by By Eric Kramer Liberal economists are open to persuasion. What about conservatives? There are many examples within the economics profession of cases where liberals have been persuaded by conservative arguments that raise doubts about the value of government intervention in markets. Harold Demsetz argued that it is a mistake to call for government intervention simply because markets depart from perfect efficiency, because not all inefficiencies can be corrected by government. Specifically, he pointed out that government cannot correct the inefficiency caused by moral hazard in insurance markets, because if private parties do not have the information needed to control moral hazard then the government generally will not have this information either.
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by Eric Kramer
Liberal economists are open to persuasion. What about conservatives?
There are many examples within the economics profession of cases where liberals have been persuaded by conservative arguments that raise doubts about the value of government intervention in markets.
Harold Demsetz argued that it is a mistake to call for government intervention simply because markets depart from perfect efficiency, because not all inefficiencies can be corrected by government. Specifically, he pointed out that government cannot correct the inefficiency caused by moral hazard in insurance markets, because if private parties do not have the information needed to control moral hazard then the government generally will not have this information either. Demsetz’s point has been widely accepted by liberal economists.
Ronald Coase argued that the Pigouvian approach of using pollution taxes or nuisance liability to make the private costs of an activity equal to its social costs breaks down in a second-best world with more than one externality. For example, making railroads liable to farmers for fires caused by passing trains will lead railroads to take steps to reduce sparks, but it will also give farmers an incentive to plant too close to the tracks, so it is not clear a priori that making railroads liable for fires will improve overall welfare, even though it internalizes external costs on one margin. Coase’s point is widely regarded as correct.
Liberals have largely accepted the Lucas critique in macroeconomics. Many liberals have come to agree with conservative scholars that current zoning regulation and occupational licensing rules create serious social costs.
In many of these cases it is plausible that their natural skepticism of government led conservatives to think about problems in a novel and productive way, and to question policies or methods of economic analysis that liberals may have been too willing to accept. Intellectual diversity is valuable, at least if people are willing to have their ideas challenged.
But it is not clear to me that similar examples could be given of conservative openness to liberal ideas. Certainly, individual conservatives sometimes become more liberal in their orientation. This seems to be true, for example, of many of the scholars currently at the Niskanen Center. But are there any examples of communities of conservative scholars in the past 50 years modifying their views in response to liberal insights and endorsing a larger role for government than they previously were willing to accept? Have the followers of Hayek or Buchanan recognized the validity of any liberal criticisms of their views?