Truck and Barter Where Sympathy and Hedonism Collide
Wednesday, April 23, 2003
Whenever goverment agents (or interest groups) want to intervene in the economy, in places previously guided by institutions condoning "peace, easy taxes, and a tolerable administration of justice," they must be able to easily reference, discuss, and model such an intervention. Hence, a group of interconnected people, businesses, places will become a system. The communications and transactions occurring within the system (think "health", "education", "statistical", "transit", etc.) are analyzed for difficulties, problems, and concerns. Not surprisingly, there exist a total of zero systems that are perfect--and cannot conceivably be improved in some manner--especially if we ignore the costs of improving that system.
By the time we have assessed all the costs and benefits of intervention, and decided what the government should deo, we seem to have forgotten that the "system" was just our own construction, and that our interventions might not impact the real world as they impact our imaginary model.
I'll ruminate about this for a while, as it hints of the difficulties of assessing the social cost of any intervention into any "system".
The federal and state governments spend a considerable sum on tracking citizens' economic transactions. On the whole, the agencies appear to sufficiently balance their desire for more data against the privacy and confidentiality of economic actors. But, using standard economic analysis, what is the optimal type and amount of economic statistics to be produced?
If produced by the government, how can a government decide that free distribution of the statistics is more important--economically or otherwise--than charging a fee to the end users to pay for the fixed costs of operating the statistical agencies?
I do not buy the price should equal the marginal cost of the last good sold argument for efficiency of a public good. For a government there are three choices--produce and charge MC, produce and charge MC+FC apportioned, or not to produce at all.
If the government charges MC, and finances the FC through taxes, how--on earth, not utopia--is it possible for the government to know if it is producing efficiently? Should it produce the good at all, charge more, or charge less? After all, it produces and prices goods like statistics efficiently in a Kaldor Hicks sense when the total value of each alternative is less than its actual course of action.
But by pricing at MC, all the government knows is that it is losing money. It has no ability to know that incurring fixed cost (even without deadweight losses of taxes) yields (after netted from of consumer surplus) positive value to citizens. Only by charging positive prices to cover its fixed cost does an enterprise know if social welfare is enhanced by any specific undertaking of fixed cost.
How can a statistical agency decide what is efficent to produce? Should it make such a decision? Can any actor--government bureaucrat or entrepreneur--actually make such a decision? We know entrepreneurs solve this problem implicitly by maximizing profits (or similar goals); does government even try?
The always interesting David Warsh writes about the system. No, not the oppressive anglo white male dominated system, nor the statistical system, or the health-care system, but the economist-production system.
Under this widespread, interlocking, very structured order of top-tiered departments, entry comes with a nod from the committee. Committees compete for the top graduate students, as measured and compared by test scores, undergraduate dedication to economics (or an economist), and mathematical ability.
Once they've entered, graduate students succeed and fail by several factors. Originality is the first--success means "something happens", while failure means it doesn't. Another factor is the real scarcity of economists of a certain gender. (Dare I ask how frequently "best woman economist" equals "best economist for the job")? If this binary factor indicates F instead of M, output is more highly valued in the top departments. Oh, well; De Gustibus Non Est Disputandum.
All in all, Warsh's objective and enlightening analysis makes me wonder why graduate students want to be a part of the system. No doubt, economists like being perched at top schools, as both students and professors. Of all academia, pay, schedule, excitement, and respect are the best.
But my single question to all system participants is, what are the opportunity costs of being a part of the system?
I cannot answer for anyone else. But for me, the opportunity costs of being in the system were way too high; so I never entered it. Instead, I am getting by with an economics Ph.D. at George Mason University, while working full time at RAND corporation. The GMU economics department is like any other in its infighting, professorial self-aggrandizement, and grad-student muscle-flexing, but it is unlike any other in its unwavering commitment to tailoring a Ph.D. to a student's mind, goals, and outside interests.
What will I consider a "successful" Ph.D.? Certainly not getting into Harvard or MIT as a professor of economics. In fact, becoming a professor would mean I've failed to use economic thinking to hands-on solve real problems in the business world and government. This answer puts me into direct conflict with the opinions of those in "the system"; which is exactly why I avoided it.
All I can really say about the system is "not in my name". I refuse to become a prose-deficient econometrics-pushing gnome. I do not acquiesce to the world full of dull over-mathematized arguments. I will not live in it, but from the outside I will do my best to live with it.
There have been several serious attempts to account for the costs of the 9/11 attacks, the invasion of Afghanistan, the continuing war on terror, the invasion of Iraq, and the rebuilding of Iraq. Most of these try to put a dollar amount to economic and noneconomic variables. To me, these are art, not science; they're ways of informing decisions that have no clear impact on specific individuals, and no clear decision maker. They're useful--to a point--but they're not, in any sense, definitive.
In fact, the only "cost-benefit" choice problem economists can readily tackle is the one in which an individual chooses between alternatives that he values by himself. As soon as groups must decide, we lose any clear way to value alternatives.
Some economists might object that even in individual choice problems, externalities are pervasive, and lesser values get chosen. Externalities imply that the some material consequences of an individual's choice are inflicted upon those who have not voluntarily transacted with the chooser, so the chooser has an incentive to take an alternative that imposes costs on others, instead of himself. My response is that solutions to externalities are just as pervasive as externalities themselves. Eliminating externalities is precisely what law, morality, rights, and mores do for us. They help us make sure that with all large (or relevant) changes occur to those voluntarily engaged with the choice maker.
With an individual chooser, the "costs" of choosing are the value of the best alternative not taken, as estimated by the chooser at the moment of choice. These costs are intuitive, and never will exist.
All other types of cost-benefit analyses estimate a different type of costs and benefits--those that accrue to everyone--before or after the fact. These analyses do not measure value to anyone or everyone; they're just a sum of goods times their spot prices.
Such a dull technocratic blade! Such inadequate results.