Tyler Cowen writes,

An oversimplified version of my view is that anything good is underprovided at the margin. This follows from a belief in strong network and peer effects, and a belief in the relevance of basic sociology.

I think that this is an important part of Tyler Cowen’s view. I think it accounts for the differences between Cowen and his Mercatus colleagues, Bryan Caplan and Robin Hanson. Caplan and Hanson are more atomistic in outlook. Theirs is a world of individuals, engaged in first-order self-interested behavior or, when they appear to be behaving irrationally, engaged in signalling.

Tyler’s view, which is closer to mine, is that people feed off one another’s habits. If someone works hard when they could shirk, this encourages others to work hard rather than shirk. Partly, it sets an example. Partly, it makes it easier to catch other workers who are shirking. For “works hard,” substitute “obeys laws,” “respects private property,” “refrains from engaging in corruption,” and many other behaviors. All of them have positive externalities and virtuous cycles, in this view of the world.

Thus, while Caplan or Hanson might be willing to foist some radical idea on society in order to make it more economically efficient, Cowen would worry about potential adverse effects on the social equilibrium. Cutting out a few percentage points of deadweight loss is not such a great idea if it sends society careening toward an equilibrium of cheating and corruption. Having said that, it is rarely the case that one can draw a clear connection between good economic policy and bad social cohesion.I would not be as kind as Cowen to Dani Rodrik. Rodrik makes it seem as though economists who favor free markets are simple clods who do not understand the many ways in which markets are imperfect.

I agree with Douglass North that of course the neoclassical description of perfect markets is inaccurate, and that is why we have all sorts of institutions, from contracts to consumer information services. Where Rodrik and the economists he admires are simple clods in disagreement with the George Mason school of economics is in taking the view that we must either have perfect markets or government intervention.

I think I can speak for Tyler and Alex, Russ and Don, Robin, and Bryan, as well as myself. The George Mason school of thought on market imperfections is that the best solutions to market imperfections are likely to emerge from the market, not from government.