Monday, September 7, 2015

Trust and the Sustainability of Free Economies

Here is an interesting article on trust and prosperity (HT: EV)  They describe the various ways in which broader social trust and expanding circles of expected fair treatment correlates with prosperity, with causation running in several paths.  This suggests that prosperity does not rest on a stable equilibrium.  Low trust leads to poor policies and illiberal behaviors.  Poor outcomes will lead to poor policies.

This reminds me of the Robin Hanson idea (which I can't find a good link to, but I will try to paraphrase).  Human progress continued to be delineated by the Malthusian context for foragers and farmers, even though there was some economic and technological progress because our ability to reproduce could outpace our economic growth.  But, the industrial age brought economic growth rates that were higher than our ability to reproduce.  This created a regime shift where capital accumulation was a better strategy for laying claim to future production than fertility was.  So, fertility rates decline substantially when cultures transition to capitalism and industrialism.

Possibly, the sustainability of liberal economies is a product of their ability to naturally recover from cyclical downturns.  Sort of like healthcare in the age of bloodletting.  The body's ability to heal itself is usually stronger than the doctor's inadvertent attempt at killing it.  Maybe free economies can heal themselves faster than we can kill them.

This is probably more tenuous than we would like to believe.

This article, also via Economists View, is probably related to this topic.  It describes a positive relationship between payday loans and liquor sales.  From the article's conclusion: "heterogeneity likely exists within the pool of payday loan users, and external factors will influence the ratio of `productive and counter-productive borrowers.' Lending restrictions can seek to reduce the proportion of counterproductive borrowers through the prohibition of practices known to harm consumers, including those that rely upon leveraging behavioral responses such as addiction and impulsivity."

I tend to want to come down in favor of freedom to contract in these cases, because I see a lot of anti-market bias in political activities, and most of the reaction against payday lenders seems to come from factions that don't acknowledge that heterogeneity.  But, there is probably some set of contract characteristics that becomes a signal, itself, of that contract's tendency to enable destructive behavior.

While it seems generally true that the twin pillars of trust and prosperity in our most vulnerable neighborhoods will rise with economic liberalism, which means the expansion of allowable activities, the relationship of these activities with a level of trust in the community is vital.  The delicate balance, however, is between encouraging a tableau of trust building activity and trusting our fellow citizens to make their own decisions, even when those decisions don't seem optimal to us.  The relation between trust and freedom is unstable, so freedom in a marginalized community can be destabilizing.  Yet, prohibition can become much more destructive than freedom.

How many of the seemingly endless stream of bad encounters with police officers are the result of the police enforcing petty crimes (not to mention the Drug War) or involve resisting or running because of past petty crimes, or possession of unlicensed or illegal firearms or substances?  So, on the one hand, it does seem defensible that marginalized neighborhoods might be better off, on net, with fewer payday loan stores.  On the other hand, it seems like the last thing those neighborhoods need is yet another normal, consensual, non-violent behavior to be driven in lawless black markets - yet one more behavior that is disallowed or used as a means for the state to prey on its citizens.  Could we  regulate payday loan stores more strictly while taking 20 other petty crimes off the books?

On that topic, the recent development of "Campaign Zero" coming out of "Black Lives Matter" seems like a surprisingly constructive turn, based generally on unifying and liberalizing ideas.  There are details I know people could debate, but the tone and direction seem positive.


  1. OT

    Kevin---can you name a single well-to-do, single-famiy detached neighborhood in the U.S. that would allow high-rise condo construction?

    Why is it you persist in the "NYC and SF block housing construction" meme?

    Jeez, go to Newport Beach CA and try to build...anything.

    In fact, I suspect most well-to-do single-family detached neighborhoods in general are "conservatives."

    Ergo, a more-accurate meme would be, "Conservative homeowners chronically block new housing construction, as they like free enterprise---in someone else's neighborhood."

    1. I agree with you Benjamin. The reason I focus on that is that those areas happen to be where large potential populations want to move, and thus the constraint is more acute there. In the core metros the problem has gotten so bad that the market rent you would charge on a new building, if you could build it, angers people. People in the core cities are complaining that it's a human rights issue that they are being driven out of their longstanding neighborhoods because the market rents are so far from where they should be. It could be that Newport Beach wouldn't be able to handle an influx of a million new households, either. but, it just happens that the places where it looks like there would be value for millions of households to move there are the core cities, especially NY and SF. This is where I pull in the studies that show most of the income inequality and much of the housing/wage rents coming from three counties.

      And, I don't know if I feel like every place has to be a high density place. Some of the value of Newport Beach may come from the low density. The thing is that SF and NYC get their value mostly because they were designed from the get-go to be high density. That density now brings value. There are millions of people that could profitably move there, if there wasn't a housing constraint. It's the point of the place. Rents are very high as a portion of incomes there and rent inflation is high.

      So, I don't disagree, but I think there are reasons for the focus.

  2. Well, I think you are on very squishy soil, but I will let it go in the name of intellectual companionship.

    1. Did you hear the econtalk podcast with (I think) Paul Romer, where they talked about how Long Beach could be filled with high rise apartment buildings? I think that's kind of somewhere between the Newport Beach and the core city context.

      Anyway, I'm very willing to be persuaded empirically.

  3. Yes, high rise condos should be built all along the California coast, including Newport Beach, Long Beach and Los Angeles.

    My point is that in every American city there are exclusive neighborhoods zoned single-family detached, in which many a developer would love to build high rise condos.

    If decriminalized, the additional supply of housing would lower the cost of housing for everybody.

    Developers do not want to put up condos in the ghetto, they want to put up condos in plush neighborhoods, but are restrained by government regulation, usually supported by homeowners groups.

    People in San Francisco and New York evidently feel they have some quality of life to protect by limiting housing, as do people who live in single-family detached neighborhoods.

    My point of view is that the more housing that is built the better.