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David Beckworth directed me to this tweet:

If the Fed had a single mandate to target inflation, then there would be an argument for switching from a point target like 2% to a band such as 1.5% to 2.5%. But the Fed has a dual mandate, under which an inflation band would be completely pointless. The Fed already allows inflation to fluctuate above and below 2% as required to achieve the high employment side of their mandate.

Calling something “pointless” might be viewed as mild criticism, but I have other concerns. I fear that something like this might be the sole outcome of the next Fed review of its operating procedure, which is scheduled for 2025. In that case, an inflation band would shift from pointless to deplorable.

The past two years have clearly demonstrated that the Fed is off track, and it’s not hard to see where the problem lies. Fed policy since 2021 has been far too expansionary. The biggest problem seems to have been the Fed’s “flexible average inflation target,” which, despite its name, does not call for flexible average inflation targeting. The best outcome for the Fed upcoming policy review would be to actually adopt flexible average inflation targeting. Under this regime, the Fed would make up for inflation overshoots with lower than 2% inflation going forward, and inflation undershoots with above 2% inflation going forward. Over longer periods, the Fed would keep the average inflation rate close to 2%. Obviously, the Fed isn’t doing that today. The policy must be symmetrical.

As for the “flexible” part of the policy, the Fed would allow transitory deviations from 2% inflation due to supply shocks. The best way of implementing flexible average inflation targeting would be to set a target path for the level of NGDP at a rate of 2% plus the Fed’s estimate of long run RGDP growth. Those trend growth estimates might be updated every 5 or 10 years.  

I’d actually prefer a simple NGDP level target, but as long as Congress gives the Fed a mandate for stable prices, they cannot entirely ignore inflation. Fortunately, the two options are pretty similar in practice, as long run growth trends change very slowly over time.

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The great Adam Smith was born sometime in early June 1723. I’m not going to spend time figuring out which day because it doesn’t really matter.

To commemorate Smith’s birthday, Reason magazine asked various people to give their favorite quotes from Smith and comment on them. I like a lot of the choices. Among my favorites are the ones noted by Dan Hannan, Russ Roberts, and Don Boudreaux.

Here are four of my other favorites:

Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The folly of empire:

To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen, and such statesmen only, are capable of fancying that they will find some advantage in employing the blood and treasure of their fellow-citizens to found and maintain such an empire. Say to a shopkeeper, Buy me a good estate, and I shall always buy my clothes at your shop, even though I should pay somewhat dearer than what I can have them for at other shops; and you will not find him very forward to embrace your proposal.

The second sentence in the quote above is one of my all-time favorite pithy Smith statements. It reads as if it could have been written last week.

Smith’s early cost/benefit analysis of empire:

The maintenance of this monopoly has hitherto been the principal, or more properly perhaps the sole end and purpose of the dominion which Great Britain assumes over her colonies. In the exclusive trade, it is supposed, consists the great advantage of provinces, which have never yet afforded either revenue or military force for the support of the civil government, or the defence of the mother country. The monopoly is the principal badge of their dependency, and it is the sole fruit which has hitherto been gathered from that dependency. Whatever expence Great Britain has hitherto laid out in maintaining this dependency has really been laid out in order to support this monopoly. The expence of the ordinary peace establishment of the colonies amounted, before the commencement of the present disturbances, to the pay of twenty regiments of foot; to the expence of the artillery, stores, and extraordinary provisions with which it was necessary to supply them; and to the expence of a very considerable naval force which was constantly kept up, in order to guard, from the smuggling vessels of other nations, the immense coast of North America, and that of our West Indian islands. The whole expence of this peace establishment was a charge upon the revenue of Great Britain, and was, at the same time, the smallest part of what the dominion of the colonies has cost the mother country. If we would know the amount of the whole, we must add to the annual expence of this peace establishment the interest of the sums which, in consequence of her considering her colonies as provinces subject to her dominion, Great Britain has upon different occasions laid out upon their defence. We must add to it, in particular, the whole expence of the late war, and a great part of that of the war which preceded it.

The late war was altogether a colony quarrel, and the whole expence of it, in whatever part of the world it may have been laid out, whether in Germany or the East Indies, ought justly to be stated to the account of the colonies. It amounted to more than ninety millions sterling, including not only the new debt which was contracted, but the two shillings in the pound additional land tax, and the sums which were every year borrowed from the sinking fund. The Spanish war, which began in 1739, was principally a colony quarrel. Its principal object was to prevent the search of the colony ships which carried on a contraband trade with the Spanish Main. This whole expence is, in reality, a bounty which has been given in order to support a monopoly. The pretended purpose of it was to encourage the manufactures, and to increase the commerce of Great Britain. But its real effect has been to raise the rate of mercantile profit, and to enable our merchants to turn into a branch of trade, of which the returns are more slow and distant than those of the greater part of other trades, a greater proportion of their capital than they otherwise would have done; two events which, if a bounty could have prevented, it might perhaps have been very well worth while to give such a bounty.

Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies.

Smith’s prediction of the outcome of the revolutionary war and the future of the United States:

Unless this or some other method is fallen upon, and there seems to be none more obvious than this, of preserving the importance and of gratifying the ambition of the leading men of America, it is not very probable that they will ever voluntarily submit to us; and we ought to consider that the blood which must be shed in forcing them to do so is, every drop of it, blood either of those who are, or of those whom we wish to have for our fellow-citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress, feel in themselves at this moment a degree of importance which, perhaps, the greatest subjects in Europe scarce feel. From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world.

But hey, what did he know?

If you’ve been paying any attention to EconTalk over the last few months, you know that Artificial Intelligence (AI) is very much on host Russ Roberts’ mind. This episode may end up being the most frightening of them all, as Russ welcomes Eliezer Yudkowsky, a Research Fellow at the Machine Intelligence Research Institute, and an AI, er…skeptic. Skeptic of course does not begin to encapsulate Yudkowsky’s position; Yudkowsky argues that AI will kill everyone on earth. Is his position too extreme, or are you just as concerned?

Let’s hear what you have to say. And feel free to reference any of our Artificial Intelligence episodes as well! As always, we love to hear from you.

1- Both Roberts and Yudkowsky agree that the current level of AI is not dangerous. Roberts recalls an analogy from this 2014 episode with Nick Bostrom, “In general, you wouldn’t want to invite something smarter than you into the campfire.”

Why does he bring this up, and how does it help explain the distance between Roberts and Yudkowsky’s viewpoints? Perhaps put another way, to what extent can algorithms have goals, as Yudkowsky suggests?

2- Can AI really become smarter than us? Roberts challenges his guest, “What does it mean to be smarter than I am? That’s actually somewhat complicated, at least it seems to me; i.e., does ‘it’ really know things are out there, or is this just an illusion it presents?”

What does Yudkowsky mean when he talks about an invisible mind that AI might come to possess?

3- To what extent is AI analogous to the to the market process, particularly with regard to unintended consequences?

Yudkowsky challenges Roberts, ” Put yourself in the shoes of the AI, like an economist putting themselves into the shoes of something that’s about to have a tax imposed on it. What do you do if you’re around humans who can potentially unplug you?” Roberts counters with another question, “How does it [AI] get outside the box? How did it end up wanting to do that, and how did it succeed?” How would you respond to these questions? Whose answer better convinced you- Roberts’ or Yudkowsky’s?

4- Several times Yudkowsky mentions man’s moon landing, asserting that one would not be able to explain that achievement from an evolutionary perspective. To what extent do you agree? Roberts again challenges huis guest asking whether this viewpoint requires a belief that the human mind is no different than a computer? Again- whose answer were you more convinced by?

5- Roberts recalls his conversation with neuroscientist Erik Hoel in which the threat of mutually assured destruction had been able to “regulate” nuclear proliferation. Is there any way we can retrain AI that’s similarly meaningful? Can it be done without govt/ the use of threat of lethal force? To what extent do you agree with Yudkowsky that if the government comes in and wrecks the whole thing, that’s better than the thing that was otherwise going to happen?

Some concepts in political economy operate like a Rorschach test. When someone defines them, you often learn more about them than about the concept. Democracy, fascism, capitalism, liberalism, conservatism, neo-anything, and socialism often mean different things to different people. I make no claim to being exceptional in this sense. Nonetheless, in this essay I want to offer a functional definition of socialism. This definition definitely reflects my own intellectual interests. But it also illuminates some central features of socialist systems and how they operate.

Since I tell my students not to write mystery novels when presenting an argument, here is my proposed definition: socialism is the prohibition of free entry into markets. This definition is functional in that it focuses on what socialism does. Many define socialism according to its aims, motives, or goals. But individuals can act selfishly or altruistically in the context of any political or economic system. Some socialists promise material abundance, while others extoll the virtues of asceticism. And socialists seek to implement their ideal system through a variety of means, from authoritarian central planning to anarchic communes. By stressing what socialism does, I hope to identify a common thread across these visions. If it walks like socialism and it breaks eggs like socialism, it is socialism.

Why not stick with the tried and true “common ownership of the means of production?” I in no way reject the usefulness of this definition and consider mine complementary to it. But ownership can be understood in a wide variety of ways. Were Soviet factories really owned in common, or were they effectively under the control of party elites? And by focusing on the immediate effects of socialism, I hope to provide a diagnostic tool for various policies and institutional arrangements that de facto operate in a similar way.

To arrive at this functional definition of socialism, I revisit the socialist calculation debate. Not because it is my favorite thing to talk about—though that may be true—but because it concerned a variety of ways in which socialism might be implemented. In what sense do these very different systems all lay claim to the title?

Though a number of texts predate it, the beginning of the socialist calculation debate is typically attributed to Ludwig von Mises’s 1920 “Economic Calculation in the Socialist Commonwealth.”1 The core of his argument is quite simple. Under socialism, because there is no private ownership of the means of production, there will be no markets for those means. In the absence of markets there will be no prices for these capital goods. And in the absence of prices, it is impossible to determine what how to most economically produce goods and services. In particular, Mises identifies three advantages of market prices for economic calculation (p. 97-98):

In a world of scarcity, any act of production involves an opportunity cost. What else could these resources have been used for? As the complexity of production processes increases in deploying a diverse array of capital goods, it becomes impossible to reckon such cost without a common denominator. Should we build the train tracks around the mountain and use up more steel, or through the mountain and use up more drilling equipment? Market prices do not represent some external standard of the truth about opportunity cost, but they do provide an indication of what other individuals think are the best alternative uses of resources. The process of buying and selling aggregates these judgments into an individually usable measure of what we forego and what we gain from production processes.

Mises discusses several alternatives to market prices, arguing that they cannot solve the problem of economic calculation. His primary targets are Marxists and Otto Neurath. Both of these approaches to socialism posit in natura (“in nature”) calculation. Such theories argue that socialist regimes could calculate based on something intrinsic to the nature of economic goods, rather than the extrinsic exchange value assigned from market prices. For instance, Marxists [see Karl Marx] often posited that labor inputs should and could serve as the ultimate unit of economic calculation and distribution. Mises points out the fundamental problem that just as there are a great diversity of capital goods, there is great diversity in labor. In natura approaches contrast most sharply with Mises’s insistence on exchange value and thus prices as the only way to reckon opportunity cost in a complex economy. I am not concerned here with the substance of Mises’s critique, but only that it took aim at these in natura arguments.

In 1935, F.A. Hayek published an edited collection Collectivist Economic Planning, which includes an English-language translation of Mises’s 1920 article. In response, Oskar Lange tries to rehabilitate socialism in a two-part essay the Review of Economic Studies.2 Lange’s opening move is bold: he admits that Mises is right. Economic calculation is vital to the success of a socialist economy, and it does require money prices. No money prices, no calculation of opportunity cost, no material abundance.

Where Lange disagrees with Mises is in the necessity of market institutions. Lange argues that prices for the various factors of production could be set by socialist central planners. In a perfectly competitive market equilibrium, he points out, we know that two conditions obtain (pp. 58-59). First, the average cost to produce a given unit of a good will be minimized. That is, when considering the cost of production of all cars, the cost per unit will be as low as humanly possible. Second, the marginal cost of producing the last unit of a good will equal the price of that good. If it takes ₽5,000 to make the last car produced, it will sell for ₽5,000. Producers will have squeezed every last bit of consumer surplus out of the market. These twin relations are shown in Figure 1, which haunts the nightmares of many Econ 101 students. (If you think economists get excited when two curves intersect, just imagine how happy they are when it’s three curves.)

After reviewing these conditions, Lange offers a fairly straightforward proposal (pp. 60-66). Free markets in consumer goods and labor would remain. A Central Planning Board would set accounting prices for capital goods. Production plant managers—the equivalent of entrepreneurs, but government officials instead of private owners—would use those accounting prices to calculate the least cost method of production (minimizing average cost). Directors of industries, such as the car czar, would expand or contract the number of production plants so that marginal cost equals the price. In essence, Lange proposed to use the theory of how markets work as a substitute for actual markets. Hence, market socialism. The calculation problem: solved.

How would the Central Planning Board set prices? Don’t even worry about it, says Lange. They definitely wouldn’t need a complex set of simultaneous equations (pp. 66-67).3 They could even pick prices arbitrarily. If those prices turned out to not be equilibrium prices, they would be able to observe surpluses and shortages of goods. Just like markets do, they would approach equilibrium through a process of trial and error. The system might even approach equilibrium faster since the planners would be adjusting multiple prices at once instead of just one.

There are many potential objections to Lange’s proposal. I want to focus on one in particular. Several of Hayek’s most famous articles—”Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition”—can best be understood against the backdrop of the calculation debate.4 In these articles, Hayek articulates a view of how a competitive process makes use of widely dispersed knowledge about economic conditions.

A lot of ink has been spilled about the extent to which Hayek’s rejoinders to the market socialists are similar to or different from the argument put forward by Mises. Some insist that Mises’s calculation argument has nothing to do with knowledge.5 When considering this possibility, is important to keep in mind that Mises and Hayek were taking aim at two very different proposals for implementing socialism. Mises sought to answer the question: what can socialism use to calculate, if not prices? Hayek had to answer the question: what makes market capitalist prices different from market socialist prices?

One answer is to retreat to incentives. Socialist plant managers, industry czars, and central planners simply will not have the incentives that private owners of capital would have in a market system. This rejoinder is true, but I have never found it satisfying. This is the “socialism is great in theory, but not in practice” response. It is a retreat from the original Mises-Hayek view, which is that socialism is, in fact, bad in theory.

Hayek’s tack is different. Echoing Mises’s 1920 claim that there is an “intellectual division of labor” (p. 102) at play in market societies, Hayek insists on the importance of the division of knowledge (p. 50). Knowledge about the relative scarcity of factors of production is not given to any one mind in its entirety. This often idiosyncratic or even tacit knowledge is dispersed throughout society. Market capitalist prices reflect—however imperfectly—this broadly dispersed knowledge. Market socialist prices reflect only the knowledge of the Central Planning Board. Don Lavoie would later come to call this the knowledge problem.6 Market socialism can introduce a common denominator for economic calculation, but the prices expressed in that denominator do not reflect economic reality to nearly the extent that free market prices do.

Decades later, Israel Kirzner offers a helpful clarification of the difference between market socialism and market capitalism. In an article building on Don Lavoie’s Rivalry and Central Planning, Kirzner argues that it is no accident that Mises’s post-debate work placed entrepreneurship at the center of the market process.7 The entrepreneur, for Mises, is “the first to understand that there is a discrepancy between is done and what could be done” (p. 336).8 Entrepreneurship drives the market towards increased levels of coordination, driving the prices of production goods to more accurately reflect their relative scarcities.9

In a second article, arguing for the essential continuity between Mises and Hayek’s views, Kirzner draws these threads together.10 Misesian entrepreneurs solve Hayekian knowledge problems. Real, existing prices are never equilibrium prices that would result in perfect coordination between market participants. They need not even be “proximate” or “close” to their equilibrium values. Nonetheless, they reflect “the best available entrepreneurial knowledge concerning market conditions” (p. 223). Because entrepreneurship wins profits or incurs losses, those entrepreneurs most attuned to the conditions of the market will typically have more resources at their disposal than those who are less alert. Market prices are not perfect but they do reflect knowledge that is dispersed and judgment that has passed a selection test.

The key condition for this “marvel” is freedom of entry. “It is only the possibility of unrestricted entrepreneurial entry which permits more alert entrepreneurs to deploy their superior vision of the future in order to correct the misallocations of resources reflected in the false prices which characterize disequilibrium” (p. 216). Prices do not move by magic. They move when entrepreneurs bid them up or mark them down. It is only prices that are subject to such revision that can effectively guide economic calculation.

Entrepreneurship, for Mises and Kirzner, is not the province of an elite class of businessmen. It is a part of human action. “In any real and living economy every actor is always an entrepreneur and speculator” (Mises 2007, p. 252). The more expansive freedom of entry is, the more likely is it that errors will be detected and corrected. We do not know ex ante whose knowledge will prove relevant to producing what we want at least cost. Freedom of entry means that anyone can have a go, tapping maximally into the dispersed knowledge of a modern society.

Following Kirzner, then, an essential component of a free economy is freedom of entry. By contrast, as Murray Rothbard notes, “a centrally planned economy is a centrally prohibited economy (p. 831).11 In order for there to be a central plan at all, private entrepreneurs must be prohibited from driving production decisions. A Central Planning Board may still act entrepreneurially in changing The Plan. But they will act without prices shaped by other entrepreneurs’ knowledge, alertness, and judgment. It is precisely the prohibition on exercising the entrepreneurial function that makes calculation in a socialist economy arbitrary.

Having made my argument as to why socialism can be understood as a prohibition of free entry, I now turn to why such a definition might be useful. Political economists are wont to distinguish between de jure edicts—what official law or policy declares to be the case—and de facto realities—what in fact is the case. By focusing on what socialism does rather than how it is constituted, the prohibition view allows us to distinguish between socialism in name and socialism in practice.

This definition does confront an important ambiguity that must be noted. Prohibitions are rarely, if ever, complete. As with all definitions of socialism, the prohibition view admits of degrees and of variation. Governments try to prohibit drugs, but they often remain available. Black markets also thrive in socialist countries. Some level of private enterprise is usually tolerated while the “commanding heights” remain under government control. Likewise, there are variations in the degree of prohibition. The most socialist states ban many forms of private enterprise outright, though even there a private individual might gain the ear of a high official and be allowed to proceed. Less stringent implementations make entrepreneurs go through a lengthy and costly process of introducing a new enterprise.

The prohibition view of socialism is thus congenial with Gary Anderson and Peter Boettke’s observation that Soviet socialism was not, for most of its existence, central planning per se.12 Rather, it was a decentralized but heavily interventionist system of extraction by elites of wealth that was largely produced in black and gray markets. Elite party members had de facto control of large and visible productive resources (contra the common ownership view) and prohibited entry into those markets. There was a formally socialist economy that existed parasitically on top of informal economic activity.

What about fascism? Contemporary socialists get quite agitated when proponents of economic liberalism identify national socialists as socialists. In a fascist economy, productive resources are privately owned, but their decisions are coordinated with one another and the central government. Rather than focusing on ownership and coordination, the prohibition view asks a different question: was someone who thought they had a better idea of how to organize production free to have a go? Were they permitted to buy productive resources and deploy them according to their own vision of the future? If not, then fascism counts as socialism.

Finally, let’s turn back to Lange. One might object that market socialism doesn’t really count as socialism, since consumer and labor preferences and quasi-market forces still shape production decisions. But it still shares the same functional limitations as cruder forms of central planning. The central planning board promulgates commands to industry czars and plant managers about how to combine resources in a way that is supposed to substitute for how freedom of entry shapes the size of industries (pp 58-60). In this formulation, Lange ignores the most important feature of freedom of entry, that it brings new ideas into an industry.

Even the managers in Lange’s scheme lack much capacity for entrepreneurship. Those who make production decisions are not to treat prices as Misesian entrepreneurs do. In the Mises-Kirzner view, entrepreneurs treat prices as inputs into decision making but not determinants of decision making. Indeed, a key function of entrepreneurship is to identify where current prices are sending incorrect signals. By contrast, for Lange “the parametric function of prices must be imposed on [managers] by the Central Planning Board as an accounting rule” (p. 63). Lange’s managers are prohibited from making use of their idiosyncratic knowledge, alertness, and judgment.

For more on these topics, see

Not all socialists ascribe to the ideal of central planning. Common ownership can be understood in a wide variety of ways, and implemented in more or less decentralized fashions. Some stress ballot democracy, others deliberation, and still others are just fine with an elite vanguard shepherding the people. What all these alternatives share, however, is the idea that individuals are either outright prohibited from or must seek permission to act on their imaginative views of how to serve others. Socialism is as socialism does, and what it does is outlaw the creativity that enables economic adaptation and progress.

[1] Ludwig von Mises, “Economic Calculation in the Socialist Commonwealth,” in Hayek, ed. Collectivist Economic Planning. George Routledge and Sons, 1935.

[2] Oskar Lange, “On the Economic Theory of Socialism,” The Review of Economic Studies, Volume 4, Issue 1, October 1936

[3] It is hard to see how central planners could avoid the use of some formulas. A key insight of price theory is that markets are interdependent. The price of beef is affected by the prices of pork and of hamburger buns. Without appeal to some mathematical tools, the Central Planning Board really would be blindly groping.

[4] Collected in F.A. Hayek, Individualism and Economic Order, University of Chicago 1948.

[5] Mises might be surprised by the claim that knowledge was not central to his original argument. Economic calculation “affords us a guide through the oppressive plenitude of economic potentialities” (p. 101). “The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid [of calculation]” (p. 103). “Every graded system of pricing proceeds from the fact that men always and ever harmonize their own requirements with their estimation of economic facts” (p. 107). “We cannot act economically if we are not in a position to understand economizing” (p. 120).

[6] Don Lavoie, National Economic Planning: What is Left? Cato 1985.

[7] Israel Kirzner, “The Economic Calculation Debate: Lessons for Austrians,” in Peter Boettke and Fred Sautet, eds., Competition, Economic Planning, and the Knowledge Problem, Liberty Fund 2018.

[8] Ludwig von Mises, Human Action: A Treatise on Economics, Vol. 2, Liberty Fund 2007.

[9] This is not to say that this is all that entrepreneurship does. Calm down, Schumpeterians. Joseph Alois Schumpeter, 1883-1950.

[10] Israel Kirzner, “Reflections on the Misesian Legacy in Economics,” in Peter Boettke and Fred Sautet, eds., Ludwig von Mises: The Man and His Economics. Liberty Fund 2019.

[11] Murray Rothbard, Man, Economy and State. D. van Nostrand, 1962.

[12] Gary Anderson and Peter Boettke, “Soviet Venality: A Rent-Seeking Model of the Communist State,” Public Choice Vol. 93, 1997.)

*Adam Martin is Political Economy Research Fellow at the Free Market Institute and an assistant professor of agricultural and applied economics in the College of Agricultural Sciences and Natural Resources at Texas Tech University.

For more articles by Adam Martin, see the Archive.

Jonathan Swift’s Gulliver’s Travels offers one of the most penetrating and sustained explorations of the idea that size really matters. Published in 1726 after Swift’s political ambitions had largely foundered, during a period in which he was serving in a kind of exile in the land of his birth as Dean of St. Patrick’s Cathedral in Dublin, the novel was inspired in part by the success of Daniel Defoe’s 1719 Robinson Crusoe. Both novels present tales of shipwreck and castaway but differ in other key respects. Defoe presents a largely hopeful account of the resilience, creativity, and dedication of a single person, suggesting that human beings can not only survive but also thrive in isolation. By contrast, Swift offers a portrait of a man who is always transformed by the social circumstances in which he finds himself, implying that human beings are largely defined by the society of which we are part. One of the most dramatic changes in social context Gulliver experiences during his voyages to strange lands concerns size—in the Land of Lilliput, the inhabitants are one-twelfth the height of Gulliver, while in the Land of Brobdingnag, Gulliver is one-twelfth the height of the natives.

Among the miniscule Lilliputians, Gulliver’s relatively immense size transforms his sense of his own identity. At first, he is seen as a great threat and shackled, and the inhabitants never completely get over their fear of him. Eventually convincing them that he intends them no injury, he is given the run of the land, on the condition that he avoid harming anyone. He soon becomes a favorite of the royals, although it is clear that he is prized above all for utilitarian reasons. The king persuades him to subdue a rival people, the Blefuscudians, by stealing their fleet. However, Gulliver refuses to make vassals of them, provoking royal displeasure. Soon thereafter, when he extinguishes a potentially disastrous conflagration by urinating on it, he is charged with treason. Convicted and sentenced to be blinded—a punishment that would largely deprive him of the ability to act independently yet preserve his immense potential as a power tool—he escapes the island. In a land of miniaturized human beings, where the king inspires awe because he is taller by the breadth of Gulliver’s fingernail than others in his court, otherwise ordinary Gulliver stands out as a Colossus.

In Brobdingnag, the tables are turned, and tiny Gulliver is regarded as little more than a curiosity. The farmer who finds him first gives him to his daughter as a pet, but then realizes that he can exhibit him for money. Soon sick of being shown as a freak, Gulliver is purchased by the queen of the land, who arranges for a special tiny house to be built for him. He is the butt of numerous indignities, including an attack by wasps and a near-death experience at the hands of a monkey who carries him to the rooftop. Just as in Lilliput Gulliver’s relative size meant that even the most trivial and routine aspects of his daily life, such as feeding and excretions, were transformed into matters of great moment, so among giants, everything about Gulliver seems trivial, mean, and subject to ridicule. How could such a small creature, the Brobdingnagians ask, possibly amount to anything worthy of more than trifling consideration? Such insults to Gulliver’s human dignity are compounded when he discusses history and politics with the king, who concludes that Europeans are “the most pernicious race of little odious vermin that nature ever suffered to crawl upon the surface of the earth.” In Swift’s account, seemingly defining human traits such as reason and virtue amount to very little indeed in the face of mere miniaturization and magnification.

In the spirit of Swift, consider the effect of size on health care organizations, from medical practices to multi-hospital health systems. On the one hand, increasing size can offer some readily apparent advantages. For example, larger organizations can take advantage of economies of scale in purchasing, marketing, and overheads. Medical supplies, equipment, and drugs often cost less per unit when purchased in large quantities. A larger organization can afford to mount larger and more sophisticated marketing campaigns, taking advantage of a wider range of media. Governance, documentation, billing, and information technology are among the overhead costs that may be relatively reduced as an organization grows. Moreover, larger organizations typically wield greater bargaining power, offer a greater variety of resources (such as different medical specialties and diagnostic and treatment options), exert greater influence in a healthcare market, and provide greater compensation to their executive staff, based at least in part on the rationale that they are overseeing a larger organization and therefore doing more work.

I do not think anyone would contest that we need some large healthcare organizations. A solo-practice physician cannot offer the same around-the-clock care as a group of physicians staffing different shifts. Likewise, a family physician cannot offer the same level of subspecialty expertise as a multi-specialty group practice that includes specialists in fields such as neurology, cardiology, and gastroenterology. Moreover, as a medical practice grows in size, it is able to reduce duplication and per-physician administrative costs such as record keeping, coding, and billing, a consideration that also applies to hospitals. A small hospital of a few dozen beds or less cannot afford to offer the same diagnostic and therapeutic equipment and services, including PET/MRI scanners, robotic surgery devices, and highly advanced service lines such as cutting-edge neurosurgery and cancer care, as can a hospital of hundreds of beds. Some also argue that larger healthcare organizations can also improve quality of care and reduce costs, although this is hotly debated. If bigger is not necessarily better, it does at least open up multiple opportunities for enhancement.

Yet there are also numerous downsides to consolidation, one of which is the inevitable rise of bureaucracy, or “the rule of desks.” In a small organization, everyone can know everyone else, and many decisions can be made on the basis of personal relationships, based on respect and trust. As organizations grow, not everyone can know everyone else, and decisions must be made on the basis of impersonal factors, such as job descriptions, organization charts, and policy and procedure manuals. In an industry such as manufacturing, this might not pose a problem, but medicine is founded on relationships between individual patients and physicians. As bureaucratization progresses, organizations such as medical practices and hospitals tend to become more and more rigid and less and less creative. People are hired, promoted, and fired less on the basis of the personal relationships they build than on whether they do what those above them on the organization chart expect. Everything must be done according to the chain of command, and if someone steps outside that chain, even though their idea is first rate, they are likely to be reprimanded.

In Lilliput and Brobdingnag, the royals do not really care about Gulliver as a person. Instead, their interest in him is based on what he can be made to do—in the land of the small, to function as a weapon of war, and in the land of giants, as a sort of parlor trick. His functions are fixed according to the advantages of his relative size, and if he were the same size as the inhabitants, they might take no interest in him at all. Gulliver becomes nothing more than a member of a size-based class, and any other European would be treated in the same way, as a tool of war or amusement. It is no wonder that Gulliver does not wish to linger in either land, where genuine companionship is rendered essentially impossible. Just as Gulliver soon longs to be treated as a human being, so no physician wants to be treated as little more than a member of the class of internists, pediatricians, or surgeons. Every physician wants to be seen as making distinctive contributions, but a heavily bureaucratized organization finds it difficult or impossible to treat the occupants of the boxes on its organization chart as anything else. What matters most is not the initiative of physicians but whether they are obeying the rules and performing their jobs as prescribed.

Physicians in a small-group practice or a single hospital may function day to day by putting relationships first. They are likely to know their patients and colleagues as individual human beings, with distinctive personalities, life stories, and aptitudes and interests. Such relationships help to get things done, precisely because people know and trust one another. By contrast, as organizations grow, they begin functioning more and more like inhabitants of what sociologist Max Weber called an “iron cage.” To those working within it, the organization feels less and less like a network of personal relationships—a community—and more and more like a machine. What seems most real in a small organization is often people and interpersonal relationships, but what seems most real in a bureaucracy is the design and operation of the machine, in comparison to which personnel such as physicians are often made to feel like interchangeable cogs. For people whose professional identity is bound up with caring for individual human beings, this machine-like—even prison-like—environment can prove profoundly disheartening and even positively disabling. Gulliver quickly grows weary of being treated as a mere tool.

Of course, the pernicious effects of consolidation are not confined to physician practices or hospitals. They are also readily apparent in other industries, where just as growing hospitals and health systems can begin to think of themselves as businesses whose service line happens to be healthcare, so other industries can think of themselves in terms of little more than market share, profits, and market capitalization, gradually devoting less and less attention to the quality of the products and services they were originally founded to provide. In other words, money can become such an overarching consideration that some businesses will forsake quality, reputation, and trust in order to make more of it. As Plato wrote 2,500 years ago, when this happens, a physician ceases to be a physician, a craftsman ceases to be a craftsman, and a politician ceases to be a politician, as all three are transformed into little more than money makers. Such metamorphoses are especially common when finance seems to rule the economy, business school graduates are presumed to be ready to lead in any field, and companies are bought and sold, located and relocated, and staffed and downsized based strictly on financial considerations.

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It is just at this point, when our pride gets the better of us, that we are most vulnerable. Medical practices, hospitals, and health systems exist not to expand their markets, to boost their profits, or to fatten the wallets of their executives. They exist to care for patients, and even though remaining small may run counter to every instinct of the contemporary business school graduate, there are many things in healthcare that tend to be better done at a smaller scale. First and foremost is caring. Just as Gulliver can find no intimacy with the Lilliputians, and the Brobdingnagians can find no intimacy with him, so a large and necessarily bureaucratic healthcare organization cannot care for its employees or the people for whom its employees care. Why? Because it does not operate at their scale. It is simply too big to operate on personal relationships because it is too big to see individual human beings. And any organization that cannot operate on personal relationships, with a steady focus on individual human beings, cannot, by its very nature, foster the human excellences on which good medicine depends.

*Richard Gunderman is Chancellor’s Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, Philanthropy, and Medical Humanities and Health Studies at Indiana University. He is also John A Campbell Professor of Radiology and in 2019-21 serves as Bicentennial Professor. He received his AB Summa Cum Laude from Wabash College; MD and PhD (Committee on Social Thought) with honors from the University of Chicago; and MPH from Indiana University.