Stimulate Disagreement and You Stimulate Trade

I think economists sometimes lose sight of the fact that their policies work within a context of real world events, ideas and discoveries.

I don’t see how any purely financial maneuvering — be they tax cuts or money supply adjustments — addresses the problem we have.  People don’t lack liquidity, they lack an incentive to take risks.  This isn’t because risk taking isn’t cheap enough, it’s because the advantages of being a first mover are almost the same as those of being a second mover or a tenth mover, but the disadvantages are much, much greater.    This is because there don’t appear to be any really good, concrete ideas on the horizon for new industries.  There doesn’t appear to be any “next big thing.”  So there is little to miss by sitting on the sidelines, but a lot to lose by running into the game where no one else joins you.

Imagine a herd of gazelles standing in a valley.  They all believe, based on the information that they have, that there might be a lion just over the hill in any direction.  There might be food, too, but none of them have any idea where.  Let’s assume the assign the danger (lion) and the value (food) the same probability.  Collectively, then, they have to try to leave the valley sooner or later.  But individually, the rational thing for each of them to do is to wait.  Maybe some other gazelle will get the urge and head over the mountain?  Sure they’ll have to go eventually, but they figure they can hold out at least as long as the average gazelle, so a decent set of lesser gazelles will have to check things out first.  So they just sit tight where they are.

Tax cuts and money supply adjustments can be represented by free steroids that make the gazelle stronger and faster.  If one goes over and meets the lion, its chances are marginally better.  They change the calculus slightly on the margin, but they don’t modify the driving calculation, which is that it’s still better to let somebody else go first.

What can the gazelle government do?  They can pick a spot where some (government bureaucrat) gazelles are just going to go over the hill, period.  They are taking tax revenue to make armor for these gazelles so they are safe.  They’re going to go over and see what’s there.

The free marketeer gazelles complain, with compelling arguments, that the government never chooses the best spot to go over the hill.  They are looking in the wrong place!  They’re taking our resources to make armor so they can go find a lion.  How stupid!

It’s true, it might be the wrong place, but this isn’t the point.  By forcing risk, the government is altering the distribution of outcomes.  Those gazelles that stand near the government expeditionary force could get a nice payoff or a terrible one.  Those that stand far away get neither.  Depending on a gazelle’s private information about that spot and their own risk preferences, there is now a reason to move.  It’s either time to move closer or farther from that spot.  In other words, there is now something to disagree about, something to debate, i.e. something to trade.

These trades (of position) start the herd jostling.  Other opportunities emerge to reflect their divergent preferences.   There is also more of an incentive to consider inventing new techniques identifying lion or food location, because now these ideas can be sold to gazelles who want to head to the front, rather than having to be tested by the individual who concocts them.  In other words, creative talent and risk-taking appetite don’t have to be located in the same gazelle.

Let’s assume the gazelle government picked a lousy spot to go over the hill.  The suboptimality of that probability is a cost.  But there is an enormous benefit to paying that cost — the reduction of uncertainty (entropy).  Our government should do the same.  Pick projects that make concrete claims about their outcomes: not just road improvements, new roads and bridges; not just school fix ups, specific promises about educational performance; not just money for alternative energy, concrete goals and timelines.  Yes, it would be better to be right — to achieve those goals, but there’s money to be had in betting against those things, too.  Let the disagreement begin!