and 10th have been made moribund through unchecked government action, and the 4th is also pretty much gone.

Yes, I think the members of Congress who voted for NDAA have violated their oaths to uphold and defend the Constitution. No, I don’t think it’s hyperbole to say that we are looking at the slide toward fascism unless we take affirmative action to defend our rights that the Bill of Rights was supposed to protect (although in hindsight perhaps enumerating them was a bad idea).

Also consider this: I have argued for the past year that the policies of the TSA and the way they treat airline passengers conditions us for the loss of liberty. If you doubt this, I suggest you read up on the Stanford prison experiment and Milgram’s work on authority and power. Look at these actions together, and notice the importance of a docile, accepting public to allow such liberty-destroying laws to pass. If we are docile in the face of authority operating under the false flag of terrorist threat and providing the pretense of security, we can be controlled in other ways. I see NDAA and SOPA as logical consequences in this progression.

Unless we stand up and defend ourselves from our government. Because we are moving toward a world in which a private citizen whose primary civic interest is liberty, toleration, and peace can be detained without warrant for saying that. That scares me, and it should scare you too.

“Market failure”: you keep using that term. I do not think it means what you think it means.

Lynne Kiesling

Steve Horwitz’s column in The Freeman today is a great explication of why the phrase “market failure” is so problematic, and so often misused and abused in public policy analysis when employed to criticize market outcomes. Steve does a good job of explaining the origins of the phrase in the standard textbook case of “perfect competition”: in equilibrium that simple benchmark model, resources are allocated to their highest-valued use, all Pareto-improving trades have occurred, and while firms have earned inframarginal profit, the marginal profit at the equilibrium level of output is zero. More simply, all gains from trade have been exploited and no one has left any money on the table. Thus, the argument goes, in applying that model to reality when we see outcomes that deviate from that and do have misallocation or some unrealized gains from trade, the logical conclusion is that the market has failed to enable agents to achieve that optimal outcome.

Steve highlights two reasons why this interpretation is incorrect; the first reason is a misunderstanding of the nature of competition and the market process as it operates in real conditions of the knowledge problem, imperfect foresight, differentiated products, small numbers of agents, etc. People making the above critique of markets expect a threshold of unrealistic perfection, and consequently make an unfair comparison of a simplified benchmark model with the complications and nuances of a real-world application. I encounter this argument all the time in electricity regulation, which is predicated precisely on this type of false, over-simplified argument, and has a century’s worth of regulatory institutions built upon the false presumption that achieving such a static outcome in reality is possible.

One thing I particularly like about Steve’s argument is how he points out that these cognitive-epistemological characteristics of the real world are features, not bugs, with respect to how market processes create value and gains from trade:

… these sorts of imperfections (a better term than “failure”) are not only part and parcel of real markets; they also are what drive entrepreneurship and competition to find ways to improve outcomes.  In other words, what markets do best is enable people to spot imperfections and attempt to improve on them, even as those attempts at improvement (whether successful or not) lead to new imperfections.  Once we realize that people aren’t fully informed, that we don’t know what the ideal product should look like, and that we don’t know what the optimal firm size is, we understand that these deviations from the ideal are not failures but opportunities.  The effort to improve market outcomes is the entrepreneurship that lies at the heart of the competitive market.

Thus the value of markets is not that they will achieve perfection, but that they have endogenous processes of discovery that enable people to correct the market’s imperfections.  Just as it’s the very friction of the soles of our shoes on the floor that enable us to walk, it is the imperfections of the market that encourage us to find the new and better ways to do things.

He then counters a second aspect of the “market failure” argument: this argument is typically coupled with a recommendation for some form of government intervention or regulation to “correct” the perceived failure. But if market processes in realistic contexts have imperfections, don’t government intervention and regulation have imperfections too? The relevant comparison is between the results of market institutions and government institutions in realistic contexts, not in simplified blackboard theory.

I would add a third point to this analysis. Often when I encounter the “market failure” argument I make a quick riposte of “markets don’t fail, they fail to exist”, which is the Coase/transactions cost response. Transactions costs interfere with the ability of parties to find mutually beneficial trades, thus impeding optimal resource allocation and the creation of maximum gains from trade. Transactions costs lead to missing markets, as in the case of environmental pollution and other common-pool resource situations. This driver of so-called “market failure” complements Steve’s process-oriented argument and reinforces his points … and it implies that one high-priority objective of public policy should be to reduce transactions costs, not to impose regulations that are intended to “correct” market failures but have little realistic hope of doing so effectively.

[Thanks to Aeon Skoble for the Princess Bride hook I used in the title.]

The Defense Authorization Act and unlawful detention

Lynne Kiesling

Have you been paying attention to the National Defense Authorization Act (NDAA) that the Senate passed last week? I don’t blame you if you have not heard much about it, since most media have not been covering it. In addition to military expenditure authorization, it includes controversial provisions about the detention of terror suspects; as summarized by Spencer Ackerman at Wired:

But far more dramatically, the detention mandate to use indefinite military detention in terrorism cases isn’t limited to foreigners. It’s confusing, because two different sections of the bill seem to contradict each other, but in the judgment of the University of Texas’ Robert Chesney — a nonpartisan authority on military detention — “U.S. citizens are included in the grant of detention authority.” …

So despite the Sixth Amendment’s guarantee of a right to trial, the Senate bill would let the government lock up any citizen it swears is a terrorist, without the burden of proving its case to an independent judge, and for the lifespan of an amorphous war that conceivably will never end. And because the Senate is using the bill that authorizes funding for the military as its vehicle for this dramatic constitutional claim, it’s pretty likely to pass.

This development is disturbing in many dimensions. Note the narrowing and weakening of the long-standing habeas corpus protections of citizens against unlawful detention that our legal system inherited from English common law going back to the Magna Carta. The U.S. Constitution in Article 1, Section 9, states that “The privilege of the writ of habeas corpus shall not be suspended, unless when in cases of rebellion or invasion, the public safety may require it.” Maybe this “cases of invasion” exception is the reason why Senator Lindsay Graham, one of the most vocal supporters of these detention provisions, argues “Is the homeland the battlefield? You better believe it is the battlefield.” A consequence of this position is, as Conor Friedersdorf notes at the Atlantic,

That quote is important, for Graham is saying that as long as terrorists are trying to recruit  on American soil, our homeland is a battlefield. That means a perpetual state of war. Here are the senators who refuse to affirm that American citizens retain the right to due process during this war that is supposedly being waged everywhere on earth and that has no foreseeable end in sight.

He then provides the roll call on one of the amendments that would have limited these detention powers over U.S. citizens. Note also that many of the Senate supporters (and the House supporters of the version passed there earlier this year) claim to be supporters of limited government, but are indeed here codifying increased government powers to wage perpetual war. How can they, and we the voters, not see the hypocrisy and venality inherent in these positions?

Glenn Greenwald highlights another disturbing dimension of this legislation — or, more accurately, of the detention and military powers of the U.S. government. He points out that President Obama may veto this legislation, not because it includes gross violations of the civil liberties of American citizens, but because it represents Congress claiming oversight of executive powers that the Obama Administration (like the Bush Administration before it) asserts to already possess: “… the Bush and Obama administrations have already successfully claimed most of the powers in the bill, and courts have largely acquiesced … this bill would codify indefinite military detention, but the actual changes when compared to what the Executive Branch is doing now would be modest.” Greenwald observes:

But, with a few exceptions, the objections raised by the White House are not grounded in substantive problems with these powers, but rather in the argument that such matters are for the Executive Branch, not the Congress, to decide. In other words, the White House’s objections are grounded in broad theories of Executive Power. They are not arguing: it is wrong to deny accused Terrorists a trial. Instead they insist: whether an accused Terrorist is put in military detention rather than civilian custody is for the President alone to decide. Over and over, the White House’s statement emphasizes Executive power as the basis for its objections to Levin/McCain.

It’s truly disturbing to consider how much centralized political and military power we have allowed to build over the past decade. If the issues surrounding the NDAA are new to you, I recommend Greenwald’s post as a thorough discussion of the substantive and procedural issues. Sheldon Richman’s thought-provoking analysis at the Freeman is also a worthy read.

Finally, note (as do the articles linked above) the bipartisan nature of the support for this increase in government power and authority; a public choice theory-based analysis would easily lead you to that conclusion. Both the Republican wing and the Democrat wing of the Authoritarian Party have offered substantial support for perpetual war and the associated funding and power accompanying it, for both the executive branch and the “representative” branch. The discipline that’s supposed to be provided through our ability to “vote the bums out of office” seems incredibly weak here … or is this state of perpetual war truly the will of the people?

Maybe Orwell was right after all, although I thought most people saw his writing as cautionary tales rather than how-to manuals.

An example of what not to do in persuasion

Lynne Kiesling

Alex Tabarrok has an excellent post this morning at Marginal Revolution:

David Warsh and Paul Krugman try to write Hayek out of the history of macroeconomics. …

It is true that many of Hayek’s specific ideas about business cycles vanished from the mainstream discussion under the Keynesian juggernaut but what Krugman and Warsh miss is that Hayek’s vision of how to think about macroeconomics came back with a vengeance in the 1970s. …

… Hayek was an important inspiration in the modern program to build macroeconomics on microfoundations. The major connecting figure here is Lucas who cites Hayek in some of his key pieces and who long considered himself a kind of Austrian.

I offer this as a cautionary “what not to do” note to students in particular, but also to all of us. In the piece to which Alex is responding Krugman chooses his definition of “modern macroeconomics” in a way that clearly maps into his preconceptions and reflects his confirmation bias. Such a rhetorical stratagem is unscientific and anti-intellectual. It’s also easy to critique (no disrespect intended for Alex’s good, pointed critique) by simply looking at the literature and seeing that modern macro encompasses a breadth of ideas and approaches, many of which are substantially informed by models and methodological approaches that Krugman chooses to reject.

Thus both on intellectual grounds and with a view toward crafting an argument that is persuasive to those who don’t already agree with you and share your worldview, don’t do this. Being more ecumenical and treating the contributions of your intellectual opponents with respect will make your arguments more thorough, effective, and persuasive.

On a substantive note, I’d like to echo the recommendation that Jacob Levy made in the comments on Alex’s post; the conclusion of Warsh’s essay is a good one, and suggests that incorporating more of a complexity approach into macro would enable us to build better models:

That said, it is pleasing to think that Hayek himself may yet turn out to have been a very great economist after all, far more significant than Myrdal or Robinson, when seen against the background of a broader canvas. The proposition that markets are fundamentally evolutionary mechanisms runs through Hayek’s work. Caldwell, of Duke University, notes that, starting with the Constitution of Liberty, “the twin ideas of evolution and spontaneous order” become prominent, especially the idea of cultural evolution, with its emphasis on rules, norms, and decentralization.

These are today lively concepts in laboratories and universities around the world. “It could have been that Hayek was running a different race, and the fact that he didn’t do well in the Walrasian race was that he wasn’t running in it—he was running in the complexity race,” says David Colander, of Middlebury College. Hayek may yet enter history as a prophet of evolutionary economics, a discipline dreamt of since the days of Thorstein Veblen and Alfred Marshall in the late nineteenth century but not yet forged, whose great days lie ahead.

UPDATE: See also Pete Boettke on this same theme, motivated by Alex’s post.

Natural gas is too cheap and too plentiful

Michael Giberson

Russel Smith thinks we should use government power to limit natural gas production in order to boost gas prices. Why? Because he is the executive director of the Texas Renewable Energy Industries Association and cheap and plentiful gas is cutting into the business opportunities of renewable energy companies.

“The price is so low, there’s so much being produced, and it’s perverting the effort to move renewables into the marketplace,” he said.

He continued:

With the addition of shale gas to the marketplace and continuing low gas and power prices, Smith said renewables have been unable to gain the traction that was anticipated a few years ago.

“Because prices are so low, the momentum to bring large-scale solar and wind, especially solar, to the market has been somewhat stymied,” he said. “The differential in the price of natural gas and solar wasn’t there five years ago as momentum was building.”

The article said Smith initially suggested the idea of regulating gas production to spark discussion during a conference panel. (Reminds me of the Adam Smith quote on business gatherings: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”)

If he can’t convince regulators to limit gas production, Russel Smith suggested that government could do more to boost demand for natural gas: exports, LNG for long-distance trucking, anything that might help boost the price of the competition. Such moves would, said Smith, “improve the situation for natural gas and everyone else.”

Not quite everyone else, right?