Political Entrepreneurs

The Economic Engine of Political Change

Economic Thinking in Philanthropy

December 19th, 2012 by Wayne Leighton

Imagine you are a billionaire who very much wants to change the world for the better. A big question for  you is what to do. This is the type of question Ed and I ask in chapter 7 of Madmen. It entails applying economic thinking to make sure you allocate your resources to where they can do the most good.

A related question is how to organize your efforts. Should you set up a foundation? Should it be a perpetual foundation, or should all of the funds be spent within a set number of years after your death? Again, a little economic thinking goes a long way.

In an interview for the Forbes 400 Philanthropy Summit, Bill Gates shares his view:

The more you think about it, having a finite limit makes sense. Because you can really go after a particular thing and count on the rich people of the future to understand better what problems need to be addressed and exactly who should go after those problems.

There’s some good economic logic here, even as Gates recognizes earlier in the interview that a perpetual foundation may be right for other donors. This strategy is a way to minimize the agency problem between Gates and future foundation managers, who may or may not share his vision. He can be reasonably sure that his wishes will be honored regarding how his fortune should be spent to promote the change he wants, at least more so than someone who creates a perpetual endowment.

In addition, the comment recognizes a knowledge problem. Bill and Melinda Gates are aware of current problems in the world and have ideas for how to solve them. The problems in the future will be very different. Thus, it may be best to have those who are most successful at practically applying knowlege in the future — i.e., the successful entrepreneurs of the future — be the ones to address those problems.

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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.

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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