January 27, 2004

The hockey-stick model of state intervention

Patrick Crozier | General Points (not just transport)

I am not sure if this is an idea you’ll find in an economics textbook (in part because I never read economics textbooks) but I first heard it from Brian and it is very useful in explaining some of the more peculiar effects of state intervention.

What the hockey-stick model says is that often when the state intervenes whether by nationalisation, subsidy, taxation or regulation it will, every now and then, for a short time, improve matters. Then things start to deteriorate and eventually they end up even worse than they were in the first place. And the hockey stick? Imagine an (ice) hockey stick standing on a level surface. The blade represents the short up swing of state intervention and the handle the long subsequent down swing. I suppose to get the model just right you have to imagine the handle burying itself into the ground.

goalie9.jpg
State failure explained (from Crashing the Net)
It is a model I rather like because it explains all sorts of things that seem contrary to libertarian thought: like why when the Tube was nationalised things got better. This in turn helps to explain why many people remain attached to state solutions: they’ve seen it “work”, at least in the short-term, themselves. When the state starts to fail they comfort themselves that the state can succeed. “All that we need to make the NHS/the Tube/council houses to work is the right people/regulations/more money etc”

So, why is there this upward blip from time to time? Because sometimes the state gets it right. And because, when it wants to it can put enormous resources into play. The classic example is the London Passenger Transport Board (what the Tube plus buses and trams were called after nationalisation). Here the state took a number of highly efficient, well-run but poor private sector organisations and gave them heaps of cash. It was almost inevitable that the results would be good.

Trackbacks

How hockey sticks explain the relative attractions of statism and of free markets
Catching up with Croziervision, the other day, as you do, I came across this posting, which contained a kind reference to something I had said, which on further investigation proved to be an essay by me, attached as a comment to something Patrick himse...
Samizdata.net on October 1, 2004

Comments

Wow. Fame at last.

The shape of the graph you have clearly, but the reason for its shape could use a bit more clarification. It is essentially a matter of knowledge. Markets enable knowledge to be found. Price signals enable lots of people to discover what punters want, and it is this knowledge that the politicians begin their reign by making big use of. As a result, lots of punters get what they knew they wanted, but just had to pay less for it. This applies both to producers and consumers.

Although, whether this is a straightforward improvement for all concerned (such as the millions of taxpayers who together pay for this massive improvement for a few thousand) is open to doubt, but it definitely is improvement for the few thousand.

But then, the knowledge flow supplied by price signals gradually dries up, and eventually the government operation stops doing anything that anyone wants except the people in the government operation and in due course not even they. That's an exaggeration, but only somewhat. By the end of a truly awful nationalised industry, nobody has any clue about what constitutes an improvement. The only result is that money, more and more of it, gets spent.

The other application of the hockey stick curve is that when a market truly opens up, you have an equal and opposite tendency. A new market is chaotic, and (and this is the point) ignorant. People don't, e.g., know how to spot cowboy operators, or bad products made in all sincerity but badly. Ignorance and foolishness abounds, and down goes the graph of achievement. But then, if this really is a true market, things bottom out and start to improve and in the longer run the result is a market that is orders of magnitude better than the government could ever have managed.

This helps to explain the (to many libertarians) baffling popularity of statism and baffling unpopularity of markets. In the short run, for those in the immediate vicinity of the decision, state action really can be better and markets really can be very bad. And people with problems (regular people who get active in politics always have problems) don't have time to endure short run chaos so that they can later benefit from longer term excellence. So even if people fully understand the long term benefits of markets, they may still oppose them because of the short term cost.

However, often people find themselves living in the long term decline phase of government activity and then, even though markets will not immediately improve things, they will still favour them because their only choice is more chaos now and even more chaos later (government) and more chaos now and the prospect of improvement later (market). The graph of goodness is going down NOW so fast that even the initial further downward movement of a new market is worth living with, because long term benefit is all there is in the way of good future news.

That wasn't a comment, so much as a submission to the Libertarian Alliance Economic Notes series. Nevertheless I am grateful to Patrick for having stirred me into lashing down a first approximation to it that others can finally read. Maybe I should copy and paste it into Samizdata or something.

Posted by Brian Micklethwait on January 28, 2004

What a great post! I especially liked your comment:


And people with problems (regular people who get active in politics always have problems) don't have time to endure short run chaos so that they can later benefit from longer term excellence

Hans-Hermann Hoppe claims that democracy will always work to increase a society's time-preference. Is this a perfect example of that? People with short term outlooks inevitably get into trouble - they then use the political system to impose their short term outlook upon everybody else.

Posted by Crosbie Smith on January 28, 2004

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