Showing posts with label knowledge problem. Show all posts
Showing posts with label knowledge problem. Show all posts

Saturday, May 8, 2021

The Seductive Allure of Socialism

The more local something is the more essentially socialistic it becomes. I think the best way to describe this is that size/complexity has a positive relationship with the net benefits of the market (free market principles and market incentives, etc.) while size/complexity has a inverse relationship with the net benefits of socialism (yes, there are benefits). Simply put: the bigger or more complex something is, the more you want/need markets and not central planning to do the heavy lifting.

Intelligent people recognize that they know things and understand how to solve problems much better than most other people. They see this in action locally where it works or seems to at least. Thus, their belief is reinforced. This leads them down a bad path to an unreasonable conclusion that they can guide the world.

Keep in mind that what distinguishes a person as being "intelligent" can be local knowledge rather than pure IQ. Therefore, a local shop keeper may be orders of magnitude more intelligent about running her shop than would be a team of McKinsey consultants. 

Art Carden gives a model, salient version of this. For example, consider the family, the firm, and especially small and midsize towns. The local banking relationship in these places illustrates this nicely. 

The key skill of a banker today is not financial acumen. It was once upon a time at least to the degree of assessing credit risk. But large firms, algorithmic models, and risk spreading have largely supplanted that need. It is still important--vitally important for the bank itself--but it is not primarily dependent on the skill of individual banker. I believe financial risk assessment is a quality of secondary importance.

Rather the key skill of a banker today is relationship building. That is what makes a great banker. Hence, bankers are deeply involved in their communities. Again, this is not new, but it is now the primary attribute rather than a secondary one as it was in decades past.

It is strange then that a bank and its bankers, the stereotypical image of a capitalist (think of the board game Monopoly) are in fact the leading proponents of a road to local socialism. 

Here is how it unintentionally works. First, bankers are deeply interested in current customers' wellbeing and credit soundness. They have made loans, and they want them paid back. Second, they want to make future loans. These same customers would be the easy way to accomplish that goal. This gives them an all-too human impulse to favor the known and familiar as opposed to the new and (perceived) extra risky. 

Certainly bankers are interested in growth and new development. It is just that the unseen has a built-in bias against it. 

How is this a slippery road to socialism? I am not proposing that it formally leads to socialism, but it is central planning friendly. Most directly it runs the same risks of all central planning whether at the household, firm, or governmental level: decisions are made that suffer from the knowledge problem and are subject to the local maximum problem

Bankers are deeply imbedded within their communities for good reason: they want the business relationships and they want to stay close to the credit--all the better to monitor the risk. Yet this presents a sort of capture risk similar to formal regulatory capture. The bankers can easily be persuaded to support their customers' desires at the expense of their customers' competition. 


P.S. When I was in college I had a righteous disdain for kids wearing Che Guevara t-shirts, etc. They were "old enough" to know better. As the great P.J. O'Rourke explains, that is no longer true of kids these days, who are now the same ages as those who I rebuked back in the day.

P.P.S. Iain Murray's The Socialist Temptation explores this topic in depth. For a good discussion on it I recommend this recent episode of Jonah Goldberg's The Remnant




See this for more on the source for the above image and related story.

Sunday, May 2, 2021

Zoning Laws Suffer From The Fixed Window Fallacy

The Fixed Window Fallacy is an error in reasoning whereby people believe they know or can know what is nice/preferred/optimal. This line of thought is based on unimaginative, linear-thinking and further held back by the Local Maximum Problem

It can be summarized as a thought process that goes: "We know what is best. We/they can afford what is desired (after all, it is usually for our/their own good). Therefore, we should make ourselves/them provide it." 

Both premises are false, and the conclusion is fallacious (non sequitur) as it ignores the critical questions: do we have a right to do this, and can we successfully do this? 
The only constant is change, and it comes in two types. 
  1. Depreciation, which is the natural condition, difficult to counter, and mostly objective.
  2. Appreciation, which is the abnormal condition, difficult to achieve, and highly subjective. 
Attempts to stop depreciation such as zoning laws are never done in a vacuum. They are not single events where good replaces bad, and we move on to the next decision. They are part of economic evolution where decisions made affect trend trajectories with uncertain net outcomes and unpredictable magnitudes. 

Similarly collective action attempts to realize appreciation such as subsidizes for development and master plans are fraught with captured interest risk bringing asymmetric outcomes adverse to the presumed collective goal. In other words the rent-seeking developers and their friends in power do what is good for them and costly for society. For those cases where everyone has the best of intentions, we still have the knowledge problem. When artificial outcomes are engineered by those who do not bear the full risk, bad ideas do not get properly punished and good ideas do not get properly rewarded. 

Back to zoning, trying to stop people from doing things they want to do is prohibition. People and markets work to thwart prohibitions in proportion to how much they desire that which is prohibited. The less morally sound the prohibition, the less compliant are those working against it and those third parties who have no dog in the fight. Fortunately the long-term trend is for less and less prohibition. Unfortunately working against a prohibition is costly as is the administration of a prohibition. 

Whether it is in icky markets (e.g., sex work, recreational drugs deemed illicit, kidney transplants, etc.) or in we-know-better markets (e.g., zoning), an underlying force supporting the prohibition is not in my backyard thinking. In fact I believe NIMBY is the last vestige of prohibition rationalization.