DRI-219 for week of 11-23-14: A Columnist’s Dawning Recognition of Deadly Auto-Safety Regulation

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A Columnist’s Dawning Recognition of Deadly Auto-Safety Regulation

We are familiar with investigative reports by reporters in print and broadcast media and, in recent years, online. We view these as the mechanism for regulating institutions not subject to the constraints of the marketplace. Government is chief among these.

This routine has accustomed us to casting the news media in the role of cynical watchdog, always looking for wrongdoing and too prone to suspect the motives of those it covers. Of course, we may suspect the press of pre-existing bias – in favor of Democrats, for instance. But for the most part, we believe that their interests are served by finding scandal, wrongdoing and malfeasance, because these things are news.

The possibility that the press itself may be naïve and complacent is the last one we consider. It should not be overlooked.

Air Bag Safety 

Wall Street Journal columnist Holman Jenkins has written a series of columns about auto safety and regulation. Many of them followed the regulatory travails of Toyota, which endured a prolonged crucifixion when its vehicles were ostensibly subject to a problem of “unintended acceleration.” Although it was all too clear that the problem was caused by drivers unwittingly depressing the accelerator instead of the brake pedal, the company was beset by the fable that a bug in the car’s computer code was causing cars to accelerate when they should be slowing. Despite the conspicuous lack of scientific evidence for this hypothesis – not surprising in view of its impossibility – Toyota eventually was forced to pay out hundreds of millions of dollars in settlement money to make the issue go away.

Having set a tone of skepticism toward regulators, Jenkins turned next to the recent disclosure by Takata that their air bags have displayed defects. Toyota and Honda have recalled over 8 million vehicles to replace the air bags. The defect (apparently caused by moisture entering the ammonium nitrate air filter of the air bag) breaks down the explosive tablets in the air bags, causing them to burn quicker and explode more violently than normal. In turn, this shreds the metal housing surrounding the tablets and sends a shower of shrapnel into the driver and front-seat passenger (if any).

Jenkins noted that the demand by federal automobile regulators that the companies recall millions more vehicles is suspiciously timed to coincide with the end of hearings on the response by Japanese automakers to the finding of defective air bags. He reserved his strongest note of skepticism, though, for the use of air bags as safety devices.

“The faulty Takata air bags are connected to five deaths in 13 years, which is a tiny fraction of the deaths known to be caused by air bags working as designed [emphasis added]. When the Takata mess is cleaned up, we’ll still be left with a highly problematic safety technology.”

What’s this? Air bags themselves cause automobile-occupant deaths? They’re supposed to prevent deaths, not cause them. This is surely news to the general public, which is why Jenkins continues with a brief chronology of air bags’ journey from industrial infancy to ubiquity. “Washington began pushing automakers to install air bags in the 1980s, and ever since Washington has been responsible for research that confirms that air bags save hundreds of lives a year. These studies, though, credit air bags with saving people who were also wearing seat belts, when considerable evidence indicates seat belts alone do the job.”

“These studies also assume that deaths in collisions where air bags deployed are always attributable to the collision, never [to] the air bag.”

Jenkins does not mention that the push for air bags coincides with a federal push for mandatory wearing of seat belts. The first state law that required the wearing of a seat belt meeting federal specifications – essentially, a three-point seat belt buckling over the lap but also including a shoulder restraint – was passed in 1983. States received seven-figure federal bounties for passing a mandatory seat-belt law and achieving an estimated compliance beyond a specified rate.

“A 2005 study by Mary C. Mayer and Tremika Finney published by the American Statistical Association tried to correct for these errors and found that the clearest effect of air bags was an increased risk of death for unbelted occupants in low-speed crashes. Likewise, a 2002 study of 51,000 fatal accidents by University of Washington epidemiologists found that air bags (unlike seat belts) contributed little to crash survivability.”

“[Thus] air bags began as simple bombs buried in the dashboard designed to protect the typical non-seat belt wearing accident victim – the typical unbelted victim being a 170-pound teenage male. In 1997 came the reckoning: Air bags designed to meet the government’s criteria were shown to be responsible for the deaths of dozens of children and small adults in otherwise survivable accidents.”

This is the key point in Jenkins’ chronology, the point at which the reader’s eyebrows shoot up and he shakes his head in disbelief. Dozens of deaths? Adults and children? How did I miss the public furor over this? After all, when one or two people die owing to an automobile defect that a company knew about or should have known about, all hell breaks loose. In fact, the history of government suppression of unfavorable air-bag performance goes back decades. But Jenkins makes no mention of this; instead, he moves on.

“Since then, air bags have become ‘smarter,’ with computers modulating their deployment depending on type of crash, passenger characteristics and whether seat belts are being worn. Undoubtedly the technology has improved but still debatable is whether the benefits outweigh the risks and costs. Air bags remain one of the biggest reasons for vehicle recalls – and no wonder, given that these devices, which are dangerous to those who manufacture them and to those who repair vehicles, are expected to go years without maintenance or testing and then work perfectly.”

“Because, in the minds of the public, not to mention in the slow-motion videos on the evening news, air bags are seen as gentle, billowy clouds of perfect safety, yet another problem is the potential encouragement they give motorists to drive more aggressively or forgo the hassle of buckling up.” Now Jenkins has driven himself and his readers into water over their heads and is stalled. His column will drown unless it is rescued promptly. He has made a strong case that air bags are inherently unsafe, but is now suggesting something else – a different source of harm from their use. The fatal stretch of water was entered with the words “…yet another problem is the potential encouragement they [air bags] give motorists to drive more aggressively or forgo the hassle of buckling up.” This requires the services of a professional economist.

The Economic Principle of “Risk Compensation”

 

People tend to increase their indulgence in risky activities when they perceive that the safety of those activities has been enhanced. Risk should be treated just like any other consumption good – when the price of risk goes down, we should expect people to purchase more of it.

The first of the previous two sentences would meet with the approval of most people. The second would not. Yet from the economist’s perspective they might be interpreted as saying the same thing. A space shuttle is currently being readied for commercial use by tourists; wouldn’t we expect tourists to be more enthusiastic about it when improvements in launch and flight safety reduce the risk of death and serious injury for passengers? Still, we would expect there to be an appreciable risk of space travel for the indefinite future, wouldn’t we? When improvements in contraception result in better prophylactics, don’t we expect people to have sex more often, despite the fact that they still run a risk of contracting a sexually transmitted disease?

In 1975, economist Sam Peltzman published a seminal article in the Journal of Political Economy. He analyzed the effects of a series of government-mandated safety devices introduced beginning in the mid-1960s. His analysis suggested that the net effect on safety was approximately zero. Peltzman offered two explanations for this surprising result, the most plausible of which was that requiring the use of seat belts by drivers causes some people to take more driving risk than they would have if they had been driving beltless. This additional driving risk produced more accidents. While the increased use of safety devices tended to produce fewer injuries and fatalities among automobile occupants, the increased number of accidents also implicated non-automobile occupants such as pedestrians, motorcyclists and bicyclists. These additional injuries and fatalities tended to offset the injuries and fatalities saved by the use of seat belts, so that the comparative end result in driving statistics such as “fatalities per million miles driven” was a wash.

Over the succeeding forty years, this kind of outcome became proverbial throughout the social sciences, not just economics. In 2006, Smithsonian Magazine published an article summarizing the powerful effect that Peltzman’s work has had on the world. His ideas are grouped under the heading of “risk compensation,” an evocative term that implies that we satisfy our appetite for risk by compensating for added safety by “purchasing” more risk.  The principle has been observed in nations around the world, among adults and children, in activities ranging from driving to playground behavior to sports. Famous economist N. Gregory Mankiw, former Chairman of the President’s Council of Economic Advisors under President George W. Bush, blogged about “Sam Peltzman, who taught us all that mandatory seat-belt laws cause drivers to drive more recklessly.” Mankiw dubbed the relevant principle the “Peltzman Effect,” making Peltzman one of a select group to have a scientific principle named after him.

Despite the scientific status of risk compensation and the Peltzman Effect, Holman Jenkins shows no sign of having heard of it. He speaks of the “potential encouragement” offered by air bags to more aggressive driving by motorists as if he had just exhumed a Stone Age cave and stumbled upon a rectangular version of the wheel therein. And he applies the principle to air bags with no apparent awareness of its equal applicability to seat belts.

The Perils of Mandatory Safety

 

“By now,” Jenkins laments, “those of a certain age remember that Detroit was the villain that opposed putting explosive devices in their vehicles, plumping instead for mandatory seat-belt laws (which, amazingly, certain safety groups opposed).” No economist is surprised that Detroit opposed the idea of being forced to increase the cost of production by providing a safety benefit that (a) consumers didn’t want and (b) didn’t work, which would (c) expose them to endless litigation as well as threaten them personally. Seat belts were several orders of magnitude less expensive and the loss of freedom to consumers did not represent a business loss to automobile companies.

Jenkins’ failure to understand the opposition to mandatory seat-belt laws is astonishing, though, since it is based on the very same principle that he just invoked to oppose air bags. There is a lot to be said for seat belts when provided as a voluntary option for consumers. There is everything wrong with mandatory seat-belt laws because they encourage (force?) risk-loving drivers to obey the law by buckling up, then to fulfill their love of risk by driving more aggressively – and to do this as a substitute for going unbuckled in the first place. An unbuckled risk-lover is a driver who is himself bearing the risk he chooses to run. A buckled-up aggressive driver is a risk lover who is imposing the risk he chooses to run on other drivers – and pedestrians and cyclists – who may be more risk averse. This is bad theoretically because it is economically inefficient. Economic inefficiency is bad in the practical sense because it misaligns cost and benefit. In this case, it allows risk lovers to benefit from the risks they run but imposes some of the costs on other people who don’t benefit because they are risk-averse individuals who didn’t want to run those risks in the first place.

The practical side of all this has been seen is various ways. New Hampshire is the only state that hasn’t passed a mandatory seat-belt law in the interval since the mid-1980s. It has poorer-than-average weather and topography, so we would expect to it to have worse-than-average traffic-fatality results, all other things equal. Since traffic-safety expert predicted that mandatory seat-belt laws would usher in traffic-safety nirvana by reducing fatalities hugely, we would expect to find that New Hampshire highways had become a veritable slaughterhouse – if mandatory seat belts were the predicted panacea, that is.

Instead, New Hampshire traffic statistics have improved to near the top of the national rankings despite its singular lack of a mandatory seat-belt law. New Hampshire should be the poster-state for mandatory seat-belt laws; instead, it is the smoking gun that points to their guilt. This fact has gone completely unremarked in the national news media, which is probably why Holman Jenkins hasn’t noticed it.

But there is no excuse for Jenkins’ failure to notice the slowing improvement in nationwide traffic statistics that occurred along with the installation of air bags and mandatory seat-belt laws. The rate of fatalities per million vehicle miles driven has been falling since the 1930s and the growth of modern automobiles, highways, safety methods, signage and improved quality control in production and repair. The federal highway safety bureaucracy makes a point of announcing the yearly fatality data because it usually represents a recent low point. What they fail to announce is the slowing rate of decline. Indeed, recently fatalities have actually risen in spite of the poor economy and less auto travel.

Jenkins apparently considers himself daring for suggesting that air bags are counterproductive and should be eliminated. He cites the myriad of safety innovations that have come on line in the last few years: automatic lane-violation warning devices, automatic skid-correction devices, automatic collision avoidance and braking sensors, automatic stabilizers and design features that direct crash energy away from passengers. “One imponderable is how much faster progress might have been without the bureaucracy’s forced diversion of industry capital to air bags … Each stride tilts the calculation away from having an IED in the dashboard as a net benefit to motorists, bringing closer the day when a new safety innovation will be announced: an air bag-free vehicle.”

Actually, Jenkins’ repudiation of air bags and reaffirmation of mandatory seat belts puts him about 45 years behind the times – about where we stood before Sam Peltzman wrote in 1975. Jenkins deserves credit for daring to break out of the regulatory mindset by opposing air bags, something other journalists have failed to do. That indicates the intellectual depths to which the downward market spiral of journalism has taken us.

What Jenkins should be doing is calling for abolition of the Department of Transportation, not air bags. Consider this: According to Jenkins’ own logic, the DOT mounted a nationwide campaign for mandatory seat-belt laws while also insisting upon mandatory air-bag installation in vehicles. But this is crazy. Using the language of game theory, we would say that the presence of air bags “dominates” seat-belt use, making it superfluous. With an air bag, one of two things happens: the air bag deploys as intended – in which case the passenger is protected in the accident – or the air bag explodes – in which case the passenger is maimed or killed. Either way the seat belt is superfluous. Wearing a seat belt doesn’t add protection if the air bag works and doesn’t protect against shrapnel if the air bag explodes. There is also a third possibility: the air bag might explode prematurely, killing or maiming the passenger even though there is no accident. And the seat belt is superfluous in this case as well.

Although shouldn’t be too hard on Holman Jenkins, we shouldn’t feel bound by his intellectual limitations or his inhibitions. Now that we know that both mandatory air bags and mandatory seat-belt laws are abominations enacted in the name of automobile safety, what are we to make of a federal-government safety bureaucracy that insists upon them even after their demonstrated failures? And with the technology of self-driving cars a demonstrated reality, what are we to think when that same bureaucracy is distinctly reluctant to allow it to proceed?

Why Does DOT Tend to Hinder Rather Than Promote Automobile Safety?

The heading for this section will anger many readers. The conventional view of federal regulation has been described by the late Nobel laureate James Buchanan as the “romantic” view of government. Roughly speaking, it is that government regulators act nobly and altruistically in the public interest. Upon very close examination, the term “public interest” will be found so vague as to defy precise definition. However, this is advantageous in practice, as it allows each user to define it according to his or her individual desires – it makes the theory of government into a sort of fairy-tale, wish-fulfillment affair. No wonder this approach has survived so long with so little clear-eyed scrutiny! Everybody is afraid to look at it too hard for fear that their fondest dreams will go up in smoke. And indeed, that is what actually happens when we try to put this theory into practice.

Suppose we depart from this sentimental approach by inquiring into the incentives that confront bureaucrats in the Department of Transportation (DOT). First, ask what happens if DOT develops an innovative safety technology that saves the lives of consumers. Let’s say, for example, that they develop an improved seat belt, such as the three-point seat belt which turned the failed two-point lap belt into a viable safety device. Will the individual researcher(s) in DOT get a bonus? Will he or she (or they) patent the device and earn substantial royalties? Will they become famous? The answers are no, no and no, respectively. Thus, there are no positive incentives motivating DOT to improve automobile safety.

On the other hand, suppose DOT does just the opposite. Suppose it actually worsens auto safety. Indeed, suppose DOT does exactly what the political Left routinely accuses capitalist businessmen of doing; namely, kills its “customers” (in DOT’s case, this would be the consumers who are the ostensible beneficiaries of regulation).

What an irritating, outrageous question to pose! We all know that government regulatory agencies exist to protect the public, so it is unforgivably irresponsible to suggest that they would actually kill the people they are supposed to protect. But – let’s face it – that is exactly what Holman Jenkins is implying, isn’t it? He never has the cojones to blurt it out, but the statements that “Washington has been responsible for research” and “air bags designed to meet the government’s criteria were shown to be responsible for the deaths of dozens of children and small adults in otherwise survivable accidents” don’t leave much to the imagination, do they? As it happens, there is plenty more dirty linen in the government’s closet that Jenkins leaves unaired.

As long as everybody else is as deferential (or as cowardly) as Jenkins, the general public will not link government with the deaths in the way that private businesses are linked with the deaths of consumers. When more consumers die, what happens is this: government benefits. DOT uses this as the excuse to hire more people, beef up research and spend more money. Larger staffs and bigger budgets are the bureaucratic equivalent of higher profits, but this differs from the private-sector outcome in that higher profits are normally associated with better outcomes for consumers while, if anything, the reverse is true of bureaucratic expansion in government.

Suppose DOT were to recommend that we proceed at breakneck speed to adopt driverless cars in order to eliminate virtually all of our current 30,000+ annual highway fatalities. Suppose the agency even brings about this outcome within just a few years. There would be little or nothing left for the agency to do; it would have succeeded so well that it would have innovated itself out of existence. No wonder that DOT is dragging its feet to slow the acceptance of driverless cars!

In the private sector, there is an incentive to solve problems. In government, there is never an incentive to solve problems because that will usually leave government with no excuse to exist, to grow and expand. When a private firm solves a problem, it makes a big pile of money that it can use to expand or enter some new line of business – even if the solution to the problem leaves it with no reason to continue producing its current product. There is no government analogue to this reward and consequently no incentive for government to succeed, only incentives for it to fail. Indeed, there are even incentives for it to do harm. And in the arena of automobile safety, that is exactly what it has done.

Just to reinforce the point, let’s generalize it by broadening our evidentiary base beyond federal regulation. Earlier we cited various numerous safety improvements that are being incorporated piecemeal into automobiles by the major auto companies: lane-violation detection, automatic braking, collision avoidance and others. Driverless cars include all of these and more besides. The state of California has recently passed regulatory legislation forcing all driverless cars to allow a human driver to “take over in an emergency;” e.g., bypass the sensors that govern the driverless car’s actions. But every one of the safety improvements listed was designed expressly to produce mistake-proof behavior by the car in various emergency situations. In other words, the regulatory legislation has the effect of defeating the safety purpose of the driverless car. Oh, some nobler, more romantic rationale is advanced, but that is the effective result of the law.

The case of the DOT is not unique at the federal level either. Hundreds of thousands of corpses could attest to the harm the FDA has done by blocking the approval of new drugs. Many economists could, and have, detail the harm done to competition by application of the antitrust laws ostensibly designed to preserve and protect it.

Economists are the real investigative reporters. Most of the time, their tools consist of logic and arithmetic rather than confidential informants and leaked documents. But when it comes to exposes, their stories put those of journalists in the shade.

DRI-277 for week of 11-3-13: Why Are There No Economists Among Leading Opinion-Molders Today?

An Access Advertising EconBrief:

Why Are There No Economists Among Leading Opinion-Molders Today?

Today the discipline of economics occupies a strange position within the general public. The Financial Crisis of 2008 and ensuing Great Recession brought economics to the daily attention of Americans more forcefully than since the Great Depression of the 1930s. The Federal Reserve’s monetary policies, particularly its recent tactic of Quantitative Expansion (QE) of the stock of money, have made monetary policy the object of attention to a greater extent than at any time since the days of stagflation and supply-side economics during the Reagan administration in the early 1980s. One would expect to find economists occupying center stage almost every day.

Not so, surprisingly enough. Contrast the position of economics today with, say, that in the 1960s and 70s, just prior to Ronald Reagan’s election as President. At that point, three economists were familiar on sight and sound to a great many Americans: John Kenneth Galbraith, Paul Samuelson and Milton Friedman. Today, the venues, space and time available to economists far outnumber those existing forty years ago. Yet no economist today even approaches the influence and familiarity of the Big Three in their heyday. A brief recollection of each is in order for the benefit of younger readers.

The Big Three of Yesteryear: Galbraith, Samuelson and Friedman

The Big Three economists of yesteryear bestrode the 20th century like colossi and stood tall into the 21st. They were all born and died within a few years of each other: Galbraith (1908-2006) slightly outlasted Samuelson (1915-2009) and Friedman (1911-2006) in longevity although he died first, in April 2006. They were all self-made and experienced the Depression first hand. Each was a prolific writer but appealed to a different audience.

The best-selling writer of the three was John Kenneth Galbraith, whose literary zenith produced The Affluent Society (1958) and The New Industrial State (1967). Compactly put, Galbraith’s thesis was that Americans were satiated with consumer goods but starved for so-called “public goods;” i.e., the goods government was uniquely situated to provide. The economy thrived not on competition but on monopoly exercised by giant corporations, who artificially created the demand for their products via advertising rather than merely responding to the inchoate demands expressed by consumers. Since consumer wants depended on the same process that satisfied them, that process of want-satisfaction could not be justified or defended as simply “giving the people what they want.” Therefore, government was not merely allowed but morally required to tax and regulate business to restrain their behavior and acquire the resources necessary to redress the imbalance between public and private spending. Galbraith’s views resonated with the general public much more than with the economics profession itself, where only the New Left, radicals, institutionalist admirers of Thorstein Veblen and quasi-Marxists found them attractive. Needless to say, Galbraith’s ideas seem quaint today in light of the decline and fall of the supposedly invulnerable giant corporations he worshipped.

In addition to his economic works, which also included American Capitalism (1952) and A Theory of Price Control (1952), Galbraith wrote novels and memoirs of his travels and tenure as Ambassador to India. His iconoclastic views – he minted the phrase “the conventional wisdom” – and ironic style endeared him to the general public, whose distrust of authority he shared. This seems odd of a man whose World War II service as deputy head of the Office of Price Administration made him one of America’s chief bureaucrats, but Galbraith’s early life was spent on a farm in Canada. Another of his books was a novel satirizing America’s foreign-policy establishment (“Foggy Bottom”). Perhaps the chief object of his scorn over the years was the corporate hierarchy, whose morals and mores he never tired of mocking despite his exaggerated opinion of their power over markets.

Paul Samuelson was the leading theoretician among American economists and the first American awarded the economics version of the Nobel Prize in 1970. His scholarly articles numbered in the hundreds, but he is remembered today chiefly for two books: Foundations of Economic Analysis, based on his doctoral dissertation, which signaled a turning point in economics to mathematics as the formal mode of analysis; and Economics, his all-time best-selling college text that combined principles textbooks in microeconomics and macroeconomics in order to integrate the two analytically into the so-called “Neoclassical synthesis. Samuelson combined the elements of classical price theory as developed by Alfred Marshall and refined by subsequent generations with Keynesian macroeconomics as modified from Keynes by the neo-Keynesian generation that included Samuelson himself, Franco Modigliani and James Tobin, among others. This book (really, a double book) taught generations of economists through over twenty editions from the 1940s until the 21st century.

Samuelson’s central conceit was that individual free markets worked beautifully, but markets in the aggregate were prone to unemployment or inflation. This aggregate shortcoming could only be corrected by government spending directed by… well, by men like Samuelson himself; although he always refused to take a policy post in the Democrat administrations he supported and advised.

As with Galbraith, it is difficult for non-economists today to credit the veneration Samuelson inspired in certain quarters. In the late 1950s, Samuelson began predicting that the Soviet Union would soon overtake the U.S. in per-capita GDP (then GNP). He retained this prediction in successive editions of his textbook – until the final overthrow of the Soviet Union in 1991. Galbraith and Samuelson made an odd couple of Keynesians – the former supporting massive government spending in spite of his distrust of the bureaucracy and the latter embracing deficit spending by government because he had faith in the ability of government to fine-tune aggregate economic activity. Samuelson shared a forum in Newsweek Magazine in an alternating column with the third member of our Big Three, Milton Friedman.

Friedman became well-known among fellow economists long before he attracted public notice. He won the John Bates Clark medal awarded to the leading economist under the age of 40 and published a notable collection entitled Essays in Positive Economics that contains some of the best expository writing ever done in his subject. 1957 saw what he considered his best piece of work, A Theory of the Consumption Function, which successfully reconciled cross-section data on aggregate consumption among different groups over the same time period with time-series data on consumption among all groups over time.

In the early 1960s, Friedman published two books within a year of each other that catapulted him to public attention and professional eminence. Capitalism and Freedom made both the political and economic case for free markets, an analytical position that had almost deteriorated through neglect. A Monetary History of the United States, which he co-authored with Anna Schwartz of the National Bureau of Economic Research, made an empirical case for the money stock as perhaps the chief economic variable of interest both historically and for policy purposes. Milton Friedman became the world’s chief exponent of the Quantity Theory of Money, which had been around ever since David Hume in the 18th century but had never before been put to such comprehensive use in economic theory. Ironically, Friedman’s single-minded focus on the money stock proved to be his Achilles heel. Although still greatly respected for his manifold contributions to economic theory and his prodigious talents as a defender of freedom and popularizer of economic thought, Friedman’s monetary theory is little regarded among professionals of all ideological stripes.

As the 60s and 1970s wore on, Friedman headed up the disloyal opposition to Keynesian economics within the economics profession. Keynes had been posthumously crowned king in the 1950s and early 60s as Western economies began to adopt the policy of spending their way to prosperity. But the advent of simultaneous high inflation and high unemployment, or “stagflation,” in the 1970s put paid to the Keynesian tenure atop the profession. Friedman and Edmund Phelps independently and more or less simultaneously developed the hypothesis of a “natural rate of unemployment” that defied Keynesian efforts to reduce it via deficit spending. Only through continually increasing injections of money into the economy – producing ever-increasing rates of inflation and resulting unrest – could unemployment be reduced and held below this “natural rate.” Friedman’s Nobel Prize, received in 1976, was by this time a foregone conclusion.

In 1980, Friedman reached his zenith of public popularity with the best-selling book and accompanying PBS television series Free to Choose. This was a popularized version of Capitalism and Freedom, updated for the 80s. For the first time, an economist had scaled the heights of public popularity, professional acclaim and policy prominence. Like Samuelson, Friedman preferred to exercise his influence outside of government. Unlike Samuelson, though, Friedman had actually worked for government in World War II. It was Milton Friedman, of all people, who devised the concept of government tax withholding to streamline the process of revenue collection.

Vacuum at the Top

Today, economics is omnipresent in our lives. Yet there is nobody in the public square whose position rivals that of the Big Three of yesteryear. The closest would be Paul Krugman, who has written several popular books, whose Nobel Prize is spelled exactly like the one received by Samuelson and who believes that the stock of money can play an important role in economic policy. In other words, he is a pale shadow of Galbraith, Samuelson and Friedman.

Noted economist Sam Peltzman probed this seeming paradox in an article published in the May, 2013 issue of Econ Journal Watch, 10(2) pp. 205-209, entitled “Why Is There No Milton Friedman Today?” Peltzman’s analytical qualifications are impeccable. He has carved out a distinguished career as a critic of government regulation. His crown jewel is a famous 1975 study on automobile safety that introduced the pioneering concept of “risk compensation” to the social sciences.

Risk compensation refers to the behavioral effects created by safety improvements and regulations. When people take more risk in response to safety improvements and/or regulation, this change in behavior has been christened the “Peltzman Effect.” Thus, Sam Peltzman has been given the greatest scientific honor of all – a scientific principle has been named for him.

Peltzman notes the absence of successors to the Big Three. He especially abhors the vacuum created by the loss of Milton Friedman. Peltzman’s explains it by citing Friedman’s unique talents. The first of these was his knack for communicating economic insights to the masses. The same expository skill Friedman brought to his professional work equipped him to educate the general public.

Peltzman illustrates Friedman’s style with a revealing anecdote from his own (Peltzman’s) academic career. Peltzman’s first graduate-school class was Friedman’s legendary class in Price Theory at the University of Chicago. The students “eagerly awaited our introduction to the technical mysteries of our chosen profession. Instead, we got an extended paraphrase of an article entitled ‘I, Pencil,’ in which a humble pencil tells us of the herculean coordination problem required to get itself produced and distributed and of the virtues of markets in solving that problem.” Peltzman correctly attributes the essay to Leonard Read, founder of the Foundation for Economic Education and its journal, The Freeman, in which the essay originally appeared. Peltzman’s points are that Friedman’s pedagogy was time-tested and simple and he employed it before professional audiences as well as public ones.

Friedman’s second unique virtue was his zest for combat. Libertarian economists were scarce in Friedman’s day and he knew his arguments would be received with scorn and incredulity. Nevertheless, his rejoinders were cheerful and clever; he relished the opportunity to buck the tide of collectivist conformism. And his devotion to his principles was unyielding. “All against one makes for a good show,” observes Peltzman, “and Friedman liked the odds.” This brings to mind the answer made by John Wayne’s character J.B. Books, the dying gunfighter in the movie The Shootist, when asked to account for his luck in surviving so many gunfights over the years: “I was willing.”

It is clear that even Galbraith and Samuelson couldn’t measure up to Milton Friedman by Peltzman’s criteria. Galbraith had the communication skills and debating talent but little worthwhile to communicate; his theory badly needed shoring up. Samuelson had the theory but communicated largely by writing letters to his fellow economists in the language of differential equations. His text worked well enough for a captive academic audience but nobody ever characterized his persona as “dynamic.” Both these men were, to some greater or lesser extent, arguing for the status quo, while one of Friedman’s books was titled The Tyranny of the Status Quo.

So far, so good. Peltzman makes a concise, compelling case for Milton Friedman as sui generis. Now, though, Peltzman tries to explain why today’s economists do not measure up to the standard set by Friedman. Although his observations of the economics profession seem descriptively accurate, his attitude toward their change in behavior is disturbingly complacent.

The Contemporary Economist as Engineer

In assessing the state of the profession today, Peltzman at first sounds optimistic. It’s true that there is no Milton Friedman leading the charge for freedom and free markets. But that isn’t due to a lack of free-market economists. “There are…numbers of them within our gates, perhaps more than in Friedman’s time…But they lack something that Friedman had in…his time.” Actually, they lack several somethings.

First, they lack the kind of dedicated, first-rate opponents Friedman had in abundance. “…The range of belief within economics has narrowed, partly because of Friedman’s efforts…the modal economist is less [interventionist]… than the modal economist of Friedman’s era…Market solutions…are given a respectable hearing or are part of the consensus today (think flexible exchange rates or unregulated railroad rates). There is less room today for a good fight among economists.” Apparently, Peltzman does not read Paul Krugman’s column in the New York Times.

If this sounds dubious, just listen to Peltzman’s next assertion. “Consider…what has happened in the aftermath of the financial crisis of 2008. The chattering class pronounced with excited joy that Capitalism is now Dead, but the political center hardly moved, and in some countries even moved right – to fiscal rectitude, labor market reform, etc. Hardly any left party that moved away from socialism in Friedman’s heyday has moved back since. What is a committed free-market economist spoiling for a good fight to do when the other side is not so far away?”

This narrative hardly sounds like a description of the multi-trillion dollar stimulus, multiple bailouts of big banks and financial firms, government seizure and handover to autoworkers of two of the Big Three auto companies, impending nationalization of health care, regulatory reign of terror and Federal-Reserve money-creation and asset-purchase binges that have characterized the U.S. since 2008. Contrary to Peltzman, events since 2008 have conformed more to Newsweek‘s famous cover headline: “We Are All Socialists Now.” And what has today’s “modal economist” done in response to this overwhelming frontal assault on free markets?

If Peltzman’s judgment that the economics profession has gravitated toward freer markets were correct, we would expect to read protests from our modal economist. Instead, he has, according to Peltzman, turned into “a much cooler customer. This one tends to be less committed to any politico-economic system.” Wait a minute – what happened to all those “numbers of …free-market economists…within our gates” just a minute ago? We could sure use them, because it now turns out that among the cooler customers, “the animating spirit is more the engineer solving specific problems than the philosopher seeking a unified world view. The questions asked tend to be smaller than, say, the connection between capitalism and freedom.”

Strangely, Peltzman doesn’t seem perturbed about this loss of ideological fervor, because “the skill with which the question is answered tends to be greater than in times past.” What about their professional duty to educate the public in the great truths of economics? “At some point,” Peltzman declares airily, “today’s leading economists may want to communicate their results to a wider audience. But this is an afterthought, in the sense that what is valued within the profession – the skill in obtaining the result – is not what the outside audience is interested in.”

Peltzman is surely wrong about the outside audience, who is intensely interested in “the skill in obtaining the result” because (at least in principle) it should affect the veracity of the result. Presumably what Peltzman meant to say is that the audience doesn’t care what method economists use to get the answer as long as they get the right one. And in this connection, it is hard to see what economics profession Peltzman is referring to – surely not the one that actually exists. For over two decades, Deirdre McCloskey and Steven Ziliak have proclaimed that econometric practice within the social sciences – in economics and elsewhere – is scandalously incompetent. Most empirical articles in the leading professional journals over-rely upon and misuse the principle of “statistical significance.” Thus the foundation of empirical economics has rotted away – and with it has gone Peltzman’s claim of greater skill.

Peltzman is not merely blind to the failings of his profession today; he is complacent about its future prospects. “It is hard for me to see a reversal of the kind of trends I have described…in…fields where the engineer has replaced the philosopher. Perhaps an economic calamity will shake things up in economics. But we had one in 2008, and very little changed within the profession. There was a period of befuddlement [after which] economists went back to their tinkering and were largely irrelevant to the political response to the crisis.”

Peltzman’s complacency even extends back to Friedman’s work. He attributes the fact that “there is no serious socialist faction left within economics” to “Friedman’s success,” which “makes it harder for someone to follow in his footsteps.” Peltzman declares flatly that “there is no serious political/economic alternative to some form of capitalist organization in any major economy.” Peltzman cannot have forgotten – can he? – that this was exactly the point made by Ludwig von Mises and reinforced by Mises and his student F.A. Hayek in the Socialist Calculation debates of the 1930s. This was a central contention of Hayek in his great polemic The Road to Serfdom in 1944. It was Hayek, the guiding spirit behind the Mont Pelerin Society of worldwide free-market economists who sparked Friedman’s interest in political activism in the late 1950s. Friedman admitted all this in his Introduction to the 1994 edition of The Road to Serfdom and in interviews with Hayek’s biographer, Alan Ebenstein.

Peltzman’s most outrageous error is his claim that “the Fed chairman learned from Friedman not to permit a credit freeze to turn into a monetary implosion.” Milton Friedman would have slit both wrists and reclined in a warm bath before endorsing the policies followed by Ben Bernanke before, during or after the Financial Crisis of 2008. Friedman’s criticism of Federal Reserve policy during the Great Depression did not pertain to a “credit freeze” but rather to the wholesale failure of banks throughout the U.S. and resulting nosedive taken by the money stock when deposits were destroyed. A credit freeze – whatever else it might entail – implies no such rapid decline in the money supply and therefore does not demand a “helicopter drop” of money, a la Milton Friedman, in order to cure it. Peltzman’s jaw-dropping attempt to imply a posthumous endorsement of Bernanke by Friedman is as inexcusable as it is inexplicable.

Peltzman has chosen the wrong model for his model economist – Friedman rather than Hayek. He has also chosen the wrong model for his modal economist – the engineer rather than the philosopher. In The Counter-Revolution of Science (recently republished under its original planned title, Studies on the Abuse and Decline of Reason), Hayek outlines the disastrous effects of subjecting society to control by the “mind of the engineer.”

The engineer strives to bring all aspects of a problem under his conscious control in order to achieve a technical optimum. He chafes at external constraints such as prices, incomes and interest rates; they are not “objective attributes of things but reflections of a particular human situation at a given time and place.” He sees them as meaningless, irrational interferences with his optimization techniques. When an engineer confronts a machine, for instance, he typically strives to gain the maximum power or energy output from given inputs of resources. In fact, as Hayek points out, the engineer’s technical optimum is usually just the solution that would obtain if the supply of working capital or resources was unlimited or the interest rate was zero. In adopting the perspective of the engineer, the economist is losing his own unique perspective. A good real-world example of the engineering perspective gone wrong in economic practice would be the misguided activist economic policies of former-engineer Herbert Hoover in trying to combat the Great Depression.

Peltzman correctly recalls that Milton Friedman advanced the view that the profession should pursue “positive economics” by formulating hypotheses and testing them empirically. But Peltzman neglects to inform his readers that today this viewpoint is as dead as the dodo – deader, actually, since today we can clone dodos back to life but we are not about to resurrect the canard that econometrics can be used to test predictive hypotheses in the social sciences in the same way that laboratory experiments test natural scientific hypotheses. In academic economics today, nobody believes that anymore. The massive, sausage-producing enterprise of submitting articles to refereed professional journals for acceptance continues, but purely as a ritual for granting tenure. Nobody now pretends that this process has any value above the purely ceremonial. It is now axiomatic in economics that econometrics does not prove anything, test any hypotheses or rule out (or in) any part of economic theory.

The format mathematical models economists swear by give the appearance of scientific rigor, but this is spurious. In order to reduce actual human activity to systems of solvable equations and stable equilibria, economists have to remove so much realistic detail that their models are unrecognizable to the layman. They are virtually useless for making quantitative predictions. We know this because, as the former Donald McCloskey put it, economists cannot answer “the American question: If you’re so smart, why aren’t you rich?”

Today, economic policy is taking measured that economists have warned against for centuries. The attempt to create wealth and induce prosperity by massive money creation is traditionally a tactic of desperation, one that inevitably ends in crisis and chaos. Yet economists sit silent instead of rising in indignant protest. And Peltzman appears to approve both the desperation tactics and the compliance of his profession.

Actually, Peltzman does betray deep-seated doubts about the current path of economics profession in his last sentence. It reads: “But one wonders still: is this only the calm before the storm?” And one wonders if Peltzman will have cause to regret his failure to speak out.

Whither Economics?

Sam Peltzman has courageously taken on one of the great contemporary mysteries. It is a missing-persons case. Where did the economist go in our public discourse? Peltzman succeeds in finding his quarry, all right. But having found him, he is distressingly indifferent to the runout. His confidence in the methods and motives of today’s economists seems utterly misplaced. Without realizing it, Peltzman himself is providing part of the explanation for the absence of economists from public discourse. He is sanctioning the abandonment of what they do best – teaching the philosophy behind economics – in favor of what they do worst – pretending to employ the methods and techniques of engineering in the foreign realm of economics.