Noah Smith on Wealth and Efficiency

What a strange thing for him to say. You could have said that about some place in the world at any time over the past 200 years. If you had applied his logic to some country 50 years ago and redirected that country from seeking efficiency to redistribution, we would pity them today, and regard them as third world.

So many goods and services we consider to be part of basic social safety net are products of very recent efficiency gains.

This is an ironic reason why it is so hard to get public support for markets – the one thing that markets are uniquely able to provide us with is precisely that thing that we could not have imagined.

In 30 years, when he is penning essays about how every citizen deserves free access to nano-bots and anti-aging treatments, can someone please glove-slap him for me. 😉

It seems to me that the second clause of that sentence is equally objectionable. I don’t know of a single redistribution scheme that measures its success by any metric other than the number of its recipients. (And I would expect that a large and growing number of redistribution recipients is evidence against the policy, not evidence in favor of it.) Unfortunately, Smith does not give us any indication as to why the available gains from redistribution might be large.

But is this just the “economist” in me talking? Is his point rather that “normal people” don’t ask follow up questions when they think about redistribution?

@kebko,
I think you’re missing Noah’s point. He’s not saying that there’s no future growth possible. He’s saying that there aren’t major efficiency gains possible. He’s using the term “efficiency” the way most economists use it. No economist I know of says it was inefficient that we didn’t have cars in 1700. But, to use the car analogy, I say it is inefficient to have CAFE (corporate average fuel economy) laws.

Noah Smith’s post is a perspicuous example of failing to appreciate “seen vs unseen”: “we’re doing well, so this must be the best it can get.”

Noah, there are two points you seem to be missing:

1) 2 percentage points is an enormous difference over a number of years. Over 50 years, the economy with a 2% higher growth will be 2.7 times as big as the slower one. This will bring more benefits to the poor than any redistribution plan.

2) You have to take into account decreases in growth also. Increasing redistribution would likely result in less growth than we have now. So the difference might instead be a loss of efficiency of 2-4%, leaving this country with flat or negative growth. That would be a disaster for the poor.

My problem with the passage is not with the proposition that there are relatively few efficiency gains to be had — although I doubt it is true — but rather with the fact that this proposition does not follow from the premise that we are one of the richest large economies. The unstated premise that would be needed to make the argument work is that the richest large economy at any given time — or in this particular time — must not have many efficiency gains available. This is a bold proposition that should be argued for explicitly, not assumed.

Ryan P: I thought about that, and although it is trivially true, it makes the argument nonsensical: because there are fewer efficiency gains in the United States than in a third world country, redistribution makes more sense than increasing efficiency. This can’t be what people are meant to come away with. So I humbly suspect that Smith is not only arguing from a disguised premise, but also equivocating.

You know, thinking of it more after reading Deirdre McCloskey’s comment at cafehayek, it occurs to me that if we do think of the range of outcomes stemming from efficiency, we can imagine a completely inefficient society, which would be at subsistence, or a perfectly efficient society, which might look something like Robin Hanson’s futurescape where a world of ems doubles the standard of living every few days, we might imagine how efficiency really does overwhelm any other growth factor. So, in addition to Deirdre’s contention that factors outside the standard features of economic models are largely responsible for the miracle of the last couple of centuries, we can imagine how much more room for improvement there is. If efficiency still looks like small potatoes compared to other sources of growth, that would be a sign, contra Noah, that we haven’t even begun to capture the advantages of efficiency gains.

I take Noah’s remark not about whether there are inefficiencies to be gained in general — the war on drugs and the per capita cost for our average health outcomes are good examples that there are, but rather inefficiencies that are the result of “economic” policies. Even something as large as agricultural subsidies are more redistribution than dead weight loss. Maybe the failure to tax the carbon emission externality might be considered a really large static inefficiency.

Steve Z,
I don’t understand why it’s nonsensical. If I’m very far from the current PPF (i.e., given current tech), there’s much more room for large, strictly Pareto gains from increasing efficiency and so relatively less need for redistribution insofar as I’m a weighted utilitarian who cares particularly about the welfare of the poorest people in my society. The more efficient my society is, the harder it becomes in relative terms to argue “there’s no need to redistribute when the poor can be made better off with more efficiency”.

@Deirdre McCloskey,
Good points, but you got Mark V. Anderson wrong. He was responding to Noah’s comment just above his. And his response was correct. He made no mistake, common or otherwise.