Political Entrepreneurs

The Economic Engine of Political Change

Eminent Domain Has it All (Part 1)

December 8th, 2012 by Edward Lopez

When we look “out the window” and observe political economy in action, what is a useful method for understanding and explaining the outcomes? The framework that Wayne and I develop in the book begins by explaining observable outcomes as the product of incentives, and incentives are in turn shaped by institutional rules. So far that’s pretty standard stuff, thanks to the work of Douglas North and others. These days, political economists today are familiar with the incentives-institutions approach and they use it widely and deeply.

For example, Daron Acemoglu’s and James Robinson’s book, Why Nations Fail, explains how the most proximate cause of the wealth of nations is the extent to which people in economic and political settings have good or bad incentives. In turn, whether incentives are good or bad generally depends on the quality of institutions. When rulers establish inclusive political institutions, ordinary people have good economic incentives and the pursuit of self interest results in something like an invisible hand story. The nation will succeed. But when rulers establish extractive institutions, ordinary people don’t incur the costs or reap the benefits of their own behavior, and the pursuit of self interest fails to generate mutual gains. Less wealth is created, more of the wealth that is created lands in the pockets of rulers and their supporters, and the society stagnates rather than prospers. The nation fails. Institutions matter! And that’s an extremely important message that the field of economics has been able to pin down over the past 3-4 decades (ironically by returning to a set of questions that’s over two centuries old).

Okay. So here’s the next question: if outcomes depend on incentives, and incentives are embedded in institutions, then where do institutions come from?

To put that more concretely, which figures in a society decide whether institutions are extractive or inclusive? What are the constraints on these decision makers? And what forces have the potential to perturb those constraints over time, so that the choice of institutional rules in turn changes over time?

The framework in Madmen provides answers to these latter questions. We follow political economy’s lesser-known tradition of arguing that institutions are shaped by ideas. And to explain how ideas shape institutions, we introduce political entrepreneurs — namely academic scribblers, intellectuals, and madmen in authority.

To oversimplify, the structure of political change can be stated in a linear fashion: political entrepreneurship –> ideas –> institutions –> incentives –> outcomes.

We contend that every topic under the political sun follows this chain, although obviously not in such clean and detectable ways. One policy area that does cleanly reflect all the elements of this framework (although still not linearly) is eminent domain–i.e., governments’ powers to take private property for public use while compensating the owners. In this mini-series of posts, I will show how. My twofold goal is to illustrate our framework and shed light on some under-appreciated aspects of the topic. More on this tomorrow in my next post (ADDENDUM: I shouldn’t say “tomorrow” when there is some chance of not posting the next day. Sorry about that. The next post in this series is coming soon.)

 

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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?

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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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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