Political Entrepreneurs

The Economic Engine of Political Change

Why You Should Be Skeptical of Economists’ Advice

December 14th, 2012 by Edward Lopez

I have the refrain to “Fight of the Century” stuck in my head again. “Which way should we choose? More bottom up or more top down?” I’m sure you’ve seen a lot of commentary on this video. Great job, Russ and John. I just wanted to point to a tiny slice of the lyrics, which I noticed while watching the video with my students this past semester. At 2:14, Keynes retorts to Hayek’s argument that stimulus spending doesn’t necessarily shorten the cycle. Note Hayek’s response in turn.

KEYNES: Are you kidding? my cure works perfectly fine. Have a look, the great recession ended back in ’09. Surely, I deserve credit. Things would have been worse. All the estimates prove it—I’ll quote chapter and verse!

HAYEK: Econometricians, they’re ever so pious. Are they doing real science or confirming their bias?

This is interesting because it points to the incentives of economists themselves. Last time I checked, earning a Ph.D. in economics doesn’t mean you get whacked into a spell of unwavering pursuit of the public interest. You have prior beliefs that select you into certain fields and methodologies (the count of spontaneous order econometricians is low). Once you’re trained in those areas and develop expertise, your human capital becomes locked in and your own economic welfare is tied to how highly regarded those areas are in the profession. Each year when the Nobel prize in economics is awarded, complaints and criticisms are flung by economists working in competing areas or with different methodologies, not from economists working in the Laureate’s own field.

So take note. When a so-called expert with “Ph.D. in Economics” after their name says we should do this or that with taxpayer money, he might have a lot at stake personally in the type of advice he gives.

Wayne’s and my dissertation advisor, Bob Tollison, shows from a slightly different angle how economists’ incentives affect their work. In his 1985 Southern Economic Association presidential address, for example, Bob states his maxim.

The economist cannot take a measure of the world without obeying its postulates… The economist is a rational, maximizing individual, subject to the predictions of economic science.

In the paper, Bob artfully looks at the biographies of several luminaries (Smith, Marshall, Wicksell, Keynes), especially their most creative work. In each case, these luminaries were most productive when their immediate environment created low costs of innovation. Chapter 3 of Madmen conveys Bob’s results:

For example, the Victorian economist Alfred Marshall invented the concept known as price elasticity of demand—a brilliant stroke of creative genius—while on an extended convalescent vacation on the coast in southern Italy. The cost of creative production is low while sunning oneself on the roof at Palermo. On the other hand, Adam Smith all but quit writing once he took on the responsibilities as Commissioner of the Scottish customs office, just two years after publishing The Wealth of Nations. The immediate lesson is that time constraints matter.

In economics we think about the relationships between means and ends, and how individuals choose actions that pursue their own rational self interest. That holds for consumers and firms, and since the emergence of economic imperialism in the late 1950s, we have seen how it also holds for voters, politicians, lawyers, clergy, families, interest groups, political parties, and more. Who is to say it doesn’t also hold for economists?

Now, of course, I am an economist. So my advice should be suspect too. But here’s the thing. I don’t make a habit of giving policymakers advice on how to spend taxpayer money. Instead, my general message to policymakers is: Before introducing new carrots, try rolling back old sticks. Alas, no politician I’ve ever met seems to carry that message.

Bottom line: Incentives matter for economists, too. So watch out.

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.

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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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