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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 himself had written earlier. There is nothing like the blogosphere for prodding you into writing, roughly and readily but as best you can, That Thing You Are Always Talking About.

Patrick did this to me by himself sketching out the Hockey Stick Theory thus:

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.

Or to put it another way, the state does this:


And, thus prodded, I then amplified, in the manner that follows. At the end, I even said that I ought to copy and paste this stuff into a Samizdata posting, but then I forgot about that. Now here it is. What follows is basically what I originally put in that comment, but I have changed a few things and added another hockey stick, so no italics. 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, there is an equal and opposite tendency.

A new market is chaotic, and (and this is the point) ignorant. People do not, e.g., know how to spot cowboy operators, or bad products made in all sincerity but badly. Ignorance and foolishness abound, and so to start with, 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.

Or to put it another way, free markets do this:


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) do not 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 costs.

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 markets because their only choice is: more misery now and even more misery later (government), or more misery 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 (sticking hockey stick two on the end of hockey stick one, with the hook at the bottom of hockey stick 2 starting where the handle of hockey stick 1 ends) is worth living with, because long term benefit is all there is in the way of good future news. Things will either get worse before they get better, or, in David Carr’s wonderful phrase from I forget where, they will get worse, before getting even worse than that. Those are the choices. In that world, it is the statists who are liable to be baffled by the mysterious willingness of people to tolerate free market reforms, as people pretty much have in the luckier parts of Eastern Europe. This was a classic illustration of people preferring (to switch metaphors from sports to food) jam tomorrow to no jam tomorrow, with no jam today being offered by anybody.

Something rather similar happened in Britain in the early nineteen eighties. In Britain at that time it was universally ‘known’ that Thatcher’s refusal to keep on bankrolling failed industries was an unendurable horror. Yet so many voters saw the point of such an attitude that this is now the new orthodoxy.

I am grateful to Patrick for having stirred me into writing this down, and further grateful to him for having reminded me about having done so. Sorry about the weird shapes of the illustrations pictures. There are things I know how to do with Photoshop, and there are things like this. It was important to get the hockey sticks at the correct angles.

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17 comments to How hockey sticks explain the relative attractions of statism and of free markets

  • Statism fails at creativity and innovation.

    If you already have a product and system for making it pretty much perfected then a politically managed system can probably outperform a free-market for a period of time until the production environment changes enough to render the the old methods inefficient. At this point the statist will not be able to adapt because they are unable to politically manage creativity.

    Switching to free-market causing a downturn because the system has to be rebuilt. You lose whatever efficiencies the statist system had while the dynamic system experiments with finding new solutions. Once the new solutions are found the uptick occurs.

  • anonymous coward

    oh, dear–that’s a field hockey stick (not ice hockey)

  • Dave

    Yeah thats interesting, but howcome so many on the left fail to see this?
    Yes I know Politicans are too short-term but even so, many lefties don’t recognise anything positive about the Thatcher reforms, or at least wont admit to it.
    Why do they fail to see it time and time again, particularly the far left?

  • Ron

    How will the British GP dropped from F1 motor racing story play out?

    As one of the few races not to benefit from central government help, Silverstone has been increasingly squeezed in recent years by Ecclestone, who wants the BRDC to upgrade facilities as well as meeting his huge fees to host the race.

    ( … )

    The BRDC has long argued that, as a non-profit organisation, it cannot afford to run at a loss but Ecclestone, who receives most of his fees from national governments keen to cash in on Formula One, has lost patience.

    Note that Bernie Ecclestone was the man who paid New Labour GBP 1 million in 1997-8 to allow an exemption from a ban on cigarette advertising on F1 racing cars, and still got his exemption after Labour were shamed into returning the money.

  • Ron

    What you describe is an industry on its way down the handle of the hockey stick. F1 will go on getting more and more expensive, and duller and duller as the years go by.

    I have wondered for some time why it was already so expensive and so dull. You just told me.

  • I should add that one of the features of state decline is that pure profit organisations, not subsidised by government(s) get out of whatever it is. This is one of the basic ways that the handle slopes downwards.

    Next step? Ecclestone dies, which he has to do eventually. And then the UN (or a UN type operation, such as already runs the Olympics) takes over F1. You think I’m joking? I am, of course. But that’s ths kind of nonsense we’re talking about here.

    I feel a whole new theory about the rise and decline of sports coming on.

  • Dave

    I’m more interested in the way that many free marketeers refuse to see anything wrong, even in the short-run, with markets, or anything good, even in the short run, about state activity.

    To hear some libertarians you would think that there were no costs whatever to opening up markets, and no benefits whatever to anyone of state action.

    Why leftists think as they do is a whole different subject, in my opinion. Although, the short-term goodies of political action and short term chaos of markets, do explain part of it, I think.

    And the inability of many libertarians to convert leftists, if that’s what it is, is partly explained by their blindness to the immediate realities (as opposed to the longer term realities) being argued about.

    Shannon Love: Precisely.

  • ananymous coward:

    The reason why I chose a hockey stick (as I prefer to think of it, having played hockey at school, on grass) rather than an ice hockey stick, is that the former curves and the latter kinks, and you need a curve for this. So I think Patrick got that a bit wrong.

  • A_t

    ” F1 will go on getting more and more expensive, and duller and duller as the years go by.

    I have wondered for some time why it was already so expensive and so dull. You just told me.”

    I dunno, the main reason it’s boring (relatively) at the moment is ‘cos the same guy wins almost all the races. Also, how exciting can a bunch of cars driving round & round the same track for ages be?

    & Are the indy 500 etc. in the US private-run? If so, your whole theory bites the dust.

    I tried, I seriously tried watching a bit of american car racing a few weeks back (the somewhere or other 300… I’ve erased most of the experience from my brain)… round & round & round the loop they go… one car edges it’s way past another one… wow! And look, there are still 200 laps to go! Makes the dullest of F1 races look like genius entertainment.

    On an unrelated side-note, does anyone know we evolved these very different forms of motor racing?

  • A_t

    Felt i should add, interesting & insightful original post; good reading, thanks!

  • Thon Brocket

    “F1 will go on getting more and more expensive, and duller and duller as the years go by.”

    Mounting Lewis guns, WW1 Sopwith Camel-style, might jazz it up a little. Just a thought.

  • John Harrison

    I believe the Adam Smith Institute have a good approach to this very problem. First, they are very prolific producers of detailed policy proposals. Abstract ideas are a great point for discussion but someone has to work out how to implement them. By churning out a lot of ideas and explaining how they could be done there is a chance that at least some of them will find support and it makes it difficult for opponents to oppose them on the grounds that they are impossible to implement. The other successful side of the approach is to identify what might go wrong and who might oppose the policy and provide suggestions for ameliorating the immediate discomfort of those worst affected. For example, proposing free employee shares when a nationalised industry is privatised. Given that the downswing of the ‘hockey stick’ is usually felt by a relatively small number of people (albeit intensely – so they will protest) the eventual upswing is much larger and creates much value. A small share of this value can then be used to compensate the losers from the process so they can be winners too.

  • Anonymous Coward #315

    I think you have the hockey stick misplaced. The handle should be lying horizontal (or almost). That means, the benefits from govt intervention vanish almost immediately.

  • I have wondered for some time why it was already so expensive and so dull.

    I had thought that that was why you asked me to do a talk on the subject at one of your Fridays little over a year ago; a talk, the text of which currently graces the pages of ubersportingpundit(Link).

    Obviously, I wasn’t sufficiently clear: it’s the goddam regulations.

  • I dunno, the main reason it’s boring (relatively) at the moment is ‘cos the same guy wins almost all the races.

    But this is not the first time we have had a dominant driver/designer combination. In the Sixties we had Clark/Chapman. Most enthusiasts think that Clark is about as good as Schumacher and I have yet to hear of anyone who thinks Brawn is better than Chapman. Yet Clark only won two world championships. There has to be something else going on.

    Apologies to Brian for getting us bogged down in a completely different sport from the one in the original topic.

  • limberwulf

    John Harrison,
    your comment made me realize that a part of the reason that leftists often dont see the long term future/historical benefits to the markets is the “me factor.” When thinking small-picture, the tendency is to think of how something will affect you personally. There is also a tendency to think short-term, but that is only aportion of the issue. When, as you stated: “…the downswing of the ‘hockey stick’ is usually felt by a relatively small number of people (albeit intensely – so they will protest) the eventual upswing is much larger and creates much value.” You point out that on an individual level, some are put in a difficult position.

    Essentially, it gives the left a large pot of anecdotal evidence that encites emotion. The free-market side has long term payoff, which, even when proven, does not encite pity or any other strong emotions. Its like trying to have a news program that only reports good stuff, its been tried and did not do well. It is easy to see the impact of a downturn on a personal level, and to identify with it. Even tho the free market would give those hurt in the downturn great opportunity, the responsibilty to recover still lies with the individual who did so, and his heroics may inspire, but the glory will not be given to the free market.

    In a way, that is how it should be, the triumphs of the individual should be attributed to the individual, not any sort of system. The short lived triumphs of a state system are attributed to the system, giving it glory, and making it an easier sell. The nature of the free market is to spread glory, power, opportunity, wealth, etc. As such, the free market is not attributed with its accomplishments, whereas the socialist system is. The tough part is attributing the negative accomplishments of socialism, and proving that it was socialisms fault. Those of us who study this closely see it clearly, but many people, even otherwise intelligent people, do not see it so easily.

  • gene berman

    I quite understand that this discussion of the unsatisfactory nature attending government provision of goods or services is somewhat casual, “seat of the pants,” and that, in this wise, that the hockey stick may be a fair approximation. But, as explanation, it falls far short and is actually useless in any attempt to persuade those accustomed to the quo of the status. It’s not even possible to assert, with any claim to validity, that, at the outset of such provision, that impressions as to “satisfactoriness” can be made.

    In the sphere of the market, precision in drawing conclusions as to “satisfactoriness” is not only continuously possible but actual. The easiest indicator is, simply, whether the product sells on the market for a price which returns the costs expended plus a sum spoken of as “profit.” And, of course, it is possible for a state-run enterprise to produce similar data and to draw similar conclusions–but which may be entirely erroneous.

    The difference is that the private enterprise (and any of its parts, possessions, and properties) have their own
    prices on the market; not only are there routine, periodic assessments of the value of these components but the entirety may be priced daily in “shares” on the stock market. It is only by reference to these numbers that an adequate comprehension may be gained as to whether the enterprise is profitable or not.

    Economists describe this as the market “for goods of higher orders.” And, of course, this is just what state enterprises cannot have. Thus, they are at all times deprived of the data which would inform them of whether they are producing profit or loss, the latter being the signal that they are misemploying or misallocating assets (whether they had originally acquired such assets on the market or by expropriation). In the absence of such data, success is rare and then only occurs accidentally. What is (relatively) easy for even a barely-numerate street vendor is virtually impossible to the wisest and most ably-assisted of government managers or planners.