Tag Archives: Vincent Ostrom

Economic development, markets, and a Missouri governor I’ll identify as “Jay Nixon”

Thomas Duda at the Show-Me Daily writes:

While reading the Springfield Business Journal, I ran across a mention of the governor’s recently formed Executive Advisory Board, which will produce “a five-year plan for economic growth.” The governor’s press release states:

The final outcome of the planning process will be six to 10 strategic objectives to transform Missouri’s economy for the 21st century. The objectives will pinpoint existing and future industries that will drive growth. Along with each strategic objective, the plan will include specific tactical steps necessary to accomplish the goal. The strategic objectives and tactics will focus on the next five years.

Although I find the Executive Advisory Board’s mandate ludicrous — that state government should chart and shape the course of something as complex as our collective future economic development, I do find it encouraging that a committee member quoted in the Springfield Business Journal stated:

“We spend lots of money on economic development every year. The question is, ‘Are we strategically aligned to do it in the most effective way?’”

Obviously, the panel will not consider the possibility that the state of Missouri leave the business of economic development entirely, but I am somewhat hopeful that Executive Advisory Board just might conclude that the termination of some market-distorting policies would set Missouri on a course toward a freer and more prosperous future.

Say there are several companies in cutting edge industry X that are trying to make location decisions. The key criteria for a potential location is whether or not the legal architecture for that business to operate exists or not. Do you think it is appropriate for a governmental commission to try to predict what kind of legal architecture is necessary to sustain economic growth? Consider the much debated but unarguably important scholarship of Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny (LLSV 1998) whose data-driven approach to analyzing the relationship between legal development and economic growth has been influential in persuading governments to support markets, not replace them (LLS 2008).

Consider, too, that this is not just a commission that can be characterized in a strict government/free market dichotomy. The press release notes that the commission will be directed by top business leaders; this is more appropriately characterized as a place where the public and private spheres interact to increase the efficiency of both. I point you to Vincent Ostrom, who notes in an interview with Vernon Smith:

Instead, we should expect to find some combination of market and non-market structures in every society, and we should recognize the complex configuration of institutions behind labels such as “capitalism”. We might usefully think about combinations of private and public economies existing side by side. However, it’s important to stress that not all forms of public enterprise are, or need to be, state-owned and operated. Markets are diverse and complex entities. Markets for different types of goods and services may take on quite different characteristics. Some may work well under the most impersonal conditions. Others may depend upon personal considerations involving high levels of trust among trading partners. In other words, the options are much greater than we imagine, and we can see this is true if we don’t allow our minds to be trapped within narrowly constrained intellectual horizons.

I hazard a guess that Duda does not account for these parameters. Consider Maryland, for instance. The economic development commission there (if there is one) there could make the determination that laws barring video recording of law enforcement provides a poor legal architecture for the existence of citizen journalism or documentary filmmakers, among others. Relaxing these laws would stimulate economic activities by people and firms who previously were priced out of the market by liability costs.

Or alternatively, an economic development commission could find that biotech companies would be happy to relocate to Missouri if they could rely on a legal architecture that protects them from unfair claims of tort. Without that architecture, biotech companies wouldn’t be willing to relocate to Missouri, and we’d lose what might otherwise be an very productive industry to another place.

I don’t want to extend this argument to subsidizing businesses to relocate through tax incentives and other kinds of public financing. But I do think that the notion that Governor Nixon is interested in promoting sensible economic development through the work and advice of private-sector leaders commendable, and I think that there are good arguments as to why.

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Great Lines in Economics, Vincent Ostrom Edition

It would be more accurate to call them paragraphs, actually, but this interview excerpt from Vincent Ostrom perfectly articulates an argument that I’ve made for a long time: that at the end of the day, a critically important feature of human institutions and interactions is that they are defined by complexity and nuance and that monolithic conceptions based on those interactions or institutions (like “socialism” and “capitalism”) are are intellectually straitjacketing. Worth your while:

Probably the best way to characterize our approach would be to start with one of our most influential themes: the idea that broad concepts such as “markets” and “states”, or “socialism” and “capitalism”, do not take us very far in thinking about patterns of order in human society. For example, when some “market” economists speak of “capitalism”, they fail to distinguish between an open, competitive market economy and a state-dominated mercantile economy. In this, they follow Marx. He argued that “capitalism” has a competitive dynamic that leads to market domination by a few large monopoly or monopoly-like enterprises. But what Marx called “capitalism”, Adam Smith called “mercantilism”. Similarly, many authors who write about “capitalism” fail to recognize the complexity of capitalist economic institutions. They overlook the rich structures of communal and public enterprises in societies with open and highly competitive market economies.

Instead, we should expect to find some combination of market and non-market structures in every society, and we should recognize the complex configuration of institutions behind labels such as “capitalism”. We might usefully think about combinations of private and public economies existing side by side. However, it’s important to stress that not all forms of public enterprise are, or need to be, state-owned and operated. Markets are diverse and complex entities. Markets for different types of goods and services may take on quite different characteristics. Some may work well under the most impersonal conditions. Others may depend upon personal considerations involving high levels of trust among trading partners. In other words, the options are much greater than we imagine, and we can see this is true if we don’t allow our minds to be trapped within narrowly constrained intellectual horizons.

A later edit or post will talk about my experiences coming to this line of thought through the rich world of critical literature.

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