Abstract
This paper explores some of the reasons why capitalism experiences periodic crises of legitimacy and asks whether Richard Epstein’s “simple rules” heuristic can help. The current legitimacy problem is exacerbated by the fact that we are also in a low growth situation. This means that some policy instruments that could have been used to increase legitimacy may no longer be available. The “simple rules” heuristic can help as a guide to reforms that would simultaneously address the legitimacy problem, while avoiding making the growth problem worse.
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Notes
Until 1950 the capitalized version of the word was more prevalent. I thank a reviewer for the suggestion to check the N-Gram.
Epstein overviews these rules is greater detail in part II of the book. See also Williamson (1985).
The problem with state-run vocational training programs, as opposed to the regular decentralized training provided by firms, is that it is hard to predict what kind of training should be delivered.
The successful entrepreneur can get massively rich, but the failed entrepreneur ends up miserable. The student who chooses the “right” major enjoys a successful professional life, while the one that choose the “wrong” specialization is stuck with massive debt. Etc.
For example, environmental problems are often made more likely by caps on damages. This is an example of socializing the risks (e.g. if an oil spill occurs, tax payers pay most of the cleaning costs, rather than the firm), while privatizing the benefits (if the accident doesn’t happen, the firm gets to keep the profits).
This has long been recognized even by some of the strongest supporters of social democracy. For example Paul Samuelson has noted that “[w]hen the good-intentioned state increases in scope so as to command that more than 50 percent of the GDP passes through state hands – even in the form of transfer payments for people to spend and taxes for them to pay but with no old-fashioned socialism in the sense of government ownership of factories and the other means of production – then the system somehow becomes (a) increasingly inefficient, (b) non-responsive to the human needs that we do-gooders extoll and (c) possibly infringing on important human freedoms (which does not mean business freedoms).” Furthermore, he noted that “[h]istory shows … how difficult it is for a welfare state not to over-reach itself in the attempt to correct gross inequalities” (cited by Farrant and Tarko 2020).
Use https://github.com/vladtarko/growth-scenarios to explore various investment scenarios.
See also Buchanan (1994) for an account of how norms of work ethics can affect economic growth.
Caplan (2008) also makes a similar argument.
This is similar to the concept of polycentricity Aligica and Tarko 2012.
One can argue that a Negative Income Tax (NIT), which would provide an unconditional safety net, would be a superior policy to the EITC. This is indeed true in some regards and it would also be an even simpler rule, but it may be more difficult to accept politically.
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I am grateful for receiving funding from the Classical Liberal Institute at New York University School of Law for writing this paper and presenting it at NYU School of Law in February 2020.
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Tarko, V. Simple rules for a more inclusive economy. Eur J Law Econ 52, 229–249 (2021). https://doi.org/10.1007/s10657-020-09674-2
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DOI: https://doi.org/10.1007/s10657-020-09674-2