David Levy and Sandra Peart on the problems with experts

The Queen of England famously challenged the economists to explain why they didn’t see the approach of the Global Financial Crisis. It is not clear that anyone provided an answer although the Austrians would claim that they did better than most but their voice was too small to be heard. There is another episode which would have raised the Queen’s eyebrows. This was the dismal performance of most economists who wrote about the progress of the Soviet economy during the Cold War. This is described by Levy and Peart in a new book Escape from Democracy: The Role of Experts and the Public in Economic Policy.

Most commentators thought that the Soviet economy was doing very well, with some exceptions such as Warren Nutter. The outstanding optimist was Paul Samuelson who predicted in successive editions of his best-selling textbook that the Soviets would match the US GNP per capita by the turn of the century and most likely earlier. Levy and Peart’s Table 6.2 shows the sequence of Samuelson’s prediction from 1961 to 1980 with the best case for the Soviet overtaking time, the worst case, and the ratio of the initial US:USSR GDP per capita in the year of each new edition.

The “best case” Soviet overtaking times ranged from 23 years in 1961 to 22 years in 1980. The “worst case” numbers ranged from 36 years to 32 over the same period. It is surprising to see that in 1980 the USSR was only four years out from the optimistic forecast of the overtaking time, but the predicted overtaking time was still 22 years ahead. It is difficult to see how Samuelson’s optimism survived his own figures because in addition to the numbers cited above the ratio of US:Soviet GDP per capita only changed from 100:50 in 1961 to 100:55 in 1980.

Commentators might have been more careful in the light of observations by astute travellers. Bryan Magee visited extensively in Marxist countries during his time with the leading British weekly TV news program and he wrote that he had difficulty persuading even his conservative friends of the extent of squalor (and repression) that he observed behind the Iron Curtain.

It was much the same with US estimates of the number of intercontinental ballistic missiles in the Soviet arsenal. Alan Carlin reported on work in the RAND corporation in 1959 when the US Air Force claimed that the Soviets could have hundreds of ICBMs, the CIA estimated about a dozen and later it transpired that the actual number was four (Carlin in Environmentalism Gone Mad).

Levy and Peart attribute Samuelson’s misplaced optimism regarding the Soviet economic performance to his adoption of the production possibility frontier (PPF) approach which is a curve of economic output on the assumption that all inputs are used efficiently. This approach is blind to historical and institutional factors. It is described as a “thin” approach as opposed to a “thick” approach which takes account of social and institutional factors such as the rule of law (or its absence), property rights and the moral framework which helps or hinders cooperative trading and business practices.

After the Fall of the Wall Karl Popper wrote a foreword to a Russian edition of The Open Society and Its Enemies. Popper was no economist but he was onto something when he suggested that economic reforms in the direction of a free market would not work without the Rule of Law. Given the absence of the rule of law (and a moral framework) for several generations in Russia he suggested a transplant of the French or German legal codes, supported by training in France or Germany for legal officers.

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10 Responses to David Levy and Sandra Peart on the problems with experts

  1. Rafe Champion

    The full text of the Russian Foreword, from Colin Simkin’s book about Popper’s ideas.

    ADVICE TO RUSSIAN READERS OF THE OPEN SOCIETY

    In 1992 Karl Popper was preparing a Russian edition of The Open Society, and kindly allowed me to write about his English version of a message to his Russian readers. It declared that the main idea of The Open Society is The Rule of Law.

    The West has become wealthy because of the development of free markets, and these have required both a Civil Law, which includes property and mercantile laws, and a Criminal Law, whose most important aspect is that no one can be punished before his guilt has been proved beyond reasonable doubt.

    Criminal Law is a necessary evil. Civil Law, however, is a great good because it aims at personal freedom-at enabling people to live together without the use of violence. It has enabled free markets to develop with great benefits to living standards. They need a framework of law to provide for the making, and enforcement, of numerous contracts between independent producers, suppliers, customers and workers. The Civil Law of Western societies has thus had a parallel growth with that of free markets and the industries which use ‘and serve them.

    The Revolution of 1917 destroyed this legal tradition in Russia, together with free markets. It would take a very long time to reestablish it unless Russia now copies one of the West’s systems of Civil Law, just as Japan did after the Meiji restoration by quickly adopting the German legal system. Popper suggests that Russia should choose either the French or the German codes; the British never developed a code of law that could be taken over en bloc, and in the United States there are different state codes which were themselves developed from British law.

    Adoption of the French or German codes could not fit Russia anything like perfectly, so that its Parliament would have to make changes as the need appeared for them, just as Western states have had to continuously revise or up date their own established codes of law.

    A much greater difficulty is to make real the Rule of Law. To achieve this the Russian State would have to educate its legal officers in the newly adopted code and persuade them to take it seriously, especially judges and other members of the courts of law. In times of peace, no higher interest than that of the State should be allowed to prevail. This most difficult task is really that of establishing an Open Society-of bringing about a new, flexible and living tradition of the Rule of Law, as opposed to ‘the rigid tradition of the Rule of Fear’ that had characterized the Communist bureaucracy. It might be hastened and assisted if Russia were to follow Japan’s old example of sending very good postgraduate law students abroad to study and gain experience of a Western system of Civil Law.

    It is unthinkable that Russia can approach Western standards of living until it establishes a Rule of Law to serve a free market economy. Popper regards this insight as fundamental, and of the greatest urgency’. For a market economy is extremely complex, involving millions of ‘peaceful, hard-working citizens’, and can function properly only if they can trust one another, ‘and as long as they know what honesty and decency and truth demand’. For that they need trust in the law, in the officers who enforce it, and in the judges who administer it.

    Among the serious risks of privatising Russia’s state industries, is that this process can involve serious corruption and swindling unless there are effective systems of Civil and Criminal Laws to hold them in check. Without them privatisation is unlikely to promote beneficial development of free markets and could well bring political dangers that would undermine attempts at economic reform.

  2. Popper was an adherent to the scientific principle.

  3. John Constantine

    The problem with experts is that they are all bought and paid for, on a drip feed that can be cut off at any time.

    Betray the framed narrative, and your brown paper bags contain your pony’s head, not your payola.

  4. Louis Hissink

    Forecasting is very difficult, especially of the future.

  5. Steve Kates

    Levy and Peart attribute Samuelson’s misplaced optimism regarding the Soviet economic performance to his adoption of the production possibility frontier (PPF) approach which is a curve of economic output on the assumption that all inputs are used efficiently. This approach is blind to historical and institutional factors. It is described as a “thin” approach as opposed to a “thick” approach which takes account of social and institutional factors such as the rule of law (or its absence), property rights and the moral framework which helps or hinders cooperative trading and business practices.

    Interesting find. But what interested me particularly was that they discuss the production possibility curve as some low point in economic instruction whereas I think it is the most useful diagram economists have ever constructed since it is the one that, if you understand it properly, will never mislead you. It has become the centre of my discussion of the classical theory of the cycle.

  6. Rafe

    I cant claim to understand it properly.
    May not be a fair question to answer in a comment – do you have a brief explanation or link to account for Samuelson’s call on the Soviet economy?

  7. manalive

    The “best case” Soviet overtaking times ranged from 23 years in 1961 to 22 years in 1980 …

    It was clear to the people of the Eastern Bloc the early ’80s that the state socialist system was not delivering and there were increasing protest groups and peaceful demos in countries like the Czech Republic, Hungary and Poland while the authorities largely stood by.
    In the GDR where they could receive West German TV the citizens could plainly see it too but hard-liner Honecker responded with more repression.
    Honecker asked Gorbachev for help during a state visit to Berlin in 1989 but was rebuffed with words to the effect that ‘he had better get with the programme’, the Wall came down a few months later.

  8. Rafe, a problem with rule of law is the appointment system, group think which could and is often out of sync with the majority of the population (think giving special privileges and land rights to aborgines who have little or no connection to the original nomadic inhabitants) and finally corruption.
    I would suggest that there needs to be a type of referendum recall for politicians, and senior public servants (including judges) as in some states (Cantons) of Switzerland. I think it was a Justice Vasta that was removed by parliament in Qld but lawyers look after lawyers and there are lots in parliament. Justice Murphy should never have been appointed to the High Court and he would have been removed by the public if they were given a choice. There are Justices in Supreme Courts (particularly in Qld) and the High Court that should not be there.
    Direct democracy as in Switzerland can work. I believe in some Cantons (eg Schweiz) direct democracy has worked since 1215. Some years ago I was in Canton Bern when some 50 pieces of legislation including budget items was voted by show of hands in the local town market place. I was told that the Canton Bern parliament could prepare legislation but had no authority to pass it -that was reserved to a vote by the majority of the electors. Last year in Switzerland there were 3 sets of 4 referendums questions decided by vote of electors (any for changes to the constitution need to have a majority of all voters plus a majority of voters in all the 26 Cantons).
    Also note taxing in Switzerland is done by the cantons who hand over a small fixed percentage to the Federal Government as was the case at our Federation. What is needed in Australia is more sates and less Federal government particularly in Education, health and industrial relations (eg as in Switzerland no basic wage and no assistance to unions)

  9. manalive

    There is a series of one hour podcasts available through iTunes in a ‘New Books’ series on Eastern Europe where specialist authors (mostly history PhDs) discuss their books many on the ’45-’90 era, some are a bit dry but some aren’t.

  10. Rafe Champion

    Good points cement, nice site too, will give it a plug in the next Roundup if I don’t forget!

    Thanks manalive!

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