Tyler Cowen: belief

Transcript context

…Actually, it really is an argument that to understand how labor markets work — or any market for that matter, because we look at the labor market, but we point out, it’s through product markets — one has to take on board the fact that there’s imperfect information, and in that particular case, imperfect monitoring of what workers are doing, and that you have to have an incentive to make sure that they work well. One aspect of the incentive is that there have to be consequences when they don’t work well. One of the theses of that paper is that the standard articulation of what free markets are like are just wrong. For instance, the standard view was that demand for labor was equal to the supply of labor; there’s no unemployment. What we point out is, if you couldn’t monitor labor at every moment of time, workers would have an incentive to shirk. The worst that could happen to them is they would be fired. But if they were fired, with no unemployment, they’d be hired the next moment, so there’d be no incentive to work. So, part of that equilibrium, there had to be some unemployment to induce people not to shirk. Now, there are many other mechanisms, and later work would try to talk about — there are other aspects of what was called the efficiency wage model, where you have to pay enough to induce people to produce and to work hard. There are other aspects of the labor market as an institution where the rewards are done over the long term. I think I maybe overemphasized the role of unemployment as an incentive device, but the critique of the standard model, I think, is still there, and the importance of taking a broader view of the labor market is still there. From 1986 until about 1990, you wrote a series of papers with[Raj Kumar] Sah on information architectures, hierarchies versus polyarchies, Type-I versus Type-II errors. Then the 1990s come, and you spend, I think, about seven years working in different roles in Washington, D. C. How did that cause you to revise what you had done with Sah? [laughs] Well, I had never been in a real hierarchy at the time I wrote those papers. Those papers were asking the question, what are the relative merits in decision-making when you have a hierarchy where a decision has to be approved by one person after another, versus what we often think of as the merit of a decentralized economy where you have many, many, many different decision-makers, and you let each of them take their chance. Underneath this was the idea that all humans are fallible. There are going to be some cases of disapproving good projects and some cases of approving bad projects. How do you balance the two? And how do different systems strain out bad projects without straining out good projects? When I came to live in a world of hierarchy, which was what I saw in Washington, I came to appreciate why, in some circumstances, you had that hierarchy. But I think I came to appreciate even more the virtues of decentralization, of what I call polyarchy. I guess I became more of a critic of hierarchy. I saw too many cases where there was too much fallibility built in, and too many good ideas got screened out by the hierarchy, and hierarchies when the guys at the top are not good decision-makers are particularly problematic.…

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