Will engineering become a professional school in the future?

TomServo · December 26, 2010, 5:58pm

Folks, this is why sakkynomics can be ignored. He’s one of those people who has all of the terminology down, but he doesn’t know how to think like an economist.

He cites marketing as evidence for why markets are deeply imperfect, whereas any competent economist can tell you that marketing (let’s call it branding) is a market mechanism to allow consumers to economize on scarce knowledge. It is not something that had to be invented because of the failure of markets, it is an aspect of markets. One that arose without government planning.

He also throws out Galbraith’s ridiculous notion that advertising is a way for firms to manipulate our thoughts and manufacture desire for their products. Folks, if that’s what advertising really did, then not only would there never be any kind of genuine innovation or disruptive technologies (why bother when it’s easier to brainwash people into buying something that was cheaper to manufacture?), but nobody would waste their time using such power to sell stuff, they’d use it to rule the world as supreme dictator. The work of Stigler and Becker (I can cite Nobelists too, big deal), shows that advertising is largely about increasing awareness of products and spreading information–not brainwashing.

Now sakky’s talking about hiring, whereas before he was talking about engineer who had been with the company for a long time. The existence of coping mechanisms such as branding (and credentialing can be a form of branding) does not mean markets are so imperfect that they require (FAR MORE INEFFICIENT) government planners to correct this failure. It’s like trying to go ice-skating in cleats because your ice skates weren’t perfectly frictionless.

Folks, for “100% wrong,” read “3% wrong” and move along. Actually Becker showed that as an industry becomes more competitive, biases and prejudices and whatnot in the firm’s practices become minimalized to zero.

More to the point, he again confuses work with productivity. Productivity is inexorably bound up in the value of a worker to a company. The value of a worker can be more than just what they do in the performance of their actual job. Factors like the riskiness of an employee (such as the difference between an ex-con and a monk who are otherwise identical workers), the desire to retain the employee, even their hygiene and personality, all contribute to how the company values employees.

Rather than being a market failure, pay differentials among seemingly identical employees most often reflect genuine differences, invisible to the third-party observers, in their value to the company. How likely or unlikely it is for an employee to stay or go affects the supply and demand equation, which affects price. The market failure disappears when you look at the situation on the micro level.

sakky now:

sakky before:

Yes, assuming there was an original distortion already present.

Which I always thought was a very selfish thing to say. We may be dead, but the people who benefited from our policies (which may require a painful adjustment period and not bear fruit for a while as the previously present government-created distortions get corrected) will be alive and glad we did. I sure wish I could go back in time and stop Medicare or Medicaid from ever coming into existing and distorting costs, creating bad incentives, and generally screwing up health care in this country.

Except that what regulators usually do is to mandate certain results, rather than simply creating rules. Friedman made the case, very well I think, that litigation is a much more effective regulator, as it is dynamic and can change with the times easily and creates incentives for companies rather than ironclad rules which may create much worse distortions.

Common misconception. What they really did was to trade one monopoly for another. For a better example, see Estonia or Hong Kong. And I wasn’t pwned, Germany and SK are mixed economies, and performed much better under their earlier, more liberal phases than they did under their more heavily regulated phases.

As I said, credentials mean nothing in economics. I have no formal training in econ, I’m just a dilettante. But there are plenty of people with PhDs in econ from top institutions who can’t think their way out of a wet paper bag, who, from conversation, clearly have no clue how an economy actually works, and that’s why I say credentials are irrelevant.

silence_kit · December 26, 2010, 6:07pm

Here all you are doing is hoping that guys who manage engineers know how to value them and aren’t able to get away with not paying them corresponding to the work they do.

I’m not saying with tremendous confidence one way or the other whether that is true or not, but i am saying that i find it very plausible that engineers at a particular company don’t all really do within 2.5 times the useful work, even though they all get paid within 2-2.5 times each other. sakky in his post has given more arguments why guys who manage engineers don’t know how to value them.

TomServo · December 26, 2010, 6:14pm

Sorry for coming across as condescending.

I think the difference between you and I is that I am talking about the economics of engineering, the relationship between the worker and the manager, whereas you are talking just about the engineering side of things, from an engineer’s perspective on what it means to be productive.

For example, we all know that poetry doesn’t pay well these days. But by poet standards, a guy who cranks out a masterpiece a day is very productive. But his boss a Burger King may disagree and call him a slacker because he can’t do what the boss wants to the boss’s satisfaction.

It’s like talking about efficiency. Most people use the word as shorthand, instead of clearly pinning down what they mean. This can lead to confusions and misconceptions when it comes to talking about efficiency in one way versus the economic way, and this is sort of an economic thread.

Consider two engineers, Bob and Tom.

Bob: Why so glum, chum?

Tom: My boss hates my new car engine design, even though it’s the most efficient one we’ve ever made! So I didn’t get a raise this year.

Bob: That’s terrible! Your boss is an idiot. How did you get it so efficient?

Tom: I polished it. So now it’s extra shiny. It’s the shiniest engine we’ve ever made, and the most efficient at reflecting light!

Bob: Uh, how many miles to the gallon does it get when connected to a car?

Tom: Just a few inches.

See, in this scenario, one person’s definition of what was a productive use of their time and talents didn’t match somebody else’s definition. If you want to trade your labor for money so you can provide for yourself, you have to provide something somebody else actually wants (at a price they want to pay). This is how prices coordinate the economy.

TomServo · December 26, 2010, 6:23pm

Except managers have the incentive to do their jobs properly. It’s on them if they have a lot of workers leave because they weren’t getting paid enough. At my last job I saw firsthand how things worked when wages were determined according to third-party observers rather than people who actually knew the productivity of the workers in question.

And despite what sakky says, managers overseeing their employers are the most qualified people on Earth to determine the productivity of their workers. In some jobs it is easier to determine a worker’s productivity (like when it can be attached directly to a number of widgets or something) and in other jobs it is harder to determine day-to-day what a worker’s value to the company is. Engineers can be like that.

The easiest and simplest way for managers in such situations to know whether they are paying too much or too little is to look at the number of employees leaving the firm and the number of applicants. A large number of employees leaving the firm means that conditions are not satisfactory so that means they aren’t paying enough. A small number of employees leaving means that workers are happy so pay can’t be too low. A large number of applicants means the wages are attractive to workers, and a small number of applicants means the wages aren’t high enough for a large number of workers to be supplied.

This dynamic makes it much less important whether or not managers can attach some number to a worker’s productivity.

silence_kit · December 26, 2010, 6:35pm

I hope you aren’t using this story as part of your argument against my claim that engineers don’t always do 2-2.5 times the useful work as each other. i hope you aren’t claiming that all of those ‘extraordinary’ engineers actually waste their time polishing car engines and that managers evaluations of their work are universally correct.

JimmyME · December 26, 2010, 6:41pm

Well it’s something I had to go through this past semester in all my engineering classes. I doubt my school would make it up and then blame it on ABET. From what our professors told us it is something that they just came out with and was really important that we do it because my school’s ABET audit is in the 2011-2012 academic year.

I’ll try e-mailing one of my professors later and see if I can find something from ABET describing these so-called competency questions.

silence_kit · December 26, 2010, 6:43pm

They have the most tools to make that decision, but that doesn’t mean that they make perfect or even good decisions. how do you know that all engineers do within 2-2.5 times the amount of useful work as each other for their company?

Enginox · December 26, 2010, 7:03pm

This thread derailed so I’d like “rail it” back. I assert that engineering benefits more from not being a professional school. The work of engineers is easier to offshore/outsource than the work of lawyers, and much easier to outsource/offshore than the work of physicians. I think we need to focus a bit more on demand and less on supply. Ask yourselves, are physicians and lawyers highly paid primarily because their supply is controlled or mainly because the demand for their services is high?

Think of farmers 100 - 150 years ago. 150 years ago, as the world population increased, the demand for farming services gradually increased and the productivity of farmers grew to meet that demand, yet, paradoxically, as the decades progressed, the numbers of farmers steadily decreased! To the point, that today, 20 farmers can produce much more than what 200 farmers produced decades ago. Did farming wages increase? Depending on how one sees it, yes and no; yes, because they have more product to sell; no, because the capital investments are higher (and profit margins lower). I’ll leave this to economists to debate. One thing is certain: there’s no rush by anyone to become a farmer. I don’t think farmers would’ve benefited from “cartelizing” their profession (in a sense, technology did that for them).

Now, take a look at BLS numbers for engineering earnings:

[Engineers[/url</a>]

Look at the top 5 of the highest 10%, and tell me which 2 out of those 5 is closest to a “cartelization” model, and out of those 2, which one is in highest demand and which one is in short supply. Why is one in short supply and the other one in high demand?

And finally, take a look at earnings for lawyers and physicians:

[url=<a href=“http://www.bls.gov/oco/ocos053.htm#earnings]Lawyers[/url”>http://www.bls.gov/oco/ocos053.htm#earnings]Lawyers[/url</a>]
[url=<a href=“http://www.bls.gov/oco/ocos074.htm#earnings]Physicians”>http://www.bls.gov/oco/ocos074.htm#earnings]Physicians</a> and Surgeons](<a href=“http://www.bls.gov/oco/ocos027.htm#earnings]Engineers[/url”>http://www.bls.gov/oco/ocos027.htm#earnings)

It seems lawyers are very comparable to engineers, earnings-wise, while mostly PetE approximate physicians’s earnings. There’s one little problem here, and it works to engineers’s advantage: engineers can command good salaries with just a BS degree and little debt, while physicians and lawyers must get additional degrees and higher debt to obtain those salaries.

TomServo · December 27, 2010, 12:56am

Eh, no. I was using it as an example of a principle. The principle here is that in a market economy peoples’ actions are coordinated by the price system. It works far better Saltwater economists would have you believe.

TomServo · December 27, 2010, 1:08am

I don’t, sakky came up with that figure, not me.

Although, as far as actual engineering goes, outside of R&D (where billion-dollar ideas may conceivably be thought up by a single engineer), it does seem to me that at a certain point it would be difficult to actually be ten times as productive as another qualified engineer. I could see how an engineer may be ten times more productive at, say, QA versus, say, a guy with an associates degree in electronics. But it’s hard for me to see how two guys with the same BSEE could have a 10x differential between them in many of the “grunt-work-ier” areas of engineering, and that comprises a lot of engineering unfortunately.

Getting back to the economics, I don’t think anybody has ever said that there is a direct, linear relationship between productivity and price. There is usually a curve, rather than a straight line. Consider top athletes, who may only be two or three times as good as their peers but get paid ten times as much. As I said, this seems confusing until you realize that productivity=value, and here the value of a standout player may be ten times the value (in terms of butts in seats and merchandising) of a normal pro athlete.

I don’t know of any economist who holds that there is a direct, linear relationship between output and value. For example, a knife of average sharpness might sell for ten bucks, a knife twice as sharp might sell for seventeen bucks, a knife a hundred times as sharp might sell for a hundred (only ten times the price but 100X the sharpness). So, nobody can say that this is some “underlying assumption” and so the model falls apart if it ain’t true.

TomServo · December 27, 2010, 1:18am

They’re the same thing seen from different angles, HA! :-P

Moving on… (oh, and when a thread turns into a debate about economics, it hasn’t derailed, it’s right on track!)

Both. If janitors required twelve years of college, they’d make six figures.

No offense, but where are you going with this? Are you simply trying to make the case that “cartelization” (I’d rather say “artificially shrinking the supply” in this case) leads to higher wages, given an otherwise stable demand? Well I agree.

sakky · December 27, 2010, 8:41am

True, but knowledge does mean something. Frankly speaking, you clearly have not been keeping up with the latest, say, 30-50 years of economics research.

Oh, and you do?

As a first step, you’ve already made one whopping mistake. Everything I have stated is not “sakkynomics”, but rather mainstream economics. I have stated not one concept that hasn’t been well established in the literature. Not a single avant-garde or ‘exploratory’ result.

Wrong. Any competent economist will tell you that marketing is a method of manipulating the consumers’ utility function. On occasion, that means reducing search costs. But at most other times, it means manipulating customers cognitive biases.

Think of it this way. How much do Coca Cola and Pepsi spend on brand advertising every year? Now think about why they do that. Does it really reduce consumer’s search costs? Who doesn’t already know about Coca Cola and Pepsi? I think it’s hard to find any consumer who has never heard of these brands. So why do they continue to bombard us with advertising every day regarding products that we already know? Are they just being stupid by throwing money away on advertising?

Or think about celebrity endorsements of products that have nothing to do with the celebrity’s realm of expertise. From a rational standpoint, why should that work? Simply because Peyton Manning endorses Sony TV’s, that reduces my search costs for Sony TV’s? Is Peyton Manning really an expert on TV’s? Similarly, Eli Manning now endorses Samsung TV’s. Does Eli know something about TV’s that his brother does not? If they don’t know anything about TV’s, does that mean that Sony and Samsung are just stupidly throwing their money away by paying those two brothers?

Or consider the stereotypical beer commercial. Some dude cracks open a bottle of beer with the brand-name clearly shown to the viewer, and then some hot bikini models appear out of nowhere, supposedly leading the viewer to belive that if he drinks that brand of beer, he too will attract a bevy of hot bikini models. But has that strategy ever succeeded even once? Has any guy in history ever been able to attract a woman just by the brand of beer they drink?

Or consider the ‘shock’ advertising favored by many fashion houses. Calvin Klein once ran an ad campaign featuring underage models engaged in foreplay. Granted, those models were wearing Calvin Klein clothing (and little else), but what exactly does that ad have to do with reducing search costs? Is the message that: “If you’re a consumer who wants to commit statutory rape, we can reduce your search costs by recommending that you buy Calvin Klein?” Even more notoriously, Benetton once ran an infamous ad campaign showing interracial couples kissing, a newborn baby with its umbilical cord prominently presented, and a dying AIDS patient…and without a single actual item of Benetton clothing in the ad. If all you saw was the ad, you had no idea what Benetton even sells. What does that have to do with reducing search costs? If anything, it actually increases search costs by confusing customers into what Benetton does. For example, if you saw the Benetton dying AIDS victim ad, you might think that Benetton sells hospice or funeral services.

Yet that sort of marketing that have nothing to do with reducing customers search costs comprises the vast majority of marketing expenditures. Which leaves two possibilities: either companies are stupidly throwing money away on dumb marketing expenditures - but I thought that TomServo said that company managers were smart. Or, that customers’ utility functions are indeed manipulable. For example, Peyton Manning’s endorsement does indeed spur some people to buy Sony TV’s, even though we surely all agree that Peyton Manning is not an expert on TV’s. And apparently Eli Manning’s endorsement spurs other people to buy Samsung TV’s. {But before I buy a TV, I’m waiting to see what brand is endorsed by Tom Brady.}

Uh, welcome to the real world. Where have you been? Let’s face it, most new products are not real innovations, but simply innovations in marketing and packaging.

I’ll put it to you this way. Every one of us can name a brand of milk. A brand of sugar. A brand of salt. A brand of butter. But why? These are all commodities: milk is milk, sugar is sugar, salt is salt, butter is butter.

Blind taste tests have proved that most people cannot distinguish between different brands of beer of the same blend. Hence, for most people, beer is beer. Yet people continue to be swayed by marketing. As a case in point, Pabst’s Blue Ribbon is considered in the US to be a low-end, cheap beer that hipsters enjoy only ironically. But PBR has been successfully marketed as a a luxury product in China.

Now, to be fair, I don’t think that consumers are entirely defenseless and meek sheep. Consumers learn to become resistant to marketing (which is why some of the most perniciously effectively marketing techniques are ones directed at children who have not developed such resistance). But that only spurs marketing firms to ‘innovate’ and discover new types of marketing.

And they do! Or, at least they try and often times succeed on a national level. After all, what is the first thing that any coup plotter does as soon as he takes over a country? He takes over the country’s media outlets to broadcast propaganda in justifying the coup. What is that if not manipulating your people to maintain your position as supreme dictator?

Or, put another way, why don’t the regimes in North Korea, China, Myanmar, Saudi Arabia, Iran, Vietnam, and other dictatorial nations throw open their media markets to a free press? Doing so would probably spur innovation and economic growth in those countries via the free exchange and interplay of ideas, and every one of these countries desires, or at least claims to desire, economic growth. The answer seems to be quite clear: those regimes know full well that a free press could represent a threat to their dictatorial hold on their people.

Instead, every one of those countries implements a heavily state-run media system that promulgates regime-friendly marketing, effectively propaganda, to their people. But why? If marketing (propaganda) was not effective, then why do these regimes persist in spending billions of dollars a year in propagating it? Are these regimes simply being stupid?

One can even go back to the two most murderous regimes in history. Both the Nazis and the Soviet Union under Stalin featured some of the most elaborate and expensive propaganda machines in history. Both regimes supported entire film industries: The Triumph of the Will and the Battleship Potemkin being leading cinematic examples. The Soviets even invented a brand new artform (socialist realism) that served to promote the interests of the state.

Was Hitler being stupid? Was Stalin? Seems to me that both of them were able to successfully leverage their propaganda to convince millions of their people to die for them in war, while imprisoning and murdering millions more of their own people.

Heck, even to this day, decades after Stalinist crimes were thoroughly documented and repudiated by even the Communist Party, a core group of people in the former Soviet Union - including, yes, even in the Ukraine, the cockpit of the Holodomor - continue to support Stalin. If that’s not an example of successful marketing in the name of supporting a dictator, I don’t know what is.

I’m talking about both. The new hire and the experienced engineer are both faced with problems of asymmetric information.

Why are you so sure that markets aren’t as imperfect as you say? Like I said, this is ultimately an empirical question.

And who’s to say that government policies are always more inefficient. Certainly they are sometimes more inefficient. But not always. Governments have successfully and efficiently reduced many market failures in the past. For example, do we really want to go back to the days of quack patent medicines? Do we really want to go back to the days when food was never inspected? Do we really want to go back to the days when financial markets were entirely unregulated and unfettered? Do we really want to go back to the days when cars were death traps?

Those markets became more efficient through regulation, not less. If I want to buy meat in the store, I want to have some assurance that it isn’t rotten. If I want to buy a car, I want to have some assurance that it isn’t going to explode if it’s merely scratched. That doesn’t mean that government planners need to dictate every single price or wage.

Besides, if government programs are always inefficient, then why do we let our government run the military - the greatest military in history? Why don’t we simply outsource our national defense to private military contractors? Heck, why doesn’t every country do that? After all, if private firms are always more innovative and efficient than government agencies, then the first country to completely outsource its military to private firms will enjoy a substantial military advantage over all other countries and could then vanquish its enemies, and perhaps the entire world, right (or at least until other countries did the same)? So why doesn’t some country do just that? Is every country simply being stupid?

Nope, still 100% wrong, or perhaps at worst, 99% wrong. Every company - no matter how competitive its environment - is nevertheless faced with organizational and social tensions.

Becker is correct - more competition does mean fewer biases. But the problem is that most industries are not highly competitive, nor are they becoming so.

Think of it this way. The biggest industry in the world right now, in terms of total valuation, is almost certainly the oil industry. The oil industry is far from highly competitive, and you might argue that that’s because it is dominated by giant state-owned enterprises that not only enforce monopoly rights on their national bequethments but now also own numerous properties in the West. {For example, PDVSA owns Citgo}. Now, you might argue that the world oil industry might become more efficient and pay more “rational” wages if all national governments were to complete privatize their oil assets, but the fact remains that, whether we like it or not, they’re not going to stop owning those assets anytime soon, and probably never in our lifetimes.

This is a generalized point. Most industries are characterized with firms holding some degree of market power, and that market power does not seem to be decreasing with time. {Now, if in fact, you want to argue otherwise, then please do so.}

More to the point, he again confuses work with productivity. Productivity is inexorably bound up in the value of a worker to a company. The value of a worker can be more than just what they do in the performance of their actual job. Factors like the riskiness of an employee (such as the difference between an ex-con and a monk who are otherwise identical workers), the desire to retain the employee, even their hygiene and personality, all contribute to how the company values employees.

Rather than being a market failure, pay differentials among seemingly identical employees most often reflect genuine differences, invisible to the third-party observers, in their value to the company. How likely or unlikely it is for an employee to stay or go affects the supply and demand equation, which affects price. The market failure disappears when you look at the situation on the micro level.

Uh, no, it doesn’t. The market failure of asymmetric information continues to exist and always will. Employers never really know exactly how productive any given employee is, either before their hire them, or even after they hire them.

And that is the market failure that is endemic to all labor markets. Employees never have any way to reliably signal their productivity. Again, that is why they have to rely on work experience, school brand, grades, and other items that serve as imperfect proxies of productivity. But surely we’ve all encountered those people who looked great on paper, but are actually terrible workers.

Because there is no way to reliably measure employee productivity, all that a (perfectly competitive) employer can do is offer the average value (the average expected marginal revenue) to any particularly worker with a certain vector of observable attributes. But then that means that those workers who know or believe their value to be higher than the offer price will not want to participate in a transaction. On the other hand, those workers who know or believe their value to be lower than the offer price will definitely want to participate, because they are obtaining ‘surplus value’. Hence, the high value employees are driven out of the market. That then lowers the average expected value of participating workers, causing the employer to lower its equilibrium offer, hence driving away even more high-value workers.

And that is what is happening in engineering markets now. The best engineers from the best schools - those with the highest GPA’s from the best schools - often times don’t even really want to work as engineers at all because they don’t feel they would be paid according to their worth. Even those that do work as engineers often times do so for only a few years before switching careers - i.e. via B-school. Only the less productive engineering students actually end up taking engineering jobs.

And there are already extensive distortions that exist today, and always will. We will always have to live with asymmetric information. We will always have to live with boundedly rational organizations and customers. We will always have to live with uninternalized externalities. We will always have to live with some firms holding market power. We will always have to live with natural monopolies.

And we will always have to live with large swathes of economic life that are not subject to direct market pressures, but hires plenty of people and therefore ‘competes’ for labor. For example, one of the largest employers of college-educated people is academia, and academia is not subject to market forces. {I find it ironic that most economists - whose entire raison d’etre is the study of market forces - are themselves personally immune to those very same forces because they hold positions in academia.} I can think of plenty of people who have half-jokingly stated that they took jobs in academia because they lack any actual marketable skills. Academia does not produce outputs that have easily measured economic value. What exactly is the economic value of an academic publication? Can anybody measure that?

Yet academia is not going away. They’re going to continue to employ millions of people and hence “distort” the labor markets.

Similarly, NGO’s also employ millions of people and are also not subject to direct market pressures. {They’re subjected to funding pressures, but their output is never a direct market outcome.} I have also heard of people half-jokingly stating that they work for NGO’s because they lack marketable skills. NGO’s are not going away. They’re going to continue to distort the labor markets.

And then, yes, there is the government itself. Whatever you might think about the efficiency of government, I think none of us would dispute that government is never going away. Millions of people are always going to be employed by the government, whether in the military, as cops, firemen, or in the numerous government agencies, and that serves to distort the labor market. Government salaries are at best only mildly correlated with productivity, and in fact, it’s even hard to define what “productivity” even entails as governments do not produce economic outputs. {For example, I can think of a number of people who work for the government who freely admit that all they ever do is write technical reports that probably nobody ever reads. Is that “productive”? Who knows? Yet they’re paid a decent salary, they only have to work 40 hours a week and receive gold-plated benefits.}

And even if we were to reduce the size of our government, other countries won’t. The Gulf States are not going to surrender their state-owned oil enterprises. Their policies impact our labor markets. For example, if you work for Citgo, you’re effectively working for the Venezuelan national government.

The point is that all markets, and especially labor markets, are always going to be riven with distortions and market failures, however much we might wish otherwise.

Right-wing prognosticators from Chicago such as Becker and Stigler can hold forth on the efficiencies of a hypothetical truly and purely free market system, and that’s fine. It is important that academia have a place for dreamers (and I don’t mean that facetiously). But we don’t live in their hypothetical world, or even close to it, and probably never will. I suspect even Becker and Stigler (if still alive) would agree that we are nowhere close. We have to deal with the world the way it is, not how we might wish it to be.

Really? Last time I checked, the Great Depression was stopped by the giant Keynesian injection of military spending rampup to fight WW2. I’m sure that those people in the post-Depression era were glad that it ended.

Medicare is arguably the most popular government program in US history - something like over 90% of all senior citizens are supportive of it. Furthermore, the abolition of Medicare has no political support whatsoever. During the Obamacare debates, the Republican Party took the position of “defending” Medicare. Nobody seriously believes that Medicare will be repealed anytime soon.

Which again reinforces my basic point: whether we like it or not, we are always going to have to live with substantial market distortions. Many free market reforms, such as the abolition of Medicare, will never be enacted because they have no political support.

But don’t you see the irony of invoking Friedman’s preference for litigation over bad regulation? After all, what is litigation? Answer - it’s the use of the courts to press tort claims and enforce contracts. But what are courts? Answer - it’s the government.

In other words, Friedman is implicitly conceding that some forms of government are indeed highly effective - heck, even more effective than private market transactions. If the courts could not enforce contracts, ensure the payment of compensation, and enact injunctions, all backed by the power of government, then they would be useless.

In other countries, that is precisely what occurs: somebody wrongs you, you sue them and win in court… and then nothing happens. The court lacks sufficient government power to actually enforce its rulings.

Yes - a government monopoly for a private monopoly. But that’s the point - fast free market reforms without building the necessary government institutions tends to produce suboptimal, but certainly capitalist, outcomes such as private monopolies.

During the unfettered 1990’s, Russia was precisely one of those countries in which courts lacked enforcement power, which speaks to the importance of government power. Numerous parties sued over the monopolization of state owned enterprises and won…and nothing happened.

Uh, which more liberal phases were those? Before the 1980’s when Korea was a military dictatorship that routinely crushed dissent and implemented extensive government support of the oligopolistic chaebol? Or perhaps Germany during, say, the late 1930’s under the Nazi regime that did actually produce substantial economic growth despite extensive government intervention (not to mention appalling human rights abuses)? Or even Germany during the post-War period…which just so happened to be jumpstarted by US government funds via the Marshall Plan? Are those the types of liberal phases you are referring to?

To be fair, these are all difficult questions to answer. Nobody knows exactly which policies truly do spur macroeconomic growth, and some of the answers might be distasteful. For example, what if we found that greater economic growth could be spurred by the loss of human rights and even mass murder. Would we still choose it? Yet even now some people say that Stalin was able to successfully industrialize the USSR only through the slaughter of millions.

There are plenty of people who have no credentials and also truly can’t think their way out of a wet paper bag.

Regardless, I’m quite confident that my knowledge of economics is fairly decent. I’m also quite certain that my knowledge of how an economy actually works is pretty good.

But I’ll also say this. If you are truly so confident that you know economics so well, such that you’re willing to contradict so much of the cutting-edge research, then why not become an economist yourself? Why not? I know many former engineers who are now successful economists. If the truth is really on your side, you will quickly win tenure at a top school, and hence have a guaranteed, high-paying job for life.

That seems to be a far better deal than slugging it out as an engineer, does it not?

sakky · December 27, 2010, 10:05am

But you just conceded the point: the highly productive engineer would presumably not be doing grunt work. He would be working on projects that would take advantage of his high productivity.

One of the best examples is software, which you could argue is akin to R&D. A stud developer is surely at least 10x, perhaps even 100x more productive than the average developer, chiefly because the stud developer doesn’t need to pay coordination costs. He doesn’t have to have constant meetings where he has to explain what his subroutine does and how it interfaces with the rest of the project. He can hold the entire project in his head and never has to coordinate with anybody. It is for this reason that many key pieces of software were originally written by one, or at most, a small team of developers. Granted, later versions and add-ons to the project are often times written by large teams, but the original core is almost always completed by a small group of top developers.

But that stud developer is not going to be paid 10x or 100x that of a regular developer.

Pro athletes are actually an excellent example of what I’m talking about - particularly for the players who are not stars (and the vast majority of players are not stars, but are role players).

Let’s take a specific example. Delonte West of the Boston Celtics will make $1 million this year. But is he really producing $1 million in “value” for the Celtics? Are there really that many people chomping at the bit to buy a Celtics ticket only because they specifically want to watch Delonte West? I very strongly suspect that the Celtics would sell out this year even if Delonte West was not on the roster, don’t you? Are there really that many people longing to buy Delonte West merch? {Other people have their KG, Paul Pierce, and Ray Allen jerseys, but I’m kicking it in my Delonte West jersey.}

Ah, but then you might argue that Delonte West is being paid a cool million because that’s what the minimum salary under the NBA collective bargaining agreement dictates. But that speaks to my point: his salary was not negotiated through a purely free market transaction negotiated between the Celtics and West, but rather through contractual fiat between a monopoly (the NBA) and a monopsony (the NBA Players Association). A 6-year NBA veteran like West must be paid a minimum of $1 million. He could be paid more. He could also not be brought onto the roster at all. {But the Celtics are always required to have a 12-man roster, and so without West, they would just be paying somebody else.} But he could be paid no less than $1 million.

You might then say, yes, sakky, Delonte West probably does not generate an additional $1 million in merch and ticket sales. But he may win games for the Celtics, and that ultimately may translate into more than $1million of long-term value for the franchise. Sure, but that’s a long way from start to finish. The fact is, nobody really knows if he’s going to generate any additional franchise value at all, especially compared to somebody else who the Celtics could have used the roster spot for.

Which speaks to the problem of engineering salaries. In econ-parlance, engineers, along with most employees, are credence goods. Even after you’ve hired them, you don’t really know if they’re producing value commensurate with their salary. Is that HR person you hired really producing value? Is that accountant really producing value? Is that project manager producing value? Is that engineer producing value? Who knows? Nobody really knows! The problem of actually measuring, or even defining, value is one that has bedeviled managers since the beginning of time.

One major problem is that people respond to incentives you place before them, even when those incentives are not consonant with your true objective. One bank decided that its branch managers were to be rewarded for customer satisfaction ratings, only to find that its branch managers were then writing loans at below-market rates, which obviously made customers very satisfied. Paleontologists tried to pay natives for each dinosaur bone piece they discovered, only to find that the natives were deliberately taking shattering bones they found in order to have more “pieces” they could discover. Colonial administrators in Vietnam tried to exterminate rats by paying natives for every dead rat they collected, only to have natives deliberately farm rats so they could have more to kill. Or consider this example from engineering:

<a href=“http://johnhasson.com/blog/images/1/r_dilbert2.gif[/url]”>http://johnhasson.com/blog/images/1/r_dilbert2.gif</a>

Hence, it’s often times exceedingly difficult for companies to tell how productive any individual employees truly is. Furthermore, as expressed above, employees will often times change their behavior in ways that help themselves but are actually detrimental to the long-term performance of the company.

Economists have long accepted that the interests of employees and employers, or more technically, their utility functions, are rarely aligned. In fact, the entire economics sub-branch of agency theory was developed to investigate this problem.

But the upshot is that it is natural - in fact, expected - to find plenty of employees who are providing value, either too much or too little, that does not actually correspond to their pay. We’ll never know if Delonte West is worth $1 million or Marquis Daniels is worth $2.5 million to the Celtics.

And to the possibility that inefficient behavior by the NBA in determining minimum salaries will ultimately result in a loss of competitiveness, well, who are they going to lose to? The CBA (is that even still alive)? The NBA D-League, which the NBA just so happens to own? One of the Euro- leagues? Come on. The NBA is a monopoly. It’s not subject to any competitive pressures. They can be deeply inefficient, and it doesn’t really matter.

sakky · December 27, 2010, 10:29am

Do they? Why? What incentives are those? Seems to me that they’re subject to the same agency problems as everybody else. After all, plenty of managers care not a whit about producing overall value for the company.

I suppose you could say that it’s the job of their higher-level managers to assess the productivity of lower-level managers. But the question remains, who’s to say that those higher-level managers care about the company either? And the problem builds recursively all the way to the top.

Uh, “despite what I said”? Really? When did I ever say that a specific somebody else was more qualified to determine the productivity of their workers?

What I proposed is that we can help managers by providing them with a system that reduces asymmetric information through a more stringent licensing requirement for engineers. Note, I didn’t even say that such a system must be implemented, I simply stated that it should be considered. As I’ve said several times, whether such a system would actually produce benefits is an empirical question.

Nor do I see why such a proposal is so controversial. After all, what’s the difference between that and the college degree system we have now? After all, (almost) every engineer needs a bachelor’s degree in order to be hired. Is that any different from a “license”? Is anybody seriously proposing that engineering companies eliminate their college degree requirements for applicants, in the name of efficiency?

Actually, no, your proposal only exacerbates the problem. Aggregating employment decisions only reinforces the problems of asymmetric information. What you really want is not a low overall rate of employee turnover, but rather a low rate of turnover of your most productive employees (however defined). A high rate of turnover is actually good, if those who are leaving the company are your poor workers. You don’t want those people around, because they’re actually subtracting value.

Similarly, a large number of applicants means nothing if those applicants are mostly poor workers. It’s far better to have a tiny number of applicants - who all happen to be highly productive.

But that all presumes that you have a way of actually measuring individual productivity. Since not only have you not ever proposed such a measure, but you’ve even stated that it is actually not very important to find one, then you will continue to be plagued with problems of asymmetric information and unraveling markets.

sakky · December 27, 2010, 10:42am

Or you can have the economy coordinating prices: the tail wagging the dog. How? You provide something that people think they want, by first convincing them to want that something in the first place. The rapper Nelly writes a song about his Air Force One’s, and now people want to buy Air Force One’s who would otherwise never want to buy them before. Let’s face it: that song is basically a 3 minute ad. Coca Cola pays American Idol to have the judges drink from cups emblazoned with their logo, and that convinces more people to drink Coca Cola. BMW paid to have James Bond drive one of their cars, and that apparently induces more people to buy BMW, I suppose so that they can be just as suave as Bond.

To be fair, marketing is not always effective. But it clearly must have some overall effect. Otherwise, why would companies continue to spend billions of dollars a year doing it? Are they all just stupidly throwing money away?

TomServo · December 27, 2010, 7:58pm

There are actually a variety of different schools of thought that one can call “mainstream economics.”

All the examples sakky gives are merely examples of signaling, which is itself a mechanism for increasing awareness of products. Moving on…

More signaling. Companies hire celebrities to send the signal that they are successful companies with the money to spend on celebrities, which creates the impression that the company has a proven track record of making money and implicitly from that, a track record of pleasing customers.

Take Bose. Bose speakers are crap, as any hifi enthusiast can tell you. They stay in business only through clever marketing creating the impression that they are scientifically designed, superior speakers. Does this means Bose’s marketing is not working the way I say marketing works? No. The sort of people who buy Bose speakers are not choosy about speakers anyway, if they were they’d do a little research on speakers for very little cost, thanks to a variety of market mechanisms such as magazines, web publications, etc. The sort of people who buy Bose speakers are, by and large, very happy with their purchase. They weren’t buying just speakers, they were buying a boutique item and the prestige and style that comes with it. Thanks to Bose marketing, the exact sort of people who would make great Bose customers (shallow, lots of money, cares more about brand aesthetics than actual sound fidelity, etc.) are driven towards Bose and away from other brands that wouldn’t fit their particular wants quite as well.

But a shallow observation might lead one to think that Bose was merely messing with consumer’s minds to get them to buy stuff. All marketing can do is try to persuade people who already would have been potential customers, IOW to raise awareness, as I said.

Because they aren’t buying beer, they’re buying luxury. Just as gamblers aren’t just writing checks to casinos, they are buying a thrill. You can make the argument that it is marketing which creates the aura of luxury or thrill or mystique or whatever around a product, but given that this is China we’re talking about, it’s easy to see how market mechanism which might otherwise correct this problem (i.e. third-party importers shipping American PBR bottles, other beer brands creating awareness of the scam, etc.) wouldn’t become prevalent enough or spring into existence at all. And, drawing from the Bose example, many people make purchases with little regard for the product itself and more to create a lifestyle for themselves or to signal to others how wealthy and successful they are. In this regard, phony baloney marketing is doing them a favor by leading them to brands with which they can accomplish this.

Apples to oranges. In one system, one authority has total control of the media, in another, advertising and media are under the control of a variety of competing interests who paid for their ads. The effect of propaganda under a one-party state versus the effects of mass media in a democracy with freedom of the press are different. One is not just a watered-down version of the other.

If a person doesn’t have a thorough grounding public choice economics, they don’t really understand economics. Liberals have built up this myth about the past and about the track record of government regulations and interventions. Lawsuits and branding are stronger, more effective ways of ensuring the products are safe than regulations are. The government has not stopped quack drugs from appearing on the market, and more to the point nobody was ever forced to take quack drugs. However, thanks to the government, potentially life-saving drugs are held back from the sick and dying because the drug companies haven’t spent enough billions on clinical trials and whatnot to ensure that it doesn’t cause itching or something. Why don’t you do some reading on the FDA and what public choice and libertarian economists have to say about it before criticizing?

This is why I have so much trouble having respect for big government economists, and why I am an unabashed market fundamentalist: reality. Liberals blind themselves to it and rely on the propaganda they’ve created about market failures and the government swooping to the rescue. Where did financial deregulation (beyond the punishment of outright fraud or coercion) ever actually hurt? Don’t bring up the Great Depression or our most recent recession. Don’t blame the free market for blunders by the Federal Reserve, or the rigid oligopolies or volatile gray market financial instruments created by heavy-handed regulation. Don’t tell me that it’s the free market’s fault that financial firms were forced by the government to follow the risk guidelines they laid out, to listen to the ratings agencies they told them to, to follow the incentives they created by issuing and buying up bad mortgage debt.

Companies have a far greater interest in ensuring the products they sell are safe than does some government regulator who gets paid either way. The company’s money, reputation, and existence is on the line, the bureaucrat gets paid the same regardless. Who do you trust more with your safety? The main thing the government can do is to maintain adequately-ran courts of law.

“Best” military by whose standards? If “best” means “best at spending tons of tax-payer money with little to show for it” then I agree. One hundred percent free trade between nations nullifies the need for conventional warfare anyway.

And government often do stupid things. Why do we still have government employee unions? Why are our schools so badly ran? Why is the post office such a money-losing mess when they have a MONOPOLY on first-class mail? Why does the government consistently borrow and spend more than it takes in? Why did the government-funded railroads go bankrupt when the privately-funded one is still in business after all these years?

This tends to happen in industries that are highly regulated, subsidized, socialized, or nationalized by governments. The freer and more competitive the industry, the less and less this happens. It makes no sense to say “well, this government-created problem exists, but rather than work to get rid of the government laws and bodies that create the problem, we’ll just make more laws and regulations so as to fix the problem we created in the first place.” Just for one example out of jillions, look at retail or the computer industry. Where is Woolworth’s now? What happened to Sears? A&P? What happened to 3dfx or Macintosh? SGI used to rule the CG roost, what happened to them? Why didn’t their market power save them?

“Market power” is only a useful concept when we’re talking about restricted industries, the ones where the government has intervened in someway, where competition is inhibited. Otherwise “market power” becomes meaningless because consumers are free to switch to some other thing.

But over time and through repeated transactions it tends towards equilibrium, not away from it.

Because there is no way to reliably measure employee productivity, all that a (perfectly competitive) employer can do is offer the average value (the average expected marginal revenue) to any particularly worker with a certain vector of observable attributes. But then that means that those workers who know or believe their value to be higher than the offer price will not want to participate in a transaction. On the other hand, those workers who know or believe their value to be lower than the offer price will definitely want to participate, because they are obtaining ‘surplus value’. Hence, the high value employees are driven out of the market. That then lowers the average expected value of participating workers, causing the employer to lower its equilibrium offer, hence driving away even more high-value workers.

It is statements like these that make me weep for the economics profession. I think all economists should be forced to spend five years in a real job somewhere full time (like a McDonald’s or FedEx or something) seeing how things really work as part of their education. Out there in the real world, most managers have a darn good idea of how productive their employees are. Companies that aren’t good at doing this are driven out of business by their more efficient competitors.

This is where word confuse the understanding. WW2 did stop the Great Depression, but it didn’t heal the economy. In fact it caused a devastating loss of life and property around the world. The best thing (economically) that WW2 did was put an end to a lot of the stupid New Deal programs which made the Depression last longer. There was a recession right after WW2, if you recall. That was another Keynesian bubble popping.

Enforcement of contracts is one of the things that Friedman, myself, and many other libertarians whole-heartedly believe is an important thing for the government to do. Never confuse libertarianism with anti-governmentism or anti-authoritarianism. We see a well-defined and limited role for the state, not the abolition of it. There are a few things I use screwdrivers for, such as driving screws. There are many many things I don’t use it for. This doesn’t make me anti-screwdriver when I tell people they should use keys instead of screwdrivers to open doors, or a flashlight instead of a screwdriver to find their way around in the dark, and it doesn’t mean I’m “conceding” anything when I advocate using a screwdriver to drive a screw. “Concede” implies that me (or Friedman) was hanging onto something and then let it go.

As for Germany and SK, I’ll save some keystrokes by linking to a few relevant articles:

[Germany</a> - Domestic Economy and International Economic Relations](<a href=“http://www.germanculture.com.ua/library/facts/bl_domestic_intl_economy.htm]Germany”>Germany - Domestic Economy and International Economic Relations)
[Health</a> Care Reform in South Korea: Success or Failure?<a href=“as%20for%20SK%20I%20was%20talking%20about%20their%20health%20care%20having%20been%20less%20socialized%20in%20the%20past”>/url</a>
[url=<a href=“http://www.thefreemanonline.org/columns/our-economic-past/dangerous-historical-myths/]Dangerous”>Is Money An Economic Resource? - The Freeman Online]Dangerous</a> Historical Myths | The Freeman | Ideas On Liberty](<a href=“http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1447690/]Health”>Health Care Reform in South Korea: Success or Failure? - PMC)

Because I don’t want to do it as a profession. I don’t want to go into academia or a think tank, I want to start my own company, and be a film maker. I plan to start right out of college.

And if that had been a government-ran bank, it would have taken twenty years for that policy to be put into place (at great administrative expense), ten another ten years for the bureaucrats to realize the problem, and another fifty years for the policy to be rescinded.

I’ve never sat in an economics class, but my real world experience has been that managers in the real world wizen up to people gaming the system pretty fast and put a stop to it unless there is some law preventing them from doing so. Whereas my experience as a social worker (yes, that was my last job, and you wonder where my cynicism about government came from?) has taught me that since government managers get paid the same regardless and produce output that is either worth less than the inputs used to make it or which is impossible to value, and for a variety of other reasons you can look up in a good Public Choice book, managers spend more time wasting time than they do actually fixing problems. There is usually gridlock, because various levels of managers can only work with the resources they have and must follow the rules, rules which may take Herculean effort to get changed. It takes monumental effort to really accomplish anything, and you’re paid the same regardless so most people do the bare minimum required to keep from getting fired (in many cases, this simply means SHOWING UP). Some governments are more effective than others, and to a certain degree private companies face the same problems of information, BUT they have a totally different incentive structure that they face and they AND their output and efficiency is measurable, not perfectly, but much more so than they seem to think at MIT.

silence_kit · December 27, 2010, 10:55pm

did you type this with a straight face? when dudes see a scantily clad britney spears in a pepsi ad, are they thinking ‘wow pepsi must be a reputable company if they can afford to hire britney for an ad!’ do you actually believe this?

i feel like this is a very charitable interpretation. i’d be surprised if most consumers of luxury goods would admit that they don’t care about product quality and only care about brand name. i feel like most of those guys buy bose because they believe that they are higher quality speakers.

how do you account for the lack of variance in engineers’ salaries? i think that it is very very likely that some software engineers create more than 10x the value to their company as other software engineers, but their salaries don’t show that.

your only response to this point is: nope in the real world managers are 100% competent at valuing engineers. there is no such thing as an excellent programmer.

it isn’t very convincing.

sakky · December 28, 2010, 4:49pm

Take Bose. Bose speakers are crap, as any hifi enthusiast can tell you. They stay in business only through clever marketing creating the impression that they are scientifically designed, superior speakers. Does this means Bose’s marketing is not working the way I say marketing works? No. The sort of people who buy Bose speakers are not choosy about speakers anyway, if they were they’d do a little research on speakers for very little cost, thanks to a variety of market mechanisms such as magazines, web publications, etc. The sort of people who buy Bose speakers are, by and large, very happy with their purchase. They weren’t buying just speakers, they were buying a boutique item and the prestige and style that comes with it. Thanks to Bose marketing, the exact sort of people who would make great Bose customers (shallow, lots of money, cares more about brand aesthetics than actual sound fidelity, etc.) are driven towards Bose and away from other brands that wouldn’t fit their particular wants quite as well.

Actually, your Bose example illustrates my point quite well. The people that I know who own Bose actually think it sounds good. If they were buying Bose purely for the prestige and style, they surely don’t seem to know it. Either that, or they’re really savvy at lying to me, for it sure seems to me that they really do truly believe that their gear sounds good. In contrast, some of those very same people have freely admitted that they have bought other luxury items purely for the brand and style (which begs the question of why they wouldn’t admit that they did so with Bose, if they truly knew what they were doing?)

Because they aren’t buying beer, they’re buying luxury. Just as gamblers aren’t just writing checks to casinos, they are buying a thrill. You can make the argument that it is marketing which creates the aura of luxury or thrill or mystique or whatever around a product, but given that this is China we’re talking about, it’s easy to see how market mechanism which might otherwise correct this problem (i.e. third-party importers shipping American PBR bottles, other beer brands creating awareness of the scam, etc.) wouldn’t become prevalent enough or spring into existence at all. And, drawing from the Bose example, many people make purchases with little regard for the product itself and more to create a lifestyle for themselves or to signal to others how wealthy and successful they are. In this regard, phony baloney marketing is doing them a favor by leading them to brands with which they can accomplish this.

And all of that simply reinforces the fact that marketing serves to manipulate consumers utility functions regarding the product in question. Without marketing, Chinese consumers would not ascribe a high level of utility to PBR. But with marketing, they do. Hence, consumer utility functions are constantly being swayed by savvy marketing.

So, it seems to me that you are conceding that marketing and propaganda can in fact be a highly manipulative tool, particularly in the hands of a dictatorial regime.

But secondly, it seems that you are also agreeing that monopoly power - or generally speaking - market power of any sort (with regards to marketing or anything else) is a serious market failure.

If a person doesn’t have a thorough grounding public choice economics, they don’t really understand economics. Liberals have built up this myth about the past and about the track record of government regulations and interventions. Lawsuits and branding are stronger, more effective ways of ensuring the products are safe than regulations are. The government has not stopped quack drugs from appearing on the market, and more to the point nobody was ever forced to take quack drugs. However, thanks to the government, potentially life-saving drugs are held back from the sick and dying because the drug companies haven’t spent enough billions on clinical trials and whatnot to ensure that it doesn’t cause itching or something. Why don’t you do some reading on the FDA and what public choice and libertarian economists have to say about it before criticizing?

Nobody is arguing that government is perfect, and indeed the public choice school has some important things to say. Nobody is arguing that there aren’t government failures.

But the inescapable fact of the matter is that government does indeed have a role to play in even the most libertarian dream, and government has often times indeed improved the state of society. Let’s face it - the world is indeed better off without quack patent medicines. Coca Cola used to actually include cocaine. 7-Up used to be sold as a with lithium mood psycho-stabilizer. Whatever you might want to say about the shortcomings of the FDA today, it’s still better than the bad old days of the past.

But it is the fault of the free market that bankers took the risks that they did. Nobody in government ever said that banks had to use 30:1 or greater gearing. Nobody ever said that they obtain most of their funding through the volatile repo market. Nobody ever said that they had to build synthetic instruments that nobody understood, including themselves. Nobody ever said that they had to build a web of counterparties that could potentially all come crashing down. They made those choices all by themselves.

The problem is not just that those banks then sunder their own investors (and rightfully so), but they then jeopardized the entire world’s financial system as a result. In other words, the financial industry through their numerous interlocking transactions imposed a giant risk externality onto the rest of society. If their bets paid off, the bankers pocketed huge bonuses. If they don’t, oh well, the government will bail them out. Bankers therefore captured all of the upside while sticking society with the risks.

Now, I agree with you that there were important government failures as well, and those should be corrected. But we cannot simply ignore the large market failure of risk externality. We also cannot ignore market power - the banking industry is now an oligopoly of behemoths.

So you’re agreeing that government does indeed have a substantial role to play. After all, maintaining functioning courts of law that have actual power to enforce contracts is far from trivial.

But of course that then begs the question of what happens when companies attempt to manipulate the law through skillful lawyering? As Ambrose Bierce once said, the definition of a jury is 12 men who collectively decide which side has the better lawyer.

As a case in point, the Triangle Shirtwaist Factory owners were responsible for killing 149 people yet not only got away scot-free, but actually made a profit from insurance payouts because a jury decided that they didn’t technically break the law (because there were no fire codes at the time). Sure, their reputations may have been damaged and the company was scrapped. But so what? The owners got their money, and that’s all they care about. Those people who died in the fire - well, who cares about them, right?

Yet you still haven’t answered the question as to why countries haven’t privatized their militaries, if doing so would have indeed improved their fighting capabilities. Are they all just being stupid? Wouldn’t you think that at least one of them, especially one of the more warlike ones, would have become smarter?

Sure, government does many stupid things. But government can also do extremely smart things. For example, the Internet was a government project miracle that ultimately swept aside all of the proprietary networks such as Compuserve and Prodigy away. You and I wouldn’t be talking right now were it not for this highly successful government project miracle. If you disagree, then ask yourself - why hasn’t a private company been able to produce a proprietary network that can outcompete the Interent?

The rule of law, enforced by properly functioning and impartial courts, is a government miracle. The fact that if a large company actually violates the terms written on a piece of paper that they’ve given to me, I can actually ask a court for financial redress, and if I win the case, the court will then actually obtain redress on my behalf? That’s a government miracle. Lest you think that’s just a trivial point, let’s recall that most people throughout history did not live under the framework of a rule of law with impartial courts. Like I said, right now, you could sue a company for breach of contract in Russia or China and win…and then nothing happens.

As to your question of why the government always takes in more money than it spends, the answer is easy: that is what voters want. Let’s be frank. Voters want Medicare. Voters want Social Security. Voters want a strong military. Voters also don’t want higher taxes. The libertarians can gnash their teeth until the end of time, and the voters are still going to want those things. Hence, like it or not, we are going to have to live with those policies.

And is that really going to happen? Like I said, the largest industry in the world is the oil industry. Is the government of Saudi Arabia really going to give up Aramco? Is the government of Mexico really going to give up Pemex? Is the government of Russia really going to give up Rosneft?

And that’s the point: even if the US were to pare back regulations in order to make markets more competitive, other countries won’t. Hence, world markets will always be distorted. Libertarians can gnash their teeth all they want, and those countries are still going to intervene heavily in their markets.

It tends slowly toward equilibrium, and only if the state of system remains constant. But that never happens: technologies change, laws change - we are never at an equilibrium point, a point that even most right wing economists would concede.

It is statements like this that make me weep. To wit: I actually was a manager for a time. And, I’ll tell you, I did not know how productive many of my employees were. Now, perhaps I was just a poor manager, but then again, of the guys I know who are still managers today, they admit that they hardly know how productive their employees are either.

The main problem comes when you hire people for tasks that, you, as the manager do not really know how to do. Yet that happens repeatedly, because if you yourself knew how to do it, you would probably do it yourself. But when you hire somebody for a task that you don’t know how to do yourself, then you don’t really know how productive that guy is.

To give you a case in point, I hired guys who were (supposedly) superstar Oracle database engineers, because I freely admit that I don’t completely understand Oracle databases (if I did, I wouldn’t have needed those guys). But because I don’t really understand Oracle, I don’t know whether these guys were actually productive, or just snowing me. If the guy tells me that the database won’t be available at certain periods of time for necessary maintenance, is that really true? I don’t know. If the guy tells me that the database is slow because the app code is producing unusual spiking in the load, is that really true? I don’t know.

That’s the problem: employees are credence goods. You can’t really tell how productive an employee is even after you’ve hired them. They’re akin to auto repairs: your mechanic tells you that he has to fix X, Y, and Z at a cost of $2000, or otherwise you’ll risk having your engine break down in the middle of the highway. Is that really true? Who knows? Even after he’s fixed your car, is your car now functioning better? Again, who knows? You have no idea. {And if you did know enough about auto repair to tell, then you’d probably fix your car yourself.}

That is why office politics are such a pervasive feature at most companies, because it is so difficult to ascertain the true productivity of employees. That is why the Dilbert comic strip struck such a chord - because many employees work in a Dilbert-esque environment where high productivity employees (such as the Dilbert character) are not rewarded and employees who do nothing (such as the Wally character) are never fired.

That is why I think all libertarians and those of the right-wing economic persuasion should actually go work at companies where they can marvel at the pervasiveness of office politics and other Dilbert-esque attributes. Office politics are surely economically inefficient, so why is it so pervasive?

Let’s face it: Germany and Japan were going to start a war sometime anyway. Germany wanted to escape the strictures of the Versailles Treaty and Japan wanted to extend its empire throughout the rest of Asia. So, sadly, millions of paper were going to die regardless.

But I see that you agree that large government spending did indeed stop the Great Depression. The US needed to implement large government spending anyway in order to stop the Axis Powers. But pulling out of the Depression was a nice side benefit.

Heck, the world would probably would have been better off if the US had ramped up its military spending to declare war on Germany and Japan in 1939, and hence strangled them in their cradles, not 2 years later after they had devestated much of the world.

I’ll take that recession over the Great Depression any day.

Enforcement of contracts is one of the things that Friedman, myself, and many other libertarians whole-heartedly believe is an important thing for the government to do. Never confuse libertarianism with anti-governmentism or anti-authoritarianism. We see a well-defined and limited role for the state, not the abolition of it. There are a few things I use screwdrivers for, such as driving screws. There are many many things I don’t use it for. This doesn’t make me anti-screwdriver when I tell people they should use keys instead of screwdrivers to open doors, or a flashlight instead of a screwdriver to find their way around in the dark, and it doesn’t mean I’m “conceding” anything when I advocate using a screwdriver to drive a screw. “Concede” implies that me (or Friedman) was hanging onto something and then let it go.

Friedman has also generally admitted that government has a role to play in the provision of public goods, of which the rule of law (including a functioning court system) is only one example.

Whether we like it or not, socialized health care is highly popular. No serious political party - whether in Germany or S Korea - will win by abolishing the socialized health care systems.

That gets to the general point that markets will always be distorted. Always. As long as we live in a democracy, people will sometimes vote for things that are not economically efficient. Heck, even in a dictatorship, some policies will surely be passed that are not economically efficiency.

Hence, the Theory of the Second Best will always apply in any real world setting. We cannot therefore simply conclude that any single free market reform will actually increase overall welfare - it may well decrease it because welfare does not increase monotonically. Whether any particular reform does or not is an empirical question.

I’m afraid to have to tell you that libertarians are talking about a theoretical economy that doesn’t exist, and never will. Real-world markets will always have large distortions in them. We have to deal with this world as it is, not how we may wish it to be.

But why - if you’re so sure that mainstream economics is wrongheaded and you have such important things to say about it? You could be the next Friedman!

Would it have been? All I know is that the financial services firms in 2008 did a pretty darn impressive job of devastating their own capital bases, requiring bailouts and liquidity draws from the - gasp - government to survive.

And yes, that doesn’t include just the highly regulated commercial banks that one might argue (unsuccessfully IMO) were lured into the abyss by faulty government regulation. I’m also talking about the investment banks which were under no obligation to subsidize affordable housing or follow the tune of the Fed. I’m also talking about AIG, which wasn’t even a bank under any reasonable definition of the word.

Is that so? Then ask yourself - why exactly did Dilbert become one of the most popular comic strips in history? Why did Dilbert actually become the basis of an entire media empire - including a TV show, a set of books, and even a merchandising line? Why is Scott Adams such a sought-after speaker? How did all of this happen if Dilbert didn’t strike a chord?

Or ask yourself - why is office politics so pervasive at an private company? Are there really many companies out there where people don’t game and wheedle their way to promotions? Generally speaking, companies tend to follow the Pareto 80/20 rule of thumb, where 20% of the employees are performing 80% of the work - the problem being that you’re never really sure who that 20% is, and every employee is going to claim they’re part of that 20%.

Whereas my experience as a social worker (yes, that was my last job, and you wonder where my cynicism about government came from?) has taught me that since government managers get paid the same regardless and produce output that is either worth less than the inputs used to make it or which is impossible to value, and for a variety of other reasons you can look up in a good Public Choice book, managers spend more time wasting time than they do actually fixing problems. There is usually gridlock, because various levels of managers can only work with the resources they have and must follow the rules, rules which may take Herculean effort to get changed. It takes monumental effort to really accomplish anything, and you’re paid the same regardless so most people do the bare minimum required to keep from getting fired (in many cases, this simply means SHOWING UP).

Interesting. That sounds like one of my former jobs - at a private company. Do you think it’s easy to change the rules at a large company?

Companies have the incentive to make money. Social work does not have that incentive. I agree that that means that social work then becomes highly bureaucratic - but how else are you going to run it? Are you seriously proposing that social work be privatized? Would that really make anything better?

The basic problem is that money is only one outcome in life. That’s measurable, but it’s still only one outcome. Social work involves a suite of outcomes that have nothing to do with money. Government social work surely is highly inefficient, but I highly doubt that private social work would perform any better. All they would do is optimize profit, but not the actual outcomes important in social work.

Are employees’ outputs measurable? That seems to be the crux of the debate. If so, then, again, why do office politics abound at every company?

That’s a rather random comment; I’m not at MIT.

Yet I am surprised at the right-wing streak that seems to be coming from Ohio State.

The odd thing about this dispute is that I am far from being anti-market, nor am I particularly anti-libertarian. In fact, I have great respect for the freshwater school of economics and, yes, that includes the Public Choice School and the rational choice theory school in general. Generally speaking, I have great respect for the power of free markets when they work.

The problem is that they often times don’t work. Whenever markets are distorted by informational problems - that is to say, always - then markets will produce deeply imperfect outcomes.

But I agree that government failures abound as well. That’s why I’m an empiricist, not a theorist. I advocate the careful study of economic problems, not the a-priori purely theoretical dismissal of policies before they’ve been studied. Sometimes government regulation improves welfare, sometimes it does not. Sometimes free markets are appropriate for certain processes, sometimes they are not. In that sense, I can (and have) had similar disputes with left-wing zealots who always advocate for government-based solution without careful empirical study.

In that sense, I’d like to think that my stance is quite balanced - I adhere to no single political school of thought, but am willing to be guided by the evidence. Personally, I wish more economists - or people who dabble in economics - would do the same.

sakky · December 28, 2010, 5:05pm

Think about what you just said. So you’re saying that if Sony - one of the most iconic franchises in the world - had not hired Peyton Manning, then people simply would have no idea that Sony was a highly successful company. So there are people who are thinking: “Before, I would have never bought that Sony TV because I didn’t know that Sony was a successful company, but now that I see they can afford to hire Peyton Manning, now I know that they must have money, so I’ll buy their TV now.” Really?

Or think about Coke vs. Pepsi. Is there anybody in the country who has never heard of Coke and Pepsi? Are there really people who buy Coke or Pepsi only because those companies have signaled that they have the money to spend on expensive marketing, otherwise, they wouldn’t be drinking it?

If marketing was only about signaling that a company has money, then why try to create innovative, but low-budget ads? Heck, don’t companies just publicly burn a pile of money, hence clearly signaling that they must be so successful that they can afford to burn money?

The #1 most popular ad in 2010 was probably the Old Spice “The Man Your Man Could Smell Like” ad. That ad has the virtue of being cheap - you hire a no-name actor, using very basic CGI. That’s certainly far cheaper than hiring an established celebrity.

But why would people (rationally) purchase a product just because it happened to be featured in a (hilarious) ad? Is it really because they want to be able to tell themselves: “I’m validating my own self-worth by buying products that are featured in funny ads”? Do they really want to tell their friends: “Hey guys, isn’t it cool that I have this product that was featured in that funny ad that we laughed at?” I think it’s quite a strethc to argue that people derive validation, either from themselves of from their friends, from the type of shower gel they use.

rattlehead · December 28, 2010, 10:27pm

In an attempt to re-rail this derailed thread, I will chime in with my 2¢.
I think it would do more harm than good to make engineering a professional school/degree. Engineering students already have to take multiple calculus, physics, and other science courses (depending on the field of engineering). Furthermore, there are already engineering jobs that require professional licensure, for which the FE and PE can be taken.

In response to the idea of requiring 4 years of undergraduate study in a related area to be eligible to earn a professional engineering degree, I think that would be especially harmful to the profession. A four-year bachelor’s degree is already sufficient to produce competent engineers, and when more skill or specialization is required, there are master’s degrees and doctorates. Why add another 4 years to the process if there are no resultant benefits?

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