Reapplying behavioral symmetry: public choice and choice architecture

MICHAEL DAVID THOMAS

PUBLIC CHOICE

Abstract: New justifications for government intervention based on behavioral psychology rely on a behavioral asymmetry between expert policymakers and market participants. Public choice theory applied the behavioral symmetry assumption to policy making in order to illustrate how special interests corrupt the suppositions of benevolence on the part of policy makers. Cognitive problems associated with market choices have been used to argue for even more intervention. If behavioral symmetry is applied to the experts and not just to market participants, problems with this approach to public policy formation become clear. Manipulation, cognitive capture, and expert bias are among the problems associated with a behavioral theory of market failure. The application of behavioral symmetry to the expanding role of choice architecture will help to limit the bias in behavioral policy. Since experts are also subject to cognitive failures, policy must include an evaluation of expert error. Like the rent-seeking literature before it, a theory of cognitive capture points out the systematic problems with a theory of asymmetry between policy experts and citizens when it comes to policy making.

The Past and the Future of Innovation: some lessons from Economic History

JOEL MOKYR

EXPLORATIONS IN ECONOMIC HISTORY

Abstract: In recent years, economists have revived the specter of slow growth and secular stagnation. From the point of view of economic history, what should we make of such doomster prophecies? As economic historians all know, for 97 percent or so of recorded history, the stationary state well-describes the long-run dynamics of the world economy. Growth was slow, intermittent, and reversible. The Industrial Revolution rang in a period of sustained economic growth. Is that growth sustainable? One way to come to grips with that question is to analyze the brakes on economic growth before the Industrial Revolution and examine how they were released. Once these mechanisms are identified, we can look at the economic history of the past few decades and make an assessment of how likely growth is to continue. The answer I give is simple: there is no technological reason for growth in economic welfare to slow down, although institutions may become in some area a serious concern on the sustainability of growth.

Barriers to prosperity: the harmful impact of entry regulations on income inequality

DUSTIN CHAMBERS, PATRICK A. MCLAUGHLIN, LAURA STANLEY

PUBLIC CHOICE

Abstract: Entry regulations, including fees, permits and licenses, can make it prohibitively difficult for low-income individuals to establish footholds in many industries, even at the entry-level. As such, these regulations increase income inequality by either preventing access to higher paying professions or imposing costs on individuals choosing to enter illegally and provide unlicensed services. To estimate this relationship empirically, we combine entry regulations data from the World Bank’s Doing Business Index with various measures of income inequality, including Gini coefficients and income shares to form a panel of 115 countries. We find that countries with more stringent entry regulations tend to experience more income inequality. In countries with average inequality, increasing the number of procedures required to start a new business by one standard deviation is associated with a 7.2% increase in the share of income accruing to the top decile of earners, and a 12.9% increase in the overall Gini coefficient. This result is robust to the measure of inequality, startup regulations, and potential endogeneity. We conclude by offering several policy recommendations designed to minimize the adverse effects of entry regulations.

The ethics of pure entrepreneurship: An Austrian economics perspective

THE REVIEW OF AUSTRIAN ECONOMICS

ISRAEL M. KIRZNER

Abstract: This paper focuses on the justice of income distribution in a system of private property rights. Milton Friedman argued that the “ethical principle that would directly justify the distribution of income in a free society is ‘to each according to what he and the instruments he owns produces’” (1962: 161–2). In this paper we (a) show that the winning of pure entrepreneurial profit cannot be justified on the basis of Friedman’s ethical principle, and (b) argue that a fuller understanding of the meaning of “pure entrepreneurial profit” reveals that Friedman’s universal ethic is of little relevance to capitalism, properly understood as a free enterprise system. To pass ethical judgment on pure entrepreneurial profit, it is necessary to supplement Friedman’s ethical principle with additional ethical insights. This paper does not argue directly in favor of any one such possible additional insight; it will simply demonstrate how one such additional insight might, if it passes final ethical screening, serve as the ethical defense of pure capitalism, which, we argue, Friedman’s ethical principle is unable to do.

Barriers to prosperity: the harmful impact of entry regulations on income inequality

DUSTIN CHAMBERS, PATRICK A. MCLAUGHLIN, LAURA STANLEY

PUBLIC CHOICE

Abstract: Entry regulations, including fees, permits and licenses, can make it prohibitively difficult for low-income individuals to establish footholds in many industries, even at the entry-level. As such, these regulations increase income inequality by either preventing access to higher paying professions or imposing costs on individuals choosing to enter illegally and provide unlicensed services. To estimate this relationship empirically, we combine entry regulations data from the World Bank’s Doing Business Index with various measures of income inequality, including Gini coefficients and income shares to form a panel of 115 countries. We find that countries with more stringent entry regulations tend to experience more income inequality. In countries with average inequality, increasing the number of procedures required to start a new business by one standard deviation is associated with a 7.2% increase in the share of income accruing to the top decile of earners, and a 12.9% increase in the overall Gini coefficient. This result is robust to the measure of inequality, startup regulations, and potential endogeneity. We conclude by offering several policy recommendations designed to minimize the adverse effects of entry regulations.

Individualism, Collectivism, and Trade

AIDIN HAJIKHAMENEH, ERIK O. KIMBROUGH

EXPERIMENTAL ECONOMICS

Abstract: While economists recognize the important role of formal institutions in the promotion of trade, there is increasing agreement that institutions are typically endogenous to culture, making it difficult to disentangle their separate contributions. Lab experiments that assign institutions exogenously and measure and control individual cultural characteristics can allow for clean identification of the effects of institutions, conditional on culture, and help us understand the relationship between behavior and culture, under a given institutional framework. We focus on cultural tendencies toward individualism/collectivism, which social psychologists highlight as an important determinant of many behavioral differences across groups and people. We design an experiment to explore the relationship between subjects’ degree of individualism/collectivism and their willingness to abandon a repeated, bilateral exchange relationship in order to seek potentially more lucrative trade with a stranger, under enforcement institutions of varying strength. Overall, we find that individualists tend to seek out trade more often than collectivists. A diagnostic treatment and additional analysis suggests that this difference may reflect both differential altruism/favoritism to in-group members and different reactions to having been cheated in the past. This difference is mitigated somewhat as the effectiveness of enforcement institutions increases. Nevertheless we see that cultural dispositions are associated with willingness to seek out trade, regardless of institutional environment.

Trust, Trade and Moral Progress: How Market Exchange Promotes Trustworthiness

JONATHAN ANOMALY

SOCIAL PHILOSOPHY AND POLICY, Volume 34, Issue 2

Abstract: Trust is important for a variety of social relationships. Trust facilitates trade, which increases prosperity and induces us to interact with people of different backgrounds on terms that benefit all parties. Trade promotes trustworthiness, which enables us to form meaningful as well as mutually beneficial relationships. In what follows, I argue that when we erect institutions that enhance trust and reward people who are worthy of trust, we create the conditions for a certain kind of moral progress.