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Fighting For Entry

January 14, 2010

Arnold Kling posts “a grand unified theory” of his bitterness:

I want to propose a new definition of market failure. For me, market failure exists to the extent that innovation is blocked by incumbents. If innovators can succeed by out-competing incumbents, then the market is working. If incumbents have a self-reinforcing system that keeps out innovators, then we have market failure.

Yes!  This is closely related to my “barrier to entry / high cost of switching” story for why government is bad, and Arnold brilliantly points out how it applies to many other industries as well:

Suppose that we have a group that wants enormous political power. The group rewards people who justify its power by calling them “experts.” It punishes those who question its power by dismissing them as “hacks.” If you want money and status, you want to be labeled as an expert. In order to be labeled as an expert, you produce analysis that justifies concentrated political power for the elite group.

This process is self-reinforcing. It is like the Harvard-Goldman filter. That filter says that only “reliable” people are allowed to be bank CEO’s or policymakers. A requirement for being “reliable” is sharing the views of other “reliable” people as to what constitutes reliability.

It is like the tenure system in academia. Who gets tenure? Above all, it is people who support the existing tenure system.

Note that this situation can only become problematic when the incumbents choose who will take over power from them.  The great thing about the market is that if firms can overcome whatever barriers to entry there are, and if consumer switching costs are reasonably low, it’s the consumers that end up choosing.  Hence, customer-focused innovation can be rewarded.  But when power transfers or reputation transfers are determined by incumbents, they reward stability and a maintenance of the moat.

A good question to ask about any industry is: who chooses the next generation of winners?  Google and Facebook succeeded because tons of people used their services.  The customers chose, and those companies are customer-focused.  Ben Bernanke succeeded in wielding lots of power because politicians and bankers liked him.  It should not be surprising that he turned out to be politician and banker focused.

To pound on my structural drum, this viewpoint has the same implications for the fields Arnold mentions as it does for government: structural interventions rather than folk acvitism.  Our folk intuition is to blame people – to think the problem is bad people controlling a field.  But:

Ben Bernanke is one of the most decent people I have ever met. Yet he is part of the moral rot. As Scott Sumner has pointed out ad nauseum, most economic theory favors rules over discretion in monetary policy. Yet Bernanke’s ad hoc, discretionary actions and departure from rules are what made him the Person of the Year, everybody’s hero.

We need to fix incentives, not find the right people.  The incentives will find the right people for us – and reward them for doing the right thing.  Currently, the incumbents find the wrong people and reward them for doing the wrong thing.

8 Comments
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  5. flowidealism permalink*
    January 15, 2010 4:02 am

    Great post, Patri, of course I agree 100%.

    I always wonder why other people don’t see this fact, which seems glaringly clear to anyone who has thought about it. Moreover the negative impact of this is immense; I think even fewer people have a sense of the scale of damage caused by this process of circular validation that results in the social legitimacy of legally enforced restrictions on entry.

    Perhaps there are very few of us who are:

    1. Intellectually curious.
    2. Intellectually informed in the relevant ways.
    3. Not already invested in/corrupted by the existing institutional systems.

    And even fewer of us who has some imaginative sense that allows us to imagine what could be in the absence of such restrictions.

    • Nicolas1776 permalink
      January 16, 2010 11:29 pm

      Incentives matter! 🙂 There is no incentive to even think about the problem, much less diagnose it correctly or attempt anything to fix it.

      This is not to say that there is no payoff to individuals for fixing the system.. just that there is no practically attainable one that people can intuitively see, hence the futility of spending considerable resources on it.

      One of the core strengths of seasteading is that it offers to render the payout practically attainable, and therefore fixes this incentive system, to have people think about the root of political problems and the root of their solutions.

      Seasteading has already achieved a considerable victory here and it is only a matter of time before more disgruntled idealists on all sides of the political spectrum embrace it, and more people indirectly come to realize that incentives matter, as they all begin to draft their own fantasy societies in their heads. The key to getting people thinking about it is proving that it is attainable in the first place. Once more people realize that they have a genuine interest in thinking about political structures and outcomes, they will start to do so instead of defaulting to perceived conventional wisdom.. and seasteading will catch on like wildfire.

      That incentives matter is generally intuitively accepted. But because it is also intuitively accepted that the system itself cannot change, an incentive forms not to consider theoretical alternatives and instead focus on working within the system, if at all.
      Being aware of seasteading as a viable option removes this incentive and paves the way for everything else.

      Because with seasteading the structures have to be defined from scratch with few limitations, one is incentivized to start considering what outcomes they will naturally favor and why. This is a self reinforcing process where the mere theoretical possibility of seasteading accelerates its actual feasibility and eventual widespread realization.

    • January 18, 2010 12:17 am

      It always amazes me how few people get it, but we’re going to find all of them and build an awesome community to actually change things.

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