Political Entrepreneurs

The Economic Engine of Political Change

Why Rules Matter, and Meta-Rules Matter More

December 13th, 2012 by Wayne Leighton

A key argument in Madmen is that in any given society the rules of the game matter; they determine the incentives that shape human behavior. In Chapter 4, Ed and I introduce public choice theory, which pioneered the study of rules in politics. After public choice, no longer would political decisonmakers be viewed as acting according to some ill-defined standard of public interest.

Of particular importance are the rules or principles that apply to the rule-making process itself. These are known as the meta-rules. A constitution is a good example.

You might remember another example from your high school civics class, or because every so often it makes the news. We’re talking about the filibuster — a Senate rule that allows debate to be placed on hold, and which requires 60 votes to override it. The minority party tends to cherish the rule. This means the Republicans in the Senate value it quite highly right now, as the Democrats did when they were in the minority. Recently, the Democratic leader in the Senate proposed some modifications to how the filibuster might be applied. The Economist (November 29, 2012) sums up the proposal:

 Harry Reid, the majority leader, complains that the Republicans “filibuster on everything”, gumming up the agenda and obstructing even routine business. To jolly things along, he is suggesting three reforms. He wants to ban filibusters on motions to start debate on a bill or a nomination, and on motions to refer a bill to a conference committee, where senators and representatives hash out their differences. (Filibusters preventing a final vote would still be allowed, so the minority’s veto would be preserved.) Most controversially, Mr Reid hopes to oblige senators mounting a filibuster actually to take to the Senate floor and waffle for hours on end, rather than merely signalling their desire to bring proceedings to a halt.

If this debate sounds dull and unimportant, it isn’t (at least the unimportant part). James Buchanan and Geoffrey Brennan explain why in The Reason of Rules: Constitutional Political Economy. The opening pages provide a nice introduction to why rules matter:

The same individuals, with the same motivations and capacities, will interact to generate quite different aggregate outcomes under differing sets of rules, with quite different implications for the well-being of every participant. The allocation of an individual’s time and energy will be different in a setting where rewards are related to performance and in a setting where rewards are determined by other criteria. At least since the eighteenth century, and notably since Adam Smith, the influence of rules (Smith’s term was “laws and institutions”) on social outcomes has been understood, and this relationship has provided the basis for a central theme in economics and political economy, particularly as derived from their classical foundations.

If rules influence outcomes and if some outcomes are “better” than others, it follows that to the extent that rules can be chosen, the study and analysis of comparative rules and institutions become proper objects of our attention.

A few paragraphs later the authors introduce the “rules about making rules”:

It is necessary to separate the process through which the rules are determined from the process through which particular actions within those rules are chosen.

Buchanan and Brennan end the chapter with this gem, applying economic insights to the process by which political rules are chosen:

Many social analysts might agree that market processes operate within reasonably clearly defined rules and that such rules are important objects of inquiry. They may be less willing to apply the same insight to political processes. But political “choices” also emerge from an interaction of individual agents within a set of institutional rules, with each actor being constrained by the actions of others. Political actors operate under a set of more or less clearly defined rules, and they make choices among the options available to them so as to maximize their returns (which may, here as in other settings, include ethical as well as economic objectives). The crucial issue is whether the set of rules that orders the relationships among the separate actors is that set which best leads individuals to further the interests of others, or at least refrain from imposing harm on others.

We might add another crucial issue: How does the “set of rules that orders the relationships among the separate actors” evolve over time? And when and why does such change occur? These questions get at the heart of political change.

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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