Published in the Southern Economic Journal 65(4), April 1999, pp.823-838.
Self-designated Austrian economists have two different views of modern
neoclassical economics. Some, such as F.A. Hayek, take issue with
certain aspects of neoclassical economics, without rejecting its
fundamentals. Others, most notably Ludwig von Mises and his student
Murray Rothbard, explicitly reject the foundations of modern
neoclassical consumer and welfare theory and try to construct a
systematic alternative. This paper analyzes the most distinctive
features of the Mises-Rothbard alternative to the neoclassical
paradigm; it also considers related positions defended by Israel
Kirzner. I argue that their effort to rebuild economics on
non-neoclassical foundations fails, and that their critique of
neoclassical foundations is either wrong or strongly overstated.
Published in the Eastern Economic Journal 26(2), Spring 2000, pp.191-211.
Critics of behavioral economics often argue that apparent irrationality
arises mainly because test subjects lack adequate incentives; the
defenders of behavioral economics typically reply that their findings
are robust to this criticism. The current paper presents a simple
theoretical model of "rational irrationality" to clarify this debate,
reducing the neoclassical-behavioral dispute to a controversy over the
shape of agents' wealth/irrationality indifference curves. Many
experimental anomalies are consistent with small deviations from polar
"neoclassical" preferences, but even mildly relaxing standard
assumptions about preferences has strong implications. Rational
irrationality can explain both standard, costly biases, as well as
wealth-enhancing irrationality, but it remains inconsistent with
evidence that intensifying financial incentives for rationality makes
biases more pronounced.
Published in the Journal of Public Economics 80(1), April 2001, pp.99-119.
The current paper models power-maximizing politicians' behavior
subject to imperfect political competition and perfect citizen
mobility. It then analyzes the welfare implications of federal and
non-federal structures. The model abstracts from both heterogeneous
preferences (the most common argument in favor of federalism) and
externalities (the most common argument against), showing that even in
this simplified setting federalism has important welfare implications.
There is one class of equilibria in which more federalism has the
purely beneficial effect of offsetting imperfections in the political
process. However, there is also a second class of equilibria in which
citizen mobility makes political imperfections more severe by creating
"safe districts" for both political parties.
Published in Kyklos 54(1), 2001, pp.3-26.
Beliefs about politics and religion often have
three puzzling properties: systematic bias, high certainty, and little
informational basis. The theory of rational ignorance (Downs 1957)
explains only the low level of information. The current paper presents
a general model of "rational irrationality," which explains all three
stylized facts. According to the theory of rational irrationality,
being irrational - in the sense of deviating from rational expectations
- is a good like any other; the lower the private cost, the more agents
buy. A peculiar feature of beliefs about politics, religion, etc. is
that the private repercussions of error are virtually nonexistent,
setting the private cost of irrationality at zero; it is therefore in
these areas that irrational views are most apparent. The consumption of
irrationality can be optimal, but it will usually not be when the
private and the social cost of irrationality differ - for example, in
Has Leviathan Been Bound?
A Theory of Imperfectly Constrained Government with Evidence from the States
Published in the Southern Economic Journal 67(4), April 2001, pp.825-847.
This paper develops a formal theory that combines power-maximizing "Leviathan"
political parties with well-defined imperfections in the political process.
The model implies that both parties tend to make government larger as their
likelihood of electoral victory increases. Empirical tests on state-level
data confirm this prediction. Racing the Leviathan hypothesis against
alternatives theories of party motivation indicates that both the Leviathan
and the "contrasting ideologies" views have some degree of validity.
There are also three diagrams;
unfortunately, they must be downloaded one at a time:
Published in the Independent Review 5(4), Spring 2001, pp.539-563.
Both economists and libertarians emphasize the centrality of
self-interest in social life; but if autonomous ideas play no role in
politics, libertarian reform seems neither beneficial nor possible.
This paper surveys empirical evidence that in politics, economists'
standard self-interest hypothesis fails. It then discusses new findings
from the Survey of Americans and Economists on the Economy (1996),
showing that even beliefs about economics primarily reflect education
and ideology, not self-interest. The upshot is that libertarians do not
have to persuade people to start voting against their self-interest to
change policy. The critical margins to work along are instead
redefining the ideological spectrum, and reshaping perceptions about
"what educated people think."
Published in Public Choice 107(3/4), June 2001, pp.311-331.
Models of inefficient political failure have
been criticized for implicitly assuming the irrationality of voters.
(Wittman 1999, 1995, 1989; Coate and Morris 1995) Building on Caplan's
(1999a, 1999b) model of "rational irrationality," the current paper
maintains that the assumption of voter irrationality is both
theoretically and empirically plausible. It then examines
microfoundational criticisms of four classes of political failure
models: rent-seeking, pork-barrel politics, bureaucracy, and economic
reform. In each of the four cases, incorporating simple forms of
privately costless irrationality makes it possible to clearly derive
the models' standard conclusions. Moreover, it follows that efforts to
mitigate political failures will be socially suboptimal, as most of the
literature implicitly assumes. It is a mistake to discount the
empirical evidence for these models on theoretical grounds.
Published in the Quarterly Journal of Austrian Economics 4(2), Summer 2001, pp.69-86.
This is a response to two critiques of my 1999 Southern Economic Journal
article, "The Austrian Search for Realistic Foundations."
Published in Public Choice 108(1/2), July 2001, pp.69-86.
Much of the public finance literature argues that local
governments behave competitively due to residents' ease of exit and
entry. The model presented here challenges this widespread conclusion.
Though it is costless to relocate to another locality, the presence of
tax capitalization makes it impossible for land-owners to avoid
monopolistic pricing of public services by moving; land-owners can only
choose between paying the tax directly, or paying it indirectly in the
form of a lower sale value for their housing if they exit. In
consequence, the only real check on local governments comes through
imperfectly functioning electoral channels.
Published in the Journal of Law and Economics 44(2), October 2001, pp.395-426.
The positive economic beliefs of economists and
the general public systematically differ. (Blendon et al 1997) What
factors make non-economists think more like economists? Using the
Survey of Americans and Economists on the Economy (1996), this paper
shows people think more like economists: if they are well-educated; if
they are male; if their real income rose over the last five years; if
they expect their real income to rise over the next five years; or if
they have high degrees of job security. However, neither high income
nor ideological conservatism have this effect. My findings for
education, gender, and income have close parallels in political
science: on tests of objective political knowledge, the better-educated
and males score higher, controlling for numerous other variables, and
the independent effect of income is minor. (Delli Carpini and Keeter
Published in the Journal of International Money and Finance 21, 2002, pp.145-162.
Wartime periods have frequently been treated as natural macroeconomic
experiments, but the international pooled time series evidence
presented here shows that the literature has over-emphasized the
experience of the United States and the United Kingdom. Wars fought
exclusively on foreign soil do have marginally higher real output
growth than peacetime periods, but real growth during all other wars is
sharply below peacetime levels. Evidence for foreign and domestic wars
is consistent with monetarist, fiscalist, and mixed theories of wartime
booms; the results also unexpectedly support time consistency and
optimal inflation tax theory.
Published in the Economic Journal 112, April 2002, pp.433-458.
The differences between the general public's
positive economic views and economists' resemble other judgmental
anomalies: Laypeople and experts persistently and systematically
disagree. The current paper analyzes this puzzle using data from the
Survey of Americans and Economists on the Economy. (Blendon et al 1997)
It first tests and decisively rejects the hypothesis that the
differences solely reflect economists' self-serving bias: controlling
for income, job security, recent and expected real income growth, age,
gender, and race only marginally diminishes their size. The paper then
examines whether economists' political ideology and party loyalties
explain their disagreements with the general public; if anything, this
slightly increases their magnitude. The effect of economic training
clearly diminishes but remains large even after adding education to the
set of control variables. The robustness of the apparent biases in the
public's economic beliefs suggests that this anomaly is real.
Published in Social Science Quarterly 83(2), June 2002, pp.416-435.
Economic models of politics typically make two
assumptions about voters: First, their motives are egocentric, not
sociotropic; second, their beliefs are rational, not subject to
systematic bias. Political scientists have presented strong evidence
against the first assumption (Mansbridge 1990a), but have become
increasingly willing to accept the second. (Page and Shapiro 1992;
Marcus and Hanson 1993) The current paper presents evidence from the
Survey of Americans and Economists on the Economy that both assumptions
are seriously mistaken even for the case where the economic approach
would seemingly be most relevant: economic beliefs. It then argues this
is not necessarily cause for greater optimism about the efficiency of
democracy: Sociotropic voters with biased economic beliefs are more
likely to produce severe political failures than are selfish voters
with rational expectations.
Published the Journal of Economic Behavior and Organization 50, April 2003, pp.391-405. (lead article)
Economists typically object to preference-based
explanations of human behavior; differences in preferences "explain
everything, and therefore nothing." But this argument is only correct
assuming that no empirical evidence exists to discipline
preference-based explanations. In fact, over the past decade,
personality psychologists have produced a robust collection of stylized
facts about human preferences. While preferences are, empirically,
quite stable, they are far from identical, and have proven predictive
power for economically interesting variables. The empirical challenge
for future research is to jointly estimate the impact of preferences
and constraints to obtain unbiased measures of their relative
Published in Rationality and Society 15(2), May 2003, pp.218-42.
Many political failure arguments implicitly assume that voters are
irrational. (Wittman 1995, 1989; Coate and Morris 1995) This paper
argues that this assumption is both theoretically and empirically
plausible: In politics, rationality, like information, is a collective
good that individuals have little incentive to supply. In consequence,
voters are frequently not only rationally ignorant but also "rationally
irrational." Rational irrationality leads to both demand side and
supply side political failures: Competition not only pressures
politicians to act on voters' biased estimates, but selects for
politicians who genuinely share those biases. The analytical framework
also sheds new light on log-rolling, political shirking and
advertising, and politicians' human capital.
Published in the European Journal of Political Economy 19(2), June 2003, pp.183-203.
The paper develops an economic-political model
to explain why the convergence hypothesis fails even though good
economic policies seem to be a sufficient condition for strong economic
growth. (Sachs and Warner 1995a) The model has three variables: growth,
policy, and ideas, which take on discrete values - "good," "mediocre,"
or "bad" - in a given period. Growth is a function of lagged policy,
policy is a function of lagged ideas, and ideas are a function of
lagged growth. Uncontroversially, better policy leads to better growth,
and better ideas lead to better policy; but the direction of the third
effect is less obvious. Negative feedback, where bad growth improves
ideas via learning, may be more intuitively plausible. Yet there is
suggestive empirical evidence that feedback is actually positive
(Caplan 2000), and with positive feedback the model closely matches the
stylized facts. Negative feedback implies convergence to a unique
steady-state equilibrium; positive feedback allows for three distinct
equilibria. In one of them, the "idea trap," bad growth, bad policy,
and bad ideas mutually support each other; better policies would work,
but are endogenously unlikely to be tried. The rest of the paper
illustrates the model's empirical plausibility by reinterpreting some
otherwise puzzling historical episodes.
To get the tables for this paper, click here.
To get the appendix for this paper, click here.
Published in the Quarterly Journal of Austrian Economics 6(3), Fall 2003, pp.61-7.
Published in the Review of Austrian Economics 16(4), December 2003, pp.309-26.
There is a tension between libertarians'
optimism about private supply of public goods and skepticism of the
viability of voluntary collusion. (Cowen 1992; Cowen and Sutter 1999)
Playing off this asymmetry, Cowen (1992) advances the novel argument
that the "free market in defense services" favored by
anarcho-capitalists is a network industry where collusion is especially
feasible. The current article dissolves Cowen's asymmetry, showing that
he fails to distinguish between self-enforcing and non-self-enforcing
interaction. Case study evidence on network behavior before and after
antitrust supports our analysis. Furthermore, libertarians' joint
beliefs on public goods and collusion are, contrary to Cowen and Sutter
(1999), theoretically defensible.
Published in Critical Review 16(1), 2004, pp.33-52.
In the 1920s, Austrian-school economists began to argue that in a fully socialized economy, free of competitively generated prices, central planners would have no way to calculate which methods of production would be the most economical. This "economic calculation problem" was said by the Austrian economists to show that socialism is "impossible." Although many believe that the Austrian position was later vindicated by the collapse of the Soviet bloc, the Austrian school's own methodology disallows such a conclusion. And historical evidence suggests that poor incentives--not lack of economic calculation--were the main source of the economic defects of "really existing socialism."
Published in the American Economic Review 94(2), May 2004, pp.402-7.
Published in the Review of Political Economy 17(1), January 2005, pp.79-105.
The political economy of Ludwig von Mises and
Frederic Bastiat has been largely ignored even by their admirers. We
argue that Mises' and Bastiat's views in this area were both original
and insightful. While traditional public choice generally maintains
that democracy fails because voters' views are rational but ignored,
the Mises-Bastiat view is that democracy fails because voters' views
are irrational but heeded. Mises and Bastiat anticipate many of the
most effective criticisms of traditional public choice to emerge during
the last decade and point to many avenues for future research.
Published in Econ Journal Watch 2(1), April 2005, pp.1-21.
Donald Wittman's "Why Democracies Produce Efficient Results," argues that the "markets work, democracy fails" outlook typical of many economists rests on bad economics. After summarizing Wittman's main arguments, I maintain that Wittman too hastily accepts the assumption of voter rationality. There is an extensive body of empirical evidence showing that systematically biased beliefs about politically-relevant topics—especially economics—are widespread. Chicago political economy would have developed in a more productive direction if it had treated rational expectations as an empirical hypothesis, and modeled irrationality as a normal good.
Published in Econ Journal Watch 2(2), August 2005, pp.165-85.
Published in Critical Review 17(1/2), 2005, pp.203-20.
This has been an unusually productive exchange. My critics largely accept my main theoretical claims about economic calculation and socialism. They have also started to do what advocates of the Misesian view should have been doing for decades: Offer empirical evidence that that the calculation problem is serious. While I continue to believe that incentive problems explain most of the failures of socialism, I am slightly less confident than I was before. Fortunately, there are many unexploited sources of information to help resolve our disagreement.
Forthcoming in Public Choice
Beliefs about normative economics appear to be
primarily determined by sociotropic rather than egocentric concerns.
(Sears and Funk 1990; Citrin and Green 1990) Using the Survey of
Americans and Economists on the Economy, the current paper finds that
the same holds for the determination of positive economic beliefs in
most - but not all - cases. Whether responses to positive economic
questions are primarily sociotropic or egocentric hinges on whether the
questions deal with what the paper terms "inputs" or "outputs": Beliefs
about causation (responses to "input" questions) depend mostly on
sociotropic variables, especially education and ideology. Beliefs about
past, present, and future conditions (responses to "output" questions),
in contrast, depend mostly on egocentric variables, with recent and
expected income growth - not income - playing the leading role. This is
consistent with a cognitive model where actors answer relatively easy
questions using personal experience, and more difficult questions using
"off-the-shelf" theories closely tied to educational and ideological
Forthcoming in Public Choice
Terrorism in general, and suicidal terrorism in particular, is popularly seen as "irrational," but many economists and political scientists argue otherwise. This paper distinguishes three different senses of irrationality: unresponsiveness to incentives, deviation from narrow self-interest, and failure of rational expectations. It concludes that an intermediate position on the rationality of terrorism is appropriate. The typical terrorist sympathizer deviates only slightly from homo economicus. But active terrorists arguably stray from narrow self-interest and rational expectations, and suicidal terrorists probably violate both. Deterrence remains a viable anti-terrorism strategy, but deviations from rational expectations increase the potential of persuasion and appeasement.
Forthcoming in Rationality and Society.
Even confirmed economic imperialists typically
acknowledge that economic theory does not apply to the seriously
mentally ill. Building on psychiatrist Thomas Szasz's philosophy of
mind, the current paper argues that most mental illnesses are best
modeled as extreme preferences, not constraining diseases. This
perspective sheds light not only on relatively easy cases like
personality disorders, but also on more the extreme cases of delusions
and hallucinations. Contrary to Szasz's critics, empirical advances in
brain science and behavioral genetics are largely orthogonal to his
position. While involuntary psychiatric treatment might still be
rationalized as a way to correct intra-family externalities, it is
misleading to think about it as a benefit for the patient.