Political Entrepreneurs

The Economic Engine of Political Change

The Pursuit of Order in a Creative World

October 27th, 2016 by James Caton

We see demands lately for a reformulation of economic theory. The current state of our practice appears to be much like the state arrived at in Babel. There is a need for new organization that is impeded by a lack of mutual understanding. Where is the solution? Answers to this systemic problem seem to exist, but lack an obvious unity. This frustration in communication seems to have left us with dependence on a paradigm that many economists are not content with. Consider the controversy recently ignited by David Romer. Romer notes his experience in disagreeing publicly with macroeconomic theory a la Lucas:

After I criticized a paper by Lucas, I had a chance encounter with someone who was so angry that at first he could not speak. Eventually, he told me, “You are killing Bob.”

Romer faces a problem noted by Machlup in “The Problem of Verification in Economics”:

. . . assumptions may well be rejected, but only together with the theoretical system of which they are a part, and only when a more satisfactory system is put in its place.

Romer frames his opposition as being the result of loyalty, rather than superiority, but those loyalties exist for a reason. Those who support Lucas see him as a superior option to the next best alternative. Given the existing capital structure in academia, the current state of macroeconomics is efficient, even if it’s awful. If Romer’s rebellion against macroeconomics a la Lucas is to have any usefulness, and if it is to avoid encouraging disorder in the field, he must 1) provide or point to better theoretical apparatus and 2) attempt to integrate what is good in macroeconomics into that apparatus. This is true not only for macroeconomics, but for social theory in general. It is a feat too large for any one individual to handle.

Romer is acting as an entrepreneur of ideas. Without an obvious alternative, however, it is difficult to see where the profit in his approach lies. The winners of the 2016 Elinor Ostrom Prize provide direction on this front:

Entrepreneurial discovery implies change in the individual entrepreneur’s personal frame of analysis. It implies also, however, a change in the public ‘language games’ the entrepreneur will play with other actors in society and, we may therefore say, change in the ‘system’s implicit frame of analysis’. . . The puzzle . . . ‘is how “a cognitive creature . . . with many beliefs about the world” can update those beliefs when it performs an act so that they remain “roughly faithful to the world”’? (23)

I will not summarize their work here, but note that Koppl, Kauffman, Felin, and Longo (2015) present a metaframework that emphasizes the non-algorithmic nature of economic change. By non-algorithmic, they mean that the categories, or understanding, necessary for functioning in the world are not known ahead of time. As humans we face unknown unknowns. “Just as we cannot list all uses of a screwdriver, we cannot list all innovations that entrepreneurs will notice and act on over time (24).”  Entrepreneurs at all levels must learn to deal with this uncertainty derived from a necessarily incomplete understanding of a world where change does not appear to be slowing:

Knowledge and expertise are fundamental, yet the rate of obsolescence of knowledge in a creative world is high. And more importantly, the required updating and reframing are probably best performed in decentralized and democratic manner that cannot be readily reconciled with expert claims to epistemic monopoly. (26)

Much work is done on the ground, undertaken by autonomous agents. Oversight cannot do the job of coordination here. Coherence of actions between agents must come from elsewhere. Just as there is a vast space that must be explored by entrepreneurs in regard to real-world problems, there is also a vast space to explore in the world of theory and formal modeling. One job of experts in any field is to provide a general manifold to which ideas and systems of ideas can hang, and thus promote coherence within the totality of a given theoretical system. “Economics for a Creative World” represents a respectable attempt at providing this manifold. It is, as the authors note, incomplete:

If we live in a creative world, it may be time to reconsider our methods, our theory, and the role of economists in a democratic society. . . We do not have all the answers. We will have provided a helpful prolegomena, however, if you arguments help to promote a larger discussion with the economics profession

 

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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