The following blog post was originally published at the SFL blog in 2015. It provides an introduction to the important concept of the "nirvana fallacy," which was introduced by the brilliant UCLA economist Harold Demsetz. Sadly, Demsetz died on January 4, 2019 at the age of 88. His contributions extend far beyond the nirvana fallacy. He was a giant of property rights economics, UCLA price theory, managerial economics, and new institutional economics. He was a Distinguished Fellow of the American Economic Association and rightly recognized as "one of the most creative and deep microeconomists of the 20th century." For a broader view on Demsetz's life and work, I recommend blog posts by Art Carden and Peter Boettke.
The world we live in is full of imperfections. As one looks around society, it’s not hard to find examples of externalities, imperfect information, or collective action problems that leave public goods insufficiently dispersed. But from these failures, it’s all too easy to leap to advocating idealized solutions. The problems we’re trying to solve arose from imperfect institutions populated by imperfect people. Positing perfection on the part of the institutions one advocates to solve a problem is unrealistic.
Economist Harold Demsetz called this error the “nirvana fallacy.” Demsetz wrote that:
“the view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement. This nirvana approach differs considerably from a comparative institutional approach in which the relevant choice is between alternative real institutional arrangements.”
This fallacy often appears when people propose solutions to market failures. They typically recognize that individuals within markets are self-interested and rely upon imperfect information, and that this sometimes results in market failures. But their proposed political solutions all too often assume an idealized government, wherein politicians implement policies solely for the public interest rather than their own self-interested aims. It’s easy to fall into the nirvana fallacy when one assumes that human nature and motivations are fundamentally different within different institutions. But this should only be done when we have compelling evidence to support such a claim. Otherwise, we should assume behavioral symmetry. As James Buchanan put it, “the same model of human behavior should be applied across different institutions or different sets of rules.”
Comparative institutional analysis doesn’t look at ideal institutions, but at different institutions populated by real and flawed human beings. It also specifically examines the institutions possible within a given context. Sometimes this leads to counter-intuitive conclusions.
For example, Somalia is often used as a trump card against anarchism, because it lacks a functioning central government and suffers from serious problems of poverty and violence. But as economist Peter Leeson points out, assuming Somalia’s ills stem from statelessness relies on the nirvana fallacy. Most who use Somalia as a negative example of anarchy are comparing this poor and underdeveloped stateless country with states in the wealthy and developed West. But simply inserting a wealthy, transparent, liberal, well-functioning Western government in Somalia is not a realistic option. Instead, we should compare stateless Somalia with how Somalia functioned when it was a state, and with neighboring countries that are states at similar stages of economic development.
This type of comparative institutional analysis surprisingly suggests that Somalia is better off stateless. Leeson’s research finds that Somalia improved immensely under anarchy compared to its prior performance under a government. He explains:
According to the data, of the eighteen development indicators, fourteen show unambiguous improvement under anarchy. Life expectancy is higher today than was in the last years of government’s existence; infant mortality has improved twenty-four percent; maternal mortality has fallen over thirty percent; infants with low birth weight has fallen more than fifteen percentage points; access to health facilities has increased more than twenty-five percentage points; access to sanitation has risen eight percentage points; extreme poverty has plummeted nearly twenty percentage points; one year olds fully immunized for TB has grown nearly twenty percentage points, and for measles has increased ten; fatalities due to measles have dropped thirty percent; and the prevalence of TVs, radios, and telephones has jumped between three and twenty-five times.
While governments can protect rights, provide governance that enables cooperation, and administer public goods, they can also cause real harm. Sometimes this is because they engage in plunder and violence that undermines cooperation. Other times, they crowd out better methods for providing public goods. In Somalia’s case, the economic development seen after state collapse “can be attributed to improvements in public goods provided better by Somalia’s anarchic private sector than by its former government.”
The economic way of thinking teaches us to understand that choices are constrained. This includes choices about political institutions. According to Leeson, “Historical features, such as clan tension, rampant corruption, territorial conflicts, and many others, which cannot be changed in the short run, severely restrict the kind of government countries like Somalia can reasonably expect to have if they have a government.” Under these constraints, a seemingly grossly flawed statelessness is better than the flawed government that is likely if a state takes power in Somalia.
Consciously avoiding the nirvana fallacy can paint a picture that seems dismal. But it is better to see the world’s imperfections than to make people’s lives worse by promoting idealized solutions that are disastrous when implemented under real world constraints.