Increasing Marginal Utility

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Explaining Obama’s Argument

I don’t like getting involved with covering partisan politics on this blog, notwithstanding my out-of-character fascination with the Republican primaries several months ago. But I do want to comment on You Didn’t Build That because little annoys me more than libertarians running around making ignorant arguments.

First, of all, what did Obama even mean? Some on the left are arguing people are just taking Obama out of context or misunderstanding him – that Obama just meant building the road. First of all, saying so also implies that Obama was making a grammatical mistake. Occam’s razor sets my priors against that. Furthermore, Elizabeth Warren has made the same argument before. So has Cass Sunstein. Both of them probably have more intellectual clout than Obama on the left and that is saying a lot. And I just read Robert Frank making the argument in The Darwin Economy that the argument is true for what felt like an entire chapter, and he acted incredulous at the notion it isn’t true.

So I act incredulous at the notion that it wasn’t what Obama meant. People arguing otherwise are just inventing things that help him appeal more to the median voter.

But here’s the thing – mainstream economics would say he is right.

There are many entrepreneurial people all over the third world. Here is a libertarian economist talking about how awesome they are. They are probably dirt poor if they live in the third world. But if you drop these people in the first world, their incomes will immediately dramatically rise. So there’s the question as to why this is the case. Three “work” from the standpoint of hardcore free markets. The other doesn’t.

  1. Their incomes may rise just because they are in the presence of people in the first world. Not because of trickle down economics; because of specialization and trade.
  2. They may benefit from living in a country where the legal system functions and the government doesn’t focus all its energies on stealing from citizens.
  3. Positive externalities from culture/informal institutions.
  4. Public goods.

Infrastructure may be incredibly important for economic development. Libertarians would deny it is a public good. I want to agree. I struggle to come up with a good reason as to why it is both non-rival and non-excludable. And if it is a natural monopoly, theoretically at most the government should just regulate it, not nationalize it. But the empirical record when economists have looked at it rigorously keeps telling them that investments in infrastructure are important. So they advocate it.

I advocate privatizing infrastructure. More to the point, I advocate seeing what would happen if we were to privatize it in a first world country. But it’s just wrong to say that “economics” tells us Obama’s comment was incorrect.

You put an entrepreneurial dude in Peru and he sets up a thriving business, making $15,000 per year. You put him in the United States, and he makes $150,000. What explains the $135,000? If the answer is public goods, that means the government built that.

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One response to “Explaining Obama’s Argument

  1. Daniel Kuehn July 20, 2012 at 11:16 am

    Ya this was Warren’s argument. I don’t like all the textual exegesis.

    It\’s not even that I’m convince they’re wrong. They may be right. But even if that’s all he meant by ”that”, the message of the whole speech was still Warren’s argument.

    And it’s right.

    And continuing on with the pretense that people care what I think, I’ve never liked talk of ”public goods” and ”private goods” anyway because it veers the discussion in such a dichotomous direction that’s really inappropriate. It’s an externality issue, not a public/private goods issue. Of course markets would build roads and provide education. It would do lots of both I’m sure. And it would do it well. But would it do enough? And would provision be burdened by the ability to pay? That’s the important question, so the externality framing is better IMO than the public goods framing.

    The one nice thing that the public goods discussion brought us was the distinction between rivalry and excludability. That\’s harder to talk about when you strictly reference externalities.

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