Political Entrepreneurs

The Economic Engine of Political Change

Behavioral Political Economy

October 17th, 2017 by Edward Lopez

Richard Thaler is the 2017 Nobel laureate in economics for his work in behavioral economics. This comes 15 years after the prize was awarded jointly to Daniel Kahneman for pioneering economic psychology and Vernon Smith for pioneering experimental economics. As the discussion unfolds, we should remember that “people are rational” is a starting point — a simplifying assumption for building models of human interaction. It is not a description of human interaction. So when lab and field experiments show evidence of people acting irrationally, this is not an indictment of economics but instead it is learning about economic models. Likewise, people acting irrationally is not an invitation for policymakers to correct people’s choices. After all, policymakers are people too, so perhaps they don’t act rationally either.

Mario Rizzo draws on his decade-plus of work with Glen Whitman to deliver this same point with greater subtlety.

It is one thing to construct clever experiments in which people do “odd” (unexpected by the standard paradigm) things. It is another to show that they engage in behavior in the real world that is ecologically inappropriate or that leads to self-defeating behavior. “Odd” behavior should be viewed as an invitation to probe more deeply rather than to condemn. Explanation is hard; evaluation can be easy and cheap.

Even among economists, there is much dissent. Look at the work of Vernon Smith, another Nobel laureate in economics, whose experimental economics has pushed us into a recognition that the errors or imperfections of individual decisionmaking need not result is poor outcomes — if the institutional structure is good. Smith has carried on the tradition of the Scottish Enlightenment which emphasized time and again the compatibility of imperfect men and outcomes that embody far more “intelligence” than any of them have as individuals.

Niclas Beggren complements this in his systematic survey of the literature, “Time for Behavioral Political Economy?” (2012 Review of Austrian Economics):

Abstract: This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program.

Also see Glen Whitman anchoring this 2010 discussion in Cato Unbound.

There is so much more to Thaler’s work than the set of nudge policy implications. The inimitable Alex Tabbarok [here] and Tyler Cowen [here] provide breadth and depth of introduction.

My own contribution to this areas of work tests for one particular behavioral “anomaly”, endowment effects, in the context of the most common public goods experiment environment, namely the voluntary contribution mechanism. Available here.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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