Political Entrepreneurs

The Economic Engine of Political Change

What I’ve Been Working on and How it Ties Together

December 16th, 2020 by Edward Lopez

[Edited 12/16/2020. Posted 12/15/2020.]

My production of journal articles slowed for the past few years. Managing CSFE and PCS has been very worthwhile, but the attention they’ve needed has taken its toll on my publication stream. This is not a new recognition. I’ve spent a long time positioning these organizations to move forward while occupying less of my direct attention. Meanwhile, I’ve been laying some groundwork for a return to journal articles. So it feels like the time is nigh for me to get back to publishing my ideas in good journals.

This blog entry gives a sense of what I’ve been working on, where I’m coming from as a scholar, and what my research agenda looks like on the horizon. I’m not deluded enough to think that this will be earth-shattering to people. The main reason I’m writing this it to organize my own thoughts, and to commit publicly to a path of scholarship that I think is ambitious yet attainable. If you have comments, suggestions, corrections, I would be delighted to hear from you.

Recent Publications

As mentioned, in recent years I’ve been light on journal articles. This list is not everything I’ve written since 2015, but it’s the important stuff.

  1. Edward J. López, “Individual Sovereignty and Coproduction of Knowledge Governance,” in Erwin Dekker and Pavel Kuchar (Editors) Governing Markets as Knowledge Commons, Cambridge University Press, forthcoming, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3727726
  2. James L. Caton and Edward J. López, “The Cognitive Dimension of Institutions,” in Andres Marroquín and Nikolai Wenzel (Editors) UFM Companion to Douglass North, https://ssrn.com/abstract=3214278
  3. Nicolás Cachanosky and Edward J. López, “Rediscovering Buchanan’s Rediscovery: Non-market Exchange Versus Antiseptic Allocation,” Public Choice 183:1, pp.461-477, May 2020, DOI: https://doi.org/10.1007/s11127-020-00819-0
  4. Edward J. López, “Socialism from the Bottom Up: Where Lawson and Powell Meet Hayek and Buchanan,” review essay of Socialism Sucks: Two Economists Drink Their Way Through the Unfree World by Robert A. Lawson and Benjamin W. Powell (2019 Regnery Press), Library of Economics and Liberty, https://www.econlib.org/library/Columns/y2020/Lopezsocialism.html.
  5. Peter T. Calcagno and Edward J. López, “Informal Norms Trump Formal Constraints: The Evolution of Fiscal Policy Institutions in the United States,” Journal of Institutional Economics 13:1 (Nobel Laureate Douglass C. North Memorial Issue), March 2017, pp.211-242, DOI: https://doi.org/10.1017/S1744137416000321
  6. Peter T. Calcagno and Edward J. López, “The Evolution of Federal Budget Rules and the Effects on Fiscal Policy: How Informal Norms Have Trumped Formal Constraints,” Mercatus Center Working Paper, November 12, 2015, pp.1-62 http://mercatus.org/publication/federal-budget-rules-and-fiscal-policy-informal-norms
  7. In 2017 I also wrote but never published a paper, “Informal Institutions, Formally: A Logical Model of  Definition, Alignment, and Formalization”. Here is a PDF copy Informal Institutions Formally v3 (circulated).

The above items, especially (1) and (7), are shaping my current and future work.

Early empirical public choice

My early papers used natural experiments and econometric methods to model institutional choices by states, parties, and individual legislators.

I also published a few theoretical papers during this time, including

  • “Incorporating Policymaker Costs Into Rent Seeking Games” (Southern Economic Journal 2006 with Ken Godwin and Barry Seldon)
  • “Who Will Deregulate the Deregulators?” (Public Choice 2010)
  • “The Legislator as Political Entrepreneur: Investment in Reputational Capital” (Review of Austrian Economics 2002). This is an early example of my thinking on non-market forms of entrepreneurship that create change in institutions.

Although I approached these questions in the tradition of empirical public choice (as a Bob Tollison student), even back then I was interested primarily and worked almost exclusively on questions that placed institutions as the dependent variable. My empirical work highlighted many patterns and examples of rational and strategic collective choices being made in politics. I found that voters can make collectively pretty savvy decisions when it comes to setting the institutional rules. I also found a lot of strategic and symbolic action, where politicians and others use romance and rhetoric to grow support for their political coalitions. This seemed natural to me because public choice treats politics as exchange, not in the venal, spot-deal sense but instead as a process where individuals join together to produce gains that would be unattainable acting alone. To me, it then became natural to begin studying how political entrepreneurs sell their ideas and invest in becoming more persuasive in mass opinion markets. I was steadily becoming more preoccupied with the question, as Douglass North puts it, “what is the structure of institutions?”

Ideas, Fashion, and Madmen

This led me toward two dimensions of inquiry: 1) how does competition among ideas shape institutions; and 2) how can economic theories of entrepreneurship account for processes of institutional change?

Imitation is the answer to both. This is what I’ve learned so far in a nutshell. Imitation is how ideas win against other ideas, and imitation is how entrepreneurs create change.

I began experimenting with this idea in a few pieces about fashion between about 2007 on the old Division of Labour blog to about 2013 e.g. my FEE article and my Marginal Revolution guest blog. Fashion is a good laboratory for observing imitation, partly because fashion isn’t covered by copyright or patent. I learned that imitation on its own does not usually create value (earn a profit), nor does it sustain a dynamic, flourishing society. Instead, slight adaptations are needed, and a society of adaptive-imitative entrepreneurs can be a flourishing one. This is the basic idea of my next book, but that’s looking far ahead.

In my last book, with Wayne Leighton, Madmen, Intellectuals, and Academic Scribblers: The Economic Engine of Political Change (Stanford University Press 2013), we bring these two dimensions of inquiry together. We sketch a framework for understanding institutional change as competition between the ideas and interests backing the status quo versus ideas and interests backing alternatives. The book sets out as as as a history of public choice thought, and then morphs into a framework of using adaptive-imitative entrepreneurship to surmount old status quo ideas. Wayne and I thought of the book as a launch of a new research program at the time, and that is what prompted us to start this blog. We then both got really busy.

In 2013, Wayne inherited the Antigua Forum where he is CEO, and I inherited the Public Choice Society where I am still Executive Director. In 2013 I also moved from San Jose State to Western Carolina, where in 2015 I would launch WCU’s Center for the Study of Free Enterprise. Amidst all that new administrative work, my time for research got severely squeezed.

Informal institutions

Yet it was also about this same time, in the 2014-16 range, when my research interests in ideas started focusing more directly at informal institutions. The first paper in this vein was with Pete Calcagno in Journal of Institutional Economics 2017. This paper interprets the history of U.S. fiscal institutions using the political-economic approach of James Buchanan and Richard Wagner’s 1977 book, Democracy in Deficit: The Political Legacy of Lord Keynes. 

In writing that article, I discovered the work of John Searle on the origins of institutions. Drawing on Searle’s famous “X counts as Y in C” framework, I then wrote what I thought would become a journal article, a paper called “Informal Institutions Formally,” in which I adapt Searle’s framework with a few simple assumptions to build a model informal institutions, from which I derive conditions for the definition, alignment, and formalization of informal institutions. I presented that paper in a few seminars, and the feedback I got on the model itself was fine. However, to the paper overall there was a pretty cool reception. Part of the problem is that the literature on institutions is balkanized. Informal institutions is a concept that gets utilized in a lot of different areas of literature, and people like they way they use it in their respective uses. But for the most part they’re rigid and reluctant toward any generalized definition of informal institutions. People are okay continuing to use the concept, or something like it, or effectively using it or something like it, whenever it’s useful in their work to talk about both explicit and implicit ways of doing things within a community. I wasn’t sure about how the paper would be received at journals. I also wasn’t totally comfortable with my grasp of Searle, and at the time I would have needed to catch up to folks who’ve been working in that tradition for a long time. Plus, I was busy with PCS and CSFE. So, I let it sit and never resurrected that paper.

Forget defining informal, instead focus on constitutive vs. regulative, change, and formalization.

I’m caught up. I recently changed my mind, and I’m going to revive that paper but with a broader foundation and shifted focus. The difference maker for me was when I sat down to write item (1) above, and in doing so I connected some important dots. First, I found that Elinor Ostrom’s early papers on the Institutional Analysis Development (IAD) framework fill gaps in Searle while also bringing me back full circle to public choice. Second, by filling in those gaps I found a firm foundation for my adaptation of Searle, namely E. Ostrom’s emphasis on cognitive and communicative interactions among members of a community as a pre-condition for institutional formation. These early papers place heavy emphasis on institutions as constitutive rules. Most social scientists, if they even think about institutions, think about them as regulative rules. This is the nature of Deirdre McCloskey’s beef with Douglass North. She always criticized him for focusing too much on constraints; it can’t be institutions because institutions are just constraints. (Interestingly she walked that back in a short chapter on Searle toward the end of vol.3 in Bourgeoise Era, more on this later). Meanwhile, most social scientists reject a general distinction between informal and formal institutions. Huh, I thought. Forget formal vs. informal, I’m with constitutive vs. regulative now.

The revived paper is going to set aside the question of how to define informal institutions. In the paper I will still use a particular definition of informal institutions, but I’ll take it as given that we do not yet have a general definition of informal institutions. I am going to focus the paper instead on modeling how coalitions form within a community to support certain ideas over others. Coalition leaders (influencers, zealots, Hayekian intellectuals, etc.) use cognition and communication  (“speech acts” in Searle’s system) to compete for the support of individual community members to back their ideas. Adaptive-imitation will be a feature that contributes to an idea’s survival. There’s a lot of work in this vein already, so I will merge into that. For now, if we imagine i number of x_i ideas circulating in the community, at any time t one of those ideas, X_t,c, will through adaptive-imitation garner enough support in community (or context) c, to have a winning-coalition. This idea, X_t,c, will therefore satisfy Searle’s condition., and X_t,c will have status as an institution, Y, for the here and now at time t in community c. A simple equation can render change of Searlean institutions as (X_t,c – X_t-1,c) as a function of shocks and the relative weights w_i assigned to the i coalitions of ideas and interests supporting each x_i  positions.

 

[I will update this soon.]

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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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