Obvious Wisdom from James M. Buchanan

Obvious Wisdom from James M. Buchanan

Jim Buchanan, Nobel Laureate and pioneer of Public Choice Economics, is one of my favorite economists. His keen insights into the reality of politics have reverberated through popular thought, and have changed the way many (especially economists) view the political process.

Want to learn more about his ideas? Check out “Public Choice” in Econlib’s Concise Encyclopedia of Economics.

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Meddle, Meddle, Meddle: An Interventionist’s Delight

This week, the European Union Justice Commissioner Viviane Reding proposed a regulation to punish companies whose supervisory board is less than 40% female. In the name of “equality,” Reding has determined that self-regulation has failed to give women the opportunities they deserve in the management of publicly traded companies. Therefore, she concludes that government intervention in the form of a quota is necessary. This New York Times article contains details of the proposal, but this kind of interventionism is nothing new.

Quotas are old friends to the interventionist, and are often part of “social justice” and “fairness” initiatives. Though discrimination can be a serious problem, quotas are not the answer. Forcing individuals into positions that they would not have attained without intervention does both the individual and the organization a disservice. In the words of Thomas Sowell,

The assumption that there is something strange about not having different groups “represented” in various occupations and institutions in proportion to their share of the population will not stand up to the slightest scrutiny.²

Not only is it silly to expect perfect representation, but quotas also create a situation where organizations hire less qualified people than they would have otherwise, to avoid the penalties of violating the quota regulation. One of the most interesting parts of an affirmative action quota is that it can only hurt the organizations involved. Before you get upset about my black-and-white view of quotas (no pun intended), think about it this way: if a minority person is the best candidate for a job, not hiring the person (discriminating against her, in other words) will hurt the company because it is missing out on an awesome worker. If a minority person is not the best candidate for a job and gets the job simply to fill the quota, the company can’t hire a worker who would have contributed more to the company. In short, affirmative action legislation is not necessary because companies that discriminate are shooting themselves in the foot. Companies can’t afford to pass up the best people.

So where does that leave us with Reding and the misguided UN proposal? If passed, it would dramatically hinder companies’ ability to hire the best people for each job. Reding is a member of a class of bureaucrats who believe that they can arbitrarily impose the “social good” on companies and not expect any repercussions. (How do I know this? Reding also “has a track record of defending citizens’ rights by successfully lowering the cost of cellphone calls.”¹ Since when has inexpensive phone service been a right? But I digress.) It is not possible for a company to be more productive by hiring less competent workers, and if Reding thinks it will be possible for European economies to do anything but collapse under this meddling, she has another think coming.

Thanks to my classmate Megan Bowser for bringing this UN article to my attention.

¹ European Proposal Presses for Women to Join BoardsNew York Times. September 3, 2012.
² Quotas on TrialTownhall.com. January 8, 2003.

The Journey, Not The Destination: Kirzner and Alchian

“Ends can be conceived as observable states of affairs only after their achievement.” -Israel Kirzner

In his book The Economic Point of View, Israel Kirzner notes that as the study of Economics has developed, economists have tended to miss key parts of economic behavior. One of the errors Kirzner detects is a tendency to forget that purpose is the key to human action. We cannot take “ends” as a given, because every person has her own. Though a person may achieve something that was desired, how the desire was fulfilled is where the economic activity happens. The choices between different possible means to the end involve weighing tradeoffs, using scarce resources, and sacrificing some goals for the sake of others.

So, we can’t just ignore the choices that led to the ends. In the case of business, it would be silly to say that the goal of a business is “profit maximization.” Not because it is untrue, but because it misses a step. The most profitable businesses do survive, but business owners can’t be successful by waking up in the morning and thinking, “I will maximize profits today!” It would be the same as a student declaring that she will get all A’s in her classes, without any plan to make it happen.

The process of profit-maximization is one of constant innovation. Some of these innovations will be amazing, like iPhones, and others will flop, like Kodak’s switch to digital photography. Arman Alchian likens this process to evolution, where some developments are beneficial to an organism, and others are not. Companies that innovate in a way that consumers like are profitable, and companies whose innovations are not embraced will fail.

Successful companies do maximize profits, but that is because they are making good decisions. They cannot make good decisions by trying to maximize profits. This may seem like a tedious point, but it is essential to keep in mind that individual decisions are at the heart of economics. Innovation cannot be taken for granted, because it is always the result of someone’s hard work.

So companies, like people, are trying to make the best decisions given the goals they want to achieve. In economics, as in other parts of life, it is the journey and not the destination that really matters.

The quote at the top of the post is from The Economic Point of View6.36

In Defense of Judging a Book by Its Cover

 

There are many common adages to which economists object, but the one that really bugs me is “Don’t judge a book by its cover.” And while I understand what the phrase tries to convey, disregarding the value of quick judgements misses an essential part of human decision-making.

If we aren’t allowed to judge a book by its cover, how do we decide which to read? Given that we don’t have time to read every single book in the library, we must decide which book we will like best based on the title and the paragraph on the back. Certainly, we will make poor decisions at times. The book that looks like it could be a New York Times Bestseller could be as interesting as watching a snail race. But on the whole, we would generally pick books that we enjoy reading. In the same way, buying laundry soap would be a hassle if we had to look up all relevant scientific information regarding the efficacy and safety of the brands carried by the store before we made a decision of which to buy. It is not worth our time. Small decisions with low-stakes are best made quickly because the benefits of extra knowledge are smaller than the value of the time expended to find that information.

However, I would argue that large decisions also benefit from these judgements. In the case of meeting a new person, it only takes a few minutes to decide if you two are likely to become close friends. These judgments might lead us to occasionally miss out on good (unexpected) friendships, but we live in a world of scarce resources and we do not have the time to get to know every person before deciding if it is worth investing additional resources in a friendship.  If a person is able and willing to invest more time in making a judgement, she is more likely to make a wise decision. But we are capable of making a tolerably good (if often sub-optimal) decisions with only small amounts of information.

Agree? Disagree? I’d love to hear your thoughts.