Pete Boettke Points Out Economists’ Common Belief In Unicorns

boettkeI fancy myself a collector of good stories and Pete Boettke told a great one at the recent celebration of the 40th anniversary of F.A. Hayek’s Nobel Prize.

Unfortunately, I think it’s gotten a little buried (along with Vernon Smith’s excellent lecture) on social media and in the blogosphere, due to articles, posts and comments, replying to a certain exchange at the same event, with which a certain circle will already be familiar (see here, here, here, etc.).

So I wanted to pull this story out and give it its due as a short, impactful, illustration of not only important economic principles but of how these principles are sometimes applied in the too often echo-chamber of research/policy economics. I think here he drives directly to the heart of some presumptions that underlie those that think regulatory failure should just be met with shiny, fancy, NEW regulations.

Pete Boettke, responding to whether new/more/better housing regulations would stop a future housing bubble, started with this story:

Many years ago I was actually at a conference with Pete Leeson, and Ann Krueger said, ‘Look, look, we all love the market. What we need is reasonable regulation that’s not capturable by interests.’

And I raised my hand and I said, ‘What if that’s a null set*?’

And then Andre Shleifer… he chuckled and said, ‘Why are you so unreasonable?’ But the question never got answered.

I think there are at least two interesting points here.

First, he’s asking a valid question about whether there is any significant number of “reasonable regulations” that are actually going to stay un-captured by industry, bureaucratic and other special interests. Will we be able to FIND any of those in the real world?

Second, within Prof. Krueger’s original statement and Prof. Shleifer’s response, you see the assumption of many economists, that the reality of the thing is not what is “reasonable”, only the theoretical possibility. They often don’t acknowledge the potential for a null set, even though, if true, it would make their proposed solution either impossible, or wholly inefficient and impractical.

But that is exactly the point of so much seen in public policy today. Far too often (arguably always), modern policy makers don’t care about being efficient or practical. They don’t care if their solution is unsustainable or will run markets into the ground. They don’t care if their impositions squeeze the life out of future growth. They really don’t care whether their “solutions” will work under any kind of real world conditions.

They do care about policies based on the “right” set of intentions and they care about whether they can back up their intentions with a model that matches their policy… Regardless of whether the model matches reality.

I would commend to you Prof. Smith’s great talk (which also delves into what really happens in markets vs theories, exactly the experimental insights for which he earned his Nobel Prize), after which is the Q&A including the now infamous exchange mentioned above and finally Prof. Boettke’s fantastic reply.

* A “null set” (for my non-math friends) refers to trying to find a group of things that satisfies a certain list of characteristics (e.g. what are “regulations” and “reasonable” and “non-capturable”?), and discovering that the set of potentially satisfactory options contains either 0 things, or so few things as to be functionally 0 (“negligible”).

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