WEHT free market pessimism?

Where are there so few free market pessimists? A post by David Henderson raises this question. Responding to Noah's claim that fossil fuels will run out, he says:

As the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources.

This is a longstanding and common position among supporters of the free market - that the market will help us overcome, or sidestep, energy shortages. And it has been correct for many years. As David says:

Every single time someone has predicted that they we will run out of oil, that person has been wrong. What reason is there to think that prediction today will be right?

However, this logic isn't watertight. The fact that things have happened in the past does not guarantee they'll continue to happen. As Bertrand Russell famously said:

The man who has fed the chicken every day throughout its life at last wrings its neck instead, showing that more refined views as to the uniformity of nature would have been useful to the chicken.

Which brings me to my question. Although David's optimism is about humankind's ability to overcome resource constraints is often associated with free market ideas, there is no necessary reason why this should be. One can, coherently, argue that whilst free markets are necessary to bring forth innovation, they are not sufficient. In fact, it's quite possible that it is now harder to make innovations than it was before, simply because we've already discovered the easy ideas.

Such pessimism is quite compatible with a belief in free markets. One could argue that, if economic growth is harder to achieve, then allocational efficiency becomes more important; if we can't produce more from existing resources, we should at least ensure those resources are put to best possible use. And a lack of growth makes it more important to incentivize entrepreneurs to exploit the few ideas there are.

It's entirely logical to believe both in free markets and in the view that diminishing returns will eventually overcome technical progress. This is especially true given that the pace and direction of technical change is largely unpredictable. In fact, it was pretty much what David Ricardo believed. And if it was good enough for him, it'd good enough for us.

Hence my question. Given that free market pessimism seems such a tenable view, why, AFAIK, is it so rare? Why does optimism about human potential seem to be more correlated with a belief in free markets than I'd expect?

I was going to suggest that free marketeers tend to have a more optimistic disposition than their critics; a lot of egalitarianism is founded upon Rawls's maximin principle, which is an ultra-pessimistic decision rule. But this seems inconsistent with research which shows that  political conservatives (pdf) tend to be more risk-averse than lefties.

You could retrieve my hypothesis by arguing that a belief in free markets isn't politically conservative - but I fear you might struggle; the two are closely associated in the US at least.

Which leaves me with a genuine question: why has free market pessimism almost disappeared, despite being so reasonable? My more partisan readers might say it's because the free market right has become anti-scientific. Even if there's some truth in this, I'm not sure it's a complete explanation. For me, then, there's a puzzle here - and, given the virtue of cognitive diversity, something to be regretted.   

Comments

[Matt Moore]

Optimism and pessimism are relative, and correlated with our desire to see more or less government.

Those on the Left would subconsciously like for catastrophic global warming / inequality-induced rioting / the Road to Wigan Pier to be imminent, because it justifies what they would like anyway - greater state control of activity.

Similarly, a certain type of Rightist is supremely pessimistic about Western culture's ability to automatically sustain itself in the face of terrorism without some kind of military adventurism, because that is what they would like anyway - some sort of glorious state.

And classical liberals / libertarians find ways to be optimistic about everything. Because really, the only reasons for state control require something to be afraid of.

So we believe what gives basis to our bias.

[Steven Clarke]

"You could retrieve my hypothesis by arguing that a belief in free markets isn't politically conservative - but I fear you might struggle; the two are closely associated in the US at least."

Let me struggle.

Hayek wrote "Why I Not A Conservative" - saying free markets cause change without some higher, wiser power ensuring such change is orderly.

Marx criticised capitalism for its disruptive characteristics - all that is solid melts into air.

And I suspect many Torie voters are vehemently against a free market in housebuilding, prostitution or drugs, for instance.

[Luis Enrique]

are secular stagnationists free market pessimists?

[Dave Timoney]

It's important to remember that the Austrian school developed in an era of widespread political and cultural pessimism, between the defeat by Prussia in 1866 and the calamity of World War One. In other words, the intellectual roots of modern free market jihad lie in social pessimism.

The sort of Burkean or Oakeshottean pessimism you are looking for springs from a belief that the "natural order" is worth preserving. The Austrian school lost this belief, lapsing into cynicism (self-interest as the motor of economic life, democracy inevitably looting the public treasury etc). It's just a different type opf pessimism.

Re "it's quite possible that it is now harder to make innovations than it was before, simply because we've already discovered the easy ideas". This is a fallacy. Innovation is cumulative - if I want to invent a new software program, I don't first have to invent electric power and computers.

Innovation also tends to branch - i.e. a primary invention gives rise to multiple secondary inventions, producing geometric growth. It is also amplified by population, education and communication. In other words, we are still growing the number of inventors, maximising their exploitation and making collaboration easier.

We're not short of new ideas, rather we're facing a surfeit of them, which is leading to commodity deflation and reducing the returns to capital.

[guthrie]

The cod fisheries off Newfoundland and such would like a word with everyone.

[Deviation From the Mean]

FATE said,

"it's quite possible that it is now harder to make innovations than it was before, simply because we've already discovered the easy ideas". This is a fallacy."

This is not a fallacy but a perfectly logical assumption, even when we assume innovation is cumulative. And especially if we add in the qualifier,

"it's quite possible that it is now harder to make innovations than it was before [for any given area]"

You used the example of a software program but made the wrong comparison. Instead of saying,

"if I want to invent a new software program, I don't first have to invent electric power and computers."

It would be more precise to say,

"if I want to invent a new software program, I don't first have to invent the language it is written in, and even if I did I can take the concepts from the other languages and make the job a lot easier."

Fate said,

"Innovation also tends to branch - i.e. a primary invention gives rise to multiple secondary inventions, producing geometric growth."

This misses out the opportunity cost of not directing innovation straight to the secondary area. For example if the secondary became the primary the innovation in the secondary may become more advanced than it would have been if it were a secondary invention.

And moreover it doesn't invalidate the idea that "it's quite possible that it is now harder to make innovations than it was before, simply because we've already discovered the easy ideas"

It should also be noted that not every new product is a new idea or innovation but simply the repackaging of an old idea! This is a problem with capitalism, there is a motive to sell something as if it was something else. There is a tendency in capitalism for salesmen to exaggerate the wonder of their new 'innovation' So alongside innovation we get innovation bullshit.

So while, as you say, "we are still growing the number of inventors, maximising their exploitation and making collaboration easier" it should be noted that we are also growing the number of bullshitters, and the bullshitters will grow in relation to the diminishing returns!

[rogerh]

Apart from comet wipe-outs and so on the problems you allude to are slow-burn - at least 10 election cycles away. So doom-sayers can easily be ignored and probably should be ignored at least until some credible analyses can be done. A good political maxim is that the wheels will fall off most of the doom-sayers wagons long before they reach us. But over say 100 years investment opportunities may get harder to find - by then pensions may well be a distant memory.

A canny politician will be buying houses on high ground - the Cotswolds is nice and easily defended. A developed narrative of 'silly billies' will palm off the rest.

[Icarus Green]

Hypothetically, If we were to put on a spreadsheet all the obvious factors that lead to innovation and an expansion of the tech frontier (in my subjective prioritisation):

1. IQs of the populace
2. Education levels/Human Capital
3. Agglomeration/Clustering
4. Information availability & communication tech
5 Government financing of fundamental research
6. Government physical and legal infrastructure
7. Small business finance
8. Corporate Investment

and so on, I think we'd realise most of these variables have improved. Unless youre a multidisciplinary scientist of some sort, gauging the technical difficulty (nevermind the financial or human difficulty) of creating future innovations is a fools errand. I imagine after they finished designing a nuclear reactor there were some that thought there wasnt much further to go. The wonderful thing about science and mankind in general is that we always find ways to do things that we never thought possible. Our only limit is our imagination! (and certain laws of physics).

[Worstall]

My optimism about resources comes from

a) Knowing something about mineral and metals

and

b) Having gone and looked at the numbers.

Despite all the howling about how we're about to run out of certain minerals it just ain't true. People get horribly confused between what a mineral reserve is, a mineral resource and the ultimate availability of those things.

Thus, at least in that area that I actually know the details of I'm not just being optimistic or pessimistic, I'm being informed.

And that attitude flows over into other areas. I assume people howling about other resources are making the same mistake. Perhaps I'm right and perhaps I'm wrong in that projection but that's where it does come from.

[Dave Timoney]

@DFTM, a fallacy *is* a logical assumption, but one that is incomplete or based on a false premise. For example, the lump of labour theory is internally logical, but it also happens to be wrong.

Similarly, the belief that innovations can be categorised as "easy" or "hard", giving rise to the notion that we have worked our way through the former and are now struggling with the latter, is based on the fales premise that innovations have a fixed value on an eternal scale of difficulty. The terms are wholly subjective - it's a matter of perspective.

I'm not clear what point you're making with the programming language example, as you (rightly) note that an innovation can be "easier" if it builds on what has gone before. Are you agreeing with me or just questioning the use of the word "fallacy"?

I'm also lost by your cunning plan to skip a primary innovation and focus on the secondary. You can't have one without the other - these are relative terms.

I agree that not every new product is truly innovative, and may be nothing more than repackaging, but this is actually a feature of capitalism, not a bug. It's about thorough exploitation (or recycling, if you prefer). Yes, this produces a surfeit of bullshit, but bullshit is an integral part of market discovery (i.e. figuring out what sort of price consumers will tolerate for all-new snakeoil).

Over time, bullshit will grow both absolutely and proportionately, but that reflects a growth in aggregate global wealth and disposable incomes, not diminishing returns. There is a structural reason why Martin Sorrell always looks so smug.

[mutant_dog]

Labels like "conservative" and "leftie" are useless in this matter, as each label describes a Big Tent, with many wings, levels, entries and exits. Yes ?

That said, why would the former be more optimistic that the latter on innovative solutions to whichever problem is under discussion ? I propose a solution, noting up front I am an American. (As we say, YMMV.)

It seems like the right-v-left issue is one of freedom from control versus imposition OF control. Thus, on the Right, technological optimism is forced, to enable the argument for freedom to innovate. It is not heartfelt; that portion of the Right movement that is literally conservative should make that obvious. So I do not think that those of us on the Right necessarily love innovation; I think we insist on our right to innovate, as we see fit, without artificial constraint.

btw, kudos to @FATE and @DTFM on their language skills - most entertaining.

[dilbert dogbert]

"Those on the Left would subconsciously like for catastrophic global warming / inequality-induced rioting / the Road to Wigan Pier to be imminent, because it justifies what they would like anyway - greater state control of activity."

As some say; If you don't link you stink.

[tew]

Re: "...arguing that a belief in free markets isn't politically conservative - but I fear you might struggle; the two are closely associated in the US at least."

"Conservatives" are generally predisposed to authority and the status quo. They don't like change. This is the same everywhere. The U.S. is and has been quite free market. Since that is the current norm, conservatives cling to it and hold it up as the ideal. (This combines with American individualism, so that U.S. conservatism does indeed align particularly strongly with a free market, low-government model.)

What we refer to today as "liberals" or "progressives" have a predisposition towards change and newness. They also tend to look critically at authority and believe that they know better. Thus, they will be critical of any current system. Liberal fashion itself changes as the current system changes. That is why no matter how much "progress" is made, liberals/progressives retain the same amount of intense displeasure with the current situation, spite of the conservatives, and passion for the current fashionable change (struggle). In the U.S., free market economics is the norm and thus they think it should be changed.

Everything else is just "the marshaling of hatreds".

[Deviation From the Mean]

FATE-

For me you are too general when discussing innovation. Innovation is like a family tree, with different branches; some innovation terminates and is never seen again. Some innovations are in a completely different part of the family tree and are hardly related, if at all. You assume every innovation is connected and you are too general, that is what I claim
.
Therefore when I read the article and saw the following:

"it's quite possible that it is now harder to make innovations than it was before, simply because we've already discovered the easy ideas"

I didn’t read it as a generalised rule but a tendency that could be applied to the different branches. I accept that the author may not have meant it this way but I was simply ‘correcting’ the concept. Therefore I think there is a tendency within any given branch of innovation that you get the cycle of diminishing returns on innovation with the corollary of an increase in innovation bullshit (which I made clear was a feature of capitalism imo).

But I think it is also a reasonable proposition to say that the rate of return of innovation will slow as science proceeds. The key is knowing when that burst of knowledge slows to a natural tendency. While this is unknowable I think the trend toward this is inevitable. I accept it isn’t an easy argument to make because we are living through the most dynamic pahse in human history. But that must slow at some point, even under a system as dynamic as capitalism.

So I think it is wrong to write something off as a fallacy even if it seems to contradict the facts.

It should also be noted that whether innovation is cumulative or not it has no bearing on this argument.

Incidentally I work in advanced business development, mainly with IBM applications, so I see innovation bullshit everywhere! Maybe I need to get out more!