What does Don Lavoie tell us about the implications of the knowledge problem for the plans of political entrepreneurs?

One of the questions that I have been contemplating in recent months is whether the tariff policies of President Trump could be part of a coherent economic plan. Can his policies be rationalized in terms of revenue raising objectives, the optimum tariff argument, provision of appropriate incentives to manufacturing industries to meet defence or employment objectives, or the pursuit of foreign policy objectives? Is it possible that he is assigning policy instruments to objectives in a manner consistent with a rational plan?

The presumption underlying such questions is that it is preferable for political entrepreneurs to endeavor to ensure that their economic plans are coherent rather than unprincipled, unpredictable, and capricious. Although that may be a reasonable presumption, there is another other option that should be considered. Perhaps it is appropriate for political entrepreneurs to refrain from engaging in economic planning.

I was reminded of that while reading Don Lavoie’s book, National Economic Planning: What is Left?  Don Lavoie was an economics professor at George Mason University, where he taught from 1981 until his death in 2001. This book was originally published by the Cato Institute in 1985 and was reprinted by the Mercatus Center in 2016.

In this book Don Lavoie explains, among other things, that political entrepreneurs are confronted with a fundamental knowledge problem when they seek to plan economic activities, The epigraph quoted above (from page 181) encapsulates an important implication of the knowledge problem.

Lavoie’s explanation of the information problem begins with the insights of F. A. Hayek. The data that a planning agency would require to engage in rational economic planning resides in the separate minds of millions of people. The data exists only in a dispersed form that cannot be fully extracted by any single agent in society. The only way that knowledge can be used effectively is by relying on competitive struggles in a market system.  (p. 56)

The most obvious implication is that it is impossible for markets to be replaced by comprehensive economic planning. However, more modest attempts to steer the market towards particular outcomes also obstruct the source of knowledge which is essential to rational decision-making. (p. 56-7)

Lavoie points out that the only way we can know whether we are squandering resources by over- or underinvesting in microprocessors or steel, for example, is via “the messages contained in the relative profitability of rival firms in these industries”. He adds:

“But this is precisely the information we garble when we channel money toward one or another of the contenders. Deprived of its elimination process, the market would no longer be able to serve its function as a method for discovering better and eliminating worse production techniques. Without the necessity of responding to consumers’ wants or needs, businesses would never withdraw from unprofitable avenues of production.” (p.181)

Lavoie notes that advocates of industry policy disagree on the directions in which the market should be steered. For example, Felix Rohatyn wanted to funnel aid to sunset industries while Robert Reich wanted to funnel it to sunrise industries. He sums up:

“It is the main conclusion of the argument that I have called the knowledge problem … that there are no rational grounds on which Reich could ever convince Rohatyn or vice versa on such matters as are involved in economic change. As a result, such battles are sure to be fought with weapons other than carefully reasoned argument.” (p. 200-201)

Lavoie notes that Rohatyn and Reich both argued that it is the responsibility of a strong leader to coordinate the actions of the rest of us. (p.190) The coordination they had in mind seems to be more akin to the coordination that military leaders impose by giving orders to subordinates than the coordination among individuals that occurs voluntarily and spontaneously in a free market.

Lavoie argues that economic planning is inherently militaristic: “The practice of planning is nothing but the militarization of the economy”. In making that point he notes that the theory of economic planning was from its inception modeled after feudalistic and militaristic organizations. (p. 230)

Some would argue that a degree of militarization is a price worth paying, or even desirable, to achieve a range of national objectives. Indeed, the conventional theory of democracy seems to entail top-down direction. Prior to elections, political leaders tell voters about their plans for education, health, social security etc. and are expected to implement those plans after they are elected.  

I am not aware of anything that Lavoie wrote that discusses the legitimacy of the concept of national objectives and the question of whether planning (and militarization) may be necessary in the pursuit of social objectives. However, he provided a highly relevant discussion of the concept of democracy in a book chapter entitled, ‘Democracy, Markets, and the Legal Order: Notes on the Nature of Politics in a Radically Liberal Society’. (The book is: Ellen Frankel Paul, Fred D. Miller, Jr., and Jeffrey Paul (Eds.) Liberalism and the Economic Order, Cambridge University Press, 1993.)

In that chapter Lavoie notes that Western liberals tend to view democracy and markets “as in some sort of necessary tension with one another”. We tend to think that “taking democracy too far undermines markets and that taking markets too far undermines democracy”. He attributes that view to “liberalism’s gradual drift into compromises with conservatism and socialism”.

Lavoie argues that liberalism needs to reinterpret its notions of markets and democracy so that they are seen to be essentially complementary. Our economics needs to take account of the cultural underpinnings of markets and our politics “needs to move beyond the model of the exercise of some kind of unified, conscious democratic will and understand democratic processes as distributed throughout the political culture”. The force of public opinion is best perceived as the distributed influence of political discourses throughout society rather than as “a concentrated will”.

Lavoie suggests that what we should mean by democracy is a distinctive kind of openness in society rather than a theory about how to elect the personnel of government:

“Democracy is not a quality of the conscious will of a representative organization that has been legitimated by the public, but a quality of the discursive process of the distributed wills of the public itself.” (p.111).

It seems to me that those who see merit in Lavoie’s view of democracy have good reasons to be skeptical about the worth of top-down planning to achieve national objectives. Individuals have different priorities and objectives that deserve to be recognized. National plans cannot solve the knowledge problem entailed in giving appropriate recognition to individual differences. 

Is it too soon to be asking in what part of the world will the next golden age be located?

 

The question posed above occurred to me as I was reading the final pages of Johan Norberg’s latest book, Peak Human: What We Can Learn from the Rise and Fall of Golden Ages.

Johan Norberg is a senior fellow at the Cato institute. He is a historian of ideas and a prolific author. If Norberg has a fan club, I might qualify for honorary membership. I have written about some of his previous books on this blog (here and here) and have read others.

Norberg explains what he means by a golden age in these terms:

“A golden age is associated with a culture of optimism, which encourages people to explore new knowledge, experiment with new methods and technologies, and exchange the results with others. Its characteristics are cultural creativity, scientific discoveries, technological achievements and economic growth that stand out compared with what came before and after it, and compared with other contemporary cultures. Its result is a high average standard of living, which is usually the envy of others, often also of their heirs.”

The author suggests that the most important precondition for a golden age is “an absence of orthodoxies imposed form the top about what to believe, think and say, how to live and what to do.” He doesn’t present the golden ages he has identified in utopian terms. He acknowledges that countries concerned all practiced slavery, denied women basic rights and “took great delight in exterminating neighbouring populations”.

As implied in the epigraph, Norberg argues that civilizations decline when they lose cultural self-confidence. He suggests that episodes of creativity and growth are often terminated because of the perceived self-interest of people who fear change and feel threatened by it. Free speech is replaced by orthodoxies and free markets are replaced by increased economic controls. The fears of those seeking stability and predictability often become self-fulfilling.

 In my view, Norberg has done an excellent job in explaining why golden ages have emerged and disappeared at different times in different parts of the world.

However, I think there may be an omission in the author’s identification of golden ages. I will briefly discuss that before focusing on the question of whether the Anglosphere is in decline.

Identifying golden ages

Norberg discusses seven golden ages in his book. Since he doesn’t provide a summary timeline showing their duration, I asked ChatGPT to construct the following:

• Athens: 480–404 BC
• Rome: 27 BC–AD 180
• Abbasids: 750–950
• Song dynasty: 960–1279
• Renaissance Italy: 1490–1527
• Dutch Republic: 1609–1672
• Anglosphere: c. 1688 onward.

If that timeline is broadly correct, it suggests that the largest gap between golden ages occurred between the end of the golden age of Rome and the beginning of the golden age of the Abbasids. What was happening at that time? Although the golden age of Rome may have ended around 180, following the death of Marcus Aurelius, the decline and fall of the Roman empire took a few more centuries. The last emperor of the Western Roman empire was deposed in 476. Plato’s Academy in Athens apparently continued to function until 532, when the seven last philosophers left to seek refuge with the Persian king. Interest in Greek philosophy grew in Persia during the 6^th and 7^th centuries, partly because of the presence of scholars associated with schismatic Christian sects.

As I was pondering what was happening between 180 and 750, I began to wonder whether India’s golden age might have been worth discussing in this book. While visiting India last year I read William Dalrymple’s book, TheGolden Road: How Ancient India Transformed the World. As well as discussing India’s impact on religion and culture throughout much of Asia, Dalrymple. points out that over the period from about 250BC to AD 1200, India was an important centre of commerce and trade, and an innovator in fields such as astronomy and mathematics.

India was the source of the numerical system with 10 digits including zero, that we use today. Norberg mentions that important contribution, but Dalrymple discusses it at greater length.

Another fascinating topic discussed by Dalrymple is the close relationship between the merchant classes of early India and the Buddhist monastic movement. Dalrymple emphasizes the importance of trade between India and the Roman empire. He notes that as the Roman empire crumbled, India’s trade with Europe was replaced by expansion of its trade with south-east Asia.

Is the Anglosphere in decline?

The Anglosphere refers to those nations where the English language and cultural values are dominant. Few would dispute that over the last couple of centuries the Anglosphere, first led by Britain and then the United States, played a leading role among nations in demonstrating the benefits of liberal democracy, free markets, technological innovation, and free international trade. Life in the Anglosphere has been far from ideal even in respect of those criteria, but there can be no doubt that we have been living in an age of widespread prosperity that is without historical precedent. As Norberg points out, the whole world has benefited from the spread of golden-age conditions fostered by the Anglosphere, with global extreme poverty declining from 38 to 9 percent in just the period since 1990.

However, Norberg notes that “many ominous signs of decline are clearly present in our time”. He mentions the “hubristic overreach” of U.S. attempts to reshape the Middle East through military interventions in Afghanistan and Iraq, the financial crash of 2008, and the growth of “crippling public debt”. He suggests that a series of crises, including the Covid pandemic, have fostered “a sense that the world is dangerous and that we need to protect ourselves from it”. He writes:

“Most worryingly, rich counties have experienced a major backlash against globalization and trade, and immigrants have become scapegoats, just as they were in so many other eras of decline, potentially shutting us out from our most potent source of constant revitalization.”

Norberg notes that both China and Russia “have recently taken a totalitarian turn and are working hard to devastate neighbours”. He suggests, nevertheless, that Russia and China will have a hard time trying to challenge the Anglosphere-led world order because it will be difficult for them to find reliable friends among advanced states. 

Unfortunately, in the short time since the book was written, the government of the United States has adopted an international stance that seems to be inconsistent with the continued existence of an Anglosphere-led world order. Countries that have long regarded themselves as allies of the U.S. are now forced to contemplate seriously how they can best protect their own interests if the U.S. pursues isolationist policies.

The book ends on a somewhat optimistic note. The author observes that there are roughly fifty prosperous, open societies around the world. If one of them fails, “that will not stop others from picking up the torch”. He adds:

“That prompts the question of where the next golden age will come from.”

After considering various possibilities, however, he suggests that “perhaps this is the wrong way to look at it because we now have a “truly global civilization” in which every literate person anywhere in the world can draw upon the accumulated knowledge of humanity and learn skills in any field. In that context, “no one country can hold a monopoly on the ideas that can make them prosper”.

I agree with the general thrust of that argument. The technology required for future golden ages is not deposited in a library that can be easily destroyed. However, the geographical location of societies that are open and prosperous is still an issue worth considering. It isn’t much consolation for citizens in the United States, Britain or Australia to know that their children and grandchildren may be able to draw upon the accumulated knowledge of humanity and learn skills in any field, if institutional change impinges adversely on their incentives to do such things. Opportunities for human flourishing depend on whether political entrepreneurs will restore and maintain sufficient economic freedom.

It is in that context that I ask: Is it too soon to be asking where the next golden age will be located?

I suggested an optimistic answer to that question in Chapter 6 of Freedom, Progress, and Human Flourishing. Looking beyond looming economic crises, I am still optimistic that the governments of most liberal democracies will eventually introduce institutional reforms to enable the drivers of progress to restore growth of opportunities.

What does the Milgram experiment tell us about human nature?

 

I can remember feeling shocked when I first heard about the Milgram experiment. Some psychology students told me about the experiment about 60 years ago, while I was at university.

At that time, the findings of the experiment caused me to question my view of human nature. I was brought up to hold the view that it is natural for humans to be kind and humane. That view is consistent with the derivation of the words, “kind” and “humane”. It is also the view I hold now. The findings of the Milgram experiment seemed to suggest, however, that a less positive view of human nature might be more accurate.

In this post I will summarize the Milgram experiment briefly before explaining why I have changed my mind about what it tells us about human nature.

The experiment was conducted by Stanley Milgram, a psychologist at Yale University. His aim was to explore whether individuals would obey instructions to harm another person when an authority figure told them to do so. The first results of the experiment were published in 1963.

Participants in the experiment were led to believe that they were assisting in a learning experiment in which they were “teachers” who had to administer electric shocks to a "learner" who made mistakes. The electric “shocks” were fakes. The “learners” were actors. They made audible protests in response to the fake shocks. As the voltage increased, the “learners” protested more.

The main finding of the experiments was that a very high proportion of subjects fully obeyed the instructions - 65% were willing to apply the highest shock level. The experiment was replicated several times with similar outcomes being obtained.

When I first heard about the study, the message I took from it was that most humans are horrible. People claim to have regard for the well-being of others, but when it comes to the crunch, most people lack sufficient empathy and/or moral fortitude to refuse to inflict pain on others. The worst part of it was that I wasn’t confident that I would have been one of the minority who refused to apply the highest shock level.

However, when I recently read an article about the study I modified my view of the participants. They didn’t lack empathy for the victims. It was obvious from their behaviour, including symptoms of stress, that they were uncomfortable following the instruction to inflict pain. Every participant paused the experiment at least once to question whether they should continue. In interviews following the sessions, participants frequently described feeling tormented by what they believed they were doing.

Participants only continued because the instructor insisted that they do so. The instructor began by asking the participants politely to “please continue”. If they continued to object, they were told: “The experiment requires you to continue”. If they still objected, they were told three times that they “must continue”.

Milgram’s subsequent experiments showed that obedience was affected by a range of factors e.g. the uniform of the instructor, the location of the experiment, and the presence of social support. In one experiment, two confederates in the room refused to administer high levels of shocks. In that context, only 10% of participants were willing to administer the highest level of shock.

On the basis of his findings, Milgram suggested that the obedient participants were in an “agentic state” where they had allowed others to direct their actions and then passed off responsibility for the consequences to the person giving the orders.

Alexander Haslam and Stephen Reicher have suggested another factor that may explain the behavior of the obedient participants. Rather than simply caving in to orders, they may have believed that they were contributing to a worthy scientific cause.

My conclusion

I am no longer surprised that 65% of participants in the Milgram study ended up doing what the instructor told them to do. They had good reasons to respect the authority of the instructor. They believed they were taking part in a scientific experiment being conducted at a reputable university.

The outcome of the experiment reflected excessive respect for authority rather than a lack of empathy with other humans.

The main point I take away from the findings is that people need to recognize that if they want to behave honorably towards others, they may sometimes need to disregard instructions from authority figures.

The findings of the experiment do not provide a reason to question the view that empathy for others is a characteristic of human nature which is suppressed only under extraordinary circumstances.  

Are declining economic growth rates likely to have undesirable impacts on social attitudes?

 

Research for an earlier essay on this blog led to the conclusion that declining economic growth rates in high income countries are likely to cause an increasing proportion of the population of those countries to feel that their standard of living is worse than that of their parents at a comparable age, and therefore to experience lower average life satisfaction. In this essay I extend that analysis to consider the social attitudes of people in the USA, Britain and Australia who feel worse off than their parents.

In the previous study I used data from the World ValuesSurvey to examine the relationship between the perceptions of respondents about their standard of living relative to their parents at a comparable age and economic growth in the countries in which they reside. That data was then linked to average life satisfaction.

The main findings were:

• Perceptions of standard of living relative to parents are positively related to past economic growth experience of the countries in which people live.
• In the high-income countries, low growth has a greater adverse impact on young peoples’ perceptions of their standard of living relative to parents than on the corresponding perceptions of old people.
• The perception of having a lower standard of living than parents at a comparable age has a substantial adverse impact on life satisfaction ratings.

These findings imply that lower economic growth rates would be likely to result in an increasing proportion of the population having lower living standards than their parents, and hence, lower average life satisfaction. The psychic costs of adjustment to lower economic growth would initially fall most heavily on young and middle-aged people.

Those findings raise questions about likely changes in social attitudes if economic growth prospects continue to decline in high-income countries, resulting in an increasing proportion of people who feel worse off than their parents were at a comparable age. This essay uses World Values Survey data to explore how some of the social attitudes of people who perceive themselves to have a lower standard of living that parents differ from those of the rest of the population.

I focus on three high-income countries – USA, Britain and Australia. The USA survey was undertaken in 2017, the British survey in 2022, and the Australian survey in 2018.

Figure 1 provides further evidence that people in the USA, Britain and Australia tend to have lower average life satisfaction if they perceive that their standard of living is lower than that of their parents.

 

Demographics

Figure 2 indicates that people who perceive themselves to be “worse off” than their parents tend to be concentrated in the 25-54 age groups.

 

Figure 3 suggests that the sex composition of those who feel “worse off” than their parents differs somewhat by age group in the countries considered, but I have no idea why. There appears to be a higher percentage of young women in that category in Australia, a higher percentage of women in the 30-49 age group in Britain and a higher percentage of older women in the United States.

 

Work and Success

Figure 4 indicates that those in the “worse off” category are less likely to agree that hard work brings a better life.

 

Attitude to Migrants and Migration

The only conclusion I can draw from Figures 5 and 6 is that Australians who feel “worse off” than their parents tend to have more negative attitudes toward migrants and immigration than those who feel better off or about the same.

 

Trust

Figure 7 suggests that a lower percentage in the "worse off" category say most people can be trusted.

Figure 8 suggests that a lower percentage of those in the "worse off" category have confidence in the justice system.

Priority given to Freedom

Figures 9 and 10 suggest that there is not much difference between the three groups in terms of priority given to freedom. Slightly fewer of those in the “worse off” category tend to give freedom higher priority than equality. Surprisingly, in Australia and Britain, slightly more of the people in that category tend to give freedom higher priority than security.

 

Government objectives

Figure 11 indicates that those in the “worse off” category are more inclined to want government to take more responsibility to ensure everyone is provided for. The percentages shown are for the top 3 ratings on a 10 point scale.

 

Figure 12 indicates that those in the “worse off” category are less inclined to give high priority to economic growth. Respondents were asked to select from a list which national aim should be given highest priority. Other items on the list include having strong defence forces and individuals having more say in decision making.

 

Politics

Figure 13 suggests that those in the “worse off” category are no more interested in politics than other people in the countries considered.

 

Figure 14 suggests that people in the “worse off” category are no more likely to consider that it is good to have a strong political leader.

 

Figure 15 suggests that people in the “worse off” category are no less likely to consider that democracy is important.

 

Figure 16 suggests that people in the “worse of” category are less likely to be satisfied with political system performance than are people in the other categories.

 

Figure 17 suggests that people in the “worse off” category are as strongly opposed to political violence as are people in the other categories.

 

Conclusions

The social attitudes of people who perceive their standard of living to be worse than that of their parents at a comparable age are similar in many respects to those of people who perceive their standard of living to be better or about the same as that of their parents.

However, there are some important differences. People who perceive their standard of living to be worse than that of their parents at a comparable age are more inclined to:

• Skepticism about hard work bringing a better life;
• Pessimism about trustworthiness of others and lack of confidence in the justice system;
• Collectivism in terms of responsibility for the wellbeing of citizens;
• Negativity about giving high priority to economic growth; and
• Dissatisfaction with political system performance.

That combination of attitudes seems likely to be self-perpetuating because it is likely to promote policy responses that will lead to lower economic growth and a further increase in the proportion of the population who perceive their standard of living to be worse than that of their parents. Adoption of more market-friendly economic policies to facilitate higher economic growth seems unlikely to occur before that course of action becomes more obviously necessary to avert major economic crises.