Knowledge regimes

The way most sciences are taught is to start with very simple models in which many unrealistic assumptions are made so that students can learn the big picture and major forces, and then the assumptions are gradually relaxed so that you end up with very sophisticated models. It is true of physics and economics. That was what the First vs. Second best debate between Dani Rodrik and several other bloggers was about a few months ago, to which I had three responses (here, here, and here).

I find the claim among the so-called Second Best camp to be over-simplified for several reasons. The first is the problem of vulgar second best-ism in which they spot an institutional failure, propose a correcting policy, and assume success without investigating whether there are multiple institutional failures which counteract each other, whether there is a private institutional response to the failure, whether the policy actually corrects the problem, or whether the policy has unintended consequences which give rise to a new institutional failure. I have a whole category for this.

The second is their assumption of a knowable, static set of affairs. This is an assumption that the Econ 101 theory is correct, but that the real-world solution of some master equation for universal efficiency and total spiritual creaminess requires state intervention because of those chewy chunks of degradation known as "institutional (market) failure" [1]. This presumes an optimal state of affairs that we should strive for -- the "correct" allocations of inputs, outputs, numbers and types of goods to be made, and prices. This seems to me to be impossible not only because of the unknowability of the current set of all knowledge, but because of the unknowability of all possible knowledge. Hayek was only half right: Not only is the sum of current human knowledge unknowable to a single person, but the sum of all possible knowledge is unknowable to all persons or groups except for the group which consists of all humans over all time.

Although the book isn't explicitly about this, Dengjian Jin's The Dynamics of Knowledge Regimes illustrates a relatively simple case in cultural comparisons, a single slice through the cone. The book is Jin's explanation of the competitive differences between the US and Japan. He notes that previous explanations of Japan's rise fail to explain the current stasis of that economy. Those explanations approach the problem from neoclassical, revisionist, institutional, cultural, technological, and complexity schools of thought, among which the revisionist and complexity schools might be counted as Second Best approaches, the former noting the importance of industrial policy, and the latter noting issues like path dependency. Jin, on the other hand, focuses less on trade and transaction and more on the way in which each culture creates, stores, transmits, and uses knowledge. Each culture has its distinctive isomorphic regime (to use his phraseology), and the two regimes are nearly mutually exclusive.

In Jin's description, the cultures can be identified along the relationship and identity axes, with Japanese falling more into connectual and contextual while Americans fall more into contractual and individual. In those terms, Williamson's contractual schema have little to do with the Japanese experience and therefore are relegated to the status of a subset of the possible relationship schema. The American knowledge regime both results in and encourages the creation of isolated, modularized, disconnected, universal knowledge, while the Japanese regime results in and encourages the creation of highly contextualized, tacit, specific knowledge. Jin also notes that the relationship between the state and industry tends to fall into the same isomorphic pattern, with Japanese government working very closely with the affected industries and American government working (or appearing to work) in a universalist relationship, i.e. DARPA awards contracts for knowledge creation in a competitive bid process while MITI would work closely with an alliance on a development project. Jin's book explores these ideas in detail and also shows how this produces competitive advantage for each culture in distinct sectors. For example, the American approach results in leadership in sectors such as software and biotechnology where talent and knowledge can be modularized and reconfigured endlessly, while the Japanese approach results in leadership in complex fabrication and assembly such as automobile and opto-electronics.

So whereas Americans work with a system which emphasizes contracting, Japanese work within a system which emphasizes long-term relationship building. Asymmetric knowledge and opportunistic breach of contract are therefore rarely a problem in Japan. On the other hand, network effects certainly are a strong problem for the Japanese while the creative destruction machine that is modern America blows through network effects rapidly (and the process appears to be accelerating). Thus, a problem that worries the second-besters in one culture doesn't even make it on to the radar in the other regime.

Now pull back a little and realize that Jin was only comparing dominant Japanese and US knowledge regimes. What would be the result of a similar study of all cultures? Or of subordinate cultures within the US, Japan, and other dominant culture types? Also, the Japanese emphasize tacit knowledge, some of which is destroyed by the simple act of trying to objectify and communicate it, so it is not even clear that we could understand all of the institutional failures in our own culture that a Japanese would note, and vice versa. What would happen if we were to be able to look at our own institutions not only in terms of Japanese understanding, but of all existing, or of all possible cultures?

Now, having made those observations, I immediately begin wondering about things like,

• What institutional failures are we failing to note?
• How many failures could there be that have yet to be discovered?
• Are there some failures that cannot be detected or described in terms understandable within our culture?
  
• Since failures may work in both directions, is the net effect of those underprovision or overprovision of the good or service in question? How can we know?
  
• Because we aren't aware of these failures -- indeed, because the state's relationship falls into the same patterns -- isn't it likely that attempts to counteract them will only exacerbate a set of underlying, undetected problems?
• Even if it were possible to detect all of the possible failures, is it possible to counteract those features which are (A) a distinguishing feature of our society, and (B) only detectable to someone outside our society, and (C) solvable only through techniques which are not available to our society or our state-society relationship? In other words, some problems are apt to be an undeniable feature of our society, but their solution is unavailable to us unless we fundamentally change our society ... in which case many of the other institutional failures and the corresponding responses will be rendered meaningless while we simultaneously choose a whole new set of institutional failures for which we have neither experience nor remedy. At best, we could go back, but then all we have is a mono- or bi-stable system in which we never completely eliminate institutional failure, but rather trade one type for another.
  

Don't think of the Stay-Puft Marshmallow Man, Ray!


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[1] pro forma, we ignore failures of the Really Big Institution, The State

Bookends

I have been reading Timothy Egan's The Worst Hard Times: The Untold Story of Those Who Survived the Great American Dust Bowl, a book about life in the Dust Bowl. It has been a nice bookend to other information I have read on the Depression. This includes Howard Zinn's People's History of the United States, John T. Flynn's The Roosevelt Myth, Jim Powell's FDR's Folly, and Friedman & Schwartz' A Monetary History of the United States. Egan's book provides a human perspective on momentous times.

My own personal theory, to which I have seen allusions but not the definitive book (surely someone has written it) is that the Depression was the effect of society absorbing the final shift from the agrarian economy. Putting a plow behind an internal combustion engine-driven machine meant you didn't need all those people working on farms. But neither were they finding employment in the cities.

Although Egan alludes to the state's complicity in the conditions that produced those hard times, and at the end acknowledges the bad long term effects of FDR's intervention, FDR, Hugh Bennett, and farm policy are definitely the heroes of the story.

The state's complicity lies in first running the natives out, then establishing incentives to farm the land rather than use it for grazing. The long term effect has been to establish farm subsidies which are detrimental. On the one hand, price supports result in the overproduction of commodities such as cotton, which the government then buys and dumps, further depressing world markets, and further impoverishing African farmers. On the other hand, other convoluted policies such as sugar price supports, ethanol incentives, and ethanol import tariffs, are intended to support corn prices, further impoverishing Mexican peasants. It is a sad reflection on people who worship FDR's policies as the salvation of impoverished American farmers while ignoring the ill effect of those policies on the impoverished farmers in the rest of the world.

Some anarchists claim that defense is the tough problem; I doubt it. I think that The Depression is a tougher problem. The benefit of Egan's book is that it highlights the real stories of real people. In the context of those times, when it seemed reasonable for the state to encourage homesteading and farming prior to the closing of the West, when the prospect of prolonged drought seemed dim prior to 1932, when the invoice for the social cost of their actions was not yet due, what happens to those people in the absence of the New Deal?

Still, one cannot help but think that Egan has absorbed just a little too much of the high school version of those events. The high school version is that the farmers were too dumb to know what they were doing, so FDR hired some smart men who invented and taught contour plowing and the use of trees for windbreaks, and then they paid the farmers to let some fields go fallow. It is an unusually common myth, as seen in this example:

In response to the urgent need for soil and water conservation programs to halt farmland destruction, the Soil Conservation Service was established in 1935. SCS employees set up demonstration plots and taught methods such as contour plowing, terracing, and strip-cropping to retain water on the fields and reduce runoff and erosion. Windbreaks were planted to break the force of the prairie winds, tillage methods were changed to reduce exposed soils, and vegetation or stubble was retained on the fields after the growing season to provide protective cover. With these methods, damaged lands were reclaimed and the dust storms were brought under control.

Also, in the free market banking system of the day, banks ripped everyone off, so FDR instituted banking reforms and federal deposit insurance. The truth? It's a little more complex.

First, the New Deal: FDR ran on the New Deal platform, which was to undo all of the Hoover Administration errors. According to FDR, those consisted of deficit spending, excessively high taxation, and too much government (Flynn). When he actually took office, the first thing they did, of course, was to raise taxes, increase spending, and run a deficit just like Dr. Keynes said they should.

Despite similar conditions in Canada, not a single bank failed there (Powell). In fact, prior to the Federal Reserve Act, the US weathered several similar periods with almost no bank defaults. The FRA was supposed to have made the government the lender of last resort, but the act was truly established to serve the needs of the bankers (Kolko).

Another Hoover policy which FDR had vowed to overturn but then repeated was the destruction of food supplies in the farming states even while people starved in the cities (Flynn and Powell). It is a question of that which is seen (starving farmers helped by the payments) and that which is not seen (starving city dwellers and destroyed crops): the former have much more impact in an era when newspaper photos and newsreels hold sway.

Today, the collective effect of those actions is an agriculture policy which enriches large corporations, leads to a substantial amount of water overuse and water pollution, reduces the quality of our food, and impoverishes poor farmers around the world who have to compete with subsidized American farmers.

Second, there is the problem that conservation measures had been around long before FDR took office. Contour plowing in particular had been around since at least ancient times

Contour farming was practiced by the ancient Phoenicians, and is known to be effective for slopes between two and ten percent. Contour plowing can increase crop yields from 10 to 50 percent, partially as a result from greater soil retention.

Or at least nearly the birth of the Republic

In 1808, Jefferson transmitted a refinement of his design to a Monsieur Sylvestre in France, for the benefit of the Society of the Seine.

The deep tillage could heavily erode the steep terrain of Jefferson's plantations, though, and he discovered that contour plowing around the curvature of the hills, rather than cutting furrows straight down-slope toward neighboring streams greatly reduced erosion.

He wrote to Tristam Dalton in May 1817 about his son-in-law Col. T.M. Randolph’s development of this method, laying off the plow lines in advance using a (wooden) rafter to measure and strokes of a hoe to mark the contours.

Plowing across slope on hilly terrain put a severe strain on the plowman and Col. Randolph modified the plow, fusing two separate shares against their flat sides at a right angle.

Plowing one way with the sod thrown down slope around the hill to the end of a furrow, the plowman would flip over the plow bottom and head back in the other direction with that sod thrown down slope as well. This eventually developed into a widely used "hillside plow."

Jefferson sent Dalton "a bit of paper cut in the form of the double share, which being opened at the fold to a right angle will give an idea of its general principle."

Jefferson's farms, including Monticello, had been losing soil into Chesapeake rivers for years and these new methods resulted in substantial improvements: "Let me beseech you" Jefferson wrote to others, "to make a trial of this method."

These techniques were not unknown to moderns:

As he had always been a voice for the working class, Villa would continue in this facet as the owner of a large piece of land. He attempted tremendous agrarian reform on his land. First, he studied the new, American techniques of contour plowing and crop rotation. His agrarian reform went one step further to include not only the crops, but also the people who tended the crops. Villa remembered the unfair economics used by the hacienda owners and made refreshing changes.

Pancho Villa died in 1923, less than a decade before Egan's story begins.

Egan relies on an article, "Small Farms, Externalities and the Dust Bowl of the 1930s" by Zeynep K. Hansen and Gary D. Libecap, published by the NBER. Among other things, the article discusses erosion as an example of several kinds of externality. In one, suspension, fine particles are blown into and then suspended in the air. To the farmer, this was an internal cost, but the fine particles in the air caused health problems to humans and livestock. Saltation and creep are externalities in which the topsoil from one farm is deposited on another farm, not only killing the wheat but also burying the downwind farm's erosion control stubble. In the article, they note that prior to the creation of the SCS,

The two leading erosion control methods in the 1930s were strip cropping with strip fallow and windbreaks of trees or brush. Both provided barriers to lower surface wind velocity and carrying capacity, but the former was more prevalent because trees could not be grown in many parts of the plains. Strip fallow also had the advantage of building up soil moisture and roughness, which reduced erodibility, whereas tree windbreaks actually absorbed moisture from surrounding ground.

This is interesting because it shows that (1) Dust Bowl farmers did practice conservation before FDR saved them, and (2) one of the fables from the high school version, FDR's commitment to using trees to block the wind, was not only a failure, but potentially could have worsened the situation. Egan also describes the tree idea as a failure.

Further in the article, they explain,

To completely combat regional erosion, all of the cultivated acreage in a topographical area of similarly erodible soil would have to be included in a "wind erosion unit" of 50,000 to 500,000 acres or more. The optimal farm sizes for addressing wind erosion and production, however, were not the same. Most estimates by agricultural economists and extension agents in the 1930s of appropriate production sizes for the region suggested two sections of land, 1,280 acres, depending on location in the plains. Few scale economies could be realized beyond that size. Nevertheless, in the 1930s, most farms were smaller than the prescribed levels for optimal production. The Great Plains was covered by hundreds of thousands of small farms. This condition was largely a legacy of the Homestead Act that limited claims to 160 to 320 acres when the region was settled between 1880 and 1925.

This is the same opinion reported by Egan of Hugh Bennett, the first director of the Soil Conservation Service. The area covered by Egan's story was formerly the domain of Plains Indians who thrived on grass-fed buffalo. The first whites to successfully live on the land ran the XIT cattle ranch. It was government policy to replace both with small claims farmers. According to their report written for Roosevelt,

"Mistaken public choices have been largely responsible for the situation," the report proclaimed. Specifically, "a mistaken homesteading policy, the stimulation of war time demands [World War I] which led to over cropping and over grazing, and encouragement of a system of agriculture which could not be both permanent and prosperous."
[...]
[Egan, continuing to quote from the report] "The Federal homestead policy, which kept land allotments low and required that a portion of each should be plowed, is now seen to have caused immeasurable harm. The Homestead Act of 1862, limiting an individual to 160 acres, was on the wesern plains almost an obligatory act of poverty."

Since the government subsequently wanted farms greater than 500 acres, and most farms of that period were smaller, Hansen and Libecap conclude that the farms were too small. This is consistent with other rationalization schemes of that era in which it was thought that efficiency required government-directed coordination.

Accordingly, collective action among farmers was necessary to address wind erosion. In commenting on strip cropping and recognizing the externalities involved, Charles Kellogg of the Bureau of Chemistry and Soils stated: "Such a practice, to be most effective, must be adopted on a community basis. Isolated farmers following this practice are not greatly benefited if the adjoining land is allowed to blow badly." The large number of small farms on the Great Plains, however, raised the costs of coordination. Indeed, Roland Renne of the Montana Agricultural Experiment Station (1935, 426-9) noted: "Dealing with thousands of different owners slows up the adoption of a planned land use program..."

They try to make a case that small farmers face different incentives than large farms:

Private motivation to invest in strip fallow was reduced when farmers did not internalize the externalities. The problem was accentuated for small farm owners. Each farmer had to consider the benefits of strip fallow with the opportunity costs of lost production. Because small farmers captured fewer of these leeward effects, they were less likely to have any fallow rotation, leaving their land in cultivation and their fields exposed to wind.

It might at first appear that there should be little difference in the proportion of land fallowed on a large or small farm since large farmers would face a correspondingly higher opportunity cost. However, a family faces about the same need for income (fixed cost) no matter how large the farm. Hansen and Libecap find that the proportion of land dedicated to conservation was proportionally larger on large farms.

Dissappointingly, they neglect to account for the possibility that adjoining farmers could coordinate through private mechanisms, in much the same way as the Animas Foundation and Malpai Borderlands Group pioneered the grassbank concept. They make passing references to "mixed incentives" to participate voluntarily and to transaction costs, but do not explain what those are. This could be the loss of reputation that might result from buying out a smaller, less profitable, and more harmful farm in a community where bidding in a bankruptcy auction brought threats of violence. Part of the problem may be that the Dust Bowl and the Depression occurred at the same time; had the Dust Bowl occurred separately, there might have been enough money to buy them out without the concurrent bankruptcy and bank failure problems.

I think this is a case in which there was little appreciation for the problem beforehand, and the immediate crisis was solved in conjunction with deep-pocketed and politically motivated politicians. Afterward, everyone is aware of the problem and at least several solutions, but now the state has become associated with the solution and becomes inseparable from it. Before: ignorance, no state. Afterward: knowledge, solution, and state.

Before	After
Ignorance	Knowledge
Problem	Solution
No state	State
Voluntary	Coercion

The frame then becomes that the state and the solution are one and the same when in fact the knowledge and the solution are independent of the state. We forget how often we have ignorance/no-state/before and knowledge/no-state/after, and also how often we have ignorance/state/before and ignorance/state/after. Celera's being the first to map the human genome is an example of the first (the state eventually joined the party), the S&L meltdown of the 1980s is an example of the second (the 1980 S&L Act signed by Carter precipitated the fiasco by expanding the federal insurance and then encouraging them to invest in local real estate (very non-diversified) and high-risk assets like art, creating a predictable problem), and most agriculture policy is an example of the third (nobody seems to know there is a problem or what to do about it).

As Egan describes the Dust Bowl era, farmers were ready for someone to show them a solution; if that happened to be a government agency that would also come in with money, they weren't going to turn it down. That doesn't seem to be the case: One telling fact that comes from the NBER paper is that the voluntary federal programs largely failed, while the coercive state programs succeeded.

Given the mixed incentives to participate in erosion control, the response to calls for voluntary collective action was limited. Indeed, the SCS noted a lack of voluntary farmer participation in the erosion control programs outlined in the demonstration projects.

Later,

More direct and coercive government intervention came in 1937 with inauguration of Soil Conservation Districts (SCDs) that had the authority to force farmer compliance and the resources (subsidies) to cover the costs of erosion control. The SCDs were local government units and required state legislation for establishment.

Oddly, according to Hansen and Libecap, "Kansas, Oklahoma, and Texas, at the center of the Dust Bowl, enacted wind erosion laws in 1935", but Egan fails to note those changes.

I am frequently accused of being too theoretical. For example, I think that this episode in America might have gone differently if the state had stayed out. People who favor state intervention will pooh-pooh the Malpai Borderlands grassbank initiative, inevitably pointing out that no private action did actually occur at that time, and that the farmers failed to join in the voluntary programs. I say that they are not going back far enough: what about leaving the ranchers and before them the Indians alone? Those are actual policies of the state that created the conditions for the environmental and social disaster. That is not a theoretical, paper claim: even Hugh Bennett agreed that the Homestead policy was a mistake. The Nature Conservancy and not the federal government pioneered the use of prescribed fire to maintain the health of the grasslands. Grass-fed buffalo are being reintroduced to the grass-fire-buffalo ecosystem as a sustainable food source. It turns out that laissez-faire would have been the best policy. But I am the theoretical one?

Student Government

UPDATE: Welcome fromthearchives and MR readers. Please note that nothing untoward was meant by the poor choice of words in the first sentence below. Second, please note that I have no reason to believe that Megan would not mind abuses of power that were aligned with her beliefs; I was throwing her in with lots of other partisans who do have that problem, it was unfair, and I have apologized.
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I do not understand Tyler's attentions to Megan-non-McArdle. I had originally drafted a well-rounded criticism of both Megan and her anonymous, "libertarian" interlocutor, but in doing so I realized that what was really needed was a harsh rebuke of her impassioned but misguided defense of bureaucracy. Megan's position is that bureaucrats "BALANCE COMPETING NEEDS" [her overemphasis]. This is untrue, and belief in it is the stem of much wrongdoing.

1) Government employees created the problem in the first place.

According to this article, "Starting in the 1920s, the U.S. Bureau of Reclamation drained most of Tule and Lower Klamath lakes for agriculture and built an irrigation canal to send Upper Klamath Lake water to farms in the neighboring Tule Lake basin."

The government not only promised land to settlers, they promised water to them and water and fishing "rights" to the Native Americans before them. This article summarizes,

Yet according to some, the government had earlier also promised farmers irrigation water "forever" when it made Klamath Basin land grants between 1908 and the 1940s.

Further, in an 1864 treaty with the Klamath Native American tribes, the government guaranteed water and suckerfish fishing rights downriver in exchange for their land upriver. When making land grants, the government did not tell the farmers of the tribe's rights.

Politicians and bureaucrats, having "no dog in this fight" as Megan says, simply blow with the wind, giving "rights" away to anyone who petitions strongly enough. One doubts whether private property rights would have been so poorly protected, but then she basically says that she does not think people ought to be trusted with a role in resolving disputes because they will defend their own interests.

Then, those farmers got subsidized electricity. We know because of the furor set off when it was proposed that the subsidies be taken away:

Rates will go from 0.6 cents to more than 6 cents per kilowatt-hour - a tenfold increase. [and that's still less than I pay!]

The Tulelake Irrigation District in Northern California, for example, has been told that its annual power bill is expected to rise from about $70,000 in 2003 to $1.05 million in 2006, said Ed Danosky, general manager.

Farmers are screaming about economic disaster and broken promises.

"People are going to suffer," said Steve Kandra, president of the Klamath Water Users Association, who said he believes many will resort to more wasteful irrigation flooding that uses a lot less juice.

But others see market-based power rates for irrigators as the much-needed catalyst for resolving entrenched conflicts between agriculture and fish. The irony is that by leaving it to market forces rather than government, they say, fish and farmers could end up healthier.

Especially in the hillier portions of the basin in Oregon, where sprinkler irrigation is dominant and flood irrigation impractical, high power rates can be an incentive to forgo farming on marginal lands.

By first abrogating the rights granted to the Natives, then spending taxpayer money to "reclaim" the valley for agriculture, then encouraging people to move there, then subsidizing their electricity (and God knows what else), thus bringing many competing interests into the valley, bureaucrats established the conditions for conflict.

2. Megan is very adamant about the balance claim; her caps lock key frequently gets stuck when discussing it. Unfortunately, the idea of measuring and balancing needs is meaningless. It has great emotional appeal, but doesn't describe what is really happening. At best, bureaucrats are making judgments about relative costs, but there can be no doubt that they are applying their own standards for such things as discount rates, which constituencies to poll, and how much weight to attach to them. They are not measuring the needs of fishermen, farmers, or Natives and comparing them on a calibrated needs scale. As with the global warming debate, we seem to have lots of physical science experts looking at a problem and then making a social science policy recommendation.

Balance, in any meaningful sense, means that each side gives a little and gets a little. A balanced solution would have involved give and take, bargaining, and compromise; I propose private mechanisms for such below. However, from what I can tell, the recent sequence of decisions had anything except balance in that sense. First, the Fish & Wildlife Service's biological opinions and those of judges reviewing the case have been in favor of fish, Natives, and fishermen, full stop. Then, the reversal was in favor of farmers, full stop.

In this way, bureaucratic decisions don't solve conflicts, they create the conditions for eternal conflict. One side is in, the other is out, and the side left out has no recourse but to politics. This is the unstated goal of much public policy: simultaneously remove traditional decentralized mechanisms for problem solving while replacing them with a central mechanism which puts politicians and bureaucrats in the role of Solomon. That is exactly what Megan means when she says that people with a stake in the conflict should not be allowed to decide it: bargaining should be banned and replaced with a rational, technocratic authority.

3. My original draft defended Megan and her co-workers from the association with totalitarian bureaucrats, but I realized in researching the background of how the conflict came about that bureaucrats are in fact the source of the wrongdoing in question. They don't realize it; they actually believe their own propaganda about working for the common good. But as I have just argued, they create the conditions for conflict, then they "resolve" the conflict in such a way that it guarantees it will continue, and meanwhile they eradicate all of the mechanisms which would allow the conflict to be amicably resolved for everyone.

People worry incessantly about the problems of artificial monopolies in private markets, but don't seem to recognize the analogous process in the "market" for law, a market in which the main player is also the referee and league commissioner. Bureaucrats do have a dog in this fight: their existence must be justified. They have interests at stake just as much as the farmers or fishermen. And yet they claim to be honest brokers.

From her comments, Megan seems to be aware of Hannah Arendt's "banality of evil", but she does not seem to have absorbed it in a way that she can apply it. Although I'm sure there were good invoice inspectors and dam inspectors in every totalitarian regime, the pseudo-libertarian commenter was wrong to liken this particular office to one charged with the task of making sure work-camp trains were running on schedule, but that's really beside the point, isn't it? Megan makes a nice show of arguing how her particular office and the office in question in her original article are filled with people trying to do the right thing, but that is also beside the point.

The civil employees are working within a system in which the rules -- not the laws she cites, but the rules of the game -- are already set and their job is merely to be the agents of the people who set the rules.* Sure, there's a little slop in the system to let everyone believe this is a transparent democracy, but get real. Someone has already decided that your telemetry geek should measure this and not that; it serves an interest. The public meetings serve to give the public the impression that cheap talk is worth something; at the end of the day, you decide against one group and for another. Someone has dictated a long list of acquisition regulations that ensures that the invoice checker is only going to see certain kinds of invoices and look for certain kinds of data. But those are just the surface conditions.

The subsurface conditions have been in place for generations: promises were made, reclamation projects were funded, subsidies were provided. Megan makes no mention of those inconvenient facts or their implications. Second, note that the salmon industry has already gotten their settlement (here and here). Now, Megan is outraged that an elected official has the audacity to intervene on behalf of a constituency group? That is what politicians do. Note that I am not defending Cheney; doubtless what he did was as cynical as anything else this administration does. Jane's Law holds.

If ultimately successful at rationalizing all decision-making in this way, a central government will have completely displaced private institutions and made the populace entirely dependent on faceless but ostensibly well-meaning technocrats. That is the problem of progressive wonkism and centralization that I have written about. And while the Fish & Wildlife service is not as dangerous as the office of Communications Assistance for Law Enforcement, passive acceptance of centralization is part of a broader problem.**

4. Megan keeps using that word "libertarian": I do not think it means what she and her sympathetic commenters thinks it means. It certainly does not mean someone who does not understand communal goods (who are Eric S. Raymond and Jimbo Wales, what is the noosphere, and how would they be relevant to this discussion?). And I'm not sure I can think of a single libertarian who would automatically side with those farmers who were essentially benefiting from at least two previous government interventions.

In fact, a libertarian response to this would have covered at a minimum the following issues:

• native property rights (wouldn't the 1864 treaty have priority over everything else?)
  
• actual fishing rights which are defensible and transferable, as opposed to fishing licenses
  
• Groups like Trout Unlimited have been promoting the idea of in-stream rights for years. Many states have laws oriented towards farming or ranching that dictate that non-use or in-stream use of water rights results in the forfeit of those "rights". Where TU has been successful at changing the status quo, they can buy water rights and then leave the water in the river so their favorite game can flourish.
  
• Stop subsidizing the farmers' inputs such as electricity: see above.
  
• Bargaining between the fishermen and the farmers. Unfortunately, while I found several articles dealing with proposals to buy farmers out, I found none that discussed direct bargaining between the two groups. Buying the farmers out is something Richard Epstein, another quasi-libertarian, would get behind. Some sources claim that by buying out just the most marginal farms in Klamath, it might be possible to leave the remaining farms and restore enough water to the river to meet the needs of fishermen. Direct bargaining between the two groups is something in which Ronald Coase might be interested. However, contra several quasi-libertarian commenters who have joined the fray since the original post, there are large transaction costs problems to be sorted out, so the Coase Theorem does not "guarantee" an efficient solution regardless of who gets the rights. Sorry.
  

Interestingly, we don't seem to have any politicians or bureaucrats trying to figure out the best way to assign property to minimize transaction cost problems so that the conflict can be resolved by the actors themselves. Why do you suppose that is?

5. Megan claims to be upset by a rogue agent hijacking government agencies for his own agenda. I'll grant her that this seems to be just that. But as I noted in this post, the left is full of people who are currently upset that NASA is not headed by a rogue agent for their interests and that the ideological purity tests are not in their favor. Must I really spend time looking up and finding all the ways that other, non-Bush administrations have applied their own purity tests? Really?? And no, don't bore me with the anecdote about the token right-to-lifer picked by Clinton to be the Second Assistant Vice-Chair of the Office of the Undersecretary for Wilderness Area Parking Lot Stripe Paint Standards. You know that in general, on average, every president picks people who broadly agree with him.

C'mon, Megan. Your real problem here is that the rogue isn't working for your team; you would be perfectly happy with a fellow traveler rogue who uses all of the right catch-phrases and paeans to the correct totems. You will happily look the other way when they violate laws with which you happen to disagree; you may even defend their behavior. Elk Hills? Serbia? Mazen al-Najjar and Nasser Ahmed? Carnivore? Echelon? Jane's Law holds.

As you mature as a civil servant, you will learn to operate within those laws with which you agree, in opposition to those with which you disagree, and in complete ignorance of many more. Hayek's theory about information in society is far more relevant to this discussion than The Road to Serfdom. It would be better if politicians and civil servants actually learned about the former, had a little more humility about their own work, and tried to think of ways to decentralize decision-making by using some of the methods bulleted above instead of thinking of themselves as hard-working, enlightened, public-interested, unbiased, angelic promoters of sweetness and light. "Civil Servant" is a misleading title intended to frame our perception: "Government Employee" is probably better.

At the same time, it would be better if citizens spent more time thinking about how to pull power back from the central authorities, to resolve conflicts ourselves, and to build or rebuild local, community-based institutions rather than actively supporting powerful, central authorities who claim to be able to do these things for us.


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* Civil servants Government employees aren't entirely passive in the process: they also shape and interpret and the laws in order to preserve or expand their own authority. Megan defends the Endangered Species Act elsewhere with an ad populum argument. While popular among the voting public, it has been less so among technical experts. In this way, Megan lines up support for her favored policies no matter what: they are either popular with the public and must be kept and enforced despite the objections of technical experts, or they are popular with technical experts and must be kept and enforced despite the public outcry. This is just one of the many techniques she will perfect as she continues her career.

** Thanks to Arnold Kling, I rediscovered Unqualified Reservations and this excellent and relevant article. Sorry, Arnold, Bryan set me straight.

Salt iodization as market failure - Part I

There is a viewpoint that the unavailability of iodized salt is a market failure since people would pay for it if only salt producers would iodize. This is supported mainly by this New York Times piece.

The benefits of iodine are unquestioned. Iodine is a preventive treatment for goiter, stunted growth, and cretinism or "low IQ". Some of these uses of iodine have been known for almost 200 years in the developed world (the use of iodine-containing foods such as seaweed has been known for much longer). Salt is an inexpensive means of distributing iodine to a population without access to other sources, so iodized salt is readily available in the developed world. In countries where iodine is available through the food supply -- Japan through seaweed, England through various means -- iodized salt is neither necessary nor mandated.

Sponges, seaweed, and other seafood were noted as cures to goiter thousands of years ago. More recently, in 1819 Jean-Baptiste Dumas showed that iodine is a remedy for goiter. Later research found a link between iodine and cretinism or IQ. Thus, iodine became a popular nutritional supplement, with governments becoming active in it only relatively recently.

Salt, however, has been a subject of intense government interest for much longer. Salt was valued as a germ-killing preservative before wide-scale refrigeration was available, giving us salt-cured ham, bacon, jerky, pickled goods, and so on. The Romans paid their soldiers salarium, salt money, giving us the word "salary". Salt in those days was a source of power and wealth: Salzburg (salt town) was a seat of power in central Europe and Poland's early wealth came as a result of its salt mines, which diminished as Germans developed technology to create salt from brine.

As a source of wealth and power, and a daily necessity, salt of course was the subject of extensive taxation. The Chinese began taxing it 4000 years ago. The British Empire in India paid for its exploits by "the hated salt tax". One of Gandhi's first acts of defiance to the Empire was to march to the sea and make salt, circumventing the tax and declaring that it is every man's right to make salt. Today, Indians still recall that act as they fight against iodine mandates with online petitions. It is currently hotly debated in China again. In Mark Kurlansky's Salt: A World History, he points out that Myanmar (Burma) mandates iodized salt, but people in the highlands can't get it so they trade illegally with China to get it. Sometimes they don't, since unscrupulous black market traders frequently sell untreated salt as iodized.

In the U.S., it is frequently asserted that iodization has been mandated. It is not. Salt companies began voluntarily adding salt in 1924, and Morton began distributing it nationally that year (see this article). Recommended Daily Intake levels are suggested for iodine in 21CFR101.9 (c)(8)(iv) to be 150 micrograms/day.

There has been a recent explosion in noniodized salt availability in the U.S. as an interest in higher quality raw materials for cooking has taken hold. This worries the professional experts, who believe that this will lead to a return of goiter and cretinism. "The National Health and Nutrition Examination Surveys found that from the 1971-1974 to 2001-2002 examinations, iodine excretion in adults dropped from 320 mcg/L to 168 mcg/L -- by nearly half -- and the frequency of iodine deficiencies in pregnant women jumped from 1% to 7%" says this site, emphasis in the original. Note that the fall in adults is from over twice the RDI to slightly above it. Similar trends are reported in this article, which also notes that a similar reduction has occurred in Canada, where iodization is mandated.

Too much iodized salt in a diet is not a good thing, possibly leading to hyperthyroidism or hypertension. The former is typically a problem only in those areas of the world where iodine is a supplement, suggesting that while iodized salt may be a good thing, it is not a perfect solution. "Too much iodine increases the incidence of iodine-induced hyperthyroidism, autoimmune thyroid disease and perhaps thyroid cancer. Too little causes mental retardation, goiter, hypothyroidism, and other features of the so-called iodine deficiency disorders. The global push to eliminate iodine deficiency in the current decades has put both excess and deficiency of iodine in the spotlight. Some countries have already moved rapidly from severe iodine deficiency to iodine excess, while others are only now recognizing iodine deficiency as a problem. Their experience, as well as that in the USA and Canada, emphasizes the need for continued monitoring to assess trends in iodine intake." (from Thyroid Manager Chapter 2 linked above)

Even a cursory reading of the NY Times article would show that this failure in Kazakhstan is not purely the fault of the market:

• It points out that the problem was not solved in the days of the Soviet Union, when there was no market.
• It points out that one of the factors working against iodization was the advertising of the iodine pill industry, proof that there is not market failure but rather an education failure. The desired goal, after all, is the intake of adequate quantities of iodine, not the production of iodized salt. A market need only make it available at affordable prices, which was the case.
  
• The article begins by stating that a public relations program led by a charity organization was the primary contributor to turning the situation around. Yes, the charities received aid (the PR campaign was paid for by the US AID program and UNICEF paid for the original salt sprayer and potassium iodate used by the main manufacturer), but the program would not have worked without the involvement of the organizations because of the massive distrust of the government. The author writes, "Also, Ms. Sivryukova's network of local charity women stepped in. As in all ex-Soviet states, government advice is regarded with suspicion, while civic organizations have credibility." No wonder nobody believed in iodized salt - and it wasn't the market's fault.
• That problem is underlined when the article points out that the problem was completely solved in neighboring Turkmenistan, where maximum leader Saparmurat Niyazof has mandated the giveaway of iodated salt. As I will argue in the next post in this series, I'm not sure I want to live in a country with this level of efficiency, and that isn't even considering that this is the same autocrat who names days of the week after his family and mandates that his own face be present on all clocks.
  
• One company makes 98% of the salt in Kazakhstan. No doubt a former state monopoly, it has access to the salt mountains near the Aral Sea. The article specifically points out that this condition enabled the central mandate to be successful. In other countries with many suppliers, like Pakistan, central mandates are unlikely to work as well.
  

The obvious solution to the final problem is to tighten government control of the salt industry, made easier by eliminating those competitors without the means to add the spraying equipment, and perhaps by restricting the competition by granting a monopoly. Given the history of government intervention in salt markets (still fresh in the minds of societies that don't have a refrigerator in every house), it is easy to understand how people in those areas might get the idea that iodization may be both newspeak for "government monopoly" and a new way to tax the poor. It's easy to dismiss such people if you lack such historical perspective, you believe that the poor are foolish, you easily entrust the government with large amounts of power, or you stand to gain from such grants.

One final point: many people fail to notice that a market failure does not always mean a 100% lack of the desired article. Private roads exist (and were much more common before the government started supporting railroads). Despite Akerlof's paper on the market in lemons and the supposed impossibility of a used car market, used cars are successfully sold every day. In this USAID report, we find that iodized salt was available in Azerbaijan in 2000, 3 years before the intervention started in 2003:

"Consumption of iodised salt by households significantly increased by years: in 2000 was 41.3% adequately iodized salt; 44% in 2002 increased to 70 % in 2003 and selling of iodized salt at the market increased from 30% (2002) to 68% in 2003; In 2004 consumption of iodized salt at households increased to 84%4. However, a WFP survey conducted in rural areas shows consumption of iodized salt to be around 66%."

Likewise in Ghana, Unilever increased iodized salt production in order to increase market share. A market failure is the underproduction or overproduction (and/or underconsumption or overconsumption) of a product, not the complete absence of it. Optimal consumption is that point at which the marginal social cost equals marginal social benefit. I doubt that we know the marginal social costs or benefits with any precision for anything. We could go on arguing about that for any number of products endlessly, and we will finally conclude that it seems likely that all products are under- or overproduced to some degree.

[UPDATE: A concerned reader fears that paragraph eight ("Too much iodized salt...") will leave readers with the impression that I think iodine is dangerous and should be avoided because the quoted material begins, "Too much iodine increases the incidence of iodine-induced hyperthyroidism, autoimmune thyroid disease and perhaps thyroid cancer. " I will point such readers back to paragraph two ("The benefits of iodine are unquestioned...") and also point out that I can't find much evidence linking excessive iodine to cancer. Iodine-induced hyperthroidism (IIH), the Wolff-Chaikoff effect, and Hashimoto disease, however, seem to be real, but probably not for you if you are reading this online.]

VT Ramblings

For some deep reflections on the Virginia Tech incident, I'll refer you to my wife's post.

I can say that my own thoughts as bits of the story were revealed to me took a turn down a strange alley. I heard that the kid had written some rather disturbing plays that indicated psychological problems. So my initial thought was, "Why didn't someone intervene?" I immediately realized that this is easier said after the fact. Before the fact, you have a problem distinguishing "dangerous" from "bizarre", "freaky", "outlandish", "peculiar", "quaint", and so on.

I vaguely remember an outcry 20+ years ago when Reagan was supposed to have closed all state mental hospitals, kicking all the patients out into the streets and the treatment of choice became jail. As usual, this was a myth of partisans who put far too much stock in the power and prestige of the executive, people who want a benevolent king to take charge and solve the world's problems*. It seemed to matter little to them that there is little practical difference between being locked up in a mental hospital and being locked up in a prison when these people are really a prisoner of their own minds. Such partisans usually forget (as was the case at that time) that the opposition controls much of the power and that there are larger currents at work in society**; Reagan, after all, was not Congress, which is who decides what programs to fund, and Reagan also had no authority to direct states to close anything***, insofar as anyone still genuflects at the whole "federalism" idea. But we would benefit from a reading of Foucault on the subject: how many ways do we try to correct atypical behavior, and how are we justified in doing so? At what point did Andy Kaufman's schtick cross the line from strange performance comedy to sick behavior when he began "wrestling" and even faked a neck injury? Was it deranged or brilliant? In smaller societies, such behavior was likely to get you the shaman's job. Do you want to live in a society where such people are tolerated, re-educated, sequestered, locked up, or simply liquidated?

There is far too much attention being paid to whether or not gun laws or video games are worth reviewing here. Those are puerile arguments made by partisans on both sides of the aisle looking to score political points off a tragedy, much as the identical people did after 9/11. The problem isn't guns: there are millions of guns not being used for crimes and far more people are killed by cars each year. The problem isn't video games: teenage violence declined during the entire video game expansion period. The real tragedy here is the mental illness. It crossed the line from idiosyncratic to dangerous when he pulled the trigger while pointing the weapon at other people. Let's try a thought experiment: what kind of life was he likely to have in the complete absence of guns? Does anyone believe that his life would have been enjoyable? This was a serious signal of distress, but it seems to be getting lost in the other noise. What was this guy's problem, what could have been done, and how many other people are suffering, undiagnosed, from it? I want to live in a society where we place some emphasis on the root cause of Cho's problem. What causes such anomie, how do we detect the dangerous variety of deviance, and how can we re-orient that back to something positive?

*The world selected a passel of such leaders in the 1920s and 1930s, and it didn't end well.
**As I have written before, partisans are largely animated by their opposition, not principles.
***Note in this timeline, which I found referenced as a proof of Reagan's responsibility, that the Act was passed in 1980: it would therefore have been President Carter who failed to sign it since a new Congress starts after the election and the president elected in 1980 takes office in 1981. Also note in this much more detailed timeline that the act in question, the National Mental Health Systems Act "asserted that the federal government would continue to shape mental health policy but assume less of the burden of paying for treatment." The Act was written by No Child Left Behind author Ted Kennedy. In other words, Reagan was blamed for cutting funding in this bizarre manner: despite the fact that that is what the bill contains, by vetoing it in 1980, before he took office, he was responsible for what would have happened if he had signed it. The timeline then goes on to point out that funding was cut in the 1981 Omnibus Reconciliation Act passed by C-O-N-G-R-E-S-S, and that throughout the 1980s, spending for mental health was increased via block grants. Yet for those years, Reagan typically takes hits for spending too much (which is actually correct insofar as by not vetoing the spending bills he is in part responsible, but it puts Democrats in a bind of accusing Reagan of spending what the Democratic Congress passed). So the game is: take money out of communities, send it to Washington, send some of it back, and dictate how it is used. Great.

P.S. I didn't intend to get off onto a political rant, but there is something else on my mind that I'll get to in a post or two which was set off by the emphasis on the executive. I therefore apologize for and admit to having done exactly what disgusted me about the reactions to this incident. To the families of the victims and the perpetrator, I am deeply sorry for your loss.

GM v. Toyota again

I had a bizarre conversation at a conference this week. We were talking about gas prices around the country and I asked what GM, Ford, and Chrysler were planning to sell if this keeps up. My wife had just told me that she got a Wall Street Journal alert that they were all down and Toyota was up, again.

Someone walked in and told me that GM wasn't down, it was showing record profits. I told him that I thought that was wrong (I haven't been near a network connection the whole week), but in any case, what could they be selling. He said they just showed several new cars at a car show last week (here's an article); I told him that those could not possibly have been what they were selling last quarter. He then explained that he lives in Detroit and knows about these kinds of things. I started to explain that Toyota is a manufacturer that makes a profit by manufacturing things, while GM thinks of manufacturing as a secondary source of income; he said that the record profits are proof that they are manufacturing and that the problem with their cars is that each car has $X of pension fund in it. I pointed out that they could have made those record profits by selling off a plant or two (or three); I did not address the fact that Toyota's pension funds are also embedded in their prices (even if those are accomplished through the public sector by means of punitive taxation). He walked away, convinced that I, a non-Detroit dweller, could not possible know what I am talking about.

I completely forgot to point out that the GM is a conglomerate whose main stream of profit comes from their lending arm, GMAC.

Yet, here it is:

• GM, Ford, Chrysler's U.S. Sales Fall; Toyota's Rise
• Toyota's sales jump while GM, Ford fall
• Big Three Get March U.S. Sales Beating, Toyota Cheers
• General Motors March US adjusted sales fall 7.7 pct to 349,867 units
• GM Sees Softer Q2 Sales; Plans Summer Incentives

Why is this so hard to understand or accept? They keep making bad cars that are only desired either by people who keep buying "'cuz thissiz wut daddy bought", or by those who can't pass up the financial incentives (don't overlook how important this is to people for whom the immediate entry cost is more significant that the future operation and upkeep). Meanwhile, Toyota keeps cranking out high quality, low maintenance, low operation cost vehicles. For me, this is a much greater puzzle than this recent design puzzle question posed on Organizations and Markets.

Absent from school: Pigou

Let's just stipulate that the use of fossil fuels creates negative externalities. Whether these are supporting terrorists and despots, pollution, AGW, or simply underwriting a lifestyle that cannot be sustained forever, I am indifferent. In any case, this is the case made for public intervention in that market. There are two main responses: One is to subsidize or mandate alternative energy, the other is to raise taxes on fossil fuels with the desired result of shifting investment from fossil fuel exploration and extraction to alternative energy research and development. The former is thought to be the worst approach for a variety of reasons, including the argument that the government is a poor decision maker, that it leads to rent-seeking by interested parties (like ADM lobbying for ethanol from corn), and that it shifts money from taxpayers to political entrepreneurs with lots of deadweight losses in between (spending on lobbyists), whereas the latter merely raises the costs of fossil fuels, possibly buttresses state coffers (allowing us to pay for public goods like defense), and does not put the government in the place of solution-picker.

That sounds plausible, even if you might pick at some of the details and ultimately argue that the best solution would be to get government out of either punishing or rewarding any industry. Let's just say that that is a standard wonk description of the problem and solutions.

So let's look at an industry that has some parallel: public education. In this case, the schools should be providing public goods (literacy, numeracy, critical thinking skills, and other skills that Jefferson would argue are critical for the proper function of a democracy), but are widely regarded as having underproduced them. This is apparent whenever the left demands more spending or when the right demands more accountability. Very few will argue that it is perfect the way it is, and usually when they do, they always come back with, "but it could be improved" (usually with more money). My analogy turns on the idea that overproviding a public bad is similar to underproviding a public good. I also believe, but do not intend to prove here, that public school problems are institutional in character: that they will always underprovide no matter how much money you spend on them in the same way that pollution is always overproduced no matter how expensive oil is in a free market (those of you anti-free marketeers please note, however, that the efficient amount of pollution is not 0 and that the heavily regulated soviet industries tended to pollute even more).

The two responses analogous to those above for fossil fuels would be to subsidize the alternative or to change the price structure on the failing industry to make the alternative look more attractive. The former exists as a policy choice in the form of vouchers, charter schools, and mandatory testing; they are at least as controversial in education policy as alternative energy subsidies and mandates are in energy policy. The Pigovian tax response does not currently exist: it would consist of charging more at the pump schoolhouse. In other words, charging tuition for public schools.

Take a few breaths and allow the shock to wear off before continuing.

I propose that we start charging a moderate, nominal tuition for attendance at public schools. I think this can be made palatable to all political parties except the rabid left and religious right. To the former, who think that all education should be free, I simply point out that it is not and cannot be truly free; someone must pay for it because buildings and equipment must be built and maintained and teachers should be compensated fairly; to the extent that the wealthy are made to pay for it, they will be interested in controlling it; and they have many ways to exert influence in the large, complex state that y'all prefer. The "free" universities in Europe are not as successful as those in the US (see Figure 9 in this, our higher per capita spending results in a better healthcare education system according to this), and the European systems are under tremendous pressure to start charging tuition because the current system is underperforming. The problem for the religious right will come up below. To everyone else, I think you'll find that I can address your concerns.

First, I have no more problem with making the tuition means-tested than I do with providing relief for the poor on fuel taxes (ah, funny how you forgot to be indignant on *that* point, eh?). In fact, it's easier to bring in your 1040EZ and get a waiver at the schoolhouse than at the pump, where it must be done with something like the EITC. Many public school systems already have a mechanism for charging tuition for out-of-district students (not alway to the student: sometimes to the sending district).

Second, I'm talking about nominal tuition: $100 - $500 per year per child. Not the full value, just a little. And I'm not advocating reducing the public expenditure on public schools. A school with 1000 students (the average high school in the US has about 752) will suddenly find itself with an additional $100-500k per year for facilities and teachers. Neat, huh?

Third, schools could charge whatever they decide locally. Schools in wealthy districts would charge more than schools in other districts. This would decrease the pressure on legislatures to equalize spending (more tends to get spent in wealthier neighborhoods now), and poorer schools would therefore find it easier to get more public spending sent their way. And to the extent that the wealthier schools would charge and spend more, and therefore be better, poor enrollees would be better off at those schools (remember, I favor making the tuition means-tested, so they can free ride, same as now).

Fourth, I believe that we should be more circumspect about the subsidies we provide for breeding. If you are concerned about fossil fuels and the environment, you should be at least as concerned about the pressure of population on the environment. And for those of you on the right: how far are you willing to take this "personal responsibility" idea? Isn't it a little unfair that people with no children have to subsidize those of you who do? Why should married couples enjoy both income tax breaks and subsidies for raising their children? You don't want to pay for the pill, condoms, or abortions for other people? Fine, but why should we pay for your refusal to use the pill, condoms, or abortions? Let's face it: the two-income family depends on the public school-as-babysitter as much as an institution of learning, and that in turn subsidizes the culture of conspicuous consumption. Incidentally, contrary to popular myth, people on public assistance tend to have fewer than the average number of children, while people who vote Republican are known to have more children than those who don't. "Free" public schools are an example of a public institution that disproportionately supports those who complain most about the taxation that pays for it.

Fifth, to the extent that schools charge some tuition, they make it possible for alternatives to rise up in a similar way a carbon or fossil fuel tax directs makes research into alternatives possible. If a school charges $500 per student per year, and a competing private school or tutor charges $1000 per year, the difference is more palatable than between the "free" public school and the private school. You get similar results to voucher and charter school plans, but

• without the vouchers that "divert" resources away from public schools (they don't in per pupil terms, if you do the math),
  
• without setting up situations where the state may be sending money to religious schools and charlatans,
  
• without therefore putting the state in the position of certifying schools to receive vouchers,
  
• without having to repeal the Blaine Amendments,
• and without giving the state an opening to start killing the independence of private schools with onerous regulations.

Questions?

UPDATE: Apparently Tyler Cowen has reached the same conclusion:

I would be happier with vouchers if we were starting from scratch in designing educational institutions. And while I agree with Jane that children have a positive right to an education, I think the out-and-out laissez-faire option doesn't get enough attention. Keep the public schools we have, but make them charge tuition.

Failure Part II - Government

Strong believers in the Theory of Second Best who see market failure in everything and who believe it sufficient to justify state action tend to believe in perfect government. This is the high school civics version of government where an informed electorate votes for politicians who wisely draw up laws that reflect the public will and the general good. How their knowledge of markets can be so sophisticated while their knowledge of government remains so simple is not clear, but there are several forms of government failure that should be noted. Before I list them, though, there are two points worth noting.

Point 1: the decision to use state intervention to address the market failure may not always undo the underlying logic of the situation.

• Example 1: Pollution is an externality. Regulation of the polluter does not make it not an externality. A Pigovian tax imperfectly internalizes the cost to the producer and consumer, but does not relieve the sufferer.
• Example 2: Forcing all car buyers to attend classes on judging automobile quality does not give them the idiosyncratic knowledge possessed by car sellers, so education does not automatically defeat the asymmetric information problem. Regulating natural monopolies does not make them not monopolies. In fact, it guarantees their monopoly status in perpetuity.

Point 2: The decision to use state interference introduces a new set of external costs. If A & B vote to do something that benefits them but costs are spread evenly, and C votes against it because it does not benefit C (who shares in the costs), then an external cost is levied on C.

With that, here are some examples of government failure:

• Log rolling: A is in favor of policy X and indifferent to Y, B is in favor of Y and indifferent to X, and C is against both X and Y. The electorate is equally split on both X and Y, but if A and B agree to trade votes, they will get both X and Y. In fact, you might have A for, B and C indifferent, and D and E against X, while A and C are indifferent, B for, and D and E against Y, and still end up with both X and Y if A and B trade votes and then convince C to go along for some future payoff (or an actual one, such as a chairmanship -- remember Jeffords?) even though public sentiment, to the extent the makeup of the legislature reflects it, is against both by 2:1. May not always be a problem, e.g. online trading of votes between Gore and Nader in 2000.
• Rational ignorance and the concentrated interests/spread costs problem (a variant of the public goods problem from market failures). If it is worth $10 to me and every other individual to change regulation X, but the industry benefiting from the regulation accrues $10 x 300 M people = $3 B, it will only be worth a few hours of my time to learn the legislators, the regulators, their views, to draft legislation, write position papers, uncover facts, conduct studies, etc., while it will be worth a few hundred million to each of (say) ten firms within that industry to counter me.
  
• Crowding out - not sure I’m a big believer in this. It says that government borrowing crowds out capital borrowing, resulting in lower growth and lower prosperity. However, we are borrowing the money from and spending it on ourselves. So long as it goes to build capital (roads, bridges, etc.), it may still be useful.
  
• Rent seeking - firms and individuals sometimes use regulations to prevent competition. Rent control is an example in which tenants seek to expropriate the value of apartments from owners. This discourages owners from building new housing, and results in shortages. Similarly, bureaucrats will seek to increase their sphere of influence and budget in order to promote their own interests (pay and prestige).
• Regulatory capture - it is possible for the regulated industry to get enough friendly votes on the regulatory boards to substantively control them. This has been true of railroads, electric utilities, banking, insurance, and especially medicine.
• Market distortion by tax structure, regulatory ordering, subsidization, risk assumption. Any one of these things could force the market into a suboptimal choice of goods and services, including LIFO inventory management, the choice of dirty Eastern coal over natural gas or clean western coal (to appease eastern mining unions), the choice of High Fructose Corn Syrup (HFCS) over cane sugar, and the collapse of the S&L industry due to an increase in the federal insurance coupled with a regulatory push towards a mix of risky investments and into a single, undiversified market (real estate).
• Unintended consequences - conditions arising from regulatory interference in ways that were unanticipated. For example, the ban on liquor in the 20s and on drugs at present has caused a rise in gang violence. Paying farmers to stay off of good farmland means they take those payments and then use them to buy irrigation and fertilizer so they can farm suboptimal farmland, resulting in more environmental degradation than if they had simply farmed the prime land.
• Some of the market failures, too, like moral hazard (crop insurance), structure (rail and airline regulation created cartel-like oligopolies), etc.

As with market failures, there are sometimes workarounds to the government solutions. However, most of these are not open to private actors as they were for market failure.

• Log rolling: A basic remedy to this is a Constitutional requirement for a supermajority. The only option open to individuals is to vote for reform.
• Rational ignorance and the concentrated interests/spread costs problem - Political Action Committees concentrate spread interests. However, this is still a public good type of problem, so PAC activity will be underproduced.
  
• Crowding out -- vote for reform.
• Rent seeking -- you can always try capturing the regulatory body 8~). Otherwise, vote for reform.
• Regulatory capture -- vote for reform
• Market distortion by tax structure, regulatory ordering, subsidization, risk assumption - vote for reform.
• Unintended consequences -- vote for reform
  

As far as I can tell, the individual's options for countering government failure are far more limited than the individual's options for countering market failures. That is why I think we're frequently better off living with the market failures than we are when we attempt a state intervention, especially if it isn't clear which market failures are dominant. The market failure may be countered by one clever individual, whose solution may then be copied by others, whereas the government failure always requires obtaining the agreement of a majority - perhaps even an overwhelming majority - of the public. There are costs to building consensus, which is why David Friedman refers to this situation as being "on the wrong side of the public good problem [paraphrasing]."

I am indebted to James Buchanan and Gordon Tullock for their illumination of some of these problems, especially the cost of consensus building and the external costs of laws, in The Calculus of Consent.

Failure Part I - Market Failure

In economics, there are several competing descriptions of "efficiency". In Econ 101, you will usually be shown how market transactions can produce one or more of these efficient outcomes. However, that demonstration is usually conducted under ideal circumstances of atomistic competition and other constraints. Later on in your academic career, you relax those constraints and find out how the real world interferes with the nice, neat perfect market.

Things which interfere with market transactions are known as "market failures". A market failure is not the failure of the market to produce the thing you desire, like a $500 Ferrari. Rather, it is the failure of the market to produce the efficient outcome. For example, if you would be willing to purchase something for no more than $500, and someone would sell it to you for no less than $250, any transaction between $250 and $500 would be efficient. If something interferes, the market is said to fail. Market failures include (in broad categories):

• Structure (increasing economy of scale or scope, path dependency, oligopoly, monopoly) - problems in the structure of the market in which one or a few firms may come to dominate. When that occurs and oligopoly or monopoly obtain, they may attempt to restrict output artificially and thereby raise prices.
  
• Opportunism/Knowledge (asymmetric knowledge, adverse selection, moral hazard, principal-agent, specialized assets, measurement) -- problems in the distribution of knowledge where one side of a trade knows more about a key aspect than the other. Used car owners know whether or not their vehicle is a good car or a lemon, but potential buyers don't and therefore assume average quality. Owners of superior used cars will refuse to sell at average prices, so the market becomes dominated by lemons (canonical example of asymmetric information). Similarly, only unhealthy elderly consumers will be willing to buy health insurance (adverse selection). If an insurer allows an asset owner to insure the asset for far more than it is worth, he runs the risk that the insured will fail to exercise proper prevention strategies and therefore be in the position of collecting on the insurance (moral hazard). A principal who hires an agent is dependent on the agent's judgment of what constitutes due diligence. A company that invests in specialized equipment (e.g. dies) to make products for a particular buyer runs the risk that the buyer will attempt to expropriate the entire value of the investment with the threat of leaving him in the lurch. When a manufacturer sells through complex distribution channels, he is frequently unable to monitor whether customers are given adequate support at the retail level.
  
• Public good (free rider, externality, holdout, commons tragedy, merit good) -- If I broadcast a radio signal to one customer, it is impossible to prevent others from receiving that same signal. Therefore, no single customer would pay for it knowing that others will free ride. On the other hand, if I agree to broadcast only if everyone agrees to pay equally, a single holdout can scuttle the entire deal. Similarly, if I agree to provide electricity to a single customer using a coal-fired plant, I cannot help but create pollution that will affect everyone (public bad). If we all decide to use a common resource, none of us can capture the rewards of conservation, but all of us can capture the rewards of increasing our use until it collapses. Some goods are thought to have externalities so valuable that they should be provided even if nobody would buy it themselves (e.g. education, vaccinations against communicable disease).
  

The existence of such failures is often considered to be the entry point for government action. This "Theory of Second Best" has been around for a while but is usually associated with both paleoprogressives (roughly 1890-1920) and neoprogressives (roughly 1990-present). The "second best" solutions open to the government are the Pigovian tax (including negative tax for merit goods) and simple public ordering (regulation). However, this is exactly the kind of problem I suggested a couple of essays ago when I stated that our choices are not between imperfect markets and perfect government policies. There are two problems here: the first is that the policies themselves may give rise to new problems, and second that the market itself may produce solutions.

A number of private solutions are available for each of the problems identified above.

• Structural problems may be countered with substitution and/or innovation. Gort and Argawal ("First-Mover Advantage and the Speed of Competitive Entry, 1887-1986", JLE vol XIV, April 2001) found that "first to the market" status conferred a positive advantage, but that the length of that advantage had declined from 30 years in 1887-1906 to about 4.5 years in 1986. In other words, the rate of change is accelerating and the advantage of the "first to market" is declining. The danger of monopoly was never as great as it was made out to be, and becomes less important every year.
• Another solution to monopoly problems is to remove public policies that create the condition in the first place. These include patents, subsidies, and legal monopolies. Many if not most historical monopoly problems were the result of regulatory capture by so-called "natural" monopolies that were anything but natural. AT&T comes to mind. Southwest Airlines is still hampered by the Wright Amendment. The USPS still has exclusive rights to carry First Class Mail.
  
• Opportunism can be countered with contractual remedies. For example, if you see that investing money in a very specialized asset for a single customer is going to open you to a situation where they can take advantage of you by threatening to abandon you after you have made the investment, you can demand a hostage or deposit.
• You can counter knowledge asymmetry with information gathering, as Akerlof even suggested in "The market for lemons" (though his suggested private remedies are usually overlooked). These include using branding and/or franchising to create or leverage existing reputation, using guarantees, or using third-party reputation sources such as licensing and certification providers. Underwriters Labs and Orthodox Union are two of the better known 3rd party certifiers, though FairTrade and others serve the same purpose. Note that these remedies are not necessary when repeated transactions within a local market are common. I used Consumers Union and Carfax when purchasing my most recent used vehicle. Hmmm - apparently, information gathering costs money, and if someone can gather it more efficiently than you, you can both profit by it.
  
• Contractual remedies are also applicable to asymmetric knowledge problems. If you think you might have a difficult time monitoring retailers of your product, you can try bundling, setting price floors, using standard contracts (common with car rental agencies), and franchising rules that prevent quality "shading" by franchisees.
• Finally, even public good problems are not entirely insurmountable. Radio is operated by bundling the public good (music, news, etc.) with public bads (commercials). Free rider and holdouts can be captured in mutual benefit contracts (covenants, for example). Commons can be divided up and parceled out with the equivalent of barbed wire and property rights assignments (such as auctioning off the RF spectrum).

The last example may benefit from a hybrid solution of public and private remedies. By assigning property rights in an application of the Coase theorem via legislative fiat, the commons problem is removed. Pigovian taxes are strictly ruled out by this (see David Friedman, Law's Order, on problems with joining Coase and Pigou), but some minor regulation may still be beneficial. For example, cap & trade markets in sulfur & carbon are generally accepted as the proper way to address the commons problem that results in pollution.

In this respect, I am not averse to public solutions so long as it can be shown that they are better than any possible private solution. That being a nearly impossible task (because of the "any possible" requirement on something as dynamic as our sophisticated economy), I would rather see state action that attempts to align incentives and allow the market to work without dictating the outcome; well-designed cap & trade markets are preferred to Pigovian taxes which are preferred to command & control regulations, so give me the sulfur market over a carbon tax over a new CAFE rule. I would also like to see such state interference written in such a way that it is subject to review and renewal frequently. Regulations are frequently written in a toxic mix of public hysteria, rent-seeking by corporate lobbyists, and power-seeking by legislators and bureaucrats, then set in stone and milked for 3-4 generations the way railroad, trucking, airline, and natural gas regulations were.

Heck, we just recently paid off the Spanish-American War.

UPDATE: This has a follow-up, Failure Part II, Government Failure.