A New Chicago School?

Consider America’s transportation system. I like to imagine that it ought to be a certain way. I imagine a world where a lot of freight travels competitive rail lines. And occasionally a transport truck traverses the country side, maybe to serve a new or small market without a rail road. I imagine a truck entering a town, passing some sort of device that alerts the local police that a vehicle has entered the town without the appropriate toll-paying transponder. Since this is the first time this has happened, the officer hands the trucker an application and signs him up on the spot. Oh! And there aren’t major freeways all over the place. Just a lattice work of efficient highways skirting the edges of towns and winding byways trailing through the country side. Perfect motorcycling roads and beautiful markets all in one.

My perfect world wouldn’t have much room for the fast modern engines we’re used to cars having. Planes and trains are fast enough for long distances and for shorter distances we simply don’t need to go so fast. The technology in those modern engines is malinvestment. That capital exists because interference with markets has skewed the relative financial benefits of different research (e.g. at the expense of investment in technology necessary for seamless and efficient toll-roads). This skewed capital structure also indirectly subsidizes fast-food while implicitly taxing the experience of traveling through, rather than past, small towns.

But what would actually keep it that way? It’s all a bit too good to be true. Am I being Utopian? Yes, but I think there might be some merit in that. My utopia can be thought of a limiting case; one of many possible best-case scenarios. We might conceive of a yard stick akin to Pareto Optimality but in a dynamic setting.

The world can be dynamically-Pareto optimal and have economic profits, but only those that arise as a result of productive entrepreneurship. Actions that create net value should be the only ones that generate profit. And externalities (whether pollution or politics) should be resolved by property rights and liability law. At least in the long run.

Such a world would serve as a benchmark in exactly the same way as Perfect Competition, and I would name it similarly. Perfect Markets (I’m open to suggestions) would be those that are simply too perfect to exist in the real world, but would offer a limiting case against which differing scenarios might be considered.

I suspect that something like this has already been offered but I’m only slowly working my way through one work and it will be a while before I get to another notable work. That first (from the Austrians) I suspect would be (justifiably) critical of what I’m discussing and perhaps it is a project best suited for applied mathematicians. It would certainly allow a good deal of theorem proving and other apparent mental master–… mastery (yes… mastery…). For some time there might be little apparent use or scientific merit in this. But number theory only became valuable with the advent of computers centuries after mathematicians started thinking about the minutiae of numbers. It’s not always for us to say that something doesn’t have a use just because we don’t see it yet. It’s a good idea to let some curious mathematical tinkerers doddle away at problems; they might turn out to have offered a valuable and useful gift to future generations.

Open Access Gary Becker papers, and a couple of thoughtful links on him

Nobel Prize-winning economist Gary Becker died Saturday. For those of you who don’t know about his work, go here. For the rest of you, economist Tyler Cowen has compiled a great list of articles by Becker that you can read:

    1. Irrational Behavior and Economic Theory.”  Can the theorems of economics survive the assumption of irrational behavior? (hint: yes)
    2. Altruism, Egoism, and Genetic Fitness: Economics and Sociobiology.”  The title says it all, from 1976.
    3. A Note on Restaurant Pricing and Other Examples of Social Influence on Price.”  Why don’t successful restaurants just raise the prices for Saturday night seatings?
    4. The Quantity and Quality of Life and the Evolution of World Inequality” (with Philipson and Soares).  The causes and importance of converging lifespans.
    5. Competition and Democracy.“  From 1958, but most people still ignore this basic point about why government very often does not improve on market outcomes.
    6. The Challenge of Immigration: A Radical Solution.”  Auction off the right to enter this country.

Cowen also linked to sociologist Kieran Healy’s fascinating take on Michel Foucault’s thoughts about Gary Becker’s work over at Crooked Timber (and here is a pdf of Becker on Foucault on Becker).

And economist Mario Rizzo shares some short thoughts about Becker’s work in relation to the Austrian School of Economics (Becker is associated with the Chicago School of Economics). Rizzo’s account of the early 1960s debate on rationality between Becker and Kirzner is worth a look.

Update: Here is Gary Becker’s 1992 Nobel Prize lecture (pdf)

Around the Web

  1. Spontaneous Order and Social Justice
  2. Persuading the Scots in regards to secession from the UK
  3. The prospects of Scottish secession from the UK
  4. The waxing and waning schools of economics: Chicago, Vienna and San Francisco
  5. Cooperation Emerging: Institutional diversity and the history of the West

Chicago, Vienna and San Francisco

Co-editor Fred Foldvary has a great essay up on three schools of economic thought that deserves to be read by all.  An excerpt:

The Vienna school emphasizes the dynamics of the economy, while the Chicago method is to apply self-interest and economizing in an equilibrium analysis.  The San Francisco school uses both equilibrium and dynamics.  The dynamic approach of change over time is used to show the advance of rent and lowering of wages as the margin of production moves to less productive land and as land speculation moves the margin out even further.  Equilibrium shows that since market rent is based on the fixed supply of land and the demand to rent space, the tax on land not affecting the rent.

The San Francisco school agrees with the Vienna school that the spontaneous order of the free market best allocates goods to human desires.  But the San Francisco school points out that if the ground rent is not tapped for public revenue, when taxes on other things finance civic works, then there is in effect a subsidy to land owners, which distorts the market.

The San Francisco school has a theory of the business cycle based on land values, which rise during a boom, when speculation carries land prices so high that investment gets choked off, resulting in a recession.  But San Francisco has lacked a consensus on the role of central banking and money.

Check out the rest here.

I tend to pay attention whenever Dr. Foldvary writes, because he is the guy who wrote a book in 2007 accurately predicting the economic collapse of 2008.  You can access the book for free here.