Carnival of the Capitalists

This week's edition of Carnival of the Capitalists is up at Jay Solo's Verbosity. I've read through most of the entries, and the ones that have piqued my curiosity so far are:

Kevin Brancato's entry on income mobility.

An overview of online gaming at TJ's Weblog.

The significance of the VIX at The Big Picture.
(The VIX is IMO the best medium-term predictor of the stock market when it reaches extreme levels.)

A succint rebuttal of Joseph Stiglitz at Newmark's Door.

Share this

I apologize for not having

I apologize for not having much time for sustained argument at present, but I will have more time soon enough to do back and forth posting.

Just glancing, though- I don't see how you can call the Newmark's door thing a rebuttal. Stiglitz's point is one to take seriously. Look at computer funding in the 70's or defense funding or agribusiness funding. They are all heavily socialized (in the worst sense- only the costs are socialized, the benefits are private) industries and they are the biggest. Or cars, even. The highway construction project, and the subsequent suburbanization of America were incredible boons to the automotive industry. Not to mention the heavy-duty protectionism that took place to protect the input industries like steel in the 19th century.

Incidentally, this protection was only stopped by satan himself (as some rightists, including spall I believe, would have it): FDR.

As far as computers go, the

As far as computers go, the innovation that spawned today's economy and efficiency improvements had nothing to do with what government was funding, and everything to do with Gates and Jobs, folks working either a new angle on software or a new type of computer in a garage, respectively.

Semiconductors? Silicon chips? Don't think you can claim a government source for those. Plastics research was done by private industry.

The Auto industry, ironically enough, is the poster-child for private innovation. No government agency sponsored Ford's work on autos (or any of the other auto mfr's of the day), and automobiles became ubiquitously popular decades before the government decided to support them with massive roadbuilding projects (one needs only to remember the once and future obsession with rail transit to debunk any suggestion of 'public' support for autos in the early 20th century).

As for the rest, nobody seriously contests that massive amounts of state cash can boost and promote an industry (as well as legal concessions, kickbacks, grants, etc) and make it grow. The question is more "would it have happened otherwise, and what were the costs of these interventions?"

We think of most of them as unalloyed "good", due to hindsight, but nobody brings up areas where federal, state, and other "public" cash bore the costs of technology and industries that never panned out.

The suggestion that innovation *doesn't* happen without 'public' intervention is absurd, and the idea that innovation would be far less without intervention is an unproven assertion. And at the end, we still must ask "as opposed to what?" Many of the innovations lauded have come with massive social costs in other ways (disrupting existing industries, technologies, ways of life)- who is to say that the government's choice of technological winner is the correct one? Especially when weighed against other peoples' desires to remain static...

Honestly, would the people have chosen an interstate highway system? How would surburban development be different without the massive subsidization of the car by government in the 30s, 40s, 50s, and 60s? Would we still have cheap rail transit?

While there may be a role for government funds in terms of science funding (and I only offer that possibility grudgingly), it certainly cannot be said that in the absence of said funding nothing would happen, and that no innovation would occur. Even steel and the steam engine came about due to private, not public, inventors...

using computers as a great

using computers as a great example of private industry is unwise. Direct government contributions to the computer industry are very well documented, and surprisingly online.

a highlight: "Between 1976 and 1995 (the earliest and latest years for which consistent data are available), federal funding for research in computer science increased by a factor of five, from $180 million to $960 million in constant 1995 dollars "

here's a nice overview:
http://www.nap.edu/readingroom/books/far/ch3.html

here's a good history of the origins of the technology:
http://www.nap.edu/readingroom/books/far/ch1_b3.html

here's the economic reasoning behind such funding:
http://www.nap.edu/readingroom/books/far/ch2.html

I should note, also, that you would have to make quite a case that Allen and Gates didn't build off the incredible gov't supported technological base when they partnered with IBM.

On plastics: I think hybrid plastics just spawned from the Air Force research lab and here's this:
http://www.lawtechjournal.com/notes/2003/05_030727_buchanan.php#FN_4

the author makes the point that NASA has produced "satellite television, satellite wireless phones, and global positioning equipment (GPS).3 In addition, various plastics, technologies like solar cells, biomedical sensors, sound-enhancing circuit cards, modern semiconductors, and the concept of computer chips have emerged because of the space program."

So yeah, Brian, I would say "semiconductors, chips and plastics" were all gov't supported.

"As ASCE noted, the interstate system has often been called 'the greatest public works project in history.' It not only linked the nation, but it boosted productivity and helped sustain a more than tenfold increase in the gross national product since the start of the program in 1956. It is the backbone of the world's strongest economy."
-globalsecurity.org

The Federal Aid Highway act was 1938, incidentally, so I'd be interested in finding some data on the popularity of the vehicles from 1908-1938, and then what happened. But I couldn't find any. Regardless, the "backbone of our economy" was a social project.

You guys are on shaky ground if you wanna just drop all empirical observations and rattle on about the free market because Milton Friedman makes a graceful argument for it. As David Felix argues, Keynes' approach to economics has been better verified empirically than free-market nonsense. I'm already suspicious of free market doctrines (just as I would be suspicious of removing all traffic lights- though incidentally, replacing them roundabouts is a great analaogy for anarcho-syndicalism)- but I'm even more suspicious of them when nearly all arguments for their greatness exist in the abstract.

For instance, Spall has argued that gov't intervention basically sustains monopoly and size. To me, that argument reeks of a closed system, like orthodox marxism. Everything that goes wrong can just be blamed on other factors, when reality seems to show otherwise.

Embracing Keynes as an

Embracing Keynes as an example of the real world pretty much destroys any credibility you'd built up prior. Seriously, someone more wrong about almost every aspect of economics than Lord Keynes is probably only Karl Marx. Henry Hazlitt's "The Failure of the New Economics" is a devestating takedown on the Keynesian fallacies in theory. The 1970s proved Keynes wrong in fact (and the 90s in Japan prove Keynes wrong yet again). The amount of waste & suffering wrought as a consequence of Lord Keynes' folly is positively scandalous.

Automobiles were so popular prior to 1938 that Ford was one of the wealthiest men in the world, let alone America. Cars were ubiquitous well in advance of government support.

Regardless of the level of government funding in "computers" (a rather vague generalization of an industry), no government program resulted in Apple or Microsoft, and to suggest that the success of the microcomputer & software markets is the result of government action is preposterous. Private individuals made the New Economy, not government planners or research.

Individuals were working on all the elements of computing before government funding appeared. Radio & Computing got their starts in the 19th century, from tinkerers. Suggesting that the Air Force made plastics is hilarious- Dupont & the rest of the chemical industry sat around and awaited Air Force Genius to dole out the technology?

If you want to say that "getting lots of resources for free helps private individuals research", then you're right on. But it simply won't do to arrogate the accomplishments of private individuals to the government's ledger simply because there was a measure of government funding...

Indeed, if one stretches the definition of "public" to any expenditure of tax funds, it is rendered quickly meaningless and without explanatory power, since in most of the cases outlined above, private industry and individuals were working on the technologies prior to government involvement, and it can be said (rather easily, since its true) that government funding often crowds out alternative (private) sources- private funds for R&D go towards, say, lining CEO pockets or ad budgets or other pursuits.

One would have to posit that the specific technologies in question (or the entire industry) would not exist save for government intervention and "innovation" if the position is to support the idea that government planning is a (necessary, indispensible) boon to economic prosperity- that absent government intervention, we wouldn't have it, period. The further one gets from this position (i.e. the more caveats and, "well, buts" one invokes) the more it turns into hand-waving and cheerleading.

In the end, simply pointing to successes won't do, since all that does is support the Austrian contention that, essentially, a blind archer will hit the target if he shoots enough.

Brian, I've got to give you

Brian, I've got to give you points for cleverness. Because you've memorized enough Senior (or Friedman or whoever) the burden of proof is on me? I have to prove that computers wouldn't exist if it wasn't for gov't funding? That's crazy talk. I just proved that they do exist because of it- I think it's up to you to prove that they would anyway, and explain why they didn't.

The Bretton-Woods system was being broken down in the early seventies, and was basically overhauled in 1973. How could that decade prove him wrong? Look at the growth rates (or basically any economic indicator) from 1948-1973, and then 1973-present. Growth, real wages, etc. All slowed considerably. Oh yeah, but you've got a great theory proving it couldn't have happened that way.

Economics is interesting, but it's not gospel- Keynes is no savior or anything, but he just seems to be closer to the mark than the neoclassical guys.

As far as hitech industry goes though, even a cursory glance into the development of products reveals a wealth of basic knowledge that's built upon. And it's not A Priori knowledge either, it comes from governement funding.

by the way, I'd love to talk

by the way, I'd love to talk about the radio example, if you think it's a serious one. Also, I said "Hybrid Plastics" - a huge company. If you look at their history, they were literally an offshoot of the air force's research dept.

Matt, I don't know who the

Matt,

I don't know who the burden of proof should be on - you and Stiglitz for making the claim, or Brian and Newmark for challenging it. But you do hint to something important about this kind of debate - the difficulty of pointing out opportunity costs. This is essentially what Bastiat was getting at in That Which is Seen, and That Which is Not Seen. Just like in the Broken Window fallacy, so too here. It is easy to see the increased economic activity flowing from a broken window. It is much more difficult to see the lost opportunities given up as a result of having to fix that window instead of doing something more productive with that money.

So too with regard to innovation. If the government takes money from us and spends some of it on research and development, how can we measure the lost opportunities that result from this taking? How can we measure whether things are better or worse? If for ever $1 the government spends on R&D for computers, the private sector spends $100,000, can we really say that computer innovation would not have existed were it not for government spending?

There are certainly reasons why we would expect the private sector to be a better decision maker when it comes to research. First of all, private investors are risking their own money, and want to see direct results, whereas the government is risking someone else's money (taxpayers) and as we have seen with the public school system, failure is probably the best way to get even more money. Second, private R&D has a profit motive, which is directly related to satisfying the desires of consumers. The government, on the other hand, has no reason to try to make socially usefull discoveries; instead, government researchers can concentrate on whatever interests them or whatever interests the higher-ups who make funding decisions. As long as it looks good on paper, they will continue to get government grants.

Third, and most importantly in my opinion, what seperates the U.S. from the rest of the world? Why does so much innovation come out of the U.S. compared to Europe and Asia? Japan is even more involved in managing their economy than we are, as is Europe. Do you think we are spending signficantly more tax dollars on R&D than they are? Or could it have something to do with lower taxes (and thus less crowding out), better returns on investment, longer patents for drug research, among other factors?

The growth of 1948-1973

The growth of 1948-1973 cannot be examined fully without understanding that the world was destroyed by WWII, with the sole exception of the United States.

When you've got one fully industrialized country working to rebuild the world, with essentially no competition, miraculous growth statistics can indeed be found. I go into this in detail at Swallowing the Blue Pill with regards to the delusion of Keynesian effectiveness during the "golden age".

In my international economics course, the professor went on an extended riff on the 19th century's gold standard, scoffing at its proponents by pointing out that between 1848 and 1914, Europe was generally at peace (and from 1872(end of Franco-Prussian war?) till 1914, no war was fought in Europe, period), and thus the system "worked great" when there was no crisis- and that when the first crisis hit, it fell apart.

Interesting, too, that during the time when there was American hegemony in trade & manufacturing and everything flowed in a nice circle (goods out, cash in), that the Keynesian system seemed to work- then when the very first crisis hit, it falls apart, and was unable to resurrect any economy that fell into recession. Remember, "stagflation" is impossible under Keynes' theory and system. I think America's experience during Carter's administration (a devoted disciple of Keynesian economics, who tried every nostrum & prescription) shows rather definitively that Keynes is bunk.

As for burdens of proof, it's rather simple. You are saying that the presence of government money in a technology or industry makes it "public innovation". I am saying that the presence of private individuals and concerns in a technology or industry makes it "private innovation".

Neither has a stronger truth claim, because they're the same argument, just with the emphasized party inverted. However, I would say that the "public innovation" assertion (the greater claim of Stiglitz' that all major innovation is from government intervention) would require greater support, since the historical record is full of inventions and innovation that occurred without state funding or direction.

I'll write more detail

I'll write more detail later, but first:
Suppose there are 2 hurdlers running a race, and behind hurdler one runs a gov't employee, lifting him every time he has to jump. Behind hurdler 2, there is noone. Hurdler 2 says: "look Hurdler 1 only did so well because of the government guy." You guys, then, would claim that hurdler 2 actually has to prove that hurdler 1 can't jump the hurdles by himself in order to have a case!

To make things more interesting, suppose hurdler 1 drank gatorade, and 2 drank powerade. Would you think that hurdler 1's performance is excellent proof of the merits of drinking gatorade? i.e. Is it a proof of a free-market capitalism? silly.

The keynes stuff is interesting, and I'll get back to it. In the mean time, I'd appreciate a link on Carter as a disciple of Keynes: as far as I know the main Keynsian institutions (IMF, World Bank) had been fundamentally altered into what are basically neoclassical institutions.

As far as the "opportunity costs" go, I think you'll have to make a better point, Micha. That boils down to "I have a theory and if experience seems to falsify it, so much the worse for experience."

I looked over "swallowing

I looked over "swallowing the blue pill" and found it somewhat unconvincing. We don't have a control, so of course there will always be variables that get overlooked, but you've got a long way to go to write off the massive shift in 1973 with the breakdown of the BW institutions. Just thinking about it abstractly doesn't it seem a little convenient to you that all of your variables that produced growth suddenly came to a head in 1973 and magically stopped producing growth, completely unrelated to the shifting of the brettonwoods function and the complete reversal of "direct investment capital" vs. "speculative capital"? Sounds pretty convenient to me.

It'd be arging about butterflies flapping their wings as an explination of hurricanes.

As far as I recall, my

As far as I recall, my (Marxist) sociology professor as well as a number of my economics professors mentioned that the influx of women into the workplace in the early 70s as a result of the sexual revolution of the late 60s is the most likely explanation of the relatively slow growth in output and wages per worker (as an increase in the number of workers necessarily decreases the average).