Tuesday, September 14, 2010

Neoclassical economics, post 2 - are public goods a socialist plot?

Stephen Williamson, in
his defense of "neoclassical"/"Minnesota" economics, says some very smart and reasonable things about public goods:
[F]or a person with an urge to fix what is wrong with the world, a course in microeconomics might be quite discouraging. Mostly (and this of course depends very much on how it is taught), conventional micro is a series of exercises in how governments can screw things up...There are, however, ways out for good-deed-doers. There are externalities (positive and negative), market failures, and monopoly power. Working out how to fix the externalities, complete the markets, or regulate the monopolies requires work, though. It may be the case that one can fix the externality through a clever market mechanism - cap and trade for pollution for example. However, the government may actually be no better at supplying some item the private market fails to provide or monopoly power might actually not be so bad - it may actually promote innovation. The answers are not clear at the outset. One has to weigh alternatives, and carefully measure the costs and benefits of government intervention.
And, later:
There are government-provided goods and services, for example those associated with National Parks, that provide consumers with direct benefits. There are items like roads and bridges that make private sector production (e.g. trucking) more profitable. For some of these types of spending (e.g. government-provided goods and services are perfect substitutes for private goods and services), the multiplier can be zero. In other cases (complementarities), we can get substantial multipliers. This boils down to the issue of whether the government is more efficient than the private sector at providing particular goods and services, or particular kinds of capital inputs. We have a whole field of economics that deals with this: public economics.
Actually, this is totally great! It's exactly what I've basically been saying since I took a public economics course and realized the importance of public goods. Yes, there are things that the government is better at providing than the private sector! Yes, it is hard to figure out what these things are, and hard to get the government to do them. But that just means we have a hard job ahead of us. That doesn't mean we should give up, and say "Well, it's hard, so let's just not do it at all."

So why do you never see "neoclassical" macroeconomists talking about public goods?

I think the answer is that neoclassical economists are worried first and foremost about the threat of socialism. They worry that perfectly reasonable justifications for government intervention in the economy will be used by socialist "do-gooders" as an excuse to permanently expand government's role, with the ulterior motive of redistributing wealth.

You can see this fear in Stephen Williamson's language. How does he refer to people who want to make the economy more efficient through better public good provision? He calls them "do-gooders." Why should they be do-gooders? Maybe they are nationalists, who want their country to have a strong economy, and recognize that public goods are useful for that purpose. Maybe they are opportunists, who know that if they provide the public goods that raise people's incomes, they will be elected to power.

But no, Williamson assumes that the people who want to provide public goods are "do-gooders" - that they are motivated by a desire to increase the "equity" in our society.

Incidentally, he also thinks that this is the motivation behind Keynesian macroeconomic theories:
What does Paul Krugman want [as a Keynesian]?...What he says he wants, given the current circumstances, is for fewer people to be unemployed and more people to be employed. Why does he want that? It appears that he is concerned with equity. For him, it is criminal that some people are doing well and won't help out the unemployed, who are in dire straits.
It's clear from the preamble to Williamson's piece that he sees economics through a political lens. Having grown up in socialistic Canada, he sees a socialist around every corner, lurking in the fine print of every non-classical economic theory. The economics world is, to him, a war between those who think "equity" (wealth redistribution) is just, and those who think it is unjust. That partisan vision is shared, of course, by many economists on the other side of the political divide.

Of course, those of us who would like to see econ become more of a truly scientific discipline think this political focus is poppycock ("poppycock" is my new favorite word, btw). The job of economists is, first and foremost, to describe reality. If a government policy boosts GDP, it does, and if it doesn't it doesn't. We do not have the luxury of picking which theory we think would lead to our favorite policy prescriptions...or, rather, we shouldn't have that luxury, but too often we indulge in it anyway, and the result is that we are perceived more as lawyers than as scientists.

When will the economics profession forget about the socialism/capitalism thing, and start simply trying to predict how the economy works? I hope it's soon. I fear it's never.

1 comment:

  1. Allowing tax payers to vote with their taxes would lead to the most efficient division of labor between the public and private sector.

    The only difference between public and private goods is that, with public goods, people can free-ride off the contributions of others. Add the element of coercion (taxes) and the invisible hand can allocate public resources as efficiently as it can allocate private resources.