Category Archives: Great Thinkers

An Economist’s Love Letter to Books

 
“No university will ever have at one time four economists of the quality of Adam Smith, David Ricardo, Irving Fisher, and Alfred Marshall, to say nothing of a dozen of their best colleagues—but they can all reside in one’s library. Their subtle minds are ever ready to instruct and tease and baffle.”
 
George Stigler (U. Chicago, 1982 Nobel laureate), Memoirs of an Unregulated Economist, p. 219.

Douglass North, 1920-2015

Many great economists live long lives. James Buchanan, Milton Friedman, F.A. Hayek, Ludwig von Mises, and Gordon Tullock all lived into their nineties. Ronald Coase died a centenarian. Sadly, Douglass North has joined that august club at age 95. Keynes’ prediction about the long run once again proves correct.

North’s ideas and influence will live even longer than he did; consider that his successful rebuttal to Keynes. North won the 1993 economics Nobel for his work as an economic historian, and for showing the importance of institutions in economic development. He also played a large role in inspiring the New Institutional Economics (NIE) movement, which has its own scholarly society.

What are institutions? North and the many economists he influenced use the word in a particular way. For example, the Competitive Enterprise Institute is an institution (it’s even in our name), but not in the Douglass North sense. For North, institutions are more like the rules of the game. In baseball, three strikes and you’re out is a baseball institution—again, in a very different sense than how the Yankees or Cubs are baseball institutions. How would a pitcher’s behavior change if the rule was four strikes per out, or two? How would a hitter behave differently if foul balls were automatic outs? That’s what Doug North’s research approach was about, except on a much larger historical scale.

One of North’s most famous papers is “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs.” It is set in 12th century France, and coauthored with Paul Milgrom and Barry Weingast, themselves distinguished economists. France had no functional national court system in the 12th century, and a dearth of professional judges and lawyers. Even so, informal markets, called Champagne fairs, opened up and spontaneously evolved their own institutions. Even without help from up on high, people found ways to make things work.

These spontaneous Champagne fair institutions ranged from how stalls were allocated to norms for bargaining and haggling, all the way up to the creation of private courts for resolving disputes. It’s a real-life illustration of Hayek-style spontaneous order. North adds the insight that the institutions that evolved in the Champagne fairs guided peoples’ behavior in certain directions. Different institutions would have guided behavior differently.

Over time, successful institutions displaced unsuccessful institutions, in an ongoing social evolutionary process. This insight continues to influence scholars in many disciplines, not just in economics.

Another famous paper about England’s 17th century Glorious Revolution, also coauthored with Barry Weingast, makes the case that checks on royal power made modern life possible. In the short run, a weaker king made people’s property rights more secure. No longer could the king just take what he wanted. Now he had to deal with a strong Parliament. Successfully removing James II, the last of the Stuarts, and replacing him with the more amiable William and Mary made Parliament a credible counterweight to royal ambition.

This new institution, which we now call separation of powers (note that John Locke’s Treatises came out at precisely this time), made modern commerce and the Industrial Revolution possible. There is obviously much more to the story of modernity, but North told an important part of the tale.

North also laid out his institutional approach in a number of books. To his credit, they are all short. One of them particularly influenced me as a student: Understanding the Process of Economic Change. Here, North goes a level deeper than the Champagne fair or Glorious Revolution articles.

Yes, institutions matter. Societies with secure property rights, the rule of law, and so on tend to be wealthier than societies that don’t. But where do those institutions come from? How do they emerge? How do institutions evolve over time? The general theme is that the institutions that best fit a given society’s circumstances emerge organically, from the bottom up. They can’t be planned and imposed from the top down. They just kind of happen, as unsatisfying as that is to say. They also change over time. What works in one time and place may not work in another, so institutions must be allowed to evolve over time. Legislation and social conventions that worked for railroads or horses might not work for self-driving cars. It is a brilliant performance.

One final point to make: economics is about human cooperation and voluntary exchange. It is quite literally a social science. Douglass North understood that point as well as anyone. Fred Smith and I have recently spent a good deal of time encouraging economists to move beyond the Homo economicus blackboard caricature and study Homo sapiens as well. Douglass North needed no such reminder. Nor do his numerous students who work every day to carry on his impressive intellectual legacy. As long as North’s career was, his influence will last far longer.

More to Markets than Wealth

From p. 92 of James Buchanan’s 2005 essay collection Why I, Too, Am Not a Conservative:

I have often noted how much better it would have been had Adam Smith entitled his treatise ‘the simple system of natural liberty’ rather than The Wealth of Nations, since his very title called direct attention to the aggregate of value generated, despite Smith’s intent and purpose.

Adam Smith’s intent and purpose, of course, was to describe and defend what he called the simple system of natural liberty. The fact that this system enables efficient wealth creation is a good thing, but a second-order benefit.

Buchanan’s intent and purpose is point out that, like Smith’s choice of title, many classical liberals only care about the wealth aspects of markets. This focus is a mistake. Markets’ virtues run far deeper, in a way that can resonate deeply with people of nearly all philosophical persuasions.

This is because market orders are almost completely subjective. Different people have different preferences, and want different things. Because markets treat people as equals, very different people are free to cooperate and exchange with each other however they want, so long as they respect others’ equal rights to do the same. That way you can get the bundle of goods you want, I can get the very different bundle of goods I want, and so on.

Compare this to an election where your choice is between one politician with one bundle of policies, or his opponent with a second bundle of policies. You can’t pick and choose the positions you like from each candidate, and discard the ones from each that you don’t. It’s an all-or-nothing deal.

Markets are more than wealth creation engines. They are dignity creation engines. You can choose how you eat, dress, live, work, and play in a way that top-down systems cannot, or will not, provide. Politics doesn’t work that way, but markets can, when they’re allowed to.

This, Buchanan argues, is markets’ true appeal. The fact that so many classical liberals focus instead on efficiency is as poor a salesmanship job as he saw in his long lifetime.

In a way, it is classical liberals’ own fault their views are unpopular.

Who Really Benefits from Economic Freedom?

From p. 40 of Don Boudreaux’s short new volume The Essential Hayek, in which Don performs the valuable service of putting Hayek’s most important ideas in plain, accessible English:

[P]eople often regard the case for economic freedom to be chiefly a case for the freedom of business. This is a mistake. At root, the case for economic freedom is a case for the freedom of consumers.

You can download a free copy of the book in PDF format here. The Fraser Institute, which published the book, also put together an accompanying website with videos and other materials.

I highly recommend reading at least the first two chapters, in which Don takes a Leonard Read/I, Pencil approach to books, paper, and ink. It’s as clear and vivid an explanation of Hayekian spontaneous order as I’ve ever seen, and it reads quickly and easily.

Reminder of Basic Principles

From p. 158 of The Social Dilemma, Volume 8 of Gordon Tullock’s Selected Works:

Altogether, the extent to which people have freedom is more or less an inverse function of the number of laws in force.

Think of it as a very 20th century way of saying the same thing Tacitus said about two millennia ago:

The more corrupt the state, the more numerous the laws.

Some principles are timeless. One of them is that simplicity is beautiful, and honest.

Gordon Tullock, R.I.P.

Imagine making Nobel-worthy contributions to a discipline in which you had almost no formal training. It’s an amazing feat. Gordon Tullock is one of the few to accomplish it. We at CEI are deeply saddened to learn that he has just passed away. But what a life he led, all 92 years of it. That, we can celebrate. Born in 1922 in Rockford, Illinois, Tullock served in World War II. He spent some time in the foreign service in China and Korea, and pondered making a career of it. But his pursuit of a law degree at the University of Chicago changed his life—along with many others.

At the beginning of Tullock’s career, he had just the barest sketch of economics in his head, mostly from the one class he ever took in the subject. He drew masterpieces from that sketch. Tullock co-founded public choice theory, and invented the now-ubiquitous idea of rent-seeking. He did more than anyone else to apply the economic way of thinking to fields as diverse as law, science, military tactics, elections, and biology; his multi-disciplinary approach lives on under the name of economic imperialism. Countless scholars today make their daily bread pruning trails that Tullock blazed. And for 25 years, Tullock edited the academic journal Public Choice, giving a high-profile forum to high-quality scholarship that might never have seen the light of day without his stewardship. Few people have been more important to the world of ideas than Gordon Tullock.

Early in his career, Tullock met James Buchanan. Together they wrote The Calculus of Consent, published in 1962. Buchanan won the economics Nobel in 1986, largely because of that book. But Tullock never won, despite vocal outcries from large segments of the profession. He now becomes the award’s all-time snub in its 45-year history. Even so, Buchanan and Tullock made quite the duo. Their friendship and collaboration spanned decades. Don Boudreaux once described Buchanan and Tullock as the Lennon and McCartney of economics.

Don’s comparison rings true. Buchanan, like Lennon, was the more philosophical of the pair, so it isn’t a perfect analogy, as Don points out. But overall, as the economic equivalent of a songwriter, Buchanan was McCartney—cleaner and more conventional. Few musicians have been more daring than John Lennon. And no economist is more daring than Gordon Tullock. He was simply relentless, and yes, he could be cocky (though he sometimes had a sense of humor about it). He made a career of applying the economic way of thinking to places nobody else even thought about—and unlike certain of Lennon’s experiments, Tullock’s usually worked. If there is such a thing as a natural-born economist, Gordon Tullock was it. He could look at almost any subject and find economic insights. A brief tour through some of his scholarship makes that more than obvious.

When Tullock and Buchanan wrote The Calculus of Consent, they paved new ground that today guides entire research programs at major universities. Public choice theory, the fancy-sounding name for their approach, is actually quite simple: the application of economics to politics. Economics teaches that people respond to incentives. And politicians are people, remember. They are not the insensate black boxes that many economic models paint them as. Perhaps politicians respond to their incentives? The basic idea is common sense. It even predates Machiavelli in the literature. But most economists and political scientists had lost that common sense by Tullock’s time, when a dreamier, more idealized vision of political behavior prevailed. Tullock and Buchanan restored some much-needed realism.

Tullock and Buchanan’s book also taught important lessons to political reformers. It is not enough to elect virtuous politicians. They need the incentive to behave virtuously. The rules of the political game are what shape those incentives. If you want better results, you need better rules. Today’s emphasis on treating root problems, as opposed to mere symptoms, owes much to The Calculus of Consent. This approach is a cardinal principle of CEI’s approach to regulatory reform. Much of our work would not be possible without Gordon Tullock.

Tullock’s first major solo effort was The Politics of Bureaucracy, which came out in 1965. It applies the economic way of thinking—incentives, tradeoffs, knowledge problems—to how politicians and regulatory officials behave inside their various hierarchies. Its analysis can come across as mercenary, but it does have the benefit of being largely true.

Later in his career, Tullock followed it up with 1992’s Economic Hierarchies, Organization, and the Structure of Production, which follows a similar theme (both books are collected here). It is more refined, reflecting the nearly 30 years since its prequel. But its overall framework needed no updates. Presidents, congressmen, the EPA, the now-defunct Civil Aeronautics Board, and others did all they could to prove Tullock right in the years between those two books. Their proofs continue to pile up.

One year after The Politics of Bureaucracy, Tullock turned his economist’s eye to science. More specifically, given how the scientific profession is set up, with its dependence upon universities, tenure, and government grants, how does that color scientists’ professional behavior? That’s what The Organization of Inquiry is about. In that book, Tullock predicts the emergence of what we now call Google—in 1966. Tullock also had insights on why many scientists are reflexively pro-government—that’s where their funding comes from. He also explains why many scientists choose the research programs they do, and why they reach the conclusions they do—their grants depend on both their topics and their conclusions. Politically unpopular research areas tend to receive little funding, especially if their findings cut against political priorities. Tullock’s ideas provide much insight into why independent groups such as CEI take so much heat from politically-dependent groups.

1967 marked the third year in a row Tullock made a major intellectual innovation. That innovation is called rent-seeking. Anne Krueger came up with the name in 1974, but the original idea is Tullock’s. In economics jargon, the word “rent” has a special meaning. It doesn’t mean paying the monthly rent on your apartment, or the lease on your car. In economics, a rent is an above-normal profit. Suppose you own a business in a sector that usually makes a five percent profit. But you make a 15 percent profit. That extra ten percent is a rent. Apple made a good-size rent when it introduced the iPhone out of nowhere. Competitors such as Samsung and Motorola now have their own competing products and are eating into that rent, which will eventually disappear altogether.

Apple made its rent honestly. Steve Jobs and his colleagues came up with an important innovation that provides value for millions of people. Tullock’s term “rent-seeking” is reserved for people who secure extra-high profits dishonestly. A steel company lobbies a politician to put up a tariff against a foreign competitor. A renewable energy company grabs after a multi-million dollar subsidy. A small business convinces its local government to require all of its competitors to apply for costly licenses, which can be approved or denied by the very people already in that business (this actually happens). The common theme to rent-seeking is using government to secure profits a company can’t make honestly.

Rent-seeking is everywhere. It has been around since the very invention of government. But it took Gordon Tullock to call it what it is, and to make rent-seeking as odious to intellectuals as it is to everyone else. Free-market thinkers have always been against rent-seeking, and so have many of their critics. Tullock made it possible for them come to common terms—though this project remains a work in progress.

Finally, the most fun of all of Tullock’s projects was to make economics a discipline without frontiers. Military strategy, elections, lawmaking—if there was a way to apply the economic way of thinking to a subject, Tullock figured out a way to do it, and his sheer joy in doing so is contagious. He was the first economic imperialist. Steven Levitt and Stephen Dubner, of Freakonomics fame, are probably today’s most famous disciples of this approach that Tullock pioneered.

One of the most fertile frontiers Tullock did away with was applying the economic way of thinking to the natural world. The coal tit, a small bird, was one of his most famous subjects. Its favorite food source is a small moth larva that incubates inside pine cones. Tullock, knowing that Mother Nature is the world’s best economist, observed that the coal tit follows the law of demand. In his words, it is a “careful shopper.” Where there are lots of pine cones, the coal tit pecks at the easiest-to-reach larvae and quickly moves on to the next pine cone, even though there is plenty of food left.

Where pine cones are scarce, and there are few alternative food sources, it will keep on at each pine cone until it gets every last bit of food, even when doing so is difficult (or the “price” is higher). This simple bird’s innate knowledge of prices and opportunity costs far exceeds that of most human intellectuals. Tullock calls this sub-field of natural science bio-economics. It deserves much more attention.

These are just some of Tullock’s contributions. Most of them are collected in Liberty Fund’s ten-volume set of Tullock’s selected works. Many others are scattered throughout the hundreds of articles published in the Public Choice journal during Tullock’s 25-year stewardship. Even though he’s gone now, Tullock will still make many more contributions in the years to come. He played a major role in developing the talents of many of today’s most formidable economic and political scholars. His legacy will impact their still more numerous students, and all of their achievements. We at CEI are not alone in mourning his loss. Nor are we alone in celebrating his achievements.

No Such Thing as Perfect Information

gordon tullockGordon Tullock has a reputation for being rather salty at times. But, more often than not, he is right. This quotation captures both qualities:

[N]o teacher with classroom experience can really believe that everyone is perfectly informed.
-Gordon Tullock,  “Rationality and Revolution,” Virginia Political Economy: Selected Works, Vol. 1, 341