Wednesday, January 18, 2006

For Stephen Cooke: Real World 101

To amplify a bit on Scotty's post about Professor Stephen Cooke and where professors in general (such as PARD) get all these nutty ideas about economics, I present some quotes from a column written a few years ago by economist Arnold Kling with thanks to Dale Courtney:
Academic life offers an almost unique mixture of high autonomy with low risk. The position of tenured professor carries perhaps the lowest risk of job loss of any occupation in America. Meanwhile, as my college economics professor Bernard Saffran was fond of pointing out, being a professor means not having a boss. Your day-to-day teaching and research are free from bureaucratic oversight or management supervision.

For the rest of us, autonomy and security tend to be mutually exclusive. In fact, the trade-off between risk and autonomy is perhaps the most emotionally wrenching issue that we face in our careers. Among people who have worked for large organizations, is there anyone who has not at some point had the urge to quit and become an entrepreneur or a consultant, in order to escape the dysfunction of office politics and the prison of bureaucratic inertia? At the same time, is there anyone who has not felt the restraining hand of the stability of a paycheck and the security of health care coverage, leaning on you to go back and put up with your boss a while longer?

The writer Bill Whittle argues provocatively that the issue of responsibility constitutes an important political divide. Whittle and I are on the side that emphasizes personal responsibility, while those on the left would tend to downplay personal responsibility in favor of group responsibility or other "root causes." I found it interesting that while the economic analysis of outsourcing posted by economist Brad DeLong was similar to mine, DeLong drew an implication for government to spend more on infrastructure and education, while I drew an implication for individuals to be more adaptable.

Those of us who have spent considerable time outside of academia can relate to Whittle's statement that "Freedom is the Platinum Visa card. We alllll want one. Responsibility is the credit rating. Not so much enthusiasm for the kind of discipline needed to earn one of those." To most of us, it is common sense that freedom and responsibility go hand in hand. On the other hand, college professors, who enjoy so much autonomy with so little insecurity, can lose sight of the significance of responsibility.

At some level, economists are aware that corporations are not single-objective monoliths. We have coined the term agency problem to describe the conflicts within a corporation -- primarily the conflict between shareholders and managers. However, the pervasiveness and significance of these sorts of problems is largely under-estimated. Academic economists fall easily into the habit of treating the corporation as an individual, when in fact -- as shelves of management books can attest -- a large business organization is like a dysfunctional family.

People on the political left, and academics in particular, have an inordinate fear of large corporations. They see no hope for smaller economic units, which they believe will be crushed by the giant corporate steamrollers. Instead, my experience has taught me that large corporations have very limited competence. One of the few academic works that captures the comparative advantages of smaller firms is Amar Bhide's The Origin and Evolution of New Businesses, which I cited extensively in my own book on bootstrapping.

By the same token, the academic left has an inordinate faith in government efficacy. They assume that if government policy means well, then it will be executed well. Those of us who have spent time in government are more keenly aware of the obstacles to effective performance that exist within the bureaucracy.

Many academics share the adolescent fantasy that government would be terrific if only the right leaders were in charge. They think that all of our problems would go away if only "the people" could get their way over the "special interests." Their model of politics is the old Jimmy Stewart movie "Mr. Smith goes to Washington."

A good way to cure the adolescent fantasy is to spend time in government. Up close, it is hard to tell the people from the special interests. The crusaders for more low-income housing turn out to be construction companies. The campaign for energy independence and clean-burning fuel turns out to be a plea for a subsidy to benefit a large ethanol producer. Conversely, those of us arguing against drug price controls do so not because we are industry stooges but because we believe that markets incentives lead to better treatments and cures.

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