Kling on markets and imperfections
I’m traveling quite a bit lately, all through Italy, to launch my new book (alas, only available in Italian), titled—misquoting W.H. Auden—“O tell me the truth about neoliberalism”. The book is born, as I’m now quite used to saying and repeating, out of my frustration: today neoliberalism is the scapegoat of choice, being constantly conjured up as the ultimate cause for whatever catastrophe you can think of. In the book, I try to distinguish “properly defined” neoliberalism (produced by historical contingencies in post WWII Germany) from its caricature; to explain why globalisation as we know it is hardly anarchy; to refute Mariana Mazzucato’s thesis of the entrepreneurial state and to share some reflections on immigration and populism and how economic matters are fading away in the political agenda, to the benefit of identity politics.
If you ask me to explain the gist of the book, I’d say it is book without a single original idea (if you ever had one, check again: the conversation on these matters went on long enough that you should know better), and without an agenda, that tries to bring together a—hopefully—sounder narrative of the role of economic freedom in the world we live in, to counter its caricature. In brief, is a book against the idea that some kind of conspiracy rules the world, and that neoliberals are behind it.
Book launches are a pleasure, particularly if you tried to write a book in simple language, aiming to talk well, not with the “average” guy (he doesn’t buy non-fiction books) but with the kind of person who reads newspapers and cares about being better informed. Most of the time, I’m asked to discuss the book with journalists or politicians. Sometimes I have to do it with economists. Bizarrely, lately I found out I have a bigger vocabulary problem with them than with the others.
Why? Better than I ever can, Arnold Kling explains it in this splendid essay.
In my book, I try to explain the economic calculation debate; I end up pointing to the Italian version of Gordon Ramsay’s TV show Kitchen Nightmares. In the Italian version, the hero there is a chef, Antonino Cannavacciuolo, of great fame and prestige, who is called to rescue apparently hopeless restaurants. Sure enough, Mr Cannavaccioulo teaches tastier recipes and his apt collaborators renovate dusty environments. But, when it comes to the recipes and the menu offered by the restaurant, he always thinks of prices, availability of ingredients, their seasonality et cetera. He thinks about the price that a particular restaurant may be able to charge and then builds an appropriate dish. How could such information ever be “aggregated”? Well, you know which direction I’m heading to.
Yet recently I had a debate with a most acute and nice economist, who suggested that, because restaurant owners were evidently mistaken, I should consider allowing the government to play the part of Mr Cannavacciuolo (Gordon Ramsay, in the original show).
In my narrative, the show was about the need to use local knowledge and to learn from your own mistakes, in a way that no top down authority could. In his narrative, the show was about people making mistakes and needing a top down authority to nudge them in a better direction, because evidently they were mistaken over and over again. In my narrative, mistakes are no reason to centralise decision-making: they are part of a learning by trial-and-error process, in which the individual parts may fail so that the ecosystem can flourish. In my interlocutor’s narrative, mistakes are deviations from a “Platonic” ideal, and call for a correction by an all-knowing, “rational” authority.
As Arnold writes, “in the minds of economists, market outcomes are deterministic. The price system is an efficient calculating machine, leading households and firms to make reliable decisions.” Given such deterministic outcomes, market failures can be corrected, top down, by well-meaning and better informed policy makers. Such an approach, Kling adds, “leaves no room for contingency” and precisely on this ground argues for heavy-handed corrections.
I thought this is an interesting difference of vocabulary. This goes back to an old point Austrians typically make: “competition” in modern economics is the opposite of what economists think competition is. It goes by trial and error, disruption, temporary monopolies, imperfect information, et cetera.
As a fan of the economic way of thinking who is no economist himself, I do not want to argue with the importance of models (neither does Arnold, though his language is strong). Indeed, the analogy between economic models and the underground map is, I think, appropriate. You don’t go to the underground map for the topography of the city, but only for understanding a certain part of reality it quite effectively represents.
But indeed, as Kling points out, a deterministic approach to economic models has important consequences on the quality of regulation we get. Markets, he writes, “aren’t infallible calculators at all, and that contingent judgments have immense implications”. This doesn’t mean markets are wrecked, and this doesn’t mean that top down planning (or nudging) works better than they do. I applaud Arnold’s continued attempts to cure the Nirvana fallacy. We need more.