I got back from my cottage in Canada Friday night. Friday morning, I took a picture of a gasoline price sign in Winnipeg. The price: 1.849 per liter in Canadian dollars. This is the first time in my memory of going between California and Winnipeg over the last 36 years that the market-clearing price of gasoline in Winnipeg was less than the price in Monterey. Here’s the simple arithmetic. There are 3.7854 liters in a U.S. gallon. The Canadian $ is worth 77 U.S. cents. So $1.849 per liter translates to $1.849 * 3.7854 = $7.00 per U.S. gallon. That translates to 0.77 * $7.00 = $5.39 per U.S. gallon. Yesterday I paid $5.69 for gasoline in Pacific Grove. By contrast, I paid about $4.30 per gallon in Grand Forks, North Dakota on Friday. (0 COMMENTS)

With the idea of “consumer sovereignty,” standard economics may seem to claim or to assume that the utility of consumers is more important than the utility of producers. Notwithstanding the impossibility of scientific interpersonal comparison of utility, one objection is that this hierarchy is arbitrary, normatively if not also positively. Since any working person and any rentier is both a consumer and a producer, the utility of one is indistinguishable from the utility of the other. Moreover, many socialists and many traditional conservatives have argued (against classical liberals) that it is in his role as a producer that an individual’s life is significant. Thus, the objection goes, an economic system based on the sovereignty of the producer would be as efficient as, if not more efficient than, one mistakenly founded on consumer sovereignty. Due perhaps to the influence of Marxism (and other post-Enlightenment philosophies such as Hegelianism) during the last two centuries, these ideas have gained some intellectual respectability. Frank Fukuyama’s recent book Liberalism and Its Discontent provides an illustration. There is no reason, he explains, “why economic efficiency needs to trump all other social values.”Are human beings “consuming animals” or “producing animals”? he asks. “This a choice that has not been offered to voters under the hegemony of neoliberal ideas.” As I note in my forthcoming review of this book in the Fall issue of Regulation, the absurdity of putting such a choice before voters can be seen by imagining a referendum that would ask “the people”: “What animal do you want to be, a consuming animal or a producing animal?” After a victory of the producing-animal campaign, an injunction would probably follow from whoever believes he represents the collective: Now, get back to work! More fundamentally, I think the answer to the question of the primacy of the consumer or the producer is the following. If it is the producer who strives to satisfy the consumer, he will automatically strive to satisfy his own preferences because he gets income to the very extent that he satisfies the consumer. If it were instead the consumer who endeavored to satisfy the producer—by letting the latter have the easiest working conditions and generally deferring to him—he would not simultaneously maximize the satisfaction of his own preferences, quite the contrary: producers would have no incentives to produce as much as possible for consumers. Therefore, the individual, who is both producer and consumer, would have less to consume. Looked at from another viewpoint, an individual who, did not as a producer work for consumers, nor as a consumer try to get as much as possible from his suppliers, would not go far in maximizing his utility. (Recall that maximizing one’s utility simply means getting in one’s most preferred situation.) If we assume that an individual usually wants to maximize his utility, he will naturally adopt a commanding posture before his suppliers and a service mentality toward his customers. There is thus a good positive reason for assuming that, in a context of individual liberty, most individuals will adopt the behavior just described. And if we make the normative judgement that the welfare of individuals as natural equals (to use a classical liberal expression) is what counts, we will favor a political-economic regime of consumer sovereignty, not of producer sovereignty: only in the former, where the self-interests of consumers and producers are well coordinated without coercion, can we hope to have an equal liberty and an good chance of prosperity for all. Such is the main argument in favor of consumer sovereignty as opposed to producer sovereignty. The political word of “sovereignty” can be misleading in this context. Consumers are not sovereign over producers in a coercive sense. Every producer is also a consumer. Moreover, production often has a consumption or pleasurable (even if stressful or anguished) component: think of artistic work as the paradigmatic case. And in a free society, although we expect the typical individual to produce in order to consume and not the other way around, eccentricity is not forbidden nor is affection or charity—producing for the benefit of somebody else—banned. What is pretty clear is that a regime of generalized producer sovereignty is at best meaningless. (0 COMMENTS)

In anticipation of Bruce Caldwell’s and Hansjoerg Klausinger’s Hayek: A Life 1899 – 1950,  the first of a two volume biography of Hayek to come out this October, I decided to read Hayek on Hayek: An Autobiographical Dialogue* to refresh my memory about F.A. Hayek’s life. This book, which has been underappreciated by many Hayek fans, is a great overview of his life in his own words.  The book consists of fragments of interviews that Hayek gave to different people and they are tied together to present his life from his very early years in Austria to his later fame. There is also a radio broadcast he gave at the University of Chicago. There are two things that make this a compelling book for the reader: a) It is small- less than 200 pages which make this very quick to read, and b) It is Hayek speaking and you can see how he experienced the different events in his life. In many cases it feels like how an old relative would tell you stories about the past. The language is plain and simple and often even comical. The reader gets to know both Hayek the man and Hayek the economist. Writing my thoughts about such a book is a hard task, because I really do not know where to start. Should I write about Hayek’s life? Absolutely not, there are better biographies. David Henderson has a nice biography of Hayek in the Concise Encyclopedia of Economics here at Econlib. Should I review it like any other book and point out its strengths and weaknesses? No, it is a very good autobiography and there is really very little to object to. Instead, I would like to offer my sincere thoughts about the book.  There are two things that really drew me to read this book and pushed me to finish it quickly. The first is Hayek’s account of himself. It is very common to see people who excel in their field as individuals who were perfect their entire lives. They were born smart, were great students in school, were recognised by their professors in university for their unusual intelligence and, last, pioneered their field. I believe one aim of biographies and autobiographies should be to dispel such myths. Hayek describes himself in a very humble and down to earth manner. In school he was a terrible student and read very little outside of biology, which was a long passion of his. He inherited this love from his father August who was a botanist. He could barely pass his classes in school; he neglected homework and relied on what he could remember from class to help him. Initially, Hayek wanted to become a diplomat, but after the fall of the Austro Hungarian Empire post WW1 such a path was not available. His interest in political and economic matters was sharpened during his time in the military fighting in the Italian front. Being part of a multinational and multilingual army he said, “I served in a battle in which eleven different languages were spoken. It’s bound to draw your attention to the problems of political organization”. Hayek looks back on his life appreciating his successes and pointing out where he was wrong or should have done more, such as with his criticisms of Friedman’s methodology and Keynes’ economics.  I was also struck by how Hayek talks about his fellow economist and the intellectual atmosphere around him. It is  exciting to “listen” to such great figures as Keynes, Schumpeter, Wittgenstein (who was also Hayek’s cousin) and Schrodinger through someone who knew them first hand. Pre-WW1 and interwar Vienna was a vibrant city where some of the greatest scientists and economists of the last century lived.  Hayek’s reminiscences of the University of Vienna are probably the most interesting. The way Viennese economists and philosophers did their work was very different from how their American colleagues operated. It was very usual for economists to meet also outside of universities at the different coffee houses or in one another’s houses and discuss the matters that interested them. There was the Mises Kreis for example which included many brilliant minds like Alfred Schutz, Gottfried von Haberler, Fritz Machlup, Karl Menger( Carl Menger’s son), Felix Kaufmann and of course Mises. They, although this was not mentioned in the book, even had their own collection of songs which was published by Kaufmann. In the introduction to this collection of songs it is mentioned: The formal meetings would begin at 7:30 p.m. and last as late as 10:00 p.m. Most of the members would then gather for dinner at the restaurant Anchora Verde, where the discussion would grow lighter. Afterwards, they would continue to the Café Künstler, opposite the University of Vienna, for coffee until 1:00 a.m., when Mises usually left. Fritz Machlup reports, however, that when he left at 3:00 a.m., he usually had to say goodnight to philosopher Alfred Schütz!  This was just one of the many circles that existed in the city, the were other groups like the Austro Marxist, the Wiener Kreis, the Mathematical Colloquium and the Geist Kreis for which I sadly don’t have the space to talk about. If anyone wants to learn more about the intellectual environment of interwar Vienna and how the Austrian economists operated in it I wholeheartedly suggest the excellent book by Erwin Dekker’s The Viennese Students of Civilization. I am now even more eagerly waiting for Professor Caldwell’s next book to come out.   * I would like to thank the University of Chicago Press for a review copy of the book. Chris Loukas was born in Greece and is an economic journalist and the youngest member of the Greek team in the international Economics Olympiad for 2022. His articles have been featured by the Foundation for Economic Education, the Mises Institute and Adam Smith Works. (0 COMMENTS)

Many people mistake the organizational form of “nonprofits” as being free from economic considerations. If the organization is not run by a profit-motive, it surely will act ethically and in accordance with the mission statement of the organization. In a sense, people view nonprofits as exempt from the regular rules of life in a market economy. However, nonprofits also have a vested interest in organizational survival. The faulty belief that without profits, people will no longer act in their self-interests, drives operational inefficiencies. Many think that since the organization is not trying to obtain money beyond operating expenses (which is in itself a dubious assumption), that the actions of the people within the organization will solely focus on achieving the organization’s stated goals. However, as talked about previously, there are incentives for delaying the achievement of these goals as a result of not wanting to become unemployed or take a pay cut. This problem takes the form of a principal-agent problem because the organization’s advisors and its donors may have different interests than the employees and those administrating a nonprofit. Typically, people donate to a firm because they think it’ll achieve a goal that they care about. However, since it is hard to monitor whether those donations are used effectively, there needs to be mechanisms in place to encourage action. I want to juxtapose two methods of funding nonprofits and suggest a manner to improve their effectiveness on the margin. The two major funding mechanisms are grants and prize money. Grants are given in advance and are able to be specified. Most donations would fall into this category. Typically, grants are favored by bureaucracies because of the fact that much of them are in perpetuity and are not tied to success, which can be fleeting. Oftentimes, grants work well in situations involving repeat players. Grants seem to work better when the purpose of an organization is diversified, and staying power is important. Two types of nonprofit that seem to do well with grants are general purpose think tanks and direct aid organizations. General purpose think tanks come up with a set of ideas that mostly follows a specific ideology. It’s not necessarily clear what success is defined as, meaning that trying to tie success to a prize may result in underutilization of good ideas. Since a lot of think tanks are premised on the idea of being a reliable authority, staying power is important. Staying power is similarly important in the context of direct aid. When dealing with a problem like providing a food kitchen, some form of regularity can be important in helping the greatest number of people. Overhead, for example, is certainly something to consider; it can be expensive forming and reforming organizations to achieve the same goals. However, just because grants are preferable for some situations, doesn’t mean that they are well-equipped to deal with easily measurable success and generally efficient use of inputs. One of the best ways to encourage an efficient use of inputs is profit and loss. Prize money, in an important sense, can serve as a “commission” [read “price”] for those who are deeply interested in achieving a goal. Those trying to win the prize are unlikely to spend more than the prize money is worth in pursuit of the goal. This discourages spending that isn’t likely to make much of a difference, while giving newcomers a better shot at winning, which allows for a diversification of inputs and incorporates more local knowledge into what is likely to be successful. If one person can put together a team to achieve a goal of building a thousand houses for the homeless, then it’s more likely to get done. This prize system has worked well in trying to achieve major social goals. For instance, Robin Hanson describes how funding for results should be the best strategy when innovators have access to capital and a particular goal in mind. If science research is best done through this market process, then it should also follow those specific goals would be better served in this way. Nonprofits are often funded by individuals and donors. Using escrow or prizes may serve as a method of solving this principal-agent problem and can result in better outcomes. If nonprofits are focused on a specific measurable goal, prizes are underutilized as a method for achieving results. Focusing on good solutions, rather than on influential groups may be what’s necessary to kickstart new approaches to solving collective action problems.   Isadore Johnson is a campus free speech advocate, an economics and philosophy student, and regional coordinator for Students for Liberty. (0 COMMENTS)

In 2018, the New York Times discussed a proposed family leave policy authored by Marco Rubio: The plan backed by Mr. Rubio (and soon to be introduced in the House by Representative Ann Wagner, Republican of Missouri) is much more comprehensive. But it still makes parents trade one benefit for another. It would allow a parent to draw from Social Security benefits to take at least two months of paid time off at around 40 to 70 percent of current pay. But those parents would then have to delay retirement or reduce their Social Security benefits to cover the cost of the parental leave. The Urban Institute found that taking 12 weeks at half pay would mean forgoing 25 weeks of retirement or reducing monthly checks by 3 percent. I won’t discuss the overall merits of this plan.  But I believe that both its conservative supporters and its progressive critics are mistaken about one aspect of the proposal.  Senator Rubio likes the fact that the plan is “paid for” by future reductions in Social Security.  Progressive critics find that aspect to be punitive.  I find it completely non-credible. I suspect that the plan would be quite popular with young mothers, as a cost to be paid 30 or 40 years in the future hardly seems like something worth worrying about today.  More importantly, many people might rationally reach the conclusion that the threat would never be carried out.  After all, the government has previously played this sort of shell game with expensive new programs supposedly “paid for” out of future taxes that are likely to be unpopular and that get repealed before taking effect.  Remember the “Cadillac tax”? I suspect that in the 2060s, the population of developing countries will be declining due to low birth rates.  At that time, I doubt policymakers will want to punish mothers who opted to have children in the 2020s by giving them reduced Social Security benefits relative to those families that chose to remain childless.  (If cuts to Social Security are made at that time, I suspect they will affect affluent retirees.) Politicians care much more about their pet projects getting enacted than they do about long run budget issues.  Thus they are willing to adopt almost any sort of financing gimmick or trickery if they think it will help to get the bill through Congress. The NYT editorial writer (Bryce Covert) opposed Rubio’s plan.  I suspect that if she understood that threat to reduce future Social Security benefits would not carried out, then she might favor the plan. (0 COMMENTS)

Regular reader and frequent commenter Kevin Corcoran sent me his thoughts on the post I did on Joey Smallwood and industrial policy. We agreed that his long comment is better as a standalone post. Here it is: On the one hand, it’s easy to read about the floundering of Joey Smallwood in the article you [DRH] mentioned and have a chuckle at his fumbling ineptitude. But at the same time, this story shows one of the problems with a common response to a common criticism of industrial policy and central planning. The common criticism is that politicians necessarily intervene in areas where they do not, and cannot, have any competence. This isn’t a claim that politicians are stupid, of course: as George Will put it in The Conservative Sensibility, “The simple, indisputable truth is that everyone knows almost nothing about almost everything. Fortunately – yes, fortunately – this is getting truer by the day, the hour, the minute. As humanity’s stock of knowledge grows, so, too, does the amount that, theoretically, can be known but that, practically, cannot be known.” But, the criticism continues, legislators, whose capacity for knowledge is no different from anyone else’s, still put their fingers into pretty much everything. There’s an amusing section in P. J. O’Rourke’s Parliament of Whores where he describes about two dozen different topics Congress would be working on that week, and observes “that, one would think, is about the limit of human capacity for expertise. To be conversant with twenty-five disparate issues at once is as much as we can ask of a person. However, it is less than 10 percent of what we ask of a congressman. During the same week in 1990, 250 other items were also on the congressional calendar.” O’Rourke lists some of these varied and unrelated topics including fish hatcheries, outer space, the economy of the Caribbean, nutritional labeling, “and, of all things, paperwork reduction.” He then quips “We expect our congressman to know more about each of these things than we know about any of them. We expect him to make wiser decisions than we can make about them all. And we expect that congressman to make those wise and knowledgeable decisions without regard for his political or financial self-interest.” The common response to this criticism is to concede that of course politicians can’t be competent in all these areas, but that’s okay because politicians can consult with people who are experts in each of these areas. This will let the politicians cast votes that are informed by multiple lines of expertise, and allow their decision making to benefit from all that accumulated expertise despite their inability to gain that knowledge directly. However, this response cuts very little ice. The simple fact is that knowing who is an expert in a given area, and how well their expertise will apply to the situation at hand, is itself something that requires a significant amount of knowledge. Smallwood clearly didn’t know how to establish a fishing industry to catch herring. He instead turned that over to Icelandic herring fisherman, to less than impressive results. Maybe these were lousy fisherman, or maybe methods of fishing that are successful in Iceland are ill suited to Newfoundland. Regardless, Smallwood, lacking knowledge of fishing, also lacked knowledge on how to identify proper expertise in fishing. But rather than allow a competitive fishing industry to emerge on the open market, he picked his chosen “experts” and funded them at public expense. The results shouldn’t surprise anyone. Now, reconsider the situation of the average member of Congress. Consider the hundreds of different topics they vote on and regulate any given year. Does anyone seriously believe that each member of Congress is able to properly identify the best and brightest scholars for all these different topics, with the relevant expertise, that will be properly applied in each situation? And that these politicians will wisely absorb and understand the advice they are given and properly reflect it in their votes? Does anyone believe this is an accurate description of how various federal regulators operate when they pass thousands upon thousands of new pages of regulations every year on every topic imaginable? To crib a line from Robert Heinlein, if you believe that, I have a wonderful offer for you. No checks, please. Cash only, and in small bills. I agree with Kevin. Let me, DRH, clarify what I think is Will’s point in writing, “Fortunately – yes, fortunately – this is getting truer by the day, the hour, the minute.” The reason it’s fortunate is that it’s a necessary consequence of something that’s fortunate: namely, the constantly expanding international division of labor, which makes almost everyone better off. The greater the division of labor, the more specialized we become and, therefore, the more productive. Also, to drive home Kevin’s point, yes, Joey Smallwood made a lot of mistakes by not consulting with experts. But the whole original article from which I quoted shows how often he did consult with experts who gave bad advice. You still have to have enough expertise to choose good experts.   (0 COMMENTS)

In freer rather than less free societies, even if not truly free as Western societies stand, people get used to debates and criticism, which tend to push them in the path of truth and thus, at least in the long run, economic efficiency. This is a major advantage over less free and unfree societies. This observation must also be valid in war, at least ceteris paribus—for example, given an equal public support for a war. An information revealed by the Wall Street Journal about a classified report being prepared by the Pentagon illustrates this point. The subject matter is the military causes and circumstances of the disastrous American retreat from Afghanistan last summer (“Report on Pentagon Role in Afghanistan Is Under Review,” July 18, 2022): An initial draft of the Pentagon’s assessment, completed by authors affiliated with National Defense University, was submitted in March. … The problem with the report submitted in March wasn’t that it was too critical, [an anonymous senior defense official] said. “A draft document would not have been returned because the belief was that it was too critical; you get nothing out of an after-action analysis if it is not critical enough,” the official said [my emphasis]. Defense secretary Lloyd Austin previously declared: We want to make sure that we learn every lesson that can be learned from this experience. The information, of course, could be false or embellished, but there is a good probability that it is correct because of the general quality of fact reporting by the Wall Street Journal. The information is not surprising anyway: the freer a society, the more criticism is valued and expected; and the more officialdom has problems hiding the truth, if only because it is likely to be leaked. A free press plays an important role—and it should be noted that a free press is not one that says what you think it should say, but a set of medias not barred from Power from saying what they want). Nothing is perfect, of course, but most things are more imperfect in an unfree society. (0 COMMENTS)

Teamwork is pretty important in determining success in competitive team sports. Eight 90 pound weaklings can beat an equal number of rowers with the power of a Mike Tyson in a regatta, if the former work together and the latter row at cross purposes. Even an excellent 3-point shooter such as Stephen Curry will not take that shot if there is an uncovered team mate hanging around the basket. Why not? By passing the ball, he can increase the expected value of the shot. I don’t care what middle name his parents gave him; his real basketball name is Stephen Teamwork Curry. It is the same in football. If there is an end standing by the goal line, all alone, and the quarterback sees him but runs with the ball anyway … why even talk about that? This would never happen, if there is even a modicum of teamwork instilled by the coach. Suppose one runner in a mile relay race refuses to pass the baton on to the next runner; what happens to its chance of winning? That is pretty obvious. But this sort of teamwork is really underwhelming, compared to that which is exhibited in markets every day. How many athletes does it take to row that boat? A lousy eight. How many basketball players on one team can be running up and down the floor at any given time? A mere five. Football? A pitiful eleven. The members of a relay race? A trivial number: four. In very sharp contrast, how many people can cooperate with each other in an economy? Pretty much as many as the population size. In the world, a bit over seven billion! That’s billion, in case you’re not paying attention. How about in the United States? Somewhere in the neighborhood of virtually all of us, some 350 million. Take one more example of teamwork: the symphony orchestra. It has typically 100 or more members. When they play those sixty-fourth notes, all together, with not one musician out of tune or not exactly on time, it is almost a miracle. But, again, even this pales into insignificance when compared to what occurs in the economy. As it does in the operating room, when almost a dozen doctors and nurses work together in unison on a patient. It is not just in sheer numbers that economics has it all over any of these other cooperative endeavors. In addition, the business world, at least under a regime of economic freedom, has no leader, no central authority, no organizer. In contrast, the orchestra has a conductor, all sports teams have a coach or manager,  the operating room has a chief physician, the head chef runs the commercial kitchen, etc. Yes, it cannot be denied, the business firm has a chief executive officer, and there is of course cooperation within the company (or it would soon go bankrupt), but that is not the type of teamwork we are now discussing. Here, we are focusing on cooperation between businesses, not within each of them. How does this work? It is simple: prices and profit and loss. Let us suppose that the ideal allocation of resources in the production of peas and carrots is 50% each. But right now, an economy features 60% of the former and only 40% of the latter. There are too many peas; there is a surplus of them. So their prices will fall, and profits earned from producing them will decrease. There are too few carrots; the opposite will occur in that market. The price of Bugs Bunny’s favorite foodstuff will rise, and with that change, profits in that field will also increase. Adam Smith’s “invisible hand” will now kick in. Farmers, importers, will be led by it to bring to market more carrots and fewer peas. If there are 90% of peas and only 10% of carrots, instead of slight price and profit alterations, these will be far more radical. Investors will be far more heavily motivated to coordinate with consumer desires than before. The trouble is, this process is widely condemned as profiteering, price gouging, dog-eat-dog capitalism. However, this institution is responsible for allocating peas and carrots, and everything else under the sun, in rough conformity to consumer desires. This is teamwork at its best, with millions, nay, billions, of team members, and without any central direction at all. It truly deserves the honorific bestowed upon it by Ronald Reagan: “the magic of the market.” It is why advanced relatively free economies enjoy a level of prosperity which would be unobtainable from any other economic system. It is the rare non-economist who can appreciate the level of collaboration that occurs under free enterprise. Rather, they wallow in economic illiteracy, blaming profiteering, price changes, the very market signals that allow for economic teamwork.   Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans and is co-author of An Austro-Libertarian Critique of Public Choice (with Thomas DiLorenzo). (0 COMMENTS)

David Beckworth recently asked former Fed governor Randal Quarles why the Fed didn’t move last fall to stop inflation. Here’s how Quarles responded: Quarles: This is maybe an eccentric belief. I don’t think that it’s universally shared or even widely shared on the FOMC. But my belief is that it’s a separate element of the Fed religion that resulted in not moving in the fall, and it became clear that it was time to pivot to withdrawing accommodation, and it’s a long-standing kind of Fed principle that you shouldn’t step on the gas and the brake at the same time; meaning that you shouldn’t be raising interest rates at the same time as you are still increasing the size of the balance sheet. And so we had decided that we needed to taper the balance sheet purchases. The lesson of the taper tantrum under Bernanke was that you’ve got to telegraph that well in advance. You’ve got to do that gradually, in order to avoid disrupting markets. And you have to have completed that before you can start raising interest rates so that you’re not doing two conflicting things. So that was the sequencing. Macroeconomics is full of myths.  There’s a widely held (false) belief that the US ran unusually big budget deficits during the 1960s, and that the high inflation of the 1970s was due to supply shocks.  The idea that there was a “taper tantrum” in 2013 that “disrupted markets” seems to be another popular myth.  Where is the evidence for that claim? FWIW, here is the S&P500 in the year after Bernanke’s May 22, 2013, speech on the need to eventually taper bond purchases (a rather obvious point, BTW): Notice that the speech did not cause any stock market turmoil, either immediately or over the next 12 months.  Nor was there any major market reaction to Bernanke’s speech in the bond market, although long-term rates did trend upwards due to a stronger than expected economy in late 2013.   (The policy was unwise, but that’s because inflation was too low at the time.) Quarles suggests that in the fall of 2021, the Fed responded to this phony “lesson” by doing nothing to restrain inflation.  Today, frustrated stock and bond market participants must be grumbling “thanks for nothing”, as the Fed’s inaction ended up causing a market tantrum in 2022, with the economy surging to high inflation and as stock and bond prices falling sharply: As I keep saying, the Fed should not focus on stabilizing financial markets; they should focus on stabilizing expected NGDP growth.  Stable financial markets cannot be engineered artificially; they result from stability in the broader economy. The Fed needs to keep its eye on the ball: (0 COMMENTS)

In the original Star Wars film, later dubbed A New Hope, Luke Skywalker was initially reluctant to join the rebellion against the Empire. As he told Obi-Wan Kenobi, “Look, I can’t get involved. I’ve got work to do. It’s not that I like the Empire; I hate it, but there’s nothing I can do about it right now… It’s all such a long way from here.” Luke notes that joining the rebellion would be costly. Joining the rebellion would mean failing to engage in work he has committed to do, work that helps his family. He perceives this cost as so high that he believes he “can’t get involved.” In the real world, joining a revolutionary movement is costly too. Time and resources that someone puts towards a movement could have otherwise been used for other purposes. In addition to expending time and resources, participants may face violence from the state or rival factions. At the same time, these movements are often striving for political changes that are ultimately non-excludable. If a rebellion overthrows an unwanted government, those who stood on the sidelines are also freed from that unwanted government. This creates a collective action problem. There is an incentive to free ride on the efforts of others, rather than making the costly move of joining the fight. And yet, despite these collective action problems, revolutions and other social movements do happen. How does this happen? Why don’t all the prospective revolutionaries choose to free ride, as The Logic of Collective Action leads us into the logic of collective inaction? Part of the answer is that rebels create selective incentives for people to participate in their movement. A selective incentive is an excludable good provided to those who contribute to the production or provision of a collective good. While being free from a hated despot or empire is not easily excludable, plenty of other things are. For instance, a medal or some other form of accolade is excludable. So too are food and drinks offered at revolutionary gatherings. Camaraderie with and esteem from others who share your values is less tangible, but it’s still excludable and it’s still something people value. The strategies available to address collective action problems are diverse, and often these solutions will play mutually reinforcing roles. Mark Lichbach explores the diversity of these solutions in his book The Rebel’s Dilemma. Dennis Chong explores some of the ways civil rights activists addressed similar problems in his book Collective Action and the Civil Rights Movement. This literature has had a big influence on my work with Chris Coyne on polycentric defense. The diversity of real-world social movements and rebellions shows that people can address collective action problems and defend themselves from both external invaders and their own domestic governments. Too many economists see free rider problems and tacitly presume that only some intervention like taxation or conscription can address it. But sometimes people address these problems from the bottom up. Social dilemmas are real. Contributing to a collective goal is costly, and often it may be tempting to say “I can’t get involved.” Yet in Star Wars, and in our world, that’s just the start of the story. People are capable of devising strategies from the bottom-up that convince their fellows to join them in collective action.   Nathan P. Goodman is a Postdoctoral Fellow in the Department of Economics at New York University. His research interests include defense and peace economics, self-governance, public choice, institutional analysis, and Austrian economics. (1 COMMENTS)