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Free market idolism

November 9, 2021

Tim Requarth writes about the excess concern given to risk compensation:

In 1975, University of Chicago economist Sam Peltzman elevated what might have remained armchair speculation to a powerful argument against safety regulations. Writing in the Journal of Political Economy, Peltzman hypothesized that 1960s-era federally mandated vehicle regulations such as seat belts were actually making the roads less safe because they encouraged so much reckless and careless driving. In his thinking, any safety advantage of the new regulations was being offset.

Peltzman’s initial research didn’t hold up to later review. More:

Whenever risk compensation has been subjected to empirical scrutiny, the results are usually ambiguous, or the hypothesis fails spectacularly. And when risk compensation does play a part in behavior, it tends to do so in small and specific ways.

Unsurprisingly, it turns out that seatbelts, guardrails, and motorcycle helmets work. The article quoted references the relevant research.

This is one example of free market idolism. Many people believe that economics has well-defined what a free market is and proven it optimal, and that any effort to regulate it for public health, control of pollution, consumer or work safety, or other public purpose is futile. Economists — of a particular preaching sort — theorize all sorts of compensatory mechanisms to explain that futility, from risk compensation to regulatory capture. Those notions get baked into general political discussion as if they were proven, on the presumption that those who aren’t much swayed just “don’t understand economics.”

The reason many of us are not swayed is that we recognize that some of what parades as economic theory is speculation untethered to data. Which is one reason it is refreshing to read about economists focused on the empirical and how to better use it, and gratifying that they get recognition.

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