Before Ken Rogoff and Larry Summers achieve their laudable goal of doing in the $100 bill, it is worth taking a moment to contemplate the $100 bill on the sidewalk that the proverbial economist doesn’t bother to pick up because if it were real, she reasons that it would have already been picked up. 

Let me call the general category within which this proverb falls the equilibrium paradox. The equilibrium paradox appears in many guises. In asset markets, someone must be rewarded for getting asset prices in line, or they won’t get there. So the asset markets cannot be totally efficient. In product markets, supernormal profits must sometimes exist or there is nothing to induce firms to enter and drive profits toward zero. For the progress of technology, there must be moments when someone points out that doing something a certain way is inferior to some other way of doing it without being successfully brushed aside by the rejoinder “Oh, so you think we have been stupid in the way we have always done it.” And in public policy, any change must get past the objection “If that would work, don’t you think we would have already tried it?”

Martin Weitzman is the reason I am a macroeconomist. His book The Share Economy: Conquering Stagflationis still a must-read 30 years after its first publication. I like what he says on pages 45 and 46 about the equilibrium paradox in the policy realm:

A doctrine of extreme fundamentalist economic philosophy argues that every existing economic institution or custom in a market economy has a deep-seated rationale that must be fully understood before any corrective action can be taken. (Incidentally, after it is fully understood, according to the doctrine, typically no action will need to be taken.) Such followers of the “no free lunch” school will undoubtedly find the message of this book irrelevant–after all, if we have a wage system, they will argue, it must already be an optimal system in some sense or why else would we have it in the first place? There is an economists’ joke about economists who look at the world this way: “How many true believers in ‘efficient markets’ does it take to screw in a lightbulb?” None–because the market has already done it for them. 

Extremists of that faith act like the precocious but obsessive young surgeon who refuses to perform an appendectomy because he doesn’t understand why the appendix exists in the first place. The truth is that vestigial organs are present in economic systems as well as in biological ones–despite denials of the possibility based, in both cases, on vague or superficial generalities about Darwinian survival value. Whether or not the immature surgeon understands the ultimate reason for the human appendix is irrelevant, of course, compared to the far more compelling insight that a patient with acute appendicitis can be saved by a routine operation. 

Yet, the equilibrium reasoning that generates the equilibrium paradox has a great deal of force to it. It does make sense to wonder if a seeming opportunity might be too good to be true. It is important to look for whether there is some reason that others might have missed something. On the other hand, it is important to wonder if there haven’t already been many, many people who have looked at that seeming opportunity and rejected it after following exactly the investigative path one would oneself end up following if one proceeded further.    

Humility is typically a virtue, but it is not a virtue if it prevents one from seeing one’s duty. If somebody has to do it, it is important to see when the appropriate somebody is you.

The most obvious case where the somebody who has to do it is you is when it is the course of your own life that is at issue. I often marvel at how I can confidently predict that one of my students will succeed, knowing that they will work hard to ensure that success. But it is no good for that student to sit back and say “I know I will succeed, so I don’t have to work so hard.” Somebody has to do it, or it won’t happen–and that somebody is them. 

The Equilibrium Paradox and Donald Trump

I thought again about the equilibrium paradox on reading Daniel Drezner’s Washington Post essay “My very peculiar and speculative theory of why the GOP has not stopped Donald Trump.” He writes:

For the past few years, political scientists and pollsters have developed a number of explanations, indicators and theories for why some candidates do well and others don’t. The Party Decides, for example, has been the primary theory driving how political analysts have thought about presidential campaigns. It seemed to explain nomination fights of the recent past quite well.

When Trump announced that he was running last summer, his lack of establishment support and high unfavorables made it extremely easy to very smart people to confidently assert that he had almost no chance at securing the GOP nomination. …

So why has it been proved wrong? My hypothesis is that GOP decision-makers also read the same analyses and concluded that they did not need to do anything to stop Trump.

This is the equilibrium paradox. In effect, Daniel Drezner argues that equilibrium reasoning made everyone think someone else would cut Donald Trump down to size. But somebody has to do it, or it doesn’t get done. And in this case, it needed to be a critical mass of somebodies.

Having used this analysis of Donald’s success as an example of the equilibrium paradox, readers might suspect a negative attitude toward Donald Trump as a possible next president of the United States. Indeed, not being either a Republican or a Democrat and making an effort be generally nonpartisan politically (while very partisan on particular policies) does not prevent me from having opinions about candidates. I wrote a great deal about my second-cousin once-removed Mitt Romney during the last presidential election season (my favorite–and the one still worth reading is “The Magic of Etch-a-Sketch: A Supply-Side Liberal Fantasy”), and I wrote about Hillary Clinton in my 2014 post “Sliding Doors: Hillary vs. Barack.” 

Most importantly, I think choosing Donald Trump would be a giant leap in the dark, since on most substantive policy questions he basically says “trust me.” Occasionally, a leap in the dark leads to a wonderful landing. But not that often! In any case, I am enough of an optimist that I will hope for the best if Donald does in fact become President of the United States, but I will expect trouble. It is always possible to be surprised.

It is reasonably clear that Donald will do something about immigration policy that is contrary to the views I expressed in “‘The Hunger Games’ Is Hardly Our Future–It’s Already Here.” And his defense of the status quo in old age policies, without any modifications, is likely to be contrary to intergenerational fairness. But on the other hand, a Donald Trump presidency could be a real gift to comedians–as long as the Supreme Court prevents Donald from abrogating the 1st Amendment enough to sue the comedians for their characterizations of him.

The vein of discontent that Donald Trump has tapped into in a large segment of the American electorate is important to pay attention to. The kinds of economic policies I have discussed here on this blog could do quite a bit to make things better for those folks–except in areas where making them better off is at the expense of making someone else much, much worse off. But I believe there are enough Pareto improvements and near Pareto improvements to be had that there are many things that could be done to reduce this discontent without too much harm to other people. In writing this, I am thinking about what I wrote near the end of “Why Thinking about China is the Key to a Free World” on “Strengthening the case for freedom.” 

Resolving the equilibrium paradox requires each of us to figure out when something that needs to be done is a job that falls to me or a job that falls to you. Making a mistake on that score can leave the job undone.