Political Entrepreneurs

The Economic Engine of Political Change

Nordic Countries, Education Reform, and Milton Friedman

February 10th, 2013 by Wayne Leighton

As we observed in a recent post on the February 2, 2013 issue of the Economist, the Nordic countries have been leading the world in a number of economic reforms. A short article in this issue continues exploring this theme and describes the role that has been played by new ideas about reform, especially those that reject traditional “left” or “right” perspectives.

 Even more striking than the Nordic world’s commitment to balancing its books is its enthusiasm for experimenting with new ideas. The Swedish state now allows private companies to compete with government bodies for public contracts. The majority of new health clinics and kindergartens are being built by private companies, frequently using private money. The state also allows citizens to shop around for the best services and take the money with them.

The Swedes have done more than anyone else in the world to embrace Milton Friedman’s idea of educational vouchers—allowing parents to send their children to whatever school they choose and inviting private companies or voluntary groups to establish “free” schools. Almost half the country’s schoolchildren choose not to go to their local schools. More than 10% of students under 16 and more than 20% of those over 16 attend “free” schools, two-thirds of which are run by private companies.

Denmark has added a useful twist to the voucher idea. It not only allows parents to take their public funds to private schools with them but also to top them up (within limits) with their own money. This is creating a flourishing market, particularly in Copenhagen, ranging from academic schools for traditionalists via religious ones for Muslims to experimental ones for ageing hippies.

The Economist goes on to say that another Nordic country, Finland, has pursued a somewhat different approach to education reform “without so much as a nod to Friedman.”

Whether it applies more to Sweden and Denmark than Finland, here’s the nod to Friedman. Over the course of his lifetime, on the issue of education, Friedman was both an academic scribbler (an idea creator) and an intellectual (that is, one who selects and promotes an issue to the masses). As an idea creator, here’s Friedman writing well over half a century ago, in a 1955 article on education reform:

We have seen that both the imposition of a minimum required level of education and the financing of education by the state can be justified by the “neighborhood effects” of education. It is more difficult to justify in these terms a third step that has generally been taken, namely, the actual administration of educational institutions by the government, the “nationalization,” as it were, of the bulk of the “education industry.” The desirability of such nationalization has seldom
been faced explicitly because governments have in the main financed education by paying directly the costs of running educational institutions, so that this step has seemed required by the decision to subsidize education. Yet the two steps
could readily be separated. Governments could require a minimum level of education which they could finance by giving parents vouchers redeemable for a specified maximum sum per child per year if spent on “approved” educational
services. Parents would then be free to spend this sum and any additional sum on purchasing educational services from an “approved” institution of their own choice. The educational services could be rendered by private enterprises
operated for profit, or by non-profit institutions of various kinds. The role of the government would be limited to assuring that the schools met certain minimum standards such as the inclusion of a minimum common content in their
programs, much as it now inspects restaurants to assure that they maintain  minimum sanitary standards.

For decades after Friedman wrote these words, few would have expected that the key elements of this proposal would be implemented so thoroughly, and so successfully, in Nordic countries. Yet the idea took hold. It’s an important historical experience worth study by those who want to understand when, and why, reform happens at certain times and in certain places.

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

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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.

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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

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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.

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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

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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

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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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