Political Entrepreneurs

The Economic Engine of Political Change

Bryan Caplan’s “Idea Trap” as a key to understanding the election

November 16th, 2016 by Vlad Tarko

In The Myth of the Rational Voter Caplan observed that two main factors make people think more like economists: education and income growth. Education is hard to change quickly, but income can. Based on this, he proposed that the following dynamic between ideas and economic conditions may be at work:

(a)     Virtuous cycle of growth: When income increases, people’s ideas about the economy are, for some reason, better, which, in turn, leads them to favor good policies, which, when adopted, lead to further growth.

(b)     Idea trap: When income decreases, people’s ideas about the economy get, for some reason, worse, which, in turn, leads them to favor bad policies, which, when adopted, lead to further decline.

Caplan speculates that it is the idea trap that makes is so difficult to improve policies in the developing world. It’s also why unusually bad policies are implemented in response to large recessions.

During the current electoral campaign, based on opinion polls, it seemed that economic conditions might not explain support for Trump very well, but that instead social issues mattered more. (The fact that Trump supporters were on average richer is not very relevant: Republicans tend to be richer than Democrats, and Caplan’s model is based on income growth, not income levels.) But the polls were actually not very good, particularly when it came to Trump supporters. It now looks that support for Trump was actually largely determined by “economic anxiety”:

Economic anxiety is about the future, not just the present. Trump beat Clinton in counties where more jobs are at risk because of technology or globalization. Specifically, counties with the most “routine” jobs — those in manufacturing, sales, clerical work and related occupations that are easier to automate or send offshore — were far more likely to vote for Trump. … [P]laces that voted for Trump are under greater economic stress, and the places that swung most toward Trump are those where jobs are most under threat. Importantly, Trump’s appeal was strongest in places where people are most concerned about what the future will mean for their jobs, even if those aren’t the places where economic conditions are worst today.

From an economic perspective, this is ironic. Trump’s stated policies are not going to make these jobs more secure, on the contrary. At best, these policies would turn all these vulnerable regions into Detroit-like failures. But people are not thinking like economists when their (expected) income falls. They get into the idea trap. The further downside now is that, thanks to the centralized nature of presidential politics, voters in the idea trap are also causing a large externality upon those who are not.

What is the mechanism at work that causes the idea trap? In The Myth of the Rational Voter Caplan proposed a model based on preferences over beliefs. Some beliefs make people feel better, but often without much connection to truth. Under what conditions do people indulge those emotional biases? In a nutshell, they use this algorithm:

Idea trap

Quantitatively speaking, the cheaper it is to indulge your emotional biases, the more likely you are to do it. The catch here is that your vote has a virtually zero chance of determining the result of an election, so why not indulge yourself? In other words, voters are not just rationally ignorant (it’s not worth it for them to spend too much time getting informed), but also rationally biased. Because voting is such a poor way of actually getting what you want, it creates a large public good failure in terms of support for informed policy.

We can speculate that the idea trap occurs because, when incomes decline (or grow slower), people pay more attention to economic matters and they are more emotionally involved in those issues. In normal times, people don’t care so much about the economic issues, so they’re more likely to be either on the “truth” side of the decision tree above or just not think about it at all. This also means that when the idea trap kicks in political entrepreneurs switch their agendas to air and indulge such emotional biases more. We’ve seen this in this election with virtually all the main parties’ contenders taking more anti-economic stances covering all the biases highlighted by Caplan: anti-trade, anti-immigration, make-work, and unduly pessimistic.

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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