Friday, July 07, 2006

Presidential Press Conference in Chicago: Why Market Process is Superior to Politics

Most theories of government failure seem to be built on the notion of rational ignorance (unsurprising, since they generally assume neoclassical maximizing agents). I think that rational ignorance is a secondary factor – sheer ignorance, bounded rationality, and the knowledge problem are the heart of the matter.

President Bush’s 7 July press conference should remind us of why politics works so badly, in comparison to the market process. Bush spoke like a simpleton, as usual. I suspect that he cultivates this as a political tool – he’s always speaking to a base that wants simple, straightforward, clear doctrines – and Bush comes off sounding stupid while he’s at it. But the real stupidity isn’t in Bush, I think, but in the people in the press and public who swallow obvious nonsense and worse without a thought. And one of the fundamental reasons politics works badly is that nonsense can be swallowed without a later reckoning that reveals the error. Some examples of nonsense:

1. On immigration and guest worker programs: Bush again called for a tamper-proof ID that guest workers would need to show to employers before being hired. For such an ID to work, it will have to satisfy two conditions. First, it will have to be mandatory for everyone, including American citizens. An employer can’t distinguish between citizens and non-citizens. And since it will be illegal for any person to be hired without the ID, this is a proposal to have a mandatory government work permit for everyone – no one will be able to work legally without government permission. In the countries that have tried this scheme previously – the USSR, Communist China, and their spinoffs – this has always been used to enslave the individual. If such a system is instituted here, the same will happen. Everyone will work and eat only with approval of the government.

Second, such an ID will have to be tied closely to the individual who holds it – this means it will be a biometric ID using fingerprints, retina scans, DNA, etc. To make it even more tamper-proof, it would ideally be physically attached to the individual, e.g. with a subcutaneous microchip. As an atheist, I don’t have much faith in bible prophecies – but isn’t it obvious that this is straight out of Revelations? Shouldn’t this nightmare be an issue where civil libertarians, free market advocates, religious conservatives, and in fact everyone other than plain totalitarians can join in fierce opposition? Apparently not, and the only reason I can think of is a general inability to realize what the proposal means – i.e. an inability to think. (Hopefully people will wake up before we end up with these internal passports, although the REAL ID has already been signed into law. I guess here there will be an eventual reckoning that reveals the error, at least – small comfort that when we all have our 666 tattoos we’ll recognize our earlier stupidity.)

2. What to do about high gas prices: Bush emphasized pushing for energy independence as the long run solution. This makes no sense at all, since imported energy is cheaper. Bush himself later correctly identified the benefits of free trade in general. The press corps demonstrated again a near inability to think at all, since they swallowed this obvious nonsense.

(Asides: Credit where it is due: Bush’s shorter term proposal of reducing environmental red tape to permit construction of new refineries would indeed work, and is a good idea.)

(Second aside: Of course I am in favor of higher gas prices anyway, so long as they are free market prices, and our current higher prices are not a crisis nor even a problem – they are not strictly free market prices, but it is mostly market forces that are driving them higher.)

3. On diplomacy: Bush kept repeating that unlike other approaches to solving international problems, diplomacy is “cumbersome and slow.” Oh yeah? Is it really more cumbersome and slower than unilaterally getting bogged down in a hopeless and endless military quagmire? Bush himself insists that no end date can be placed on the U.S. occupation of Iraq. How is diplomacy slower than a military response that might go on forever? In talking about how long diplomacy takes he even pointed out that his administration has been working for four whole days trying to organize an international response to North Korea’s missile activity. Obviously four days is a short time, and Bush is speaking nonsense simply because it works for him politically.

These examples make my point – people are capable of swallowing all sorts of nonsense that would be revealed with even tiny bit of critical thought. In neoclassical economics, the rational agent can deduce all logical consequences of the information he receives. Clearly this is falsified. Of course, in rational expectations models it’s enough if just some agents are rational in this sense, or more accurately, if agents are on average correct. But all of this is falsified as well – in political processes, there are no good feedback mechanisms to give signals of success or failure – and it is hard to imagine how there could be when individuals seem incapable of even simple critical thought.

Economists Mises and Hayek both argued that the fundamental problem of society is the struggle with uncertainty. They also argued that the market process gives us a means of overcoming, to a surprising degree, this uncertainty. In particular, losses reveal errors, and consistent losses transfer resources from those who persist in making mistakes into the hands of those who don’t. Furthermore, market prices are an information signal available to anyone. No such mechanisms operate in the political sphere, where at best the mechanisms – e.g. natural selection – are “slow and cumbersome.”

I agree with your three observations. Have you read the work of Laura Donohue? She's been looking into the curtailment of civil liberties in the wake of the war on terror—to such a degree, it would seem, that she's been put on the no-fly list.

With respect to diplomacy, I wonder what other option could Bush be considering? Threatening military strikes against North Korea or Iran seems, at best, only credible with missiles, but that's no guarantee to eliminate nuclear threats, so unlikely to be ordered. Even though we were supposed to be in a position to fight two wars at once, it doesn't seem like that would actually be possible. Perhaps if there was no post-war to handle.
Thanks for your comment, Daniel.

I hadn't heard of Donohue, but your note gives me a sinking feeling, since my sole consolation is that if things go as badly in the U.S. as they might, my one consolation is that I could fly away. I guess I shouldn't complain -- swimming, biking, and running all the way to Ukraine would be quite a triathlon. And there's no "No Tri" list...yet.

Re diplomacy, Bush may understand that he has no other options. The U.S. is overextended militarily (experts are now talking aboutwhether it's years or decades necessary to rebuild the military), and Iran and N. Korea are far tougher nuts to crack than Iraq.

I suppose that if crucial nuclear targets can be identified, they can be knocked out, but who would put that much faith into intell reports today? And if what I have read is true, the Iranians have already dispersed and hidden their nuclear facilities, to the extent that they can't all be found, much less easily destroyed.

Buying off these regimes may be the only reasonable option -- in part an option foisted upon us because of Bush's fixation on the much smaller problem of Saddam's Iraq.
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