In order to answer this question it is necessary to know what push-pin is. From what I have been able to discover it is a game played with pins on the brim of a hat. Armed with that knowledge, however, I still don’t know enough about push-pin to judge whether it might sometimes give me more pleasure than reading poetry. The answer could also depend on the quality of the poetry and my mood at the time.
In The Rationale of Reward, published in 1830, Jeremy Bentham wrote :
“Prejudice apart, the game of push-pin is of equal value with the arts and sciences of music and poetry. If the game of push-pin furnish more pleasure, it is more valuable than either” (here).
Anyone who has studied a small amount of economics would know what Bentham was talking about. Whether pushpin is as good as poetry depends on an individual’s tastes.
John Stuart Mill noted that Bentham could not bear to hear anyone speak in his presence of good and bad taste: “He thought it an insolent piece of dogmatism in one person to praise or condemn another in a matter of taste”. With obvious relish, Mill contradicts this view of his god-father by asserting that people’s likings and dislikings are “full of the most important inferences as to every point of their character”. A person’s tastes “show him to be wise or a fool, cultivated or ignorant, gentle or rough, sensitive or callous ...” and so on (see here).
Picking up a similar theme in “Utilitarianism”, Mill writes:
“It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool or the pig are of a different opinion, it only because they only know their side of the question. The other party to the comparison knows both sides” (here).
When I first read that about 40 years ago, I wrote in the margin: “interpersonal comparisons of utility?” What I meant was: ‘How could Mill know what pleasure a satisfied pig or fool might feel?’
However, I now think Mill had a point. You have to experience pleasures before you can compare them. You have to read enough poetry to gain an understanding of the pleasure that other people obtain from reading poetry before you can judge whether this pleasure exceeds the pleasure you could obtain from alternative activities. The same is true of all cultural pursuits. The implications for education of children should be obvious.
I like to think of J.S. Mill as the great defender of individual liberty who asserted that:
“Such are the differences among human beings in their sources of pleasure ... that unless there is a corresponding diversity in their modes of life, they neither obtain their fair share of happiness, nor grow to the mental, moral and aesthetic stature of which their nature is capable”.
That was what Mill wrote in “On Liberty” (here). In writing Utilitarianism, however, he had other things on his mind. In that context he was not willing to consider the possibility that anyone who had knowledge of both bodily pleasures, which he describes as “the lower pleasures”, and mental pleasures, which he describes as “the higher pleasures”, could ever view the former as superior to the latter. The most he was prepared to concede was that people who appreciated the “intrinsic superiority” of the higher pleasures could occasionally be tempted to “postpone them to the lower”.
I wonder whether Mill would have reached a different conclusion if he had framed the question as being about the allocation of time to different activities. Within that context he might have been able to appreciate that it is not necessary to decide whether the pleasure to be gained from poetry always exceeds the pleasure that can be obtained from a good meal or playing sport. The issue is not about being tempted to pursue lower pleasures. It is about obtaining balance in one’s life.
Postscript:
Since writing this I have read what Henry Hazlitt had to say on the subject ("The Foundations of Morality", 1998). Hazlitt suggests that the discovery of marginal-utility economics supplies the solution: "Bentham's dictum becomes defensible if amended to read: Marginal satisfaction being equal, a unit of pushpin is as good as a unit of poetry". However, I doubt whether that explanation would have satisfied Mill. See my next post: Is push-pin addictive.
Postscript 2: May 2010
I have now written a related post on the potential contribution of happiness research to the question of whether push-pin is as good as poetry.
Sunday, April 27, 2008
Is rule of law an esoteric concept?
A recent article in “The Economist” about economics and the rule of law (‘Briefing’, March 15, 2008) begins with a confession by a prominent economist that he does not know what rule of law really means and ends with an enigmatic pronouncement to the effect that the more economists find out about the rule of law the more desirable it seems and the more problematic the concept seems to become. The article makes rule of law seem like an esoteric concept.
The main problem that economists have in explaining the economic importance of rule of law seems to stem from the observation that some countries, most notably China, have high rates of economic growth without strong adherence to rule of law. Could this be explained in terms that everyone can understand?
In my view the best place to start thinking about the relevance of rule of law to economic growth is by considering the difference between the incentives facing roving bandits and stationary bandits. It seems to me that Mancur Olson’s crime metaphor is apt because, like governments, bandits use muscle (coercive power) to pursue their objectives (“Power and Prosperity”, 2000). Olson pointed out that a Mafia family with a continuing monopoly on crime in a particular neighbourhood can obtain greater revenue by selling protection than by committing robberies. By preventing others from robbing their ‘clients’ and leaving ‘clients’ with some incentive to earn more wealth, the ‘family’ can obtain the benefits of more revenue through a larger tax base.
This helps us explain the problem of failed states. In such countries competing war-lords tend to behave like roving bandits and bandits behave like roving war-lords. Whenever anyone tries to do something productive, someone else takes the wealth that they have created. Once a war-lord gains control of his territory, however, he then has an incentive to act like a stationary bandit by protecting his subjects from marauders and leaving them with an incentive to earn more wealth.
An autocrat might be motivated to some extent by a desire to improve the well-being of his subjects, but even if his motives are entirely selfish it can still be in his interests to enter into a mutually beneficial partnership with them. In exchange for taxes he may begin to use his power to give them the incentive to attempt to accumulate wealth, for example by recognising property rights and enforcing contracts. Even when this happens in a limited way it can still have potential to unleash a lot of economic growth in countries where people have previously had little incentive to accumulate wealth.
It should be recognised, however, that some autocrats behave more like roving bandits than stationary bandits even though their control of their territory is secure. This may occur for a variety of reasons. Some autocrats may have problems in converting their followers from a culture of pillage to one of fostering the growth of a tax base. They may have problems in determining the point on the Laffer curve where tax revenue is maximized. Most importantly, in my view, it could be rational for an autocrat to impose a tax rate higher than the revenue maximizing rate in order to keep his subjects in a state of poverty if he is concerned that they would depose him, or limit his power, if they were permitted to accumulate wealth and the power that goes with it.
Even when autocratic rulers unleash a lot of economic growth by providing their subjects with incentives for wealth accumulation, the institutional environment still falls a long way short of the rule of law. There is always the possibility that even the most benevolent autocratic rule can revert to predatory rule and become a threat to people and their property. Rights cannot be secure when they can be restricted at the whim of autocratic rulers. This means that under autocratic rule economic growth is inherently fragile.
The rule of law is not a mystery. It is the principle that no-one is above the law. Where rule of law exists, governments can be dismissed if they fail to act lawfully.
How does the transition from autocratic government to rule of law occur? Unless autocratic governments decide to surrender powers voluntarily, the transition is only possible if people acquire sufficient power to bargain with their rulers. Autocratic rulers may allow their subjects to acquire such power as a result of accidents of history. For example, autocratic rulers sometimes need to ask people for support against foreigners who threaten to depose them and that support may come with strings attached. Sometimes autocratic rulers lose the support of their armed forces. Foreign powers can also help the transition to occur, as in England in 1688, but only if there is a domestic political movement strong enough and enlightened enough to require future governments to act lawfully.
My conclusion is that it is not difficult to understand how some countries have been able to experience high rates of economic growth without adherence to rule of law. The difficult question is how long such economic growth can be sustained.
Postscript:
Since writing this I have been trying to remember a paper that provides a clear expanation of the rule of law. This paper by Richard Epstein is the one I was trying to remember.
The main problem that economists have in explaining the economic importance of rule of law seems to stem from the observation that some countries, most notably China, have high rates of economic growth without strong adherence to rule of law. Could this be explained in terms that everyone can understand?
In my view the best place to start thinking about the relevance of rule of law to economic growth is by considering the difference between the incentives facing roving bandits and stationary bandits. It seems to me that Mancur Olson’s crime metaphor is apt because, like governments, bandits use muscle (coercive power) to pursue their objectives (“Power and Prosperity”, 2000). Olson pointed out that a Mafia family with a continuing monopoly on crime in a particular neighbourhood can obtain greater revenue by selling protection than by committing robberies. By preventing others from robbing their ‘clients’ and leaving ‘clients’ with some incentive to earn more wealth, the ‘family’ can obtain the benefits of more revenue through a larger tax base.
This helps us explain the problem of failed states. In such countries competing war-lords tend to behave like roving bandits and bandits behave like roving war-lords. Whenever anyone tries to do something productive, someone else takes the wealth that they have created. Once a war-lord gains control of his territory, however, he then has an incentive to act like a stationary bandit by protecting his subjects from marauders and leaving them with an incentive to earn more wealth.
An autocrat might be motivated to some extent by a desire to improve the well-being of his subjects, but even if his motives are entirely selfish it can still be in his interests to enter into a mutually beneficial partnership with them. In exchange for taxes he may begin to use his power to give them the incentive to attempt to accumulate wealth, for example by recognising property rights and enforcing contracts. Even when this happens in a limited way it can still have potential to unleash a lot of economic growth in countries where people have previously had little incentive to accumulate wealth.
It should be recognised, however, that some autocrats behave more like roving bandits than stationary bandits even though their control of their territory is secure. This may occur for a variety of reasons. Some autocrats may have problems in converting their followers from a culture of pillage to one of fostering the growth of a tax base. They may have problems in determining the point on the Laffer curve where tax revenue is maximized. Most importantly, in my view, it could be rational for an autocrat to impose a tax rate higher than the revenue maximizing rate in order to keep his subjects in a state of poverty if he is concerned that they would depose him, or limit his power, if they were permitted to accumulate wealth and the power that goes with it.
Even when autocratic rulers unleash a lot of economic growth by providing their subjects with incentives for wealth accumulation, the institutional environment still falls a long way short of the rule of law. There is always the possibility that even the most benevolent autocratic rule can revert to predatory rule and become a threat to people and their property. Rights cannot be secure when they can be restricted at the whim of autocratic rulers. This means that under autocratic rule economic growth is inherently fragile.
The rule of law is not a mystery. It is the principle that no-one is above the law. Where rule of law exists, governments can be dismissed if they fail to act lawfully.
How does the transition from autocratic government to rule of law occur? Unless autocratic governments decide to surrender powers voluntarily, the transition is only possible if people acquire sufficient power to bargain with their rulers. Autocratic rulers may allow their subjects to acquire such power as a result of accidents of history. For example, autocratic rulers sometimes need to ask people for support against foreigners who threaten to depose them and that support may come with strings attached. Sometimes autocratic rulers lose the support of their armed forces. Foreign powers can also help the transition to occur, as in England in 1688, but only if there is a domestic political movement strong enough and enlightened enough to require future governments to act lawfully.
My conclusion is that it is not difficult to understand how some countries have been able to experience high rates of economic growth without adherence to rule of law. The difficult question is how long such economic growth can be sustained.
Postscript:
Since writing this I have been trying to remember a paper that provides a clear expanation of the rule of law. This paper by Richard Epstein is the one I was trying to remember.
Do governments make good entrepreneurs?
I liked the final sentence in Dani Roderik’s book:
“Perhaps most difficult of all, economists will have to learn to be more humble!” (“One economics, many recipes”, 2007).
However, this is not a book by a disciple of F. A. Hayek warning about the “fatal conceit” involved in governments’ attempts at economic planning. Although Dani Roderik is not an old style economic planner he is, at best, equivocal about the benefits of economic freedom in facilitating economic growth.
Many of the criticisms that I would like to make of this book are contained within it. The author makes clear that he is fully aware of many of the objections that others will raise about his views. In brief, he argues that despite all the legitimate concerns that economists have about government failure the best way for governments to cook up economic growth is to develop their own home-grown recipes to provide necessary incentives – including by correcting alleged market failures.
The part of the book I found most interesting was the discussion of what the author describes as “information externalities”. The discussion begins by indicating that the author is considering the role of entrepreneurs in experimenting with new product lines – which involves, among other things, discovery of information about technologies, cost structures and profitability. The author refers to this as a process of self-discovery. He writes:
“When we put ourselves in the shoes of an entrepreneur engaged in cost discovery, we immediately see the key problem: this is an activity that has great social value and yet is poorly remunerated. If the entrepreneur fails in his venture, he bears the full cost of his failure. If he is successful, he has to share the value of his discovery with other producers who can follow his example and flock into the new activity. In the limit, with free entry, entrepreneurship of this kind produces private costs and social gains” (p105).
In reading this my first thought was that even though the economics is dodgy, at least it makes a change from the argument that first-movers enjoy huge advantages and make unwarranted profits.
Then, on the next page I read:
“The first-best policy response to the informational externalities that restrict self-discovery is to subsidize investments in new, nontraditional industries”.
I agree that it is quite plausible that in many low-income countries entrepreneurs can expect little profit in return for their efforts in discovering new opportunities. It seems more likely, however, that the reasons for this would have to do with predatory behaviour, of one kind or another, associated with the tax and regulatory environment than with market competition. If so, the best policy response would be to deal with the predatory behaviour rather than to label the problem as an information externality.
Dani Roderik argues that his first-best strategy (investment subsidies) is not feasible, so governments should get involved in winner-picking – in effect, taking on part of the entrepreneurial role. He acknowledges that some of the investments promoted by governments will turn out to be failures. He suggests, however, that if there were no failures this would mean that the program was not sufficiently aggressive. A good industrial policy will ensure that failures “are phased out”.
Unfortunately, that is where the discussion ends. In the course of the discussion readers are given some examples of entrepreneurial efforts of governments have apparently succeeded. The discussion would have been more persuasive if the author had included examples of governments that have had no difficulty in phasing out the failures that have arisen as a result of their winner-picking efforts. I suspect, however, that he would have had difficulty in finding such examples.
“Perhaps most difficult of all, economists will have to learn to be more humble!” (“One economics, many recipes”, 2007).
However, this is not a book by a disciple of F. A. Hayek warning about the “fatal conceit” involved in governments’ attempts at economic planning. Although Dani Roderik is not an old style economic planner he is, at best, equivocal about the benefits of economic freedom in facilitating economic growth.
Many of the criticisms that I would like to make of this book are contained within it. The author makes clear that he is fully aware of many of the objections that others will raise about his views. In brief, he argues that despite all the legitimate concerns that economists have about government failure the best way for governments to cook up economic growth is to develop their own home-grown recipes to provide necessary incentives – including by correcting alleged market failures.
The part of the book I found most interesting was the discussion of what the author describes as “information externalities”. The discussion begins by indicating that the author is considering the role of entrepreneurs in experimenting with new product lines – which involves, among other things, discovery of information about technologies, cost structures and profitability. The author refers to this as a process of self-discovery. He writes:
“When we put ourselves in the shoes of an entrepreneur engaged in cost discovery, we immediately see the key problem: this is an activity that has great social value and yet is poorly remunerated. If the entrepreneur fails in his venture, he bears the full cost of his failure. If he is successful, he has to share the value of his discovery with other producers who can follow his example and flock into the new activity. In the limit, with free entry, entrepreneurship of this kind produces private costs and social gains” (p105).
In reading this my first thought was that even though the economics is dodgy, at least it makes a change from the argument that first-movers enjoy huge advantages and make unwarranted profits.
Then, on the next page I read:
“The first-best policy response to the informational externalities that restrict self-discovery is to subsidize investments in new, nontraditional industries”.
I agree that it is quite plausible that in many low-income countries entrepreneurs can expect little profit in return for their efforts in discovering new opportunities. It seems more likely, however, that the reasons for this would have to do with predatory behaviour, of one kind or another, associated with the tax and regulatory environment than with market competition. If so, the best policy response would be to deal with the predatory behaviour rather than to label the problem as an information externality.
Dani Roderik argues that his first-best strategy (investment subsidies) is not feasible, so governments should get involved in winner-picking – in effect, taking on part of the entrepreneurial role. He acknowledges that some of the investments promoted by governments will turn out to be failures. He suggests, however, that if there were no failures this would mean that the program was not sufficiently aggressive. A good industrial policy will ensure that failures “are phased out”.
Unfortunately, that is where the discussion ends. In the course of the discussion readers are given some examples of entrepreneurial efforts of governments have apparently succeeded. The discussion would have been more persuasive if the author had included examples of governments that have had no difficulty in phasing out the failures that have arisen as a result of their winner-picking efforts. I suspect, however, that he would have had difficulty in finding such examples.
Will China succeed?
Until very recently I had the idea in the back of my mind that high rates of economic growth in China could be explained largely in terms of expansion of the private sector to meet export demand – with this rapidly growing sector absorbing a large amount of surplus labour from the agricultural sector. I knew that high economic growth in China was associated with substantial disparities in income between the industrial areas along the coast and the rural hinterland, but I imagined that the latter areas would also share in the benefits of growth as surplus labour was drawn out of the agricultural sector.
I must have connected the wrong dots. A recently published book by John Lee, Will China Fail?, points out that 75 percent of China’s growth comes from capital accumulation and over 70 percent of the capital goes to state owned enterprises (SOEs) – which produce less than 30 percent of output (Policy Monograph 77, Centre for Independent Studies, September 2007, p 60). Growth of employment in the non-state sector fell from 6.8 percent per annum in the 1980s to 3.4 percent in the 1990s (p 89). The capital allocation to SOEs apparently has more to do with preserving existing jobs than creating additional ones. So that means that high economic growth has not been doing much to absorb surplus labour from agriculture or to employ over 100 million people who are apparently floating around looking for jobs.
How could this happen? The story John Lee tells is about state banks that are flush with funds (high levels of private savings to fund health and education) which they direct to state owned enterprises, which have powerful friends in politics. This means that increasing amounts of money are being poured into production of goods that are not being consumed. The result for the banks is an increasing proportion of non-performing loans.
It is difficult to obtain independent confirmation that the situation with regard to non-performing loans is currently as bad a Lee claims. A relevant study by the IMF published in 2004 (see here) suggests that there had been some improvement - but the study may be out of date.
Can the Chinese government resolve these economic problems? I am more optimistic than John Lee, but I must admit I don’t have much basis for my optimism. From what I read in the papers, the present crop of Chinese leaders seem at least to acknowledge that they have problems and to be announcing policies to address them. They might manage to reform the system to a sufficient extent to enable economic growth and some degree of social harmony to be sustained.
What would it mean for us if China fails? There are obvious implications for Australia’s mineral exports. The people who have been saying that the mining boom would not last for ever were always going to be right one day. A weakening in mineral export prices in the next few years now seems to me to be a distinct possibility. It would represent a significant shock to the Australian economy, but not an economic disaster.
The more worrying implication of economic failure in China would be the possibility of a retreat from its peaceful rise policy and adoption of an increasingly belligerent stance in international relations.
I must have connected the wrong dots. A recently published book by John Lee, Will China Fail?, points out that 75 percent of China’s growth comes from capital accumulation and over 70 percent of the capital goes to state owned enterprises (SOEs) – which produce less than 30 percent of output (Policy Monograph 77, Centre for Independent Studies, September 2007, p 60). Growth of employment in the non-state sector fell from 6.8 percent per annum in the 1980s to 3.4 percent in the 1990s (p 89). The capital allocation to SOEs apparently has more to do with preserving existing jobs than creating additional ones. So that means that high economic growth has not been doing much to absorb surplus labour from agriculture or to employ over 100 million people who are apparently floating around looking for jobs.
How could this happen? The story John Lee tells is about state banks that are flush with funds (high levels of private savings to fund health and education) which they direct to state owned enterprises, which have powerful friends in politics. This means that increasing amounts of money are being poured into production of goods that are not being consumed. The result for the banks is an increasing proportion of non-performing loans.
It is difficult to obtain independent confirmation that the situation with regard to non-performing loans is currently as bad a Lee claims. A relevant study by the IMF published in 2004 (see here) suggests that there had been some improvement - but the study may be out of date.
Can the Chinese government resolve these economic problems? I am more optimistic than John Lee, but I must admit I don’t have much basis for my optimism. From what I read in the papers, the present crop of Chinese leaders seem at least to acknowledge that they have problems and to be announcing policies to address them. They might manage to reform the system to a sufficient extent to enable economic growth and some degree of social harmony to be sustained.
What would it mean for us if China fails? There are obvious implications for Australia’s mineral exports. The people who have been saying that the mining boom would not last for ever were always going to be right one day. A weakening in mineral export prices in the next few years now seems to me to be a distinct possibility. It would represent a significant shock to the Australian economy, but not an economic disaster.
The more worrying implication of economic failure in China would be the possibility of a retreat from its peaceful rise policy and adoption of an increasingly belligerent stance in international relations.
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