Josef Šíma, President of CEVRO Institute, talks with professor Michael Munger of Duke University about the economics and politics of unicorns, sharing economy, truly voluntary exchange and the PPE approach which combines rigorous policy analysis with an acceptance of ethical obligations of charity.

Professor Munger, one of your great example which makes us think realisticaly about political processes and policy-making is your unicorn analogy. Could you eplain in what way unicorns help us understand politics?

The “Problem of the Unicorn” is actually generic. Pro-market people, socialists, and people in-between all have policies that they can think, and systems they can imagine where those policies work. There are two famous examples of economists from across the ideological spectrum lamenting this problem.

Ludwig von Mises: Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world … They wish to be free of a universe of whose order they do not approve. (Epistemlogical Problems of Economics)

Arthur C. Pigou: In any industry, where there is reason to believe that the free play of self-interest will cause an amount of resources to be invested different from the amount that is required in the best interest of the national dividend, there is a prima facie case for public intervention. The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously. It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine. 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 corruption by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole. This objection to public intervention in industry applies both to intervention through control of private companies and to intervention through direct public operation. (The Economics of Welfare).

The point is that we have a notion of what policy can do. When the reality is different, we persist in the imagining rather than updating our models. We prefer the unicorns we can imagine. This often results in the “we should do something fallacy”:

X is a problem. We conclude we should “do something.”

Y is something.

Therefore, we conclude we should do Y.

But if someone objects that Y won’t solve X, the unicorn-believer becomes angry. “Would you have us do NOTHING! You just hate [people who suffer from X].

So, suppose people think poverty is a problem. So they propose rent ceilings, controls on the prices of flats. But rent controls make the problem of affordable housing much worse. But when you object, the supporter of rent controls says, “You just hate poor people! We have to do something!”

The study of PPE (Philosophy, Politics, Economics) can help us deal with this problem, because it combines rigorous policy analysis with an acceptance of ethical obligations of charity.

Could you give us some more real-life examples of economists endorsing unicorns?

In the U.S., the insistence on large-scale “stimulus” spending, even though there was no evidence it had any benefits.

The reliance on foreign aid focused on large transfers of money to corrupt leaders and large construction projects, when what people really need is plastic buckets and clean drinking water. William Easterly has been especially effective in pointing out this kind of unicorn. For example, Microsoft magnate Bill Gates paid millions for mosquito nets, but it turned out that people used them to go fishing, because that was their greater need. It didn’t matter if they were safe from mosquitoes if they starved.

Last question about unicorns. Do you have any suggestion, how to get rid of them when solving social problems, so that they can fourish only in the ficticious world of legends and fairytales where they belong.

Well, the problem is simplistic models, and the intentional discounting of unintended consequence and the complexity of human behavior. The school with the best understanding of the better approach is Austrian economics. Allowing people to have the flexibility to design local and voluntary solutions, rather than depending on state action, is the answer. States have too little information, the wrong incentives, and an inability to respond quickly.

Sharing economy is changing many economic sectors around the world. Is that a major innovation which will have lasting effects on the way we understand economic processes and how goods and services are provided, or is it just a fashionable thing, a curiosity enabled by modern technology which will go away without long-term impacts on market structures?

For the first time in human history, it is now possible for entrepreneurs to make money by selling reductions in transactions costs. Until now, entrepreneurs had to produce something new, or better, or cheaper. But now the combination of internet connections, smart phones, and software applications makes it possible just to sell access to existing products that are “in the wrong place.” It is now possible for someone in the Czech Republic to make a living writing software that allows me, in North Carolina, to find a place to buy pickles or lawn service.

The idea of sharing was always very popular among the leftist group and environmental activits. Services like Uber and airbnb are at the same time celebrated by free-marketeers as a great way to show the operation of decentralized systems. Is it likely that we could see a “right-left” consensus on the – otherwise incompatible – understanding of competititon?

It was a mistake for market supporters to concede the sharing idea to the left. Markets are ALL ABOUT sharing! Any salesmen must make sure his customers are better off. The only way to succeed is to create value for customers. Then seller and customer “share” in the surplus created by the transfer of product or service for payment. All are better off.

The new “sharing economy” is simply an extension of this idea. Rather than everyone owning a car, and a lawnmower, and power tools, we can all share by renting these products. We will need far fewer cars and tools, because they will always be in use. Now, they sit around most of the time, and we have to pay to store them. We will have much less need for parking, closets, and garages to store a bunch of junk we hardly ever use.

Whould you tell us about your current research projects and plan for the future?

My current book is Tomorrow 3.0, which is summarized here:http://www.iea.org.uk/blog/tomorrow-30

I am also interested, in the longer term, in the problem of exchange. When is exchange truly voluntary? The reason this is important is that in a truly voluntary exchange, both parties are better off. Then the implication is that the state should never regulate such transactions.

But then the objection is that many exchanges are not “truly” voluntary. So I developed a new analytical concept: “Euvoluntary exchange.” The Greek prefix “eu” means well or truly. I expect to work on this concept for the next decade!

The interview was originally published at: www.citime.cz