LA4_cochrane20110405145650

From John Cochrane, The Grumpy Economist, Behavioral Political Economy

excerpt:

People do dumb things, in somewhat predictable ways. It follows that super-rational aliens or divine guidance could make better choices for people than they often make for themselves. But how does it follow that the bureaucracy of the United States Federal Government can coerce better choices for people than they can make for themselves?

For if psychology teaches us anything, it is that people in groups do even dumber things than people do as individuals — groupthink, social pressure, politics, and so on — and that people do even dumber things when they are insulated from competition than when their decisions are subject to ruthless competition.

So on logical grounds, I would have thought that behavioral economists would be libertarians. Where are the behavioral Stigler, Buchanan, Tullock, etc.? The case for free markets never was that markets are perfect. It has always been that government meddling is worse. And behavioral economics — the application of psychology to economics — seems like a great tool for understanding why governments do so badly. It might also inform us how they might work better; why some branches of government and some governments work better than others.

HKO

Bureaucracies are also insulated from accountability. Political factors make it much harder to admit mistakes or failures.  Business organizations are also resistant to change but market forces are far less political and often blind and brutal.  Bureaucracies will make better decisions when they face the same accountability faced in a bankruptcy court.

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