Sunday, July 12, 2009

Tyler Cowen vs Justin Lin

Lin wrote in this piece that small banks are good for developing economies, Cowen is reluctant to endorse Lin's view.

The gist of Cowen's argument is this:

But what if those institutions (Gary's note: big banks) start to arise naturally, from market forces, as indeed they will at some point? Should they be discouraged or shut down or somehow taxed at disproportionate rates?



Justin made similar mistake in his recent book 解讀中國經濟. All of us know that comparative advantage determines the pattern of trade and industrial development. With this, Lin came to the conclusion that government should support the industy which has comparative advantage, with favourable government policy or subsidy.

Is it a tendency of economists? When market fails, government correct it. When market succeeds, government amplifies it.

Gary M C Shiu said...

Thanks KM for your comment.

Correct me if I am wrong, it is also Justin Lin, who in his earlier book "The China Miracle" (published circa 1990 and revsied later on) who endorses the idea that comparative advantage (CA) of a nation shifts the economy develops.

For Lin's argument to go through, one has to answer the following question: what kind of market failure, if any, renders the government involvement in promoting industry compatible with CA necessary.

As far as I recall, Lin does not offer an answer in his book. Failure to explain why anyone would fail to pick up a five dollar bill on the sidewalk (ie. why benefits from exploiting an economy's CA fail to be exhausted by entrepreneurs) renders Lin's argument totally unconvincing.

There is another possibility. In stead of advocating government involvement from a market failure perspective, Lin could also be thinking that the government might be better positioned to indentify the CA of an economy. That argument, if indeed this were Lin's thinking behind his policy recommendation, is even less convincing than that mentioned above.