Over the years I’ve become friends with a very sharp economist whose views sometimes agree with mine and sometimes differ a lot from mine. His name is Jonathan Lipow. He has an interesting background. Although he grew up in the United States, he was also a member of the Israel Defense Forces. He calls himself a progressive economist and even wrote a book titled Public Policy for Progressives.
He teaches at the Naval Postgraduate School, where I used to teach. At least once a year, he has me come and give a talk to his students. The talk is titled “How Economists Helped End the Draft.” Although I’ve improved it, you can see an early version here.
When he introduces me, he tells a story from his first book, a story that he has already told the students at that point in the quarter. He and I call this “The Taco Bell Incident.” Here’s a segment from that earlier book, a segment that he has given me permission to use:
My own thinking on this issue [DRH note: the issue of the proper role of government] was strongly influenced by occasional debates I have had with two of my colleagues at the Naval Postgraduate School—Francois Melese and David Henderson. Francois and David are what you could loosely characterize as “libertarian” in their world view, and we often argue about the role of government in society. One particular “clash” stands out in my mind, because it helped me crystallize my thinking on this matter. So we were talking while eating lunch at the Taco Bell in downtown Monterey of all places. Suddenly David, a man in his sixties, excused himself, got up, and ran outside. What had happened was that he had seen several young men bullying and roughing up another young man, and David had gone to intervene.
In thinking about what David had done, I finally understood how he and other libertarians could see their vision of limited government as a viable means of running a society. Such a society would be entirely workable if most people behaved like David! And I realized then that no answer would ever emerge from ideological debates over the size of government because it was the wrong question to ask in the first place.
While I, of course, appreciate his implied compliment, I don’t think that for a free society to work, most people need to be willing to take a small risk of physical harm to protect someone else from being hurt. I do think that a certain percentage of people must be honest. If a large percentage of the population are out to cheat each other in almost every transaction, then a free society would not work well. But the good news is that in a free society, there are strong incentives not to cheat people.
In The Joy of Freedom: An Economist’s Odyssey, I discuss how free markets cause people to be accountable. In Charley Hooper’s and my book, Making Great Decisions in Business and Life, we point out that when you continuously cheat people, you narrow down more and more the number of people who will deal with you. In that chapter, we note that P.T. Barnum, who was alleged to have said, “There’s a sucker born every minute,” never said it. In fact, quite the opposite. He built his fortune by turning around the circus industry from one in which the circus owners and employees cheated customers to one in which people could feel confident of not being cheated. We quote author John Mueller’s statement that “Barnum’s great discovery was not so much that such behavior is immoral but that from a business standpoint it is stupid.” (Italics in original.)
What about socialism?
When I gave the talk in Jonathan’s class earlier this year, he added something to the Taco Bell story that I had never heard him say. He said that not only a society with limited government would work well if most people behaved like “David” (me), but also even a socialist society would work well if everyone behaved like me.
I didn’t have time to think through his comment, and I wanted to get to the topic at hand: how economists helped end the draft. So I didn’t comment other than to thank Jonathan for his gracious introduction.
But I have had time to think through Jonathan’s statement. It’s fundamentally incorrect in two important ways: one having to do with information and the other having to do with incentives.
The role of decentralized information
Imagine a socialist society in which most people are good. Jonathan said such a society would work well.
It wouldn’t. The reason has to do with an insight that Ludwig von Mises had over a century ago and that his student Friedrich Hayek elaborated on beautifully over eighty years ago: the absence of key information in a socialist society.
In his classic 1945 article, “The Use of Knowledge in Society,” Hayek argued that central planning cannot work because the information planners need is not available to them and can’t be available to them. The reason is that the relevant information is in the minds of the millions of economic participants in the typical economy. Hayek wrote:
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
Except for Hayek’s claim that knowledge can be contradictory, this is a beautiful statement of the issue. By the way, this article was published in the American Economic Review, which was then and still is one of the leading journals in economics. Sadly, the editors would never publish such an article today.
Hayek elaborated:
Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.
Modern economists in the Hayekian tradition—I am one—now refer to the “knowledge of the particular circumstances of time and place” as local knowledge.
Hayek went on to show how markets deliver information that people need in order to plan. He gave an example of a change in the price of tin. The change could come about due to an increase in the demand for tin or a decrease in the supply. The wonderful thing about the market is that users of tin don’t need to know what caused the price increase to make optimal adjustments.
A central planner would not be able to do nearly as well because the planner has forsworn markets.
Now back to how a society of Davids would work if we Davids were all central planners. It wouldn’t work. We would find out about the increase in the demand for, or increase in the supply of, tin only with a lag. Then what would be do with that information? What would we tell producers of tin pots or tin cans about how much less tin to use and how much to raise the prices of the pots or cans they sell? We could be the most benevolent people in the world and have the best intentions. The problem is that that wouldn’t be enough. A centrally planned economy is an economy at sea during a storm.
The role of incentives
On the issue of incentives, Jonathan Lipow might think he’s on firmer ground, but he’s not.
Why did I turn out the way I did, as someone who cares about other people? Also, why did I decide not to cheat people? It has to do with how my parents raised me, but that wasn’t enough. In the relatively free society that I grew up in in Canada, parts of the environment encouraged my looking out for others and encouraged me not to cheat. People trusted me and, to some extent, looked out for me.
But what if I had grown up in a socialist society? I probably wouldn’t be trustworthy. Once I had gotten used to lining up for bread and other basics for a few hours a week, I wouldn’t care so much about other people. I might even, as many citizens in a socialist country do, become a liar. And I would certainly engage in corruption. Hedrick Smith was the Moscow bureau chief for the New York Times from 1971 to 1974. In his 1976 book, The Russians, he discussed how Russia was riddled with bribery and corruption. In Odessa, then part of Russia, a common curse was “Let him live on his salary.” People needed to cheat regularly to get ahead, and Smith told many vivid stories of everyday cheating, large and small. Corruption was a normal part of life in that socialist society.
That means that the David Henderson whom Jonathan Lipow has come to like and respect might, in a socialist society, be someone he would neither like nor respect.
Conclusion
Even good people cannot, as central planners, make good choices for a society. They don’t have the information necessary to do so. And the incentives in a socialist society drive people not to be good.
