American Compass’s Oren Cass recently had a piece – co-authored with his colleague Chris Griswold – in the New York Times that I just got around to reading. In it, they advise Republicans on what policies to push if the GOP wins big in November. But it’s the following passage that especially caught my eye:
Our organization, American Compass, has been developing a conservative agenda that supplants blind faith in free markets with policies focused on workers and their families.
Accusing proponents of free markets of being motivated by “blind faith” is a good soundbite. But with all due respect, it’s also a load of baloney.
Those of us who support free markets are not remotely under the spell of blind faith. We have a well-worked out theory, with lots of history and empirical research to back it up- of how innovation is spurred, and resources are allocated efficiently by market prices. (Among the many works that give intellectual credence to support for competitive market processes are Hayek’s “Use of Knowledge in Society” paper, the economics of Armen Alchian, and the historical and theoretical works of Deirdre McCloskey. The empirical literature that shows that economic freedom is key to promoting all the major aspects of life we want like growth, better education, a lift out of poverty, a decline in crime, and more.) As long as consumers spend, and investors invest, their own money and are allowed to keep the bulk of the gains of good decisions while suffering the losses of poor decisions, resources tend be released from less productive uses in order to be reallocated to more productive uses.
At the very least, the competitive market process allocates resources better than does a system in which politicians and bureaucrats – spending other people’s money – override the market’s allocation with various forms of subsidies, restrictive licensing, and protective tariffs. National-security concerns might justify narrowly targeted restraints on competitive markets, but Cass and Griswold were writing here about how to improve the economy, not about how to strengthen national defense.
No offense, but those who truly rely upon blind faith are industrial-policy supporters such as Cass and Griswold who continue to assert that, in the face of lots of evidence to the contrary, government officials can allocate resources better than can the price system. At the very least, unless and until they explain just how politicians and bureaucrats will get and use the knowledge that markets get and use with remarkable success each moment of each day, and how to prevent the fiascos and cronyism produced by past attempts at industrial policy, Cass and Griswold shouldn’t accuse people other than their fellow supporters of industrial policy of being guided by blind faith.
Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators.
READER COMMENTS
Thomas Lee Hutcheson
Aug 25 2022 at 4:24pm
Good economic policy is undermined by “blind faith” in free markets. It
“Free markets” are indeed the best arrangement for most good and services. International trade a immigration are two where (almost completely) free markets would bring enormous benefits. But there are a few others — the non-market for the net emission of CO2 into the atmosphere being the biggest exception — where Pigou taxation is needed.
Don Boudreaux
Aug 25 2022 at 5:17pm
Mr. Hutcheson: From where will the knowledge be gotten to determine the optimal level of Pigouvian taxation? And why do you suppose that the same externalities that perhaps cause carbon emissions to be too high are not operative in politics, thus causing decision-makers there to take inadequate account of the costs on innocent others of their decisions? These questions are neither idle nor unimportant. I’m very interested in an answer.
BC
Aug 26 2022 at 2:33am
When we believe markets are good at pricing something, then we are able to back out the “implied” expectations embedded in prices. For example, one can infer market expectations of inflation implied by TIPS prices. Similarly, if we believe that governments are good at setting Pigou tax rates, then we should be able to infer social costs of externalities that are implied by those tax rates. Current carbon taxes are zero in most jurisdictions. So, does that mean that the implied current social cost of carbon is close to zero or does it mean that political systems run by actual humans just aren’t very good at setting Pigou tax rates? One of these two things must be true.
Of course, one can always suggest that it’s *possible* for government to impose taxes that account for social costs of externalities. Anything’s possible. But, we could just as well claim that it’s “possible” for markets to handle externalities. We could just as easily inform all market participants of the social cost of carbon and ask them to take such cost into account in their consumption decisions as we could inform all political actors of the social cost of carbon and ask them to take such cost into account in setting policy. The question is not what’s possible. The question is what we expect will actually happen: how do we expect actual market participants and political actors to behave? Empirically, we do observe many individual market participants voluntarily cutting their carbon emissions — buying electric cars, installing solar panels, etc. Perhaps, such actions are less than socially optimal, yet we also observe carbon tax rates stubbornly fixed at zero. We also observe policy makers imposing protectionist trade barriers in their so-called climate bill and humorously calling that package the “Inflation Reduction Act”.
I wish Pigou tax proponents would share their model of political actors’ behavior that leads them to expect that actual human political actors are likely to set tax rates at socially optimal levels. Why should we believe the Efficient Government Hypothesis?
Don Boudreaux
Aug 26 2022 at 6:15am
BC: Excellent points throughout, but I especially like the point in your first paragraph.
Jon Murphy
Aug 26 2022 at 9:24am
I appreciate (and also like) your point, but I think the claim I quote here is explicitly true but implicitly incorrect. By that I mean there are many implied carbon taxes out there. The US does not have an explicit tax on carbon, but many things the government does tax varies carbon emissions. For example: gas taxes, automobile registration fees and excise taxes, mass transit subsidies, parking fees, etc. All of these items affect carbon usage and put an implied price on carbon. We must take these taxes and their results on carbon into account when discussing carbon taxes.
Thomas Lee Hutcheson
Aug 27 2022 at 9:58am
Mileage standards (which are a very poor fourth best tax on CO2 emissions) should of course be eliminated when we have a tax on net CO2 emissions. A tax on miles driven by vehicles of different weights and specifications as road user charge, although it clearly “affects” net CO2 emissions, (what kind of policy does not?) are still compatible with taxation of net CO2 emissions. The same would be true if we had congestion taxes for metropolitan street and road use. The trajectory of the tax on net CO2 emissions would of course change over time as fuel use and technologies improve.
Jon Murphy
Aug 27 2022 at 3:00pm
One would hope, but as we have seen simply by your comment that the price is 0, it is unlikely that carbon takes would be efficiently designed even to be Pareto improving, never mind optimal.
Thomas Lee Hutcheson
Aug 26 2022 at 5:25pm
From the same place that knowledge of which goods and service NOT to apply Pigou taxation to.
More seriously, I do not assume that the Pigou taxation rate that come out of the best process we can wrangle will be optimal, just better than the current rate of zero and better than the set of measures like those in the IRA.
Jon Murphy
Aug 27 2022 at 10:49am
And therein lies the rub. That knowledge is tacit and inarticulate. One does not even possess enough information to make this statement true:
That’s an assumption, not a correct statement (it’s also factually incorrect to claim the current price of carbon is 0).
Don Boudreaux
Aug 27 2022 at 10:59am
Mr. Hutcheson: First, the current rate of taxation on carbon emissions is not zero; carbon fuels are – and have for many decades – been taxed.
Second, you simply cannot know that a higher (or even a positive) rate of taxation on carbon emissions is closer to optimality than is a lower (or even a zero) rate of taxation. If for no reason other than possible beneficial external economies that might arise from greater use of carbon fuels, advocates of carbon taxes simply have no way to know if using higher taxes to reduce carbon emissions will make humanity better or or worse off. I concede that we opponents of such taxes have no way to know if not raising taxes on carbon-fuel use will redound or not bo humanity’s benefit. But in a free and liberal society the burden should be on those who propose government intervention rather than on those who oppose it. Carbon-tax proponents’ lack of any way to know if higher taxes on carbon-fuel use will redound or not to humanity’s improvement, the case for carbon taxes is simply not really made.
Don Boudreaux
Aug 25 2022 at 5:14pm
Excellent post.
I’m thinking of publicly issuing a challenge to Oren or someone else who believes that industrial policy is a practical means of raising the living standards of the masses over time. (I’ll here use Oren as the example.) The challenge will not be to debate the merits and demerits of industrial policy. Instead, the challenge will be to establish which side – the free-marketeers or the industrial-policy proponents – are more prone to rely on faith rather than on a sufficiently detailed understanding and explanation of real-world resource-allocation possibilities.
My challenge (which is still tentative, because I’m still thinking through its detail) would likely look something like the following:
Even if, as is highly likely, neither of us will convince the other, each of us will learn – and perhaps also the resulting essays will be of interest to the general public. At the very least Oren would no longer be able to sincerely accuse those of us who oppose industrial policy as having a “blind faith in markets.”
Walter Boggs
Aug 25 2022 at 10:49pm
I hope to read the results of that challenge in the near future.
Gerard Fosse
Aug 26 2022 at 3:50pm
There’s an important point you miss. Free markets could be the greatest for meeting consumer needs but Cass understands, which you and deRugy don’t, that free markets these days and unchecked globalization fail at meeting workers needs. The industrial policy which Cass wants is one which would reverse the erosion of meaningful manufacturing jobs.
Richard W Fulmer
Aug 27 2022 at 9:04am
Some 850,000 manufacturing jobs are currently unfilled.
Don Boudreaux
Aug 27 2022 at 10:18am
Mr. Fosse:
Even if industrial policy à la Oren Cass were to “reverse the erosion” of manufacturing jobs, the ‘meaningfulness’ of the jobs that would thus be artificially created would be swamped by these jobs being also parasitic. Workers in those jobs would find “meaning” in them only insofar as these workers remain blind to the reality that their “meaningful” jobs exist only as a result of resources being forcibly extracted from American consumers (through protective tariffs) and from American taxpayers (tapped for the funds paid out as subsidies).
Because decent people want to be net contributors to – rather than parasites on – their fellow citizens, no decent person who is economically knowledgeable would find great ‘meaning’ holding the kind of job that would be created by Oren Cass’s industrial policy.
More generally, you and Oren would do well to take a longer historical perspective. In 1917 the great British economist Edwin Cannan wrote this:
A century ago people gnashed their teeth over the demise of employment in agriculture – a demise caused largely by improved technology. Those gnashing their teeth back then were blind to the reality that the resulting release of labor allowed the growth of new, more-productive industries and, thus, the creation of new, more-productive, better-paying, and (I dare say) more “meaningful” employment.
Today, people gnash their teeth over the demise of employment in manufacturing – a demise caused largely by improved technology. Those gnashing their teeth today are blind to the reality that the resulting release of labor allows the growth of new, more-productive industries and, thus, the creation of new, even more-productive, even better-paying, and (I again dare say) more truly “meaningful” employment.
………
* Edwin Cannan, “The Influence of the War On Commercial Policy,” which is a speech delivered by Cannan on September 22, 1917; the text of this speech appears in Cannan, An Economist’s Protest; (London: P.S. King & Son, 1927). The quotation here is on page 123.
Jon Murphy
Aug 27 2022 at 10:58am
Gerald:
There’s a subtle tension in your comment. You (and Cass) talk about “meeting workers needs,” but then you highlight only certain workers’ needs should be met: manufacturing workers. In particular, only a subsection of manufacturing workers: “meaningful manufacturing jobs.”
“Meaningful” here is left undefined, but it is implied that whose jobs would be meaningful would be determined by Cass (or some other planner).
So, why do certain workers get protection while other workers’ needs are dashed? After all, resources are scarce, and if some industries are protected, others must necessarily shrink. If, for example, Industrial Planning were to reduce imports (and consequently exports as well), then longshormen, seamen, and shipbuilder jobs would be sacrificed for manufacturing jobs.
Another point: Cass (and you) are simply assuming that there is a dearth of manufacturing jobs. But, in reality, there is a relative abundance of manufacturing jobs (which is to say there is a relative scarcity of manufacturing workers). Job Openings for Manufacturing tends to run higher than the economy as a whole. Go to any manufacturing factory and one thing they’ll complain about is the inability to get workers. So, even if Cass et al were able to successfully plan an economy and bring manufacturing back, it’s not even clear that there would be workers for those jobs.
Richard W Fulmer
Aug 26 2022 at 2:04pm
Extraordinary claims require extraordinary evidence. Oren Cass’s is making an extraordinary claim when he argues that we will be better off if we take decisions out of the hands of individuals who understand local conditions, who can quickly respond to feedback, and who will pay a price if they choose poorly and place them in the hands of central planners who have limited knowledge and imperfect feedback mechanisms, and who pay no price for being wrong.
Cyril Morong
Aug 26 2022 at 6:50pm
In addition Hayek, Armen Alchian, and Deirdre McCloskey I would add How the World Became Rich: The Historical Origins of Economic Growth by Mark Koyama and Jared Rubin. This is an excellent book
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