If we can keep it

From the founding of the American republic, we have had different views on policies to improve our “more perfect union.” That we have lived and flourished together is the result of several important features of American society that we should never take for granted.

The first is a constitution that establishes a limited government that provides maximum scope for each of us to live our individual lives as we see fit. The potential frictions from our different views are thus minimized.

But the individual freedom structure of our government and its accompanying laws are not enough to explain our relative success. Civil society can only flourish within that structure if our values are virtuous and our cultural norms support tolerance and cooperation. Such norms derive from tradition but evolve with experience of what works. This was the insight of Fusionism—the need for both freedom (limited government and free markets) and good values. “Popularizer [William F] Buckley and politician [Ronald] Reagan took the productive tension between freedom and heritage and translated it into political action under the term “fusionism.” “Conservative nationalist or fusionist manque”

“As far as viewing individual freedom as the supreme principle, Mr. Fusionism Frank Meyer explained in his “Western Civilization,” that freedom did rank first politically, as what he called the ‘criterion principle, the guide.’ But ‘the application of principle to circumstances demands a prudential art’ derived from ‘the intricate fibers of tradition and civilization, carried in the minds of men from generation to generation…. The compelling, if secondary, claims of other principles, though not decisive to judgment in the political sphere in the way that freedom is, do nevertheless bear upon every concrete political problem.’ So, practical action requires balancing freedom and beliefs.” 

Culture informs how we use our freedom. Our personal survival and flourishing (self-interest) naturally have priority. But our cultural and moral values help inform our behavior toward ourselves and toward our neighbors that best serve our flourishing and happiness. Our personal welfare also depends on how we treat others.  In the fusionist spirit, two of the critical elements of successful societies are trust in the institutions that govern them and respect for those with whom they disagree.

Political debate in America today is too often merely finger pointing and damning the other side as disingenuous—treating them as enemies rather than partners in brainstorming sessions to find the best solution to opposing views. The pros and cons of proposals and an understanding of the sincere needs and concerns of the other side and the development of compromises and consensus are not possible in such an environment. Our defense of free speech is critical but of limited value if we are just shouting at each other and forget that listening is an important part of a productive conversation.

More deeply disturbing and dangerous is the widespread loss of confidence in our institutions. How best to protect ourselves and our families and our community from Covid-19, for example, should not be a political issue. We should be able to rely on the best advice coming from our public health agencies as they gather and evaluate the evidence. But these institutions bent to political pressures and lost public confidence. “Should you get vaccinated for covid-19”   “The unnecessary fight over covid-19”

More disturbing still is former President Donald Trump’s persistent lies to his supporters that he actually won the 2020 election, thus undermining trust in our elections. That Trump makes such claims is less surprising than that so many of his supporter believe it despite the almost total failure of any evidence presented in court (thus under oath) to establish voter fraud or miscounting, and the rejection of such claims by Trump’s campaign manager, Bill Stepien, and  Trump’s appointed Attorney General, William Barr, who called the claims “BS.” There is no way anyone really seeking the truth can still believe Trump’s claim of a stolen election. But a lot of people still seem to.

Unfortunately, it gets worse. We all listened to Trump’s failed effort to persuade George Secretary of State Brad Raffensperger to find 11,780 more votes for him. “Trump-Raffensperger call transcript on Georgia vote”   When such efforts were exhausted, Trump explored ways to overturn the election results in Congress with the help of “legal” advice from John Eastman and Rudy Giuliani. The final desperate plan was to convince Vice President Mike Pence to reject the Electoral College vote and declare Trump President. The scheme was illegal. The Vice President’s legal adviser, Greg Jacob, explained the illegal nature of the plan to its author, John Eastman, and to the Vice President as did Judge Michael Luttig. VP Pence refused Trump’s pressure to overturn the election, for which we must all be very grateful.

In response to Pence’s refusal to violate the law, “Trump tweeted that Pence ‘didn’t have the courage to do what should have been done,’ prompting rioters Trump had sent to the Capital to “chant ‘hang Mike Pence’ and erect mock gallows.  Committee Vice Chair Liz Cheney has described testimony from Trump aides saying he responded by saying Pence ‘deserves it.’” “How did Trump respond when mob chanted hang Mike Pence?”

The mob that attacked the Capital on Jan 6, 2021 was sent by Donald Trump. “Five people died during the attack or in the immediate aftermath.”  “January 6 attack on capitol-guide to what we now know”  “A grand jury has accused Proud Boys leader Enrique Tarrio and four associates with seditious conspiracy tied to the Jan. 6 attack on the Capitol.” “Proud Boys leader charged with seditious conspiracy related to Jan 6”   “Stewart Rhodes, the founder and leader of the far-right Oath Keepers militia group, and 10 other members or associates have been charged with seditious conspiracy in the violent attack on the U.S. Capitol.”  “Stewart Rhodes arrested-Oath Keepers-Jan 6 insurrection” Two of them have pleaded guilty so far.

Trump’s behavior on Jan 6, such as his long delay in taking any action, remains somewhat cloudy because some of the key Republicans involved that day have refused the subpoenas to testify before the Jan 6 Commission:

“Those gaps are largely the result of the refusal of key Trump allies to participate in the investigation, a list that includes his former chief of staff Mark Meadows as well as his most prominent defenders on Capitol Hill: GOP Reps. Kevin McCarthy (Calif.), Jim Jordan (Ohio), Scott Perry (Pa.), Andy Biggs (Ariz.) and Mo Brooks (Ala.), all of whom have rejected congressional subpoenas to appear before the panel” “Jan 6 committee is telling a story but plenty of gaps remain”

This is an outrage. It is disrespectful to those of us, hopefully all Americans, who want and deserve to know the full truth of what happened that day (and before).

What if Trump is allowed to run again in 2024 and claims that he has won even if he hasn’t?  Will our institutions and public trust in them withstand the better trained and better prepared Trump insurgents next time. Judge Luttig issued a strong “warning to a country whose democracy, he said, is on ‘a knife’s edge.’”

 “Ignoring Jan 6 hearings Michael Luttig explains why you shouldn’t”   “Read Luttig statement”

Trump seems to be preparing for such an event.  “Speaking during a Faith and Freedom event in Nashville, Tenn., Trump said [of] the defendants charged in the Capitol riot… if I become president, someday if I decide to do it, I will be looking at them very, very seriously for pardons. Very, very seriously….” “Trump-says-he-would-look-very-very-seriously-at-pardons-for-jan-6-defendants-if-reelected”

I hope that he won’t be allowed to run:  “The criminal case against Donald Trump”

Social media and false information

America is suffering from the wide dissemination of misinformation.  The advent of social media on the Internet, such as Facebook, has introduced new means for the rapid and widespread dissemination of potentially deadly lies. Most of us retweeting or “sharing” lies believe them to be true. The motives of those who invent them are another matter.

Determining what information to trust has always been a bit of a challenge but social media has certainly upped the game. “What to do with social media”   “New tools require new rules”

A great deal of attention has focused on Facebook. What should it do to protect us from misinformation and who should set the rules? Facebook is a private platform on which we post our thoughts and pictures or repost information supplied by others. It does not provide content of its own. Facebook’s business model is to attract as many users/viewers as possible and to keep them happy in order to connect them with advertisers selling products that might interest them.

Some have claimed that the Facebook “like” button and other reaction indicators has enabled Facebook to direct posts that are liked or that create a strong reaction to the reacting users, thus creating echo chambers (bubbles) in which people increasingly only hear what they already agree with. If they are viewing misinformation, it risks going unchallenged.   “Must Read on Facebook”  

Without delving (again) into how well or poorly Facebook is doing its job of bringing useful information to its users, I want to address (again) the question of who should be responsible for rejecting and filtering out false information. “Facebook covid misinformation” 

Should it be the government (the Xi, Putin model only with Trump or Biden at the helm), social media themselves (the charming Mark Zuckerberg), or its users (us)?

Anyone who has read more than one of my blogs knows where I stand. America’s greatness derives from the fact that sovereignty in America resides in each individual (us) and we delegate rule making upward (to our family and friends, then our clubs and villages, then our cities and states, then to the Federal government, and finally, on a very limited basis, to the world community) as needed to protect ourselves and our property and to facilitate cooperation and commerce among us. In short, while Facebook and other social media platforms should continue to work at improving their game, the choice of what to believe should rest with each of us.

We should learn from our parents and schools how best to evaluate information and where to look for trustworthy information. The success of American democracy will depend, in part, on how well we each perform this duty. I recommend that you start with the new book by Jonathan Rauch: The Constitution of Knowledge: a defense of truth“Trust”

Our Right to be Free

Our country was founded and has prospered on the proposition “that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” We jealously guard our individual liberty. We are free to decide what we want to do and how we want to do it. This liberty is subject to two major conditions: we must live with the consequences of our choices and actions, and our actions cannot interfere with the same exercise of freedom by others. We never fully live up to these high principles, but they do define the goals we continue to and should continue to aim for.

When our actions or circumstance fail to sustain us, we do step in to help those in distress, whether from family obligations or friendships or a government administered social safety net. We continue to debate and refine its features.

Determining the boundary between those actions I am free to choose, and those that unacceptably affect others is not always easy. Walking in public naked is not acceptable in most societies (except at designated nude beaches). While this would not infringe on the freedom of others to behave as they want, it would “force” them to see something they do not want to see.

I chose this example because it does not fall neatly into something purely private that I have a right to do (walking around my home naked) or something clearly and obviously damaging to others that I do not have a right to do (driving my car through my neighbor’s garden).  In the realm of social norms, I can walk in public dressed in many ways depending on the society I am in.  A man might freely walk around in a dress (if he chooses the neighborhood carefully) without getting knocked down in some societies but not in others. Such social norms are important in defining and guiding acceptable public behavior and they vary across societies and over time. Such norms are continuously debated.

But clearly my freedom to swing my fist ends where your face begins. If you are infected with a contagious disease, you do not have the freedom to walk around potentially infecting others even in the most libertarian of societies (e.g., lower Manhattan). I assume that anyone sick with Covid-19 knows that she must isolate/quarantine herself.

But what about someone who doesn’t feel sick but hasn’t been vaccinated?

Any establishment has the right to require that only vaccinated people work or shop there and/or wear face masks. And I certainly have the right to attend only those performances or eat in those restaurants that impose these requirements. These are implications of freedom.

Surely everyone understands and accepts these propositions.  So why is there such controversy over wearing masks and getting vaccinated? I don’t know the answer to this question but will suggest a few factors that I think are important. That such health issues have become so politicized is almost more distressing than the fact that in the United States 728,000 people have died from Covid-19 by October 10, 2021.

One reason is that some people are pushing back on being told what to do by the government. Such behavior is common in freedom loving children but rather unseemly in adults. Another is that vaccines were developed with miraculous speed and their effectiveness and potential side effects are not yet fully known. None the less the evidence is overwhelming that being vaccinated significantly increases your prospects of living and surviving the infection compared to those who are unvaccinated. Another is that during the Trump administration medical policy and advice became quite politicized. Many of us, often with good reason, stopped trusting the messages from the CDC and FDA. And to this day government messaging remains poor. Rather than offering advice based on the most recent evidence (which can change over time) and the reasons for those recommendations, government pronouncements are often confusing and sometimes sound like demands. Many of us have lost trust in the government’s pronouncements. Unfortunately, some people have put their trust in unreliable sources of information and even, in some cases, in deliberately malicious sources (and we can’t always blame Russia). 

Where our choices and actions affect only ourselves, we should be free to do as we like and benefit (or suffer) from the outcome. Where our actions affect others, more or less directly, social norms and government rules should limit our choices. In societies where its citizens live by the golden rule and respect these norms, beneficial behavior is followed voluntarily — enforcement is not a serious problem.  We must determine the sources of information that we trust carefully and based on such information we must treat our neighbors with the respect we expect from them.

Protecting our freedom is critical but it is not enough. We must also exercise it virtuously. The “fusion” of freedom and virtue has been (most of the time) the basis of American success. We seem at risk of losing both. Get vaccinated now for everyone’s benefit. Please.

Trust

Trust is a critically important feature of successful relationships and of flourishing societies. Enduring trust builds on honestly and truth.  I have just finished reading Jonathan Rauch’s exposition of these truths in The Constitution of Knowledge: A Defense of Truth and his enlightening exploration of how to find and defend truth in today’s challenging environment. 

How can we determine what is true and what is not? Rauch’s book explores this question. In sorting out fact from fiction we must recognize the personal and social biases through which we evaluate claims and the factors that motivate them. The task is made even more difficult by the fact that there are some who deliberately propagate falsehoods for their own purposes. Whatever else might motivate them, political and other leaders act to gain or retain their power. They often have an incentive to misrepresent facts, i.e., to lie. Former President Trump and his Big Lie (and his many, many other lies) is by no means the only President to have lied to the American public. Many other Presidents have also lied.

Ken Burn’s documentary, The Vietnam War, is a brilliant expose of such lies and yesterday I watched for the first time the 2010 Goldsmith and Ehrlich directed documentary The Most Dangerous Man in American: Daniel Ellsberg and the Pentagon Papers. Lyndon Johnson and Richard Nixon almost give Trump a run for his money as liars, though I think that they thought they were lying for the benefit of our country along with their reelection (which by no means excuses it).

Our constitution provides limited, enumerated powers to our government and checks and balances of the powers between its branches and its citizens. But the power of free speech and a free press to expose lies is an indispensable check on the lies of public officials. Our republic has been defended from foreign attacks by many brave solders. But we should also be grateful for the self-sacrifices of a few brave whistleblowers for exposing government lies and thus defending our republic and the individual liberty in which we have flourished.

Wednesday, I watched Daniel Ellsberg receive the Committee for the Republic’s Defender of Liberty award. We are still meeting virtually, but the event was a fascinating discussion of the Vietnam war decision making. The discussion included the Pentagon Papers movie directors, Goldsmith and Ehrlich; the official head of the Pentagon project that wrote the Pentagon Papers history of the war, Morton Halperin; the New York Times reporter who wrote the first article on the Papers given to him by Ellsberg; and Ellsberg himself who went on at great length. It was a riveting two-hour discussion. You can watch it here: https://youtu.be/l7L3DOhakNU

I hope that we can present this award to Edward Snowden in the future.  

Holding our government officials accountable for speaking the truth and for abiding by the law are critically important in preserving (or restoring) trust and in determining “the truth.” Each one of us contribute to (or detract from) those goals. But I am in awe at the personal sacrifices of Ellsberg and Snowden in the service of truth, which so badly needs defending. If there is hope of saving our fractured and disbelieving Republic, it will be because of the bravery of such people and the embrace by the rest of us of the wisdom expressed by writers like Rauch. It requires our individual commitment to truth and the institutions and norms that facilitate and incentivize finding it (filtering falsehood from truth). It requires an effective Constitution of Knowledge.

Trust and False News

January 26, 2017

The quality and extent of interactions among people (neighbors, companies, governments) profoundly affect our quality of life. Trust is a critically important element of such interactions and of “The Wealth of Nations,” to quote Adam Smith. No society, beyond (perhaps) the family and relatives, enjoys total trust. The willingness to and low cost of dealing with others in such a society would surely make it the richest one on earth. The more distant our relationship with someone, however, e.g., hiring a contractor to add a room to the house, the more formal our understandings need to be. But the deeper and more reliable is trust within a society, the simpler such contracts and their enforcement can be. This goes well beyond the obvious costs (effectively taxes) of doing business of security guards and surveillance cameras at department stores. More Trust frees up resources to produce the goods and services that we really want.

As part of its attack on Europe and the United States, Russia for some time has systematically worked to undermine trust in the West. For example, it generates and distributes “false news” in a variety of ways. It has become more difficult to judge when news is true or deliberately made up. As a result, the public’s trust in public institutions and performance is eroded to some, hopefully still limited, extent. As I argued above, a decline in the level of trust in Western societies reduces their economic efficiency and output.

False news must be distinguished from biased reporting and from disputed facts, unfortunately labeled “alternative facts”, by Trump senior advisor Kelly Anne Conway. Bias, or priors as we economists put it, reflects our inner beliefs and tentative understandings about what is true and can influence what a reporter chooses to report or emphasize. It does not reflect a willingness to report or repeat knowingly false information. The strange case of the size of the viewing audience for Trump’s inauguration ceremony illustrates bias and a few other things on all sides.

Trump was angry that the press reported mediocre attendance to his inauguration. The highly respected conservative economist Tyler Cowen provided an interesting analysis of why he thinks Trump forced his poor press secretary Sean Spicer to launch an attack on the Press for its “misreporting” of this matter: Why trump’s staff is lying. During his first official press conference on January 23, Spicer stated very clearly several times that his assessment that Donald Trump had the largest audience for his inauguration in history referred to total viewers “both in person and around the globe”. After apologizing for having reported the previous Saturday incorrect numbers for subway ridership he proceeded to present his estimate of TV and Internet viewers along with mall attendants and asked the press to correct them if wrong. USA Today reported that “On that point, Spicer may be correct…. But there is no comprehensive measurement available that would prove or disprove this claim.” The attending press persisted in referring to the size of the crowd on the mall. That reflects bias by the Press to the point of blindness. That Trump felt compelled to speak out about the size of his audience is sad evidence that he has not yet properly transitioned from candidate to President (that the thin skinned, megalomaniac we watched during the campaign has not yet grown up).

Alternative facts abound and refer to a lack of consensus on what the facts are. These are the bread and butter of scientific investigation and debate. Whether global temperatures last year were higher or lower than the year before depends on the measurement instruments used (surface instruments of one type or another, satellite systems, etc.), their location (country side, urban areas, ocean, etc.), frequency of measurements (daily, hourly, etc.), etc. Meteorologists debate this “fact”.

Candidate Trump lied so frequently and so freely during his campaign that I can only assume that he did so deliberately as a part of a general disinformation campaign. His claim, for example, that President Obama was not native born was so irrefutably disproved that Trump eventually (but very late in the game) withdrew it. President Trump sadly continues the practice by following up his ludicrous claim that he won by a landslide, with the claim for which there is no factual support at all of wide spread voter fraud. Trumps-disregard-for-the-truth-threatens-his-ability-to-govern.

Poor Sean Spicer was forced to announce Trump’s voter fraud lie to the press. When asked for evidence he cited “A 2012 Pew study [that] found that about 1.8 million deceased people were still on the rolls and that 2.75 million people were registered in two states. The study called for states to clean up their voter rolls but did not draw conclusions about voter fraud.” Trumps-voter-fraud-claims-undermine-the-voting-system-and-his-presidency/2017/01/24/. In fact, Trump’s Chief Strategist Stephen Bannon is registered in both New York and Florida, Treasury Secretary Steven Mnuchin is registered in New York and California, and Trump’s daughter Tiffany is registered in both Philadelphia and New York though neither voted twice. Bannon-was-registered-to-vote-in-two-states. Recidivism-watch-Spicer-uses-repeatedly-debunked-citations-for-trumps-voter-fraud-claims.

Trump’s lies, whether he believes them himself or not, along with false news perpetrated by Russia and others, are increasingly undermining public trust in the information so freely available on the Internet and elsewhere. This is bad for our democracy. It is not obvious what motivates him.

“Is Trumpism a scam? And if so, whom is Donald Trump scamming?

“Or is the country confronting something even more troubling: a president unhinged from any realities that get in the way of his impulses, unmoored from any driving philosophy and willing to make everything up as he goes along, including “alternative facts”?

“Of course, there’s another possibility: that there’s a method in all of this.” E. J. Dionne, Jr. What’s-the-method-in-trumps-madness/2017/01/25/

It is one thing to disagree with the President’s policy proposals—we can discuss and debate the reasons for our differences—and quite another when we cannot trust the integrity of the President or his administration. When the President proclaims over and over that he will insure that we “Buy American and hire American” (so much for shifting power from Washington to the people), rather than explaining why this is such a bad policy—save-trade—we turn immediately to the President’s hypocrisy rather than the substance of his policy. In Trump’s own business dealings he buys his materials where they are cheapest—steel and aluminum from China (Newsweek), furnishings for his new Hotel in Washington DC from China (The-new-Trump-hotel-in-D-C-hotel-is-filled-top-to-bottom-with-goods-made-in-China), the clothing for his signature Donald J. Trump Collection from Mexico (Trumps-hypocrisy-on-trade-he-outsources-and-invests-globally-but-doesnt-want-Ford-to-do-the-same/), and the long list goes on (Trump products).

Trump’s business career is full of shady dealings (The-myth-and-the-reality-of-Donald Trumps-business-empire). Why would we have expected him to be different as POTUS? Trump the terrible. Lying has worked for Donald Trump—so why should he stop now? Why Trump lies.

Trump is very quickly running out of time to save his administration. His tweet this morning stated: “The U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers… of jobs and companies lost. If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting.” As a result, the Mexican President cancelled his planned visit. Our current account deficit with Germany in 2015, by the way, was $285.2 billion, about the same as with China. Putting his economic ignorance (or blatant lying) aside, his conduct of foreign policy, trade or otherwise, is simply dangerous. We must stand up and yell STOP. STOP!!!

A glimmer of hope is offered by the fact (a real one) that orders for George Orwell’s classic novel of tyranny “1984” have soared in recent weeks.

FREE MARKETS UBER ALLES

World per capita income didn’t change much from the time of Christ to the founding of the United States ($444 to $650 in 1990 dollars), a period of 1,790 years. But in the following 320 years it jumped to $8,080. And about half of that jump came over the last 50 years. What explains this fairly recent explosion of well being? Many things, of course, but central to this explosion of wealth was trade. Only when people could specialize, which requires relying on others to produce part of what they need or want, i.e. to trade, was it possible to dramatically increase the productivity of individuals. The prospect of selling to others also carried the incentive to innovate and develop new technologies, etc.

Trading requires some level of trust in the person you are trading with and mutual acceptance of the rules of the game (contracts). This is relatively easy when you trade with your neighbors and fellow villagers face to face. But as trade extended over longer distances—as it expanded from personal to impersonal dealings— the development of trust became more challenging but no less essential. Product standardization, for example, allowed even greater efficiency and productivity but also facilitated the development of trust in the quality of what we are buying. Companies invested in building and preserving their reputations, which became associated with brand names. As trade expanded, the need for trust was satisfied in more innovative ways.

In today’s rapidly expanding Internet world, where virtually anything under the sun (virtual or real) can be traded via the impersonal Internet, the old brand name reputation approach to establishing trust continues to be useful. Thus we trust the level of quality of products marketed by Sears, or Nieman Marcus on their website to match what we find in their physical locations. However, “the customer review” is rapidly becoming an important source of trust, whether looking for a plumber, a restaurant, a hotel room, or buying a new car.

Government’s have long facilitated trade via providing security (Feudal Lords providing Sheriffs to hunt down highway robbers) and enforcement of contracts. At some point governments began to think that they could establish (or replace) trust more effectively than did competitive markets by imposing regulations to inform or protect consumers. Standard product information, for example, the contents and their nutritional values on the labels of food products, help consumers decide which product best meets their needs. Licensing practitioners of various professions—from cab drivers to physicians—became a widespread form of vetting minimum professional competence or standards. In many if not most professions the regulators tended to be captured by the industry they regulated resulting in protection of the practitioners from competition rather than protection of the customers from poorly trained service providers. Medical doctors fought, often successfully for a long time, competition from providers of alternative medical services (chiropractors, acupuncturists, Internet medical service providers, etc.). Licensed taxi companies obtained exclusive rights to serve specific areas and limit their number in order to boost fares in the name of consumer protection.

The medallions required to operate a taxi in New York City are a famous example of a government created monopoly. The following is from the website of the New York City Taxi and Limousine Commission announcing the auction of 89 medallions on May 2, 2008:

New York City Taxi and Limousine Commission (TLC) Commissioner/Chairman Matthew W. Daus has determined that the Minimum Upset (Bid) Price for each of the 43 available lots of two Minifleet (Corporate) Accessible Medallions that will be auctioned on May 2, 2008 will be $700,000. One Individual Accessible Medallion will likewise be available for bid on that date at a Minimum Upset Price, also set by the Chairman, of $189.000, as will two Individual Alternative-Fuel Medallions at a Minimum Upset Price of $300,000.

The Minimum Upset Price is the minimum amount that will be considered valid. The highest valid bids will be named apparent winners.

Such systems of licensing are meant to insure minimum quality of service (both of the car and of the driver). They are meant to establish trust on the part of customers that when a yellow car pulls up, he will not over charge or rape or rob you. These issues are explored in an interesting paper by Christopher Koopman, Matthew Mitchell, and Adam Thierer: “The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change” Mercatus Center, George Mason University

Click to access Koopman-Sharing-Economy.pdf

“Under the traditional ‘public interest theory’ of regulation, regulation is sought to protect consumers from externalities, inadequate competition, price gouging, asymmetric information, unequal bargaining power, and a host of other perceived ‘market failures’.”

Unfortunately, as economists Mark Steckbeck and Peter J. Boettke observe, regulators often ignore ‘the dynamism of markets and the incentive mechanism driving entrepreneurs to discover ways to ameliorate problems associated with market exchange.’” page 6

“Writing in 1920, Arthur C. Pigou cautioned against contrasting ‘the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine.’ Instead, he noted that in the real world, policymakers may not implement policy as scholars think they ought to: For we cannot expect that any public authority will attain, or will even whole-heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corrup¬tion by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole.” Page 7

“Because rent-seeking is used to contrive exclusive privileges rather than to create value for customers, these efforts cost society forgone productive opportunities. To compound the problem, rent-seeking changes the way people allocate their talents. Rather than keeping a focus on devising new and innovative ways to create value, entrepreneurs turn their efforts toward devising new ways to acquire these regulatory privileges.” Page 10

So how has NYC’s medallion system worked? Ask a New Yorker. In 2006 there were only 12,799 licensed taxicabs in New York City, compared with 21,000 in 1931, when the city had about 1 million fewer inhabitants.

Koopman, et al, explore the implication of the choice (or mix) between market and government regulation for the area of what they call the “sharing economy.” The trading facilitated by Craigslist, Uber, and Airbnb has existed for centuries, but the use of the Internet by some clever entrepreneurs has transformed the business model.

Most of us in years past have taken advantage of a limousine driver between official jobs passing by slowly and offering a relatively cheap fare. Unauthorized drivers hang around airports and Theaters to pick up extra fares illegally. My favorite experiences were in the former Soviet Union in the first few years after its collapse. Most everyone wanted free markets but didn’t have a very clear idea how they were organized. We came to realize that virtually any car on the road was potentially an informal taxi. We could flag down almost any car and if we could communicate where we wanted to go and agree on a price, we had a ride. Uber has provided a high tech means of connecting such drivers with customers. “The company says it is not a transport or taxi service; it is a technology company whose product is not car rides but the phone application used to arrange them. Its UberX service relies on partnerships with thousands of independent contractors who use their own vehicles. Drivers find passengers using Uber’s phone app and then remit a percentage of the fare to the company.” uber-pressures-regulators-by-mobilizing-riders-and-hiring-vast-lobbying-network/2014/12/13/Washington Post

But what about trust? Those of you who have used Uber have probably experienced, as I have, an easier, faster, more polite, and cheaper ride. But how can we trust that the car will be safe and the driver competent and honest? The success of Uber and other web based services rests on their being able to satisfy these concerns. Will the dictates of market success do a better job than government regulation in satisfying these customer concerns?

“Reputation systems are arguably the unsung heroes of the social web. In some form or another, they are an integral part of most of today’s social web applications.” Chrysanthos Dellarocas, “Designing Reputation Systems for the Social Web,” in The Reputation Society: How Online Opinions Are Reshaping the Offline World, ed. Hassan Masum and Mark Tovey (Cambridge, MA: MIT Press, 2011), 3. To gain and keep the public’s trust, Uber has established internal standards for the private drivers and their cars that it signs up to connect with customers through Uber. The failure of any driver or car to live up to those standards (and they have several car types) hurts Uber’s reputation and thus its bottom line. It has a strong incentive to get it right. Uber also uses easy to provide customer reviews of each ride experience as do a growing number of web based trading serves.

But what about dishonest reviewers, perhaps working for a competitor (the world is a harsh and cynical place)? The presence of dishonest people lowers the standard of living in any society whatever its system of government or economy. Societies heavily dominated by honest people, are more prosperous. But some people will be dishonest and we need ways to deal with them and minimize their damage. Waze, the very popular GPS based car destination app, provides up to the minute information on traffic conditions on your route provided by users on the spot. It harnesses the desire of most people to be helpful. The information provided by users (their reviews, if you will) is rated for accuracy by other users (in the form of an easily delivered “thank you”). I have no doubt that services traded via the Internet will continue to explore better ways of establishing trust in the products and services traded there.

The recent alleged rape of a young woman in New Delhi, India by an Uber driver raises this issue in a dramatic way that the rape of a young woman in Fort Lauderdale two months earlier by a Yellow cab driver didn’t seem to. A foolish, careless comment by an Uber official about how he might use travel information on Uber’s customers, also raises questions about the safety and uses of such information. Are these problems better handled by regulation or by market competition?

The answer in my view is that the government should provide the foundation for trade provided by contract law and its enforcement, and minimal requirements that are generally applicable (a driver’s license and appropriate insurance). But the Uber’s of the world should be required by free competition to prove themselves and their service to the satisfaction of their potential customers rather than to regulators. If you want to know the standards of safety Uber has set for its self as it seeks customers, check its website, for example: http://blog.uber.com/driverscreening.