Another of the characters in my virtuality.

While writing my Ph.D. dissertation in Mathematics at Harvard, I became a anti-Vietnam war/pro-civil rights activist, which led me to embrace Marxism (I didn't know what Marxism was, but I knew the people I hated hated it, so I figured it must be good), and thus to transfer to the Ph.D. in Economics at Harvard, because I was told that "economics determines everything." . . .

Lately, I have been very dissatisfied with the main currents in the political economy of social policy. I read the liberal journals, such as Dissent and The American Prospect, but found I could not stomach their platitudes. I read Commentary and the Cato Institute publications, but their knee-jerk love affair with free markets and their lack of concern for the poor and the environment exasperated me. So, I thought I would go back to the classics, rereading Milton Friedman and the other Chicago school policy types, Hayek and the Austrians, and their popularizers. This was very fruitful. Milton Friedman was a deeply insightful genius and in a different way, so was Friedrich Hayek. But their policy positions I found not just incorrect but wildly bizarre and completely out of touch with reality. There are no equally deep popularizers on the liberal side (Galbraith was a great essayist, but had no analytical core, some modern liberal economists like Paul Krugman do brilliant professional work, but their policy positions are puerile). Amartya Sen is a great economist/policy-maker, but his work centers on third-world development. So, before I get to an assessment of Skousen's analysis of the two rival schools of laissez-faire economics, the Chicago school and the Austrian school, let me say what I think the orthodox neoclassical position is---a position that I in fact think is just about completely correct.

The central model of neoclassical theory is the Walrasian general equilibrium model, which portrays consumers/workers/owners earning returns on the labor and capital they supply to firms, which turn labor, capital, and resources into consumer and capital goods. Kenneth Arrow, Gerard Debreu, Frank Hahn, and others showed in the 1950's and early 1960's that when certain provisionally plausible assumptions hold, there always exists a set of prices such that all markets clear, and at such an "equilibrium" the allocation of goods is Pareto-optimal; i.e., you can't rearrange things to make anyone better off without making someone else worse off. This is Adam Smith's famous "Invisible Hand."

It became immediately obvious that several of the assumptions mentioned above sometimes fail. For instance, an industry can produce not only a good x that it sells on the market for price p, but may also produce pollution y, which it "gives away for free" to the community. To restore efficiency, the government must step in and force the industry to pay for its effluents, so that the marginal cost of polluting equals the price the industry must pay. These are called "externalities." Second, there are industries where the efficient scale of production is so large that market competition is precluded (e.g., nuclear energy), or where it is impossible to exclude people from use of the good (e.g., clean air, national defense, epidemic control). These are called "public goods." Third, consumers may have incomplete information as to the quality of goods, so things like the Food and Drug Administration are needed to ensure adequate product quality. These are called asymmetric information problems. Fourth, there may be certain things that we, as a moral society, do not wish to permit to be traded on markets. These so-called "merit goods" include body parts, prescription and recreational drugs, votes, and sexual services. Finally, it may be prohibitively costly to enforce certain contracts (e.g., labor and capital) through courts of law, so game theoretic issues involving endogenous enforcement and mutual trust and reciprocity must be added to the general equilibrium system. This is called the problem of "costly enforcement."

This model, with these emendations, I maintain is correct, and if we understand the emendations, we can handle the chain saw that is neoclassical economics without getting hurt.

There's much to admire in this song. It's a simple and clear lament of wasted youth, shattered illusions and homecoming. But IMV there's still great confusion. Home may be where the heart is, but that doesn't make it sensible.

There is an assumption that there is still magic in the world, that the old gods still lurk in high mountains and deep caves ready to rejoin humanity if only we believe. For example, there is the assumption that the government actually can solve the problem of the pollution that industry gives away for free. This is only true for very small values of solve, and there are likely far better solutions, though none of them are so magical that they can repeal reality and eliminate pollution. The best that can be done is to displace it and pretend that the problem has been solved since only the evolution of superior production methods will truly change anything for the better.

Similarly, the idea that some technology, such as nuclear power, is necessarily non-competitive due to scale is not just factually incorrect, it also fails to consider technological evolution. Nuclear power is viable on the village scale and is in fact the best solution for remote areas. Nuclear submarines and ships proved this decades ago with fairly primitive early versions, and the newer class of "nuclear batteries" and other mass producible small scale systems make the idea simply laughable.

And so on. I think that this is more than quibbling with the examples chosen to explain an otherwise sound idea. The idea is suspect. A more careful analysis would, IMV, reveal that government can best serve by doing useful gathering of information and helping to make it widely and cheaply available. Information about problems, such as people complaining of pollution, and information about solutions can then be better matched. There are problems, there are solutions and they are important enough to draw the attention and "the uncompromising integrity of creative visionaries and the productivity of inventors, innovators and entrepreneurs." Solutions may not instantly appear, but neither will the fanciful pseudo-solutions that we most often get from governments tasked with solving problems for which there are no ready solutions, at great expense, and with great distraction from the real work of problem solving.