Tag Archives: political economy

Economists, doctors and quacks

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The news of the death of Ronald Coase sent me to his key papers, of course (all listed here), but also to a collection of essays I hadn’t read before, [amazon_link id=”0226111032″ target=”_blank” ]Essays on Economics and Economists[/amazon_link]. He makes some very interesting points about the role of economics in public policy, expanding on the question of how limited government intervention to correct market failures ought to be. Essentially, Coase argued that this is an empirical question. The existence of significant transactions costs means market arrangements can lead to inefficient outcomes, but government interventions are often flawed too. He approves of George Stigler’s work on the political ‘market’, with the firms affected by regulations likely to be the highest ‘bidders’, therefore able to shape regulation in their own interests. (If this seems cynical, think about banking regulation.)

[amazon_image id=”0226111032″ link=”true” target=”_blank” size=”medium” ]Essays on Economics and Economists[/amazon_image]

In ‘Economists and Public Policy’, Coase turns to economists: “The problem is that economists seem willing to give advice on questions about which we know very little and on which our judgements are likely to be fallible, while what we have to say that is important and true is quite simple – so simple that little or no economics is required to understand it.” However, the simple truths are highly unwelcome. The essay goes on to discuss the political and popular resistance to economic arguments against, say, price controls after a bad harvest. “History indicates that these are simple truths which people find it easy to reject or ignore.” The essay is not entirely pessimistic – Coase believed that when the counter-productive effects of policies became too large, the policies would be reversed.

Coase is also trenchant on the character of economics. It is clear he disapproved of the ‘imperialism’ of economics, the Chicago-originated move into subject areas such as family life, previously the terrain of other social sciences. He cannot have been a fan of [amazon_link id=”0141019018″ target=”_blank” ]Freakonomics[/amazon_link]. However, he is pretty scathing, in the essay ‘Economics and Contiguous Disciplines’, about the failure of other social sciences to raise their game in their techniques and attention to evidence – he sees as particular strengths of economics the recognition of general equilibrium effects (everything is connected) and the relevance of economic incentives in other decisions, too often simply denied by other social scientists. Finally, the essay argues that economists need to study contiguous social sciences, “because it is necessary if they are to understand the working of the economic system itself.” He concluded: “We may expect the scope of economics to be permanently enlarged to include studies in other social sciences. But the purpose will be to enable us to understand better the working of the economic system.” His own work, of course, laid the foundations for institutional economics.

There are a couple of interesting essays on Marshall in the book too. Coase likes Marshall’s insistence on the need for both theory and evidence, deductive and inductive reasoning in economics. He obviously found modern economics far too much on the theoretical, deductive (or reductive) side.

I also happened to read this weekend Jamie Whyte’s pamphlet for the Institute of Economic Affairs, [amazon_link id=”0255366736″ target=”_blank” ]Quack Policy: Abusing Science in the Cause of Paternalism[/amazon_link]. There was a brief to-do online about this, with critics noting that it was hardly surprising the free-market IEA had published a pamphlet arguing against government interventions, and how could anyone argue against evidence-based policy? Whyte wrote some years ago an excellent and funny book, [amazon_link id=”0954325532″ target=”_blank” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_link], about the absence of logic and sense in much public debate. The pamphlet looks at several different areas of policy and asks about the standards of evidence underpinning them. It’s obvious where it’s coming from, but it makes a number of sound points.

[amazon_image id=”0255366736″ link=”true” target=”_blank” size=”medium” ]QUACK SCIENCE & PUBLIC POLICY[/amazon_image]

The first two examples are health-related: proposals for minimum alcohol pricing and the ban on ‘passive’ smoking. Any health-related subjects are awash with political correctness and the abuse of statistics; medical people are strongly resistant to the relevance of any economic considerations at all, which one might take more seriously if they were more statistically-adept. In these two chapters Whyte argues that:

(a) a cost-benefit analysis must take account of the costs of outlawing something, and this is rarely done in health matters – NICE guidelines seemingly explicitly rule out consumer welfare considerations (p35);

(b) the incremental risks of the target behaviour are such that these costs can be very small (although he seems to me to underestimate them in the alcohol example); and

(c) the policies ought not to be economically perverse.

Actually, I think he misses the strongest case against a minimum alcohol price, which is that it increases the profits of big retailers by enforcing the kind of retail price maintenance long outlawed by competition authorities. If the government decides alcohol should be dearer, it should raise the rate of duty. This would not, however, be so pleasing to the sellers of alcohol as taxpayers would then benefit, not retailers – see Coase’s essay, above.

Whyte has a chapter on global warming that goes through the debate about how much we should weigh future against current welfare, including the likelihood that future generations will be richer, and that technological progress will occur, in trying to calculate the costs and benefits of action against global warming. (I think he’s sceptical about whether it’s occurring but that isn’t the main point here.) This is the same debate that occurred among economists like Partha Dasgupta, William Nordhaus and Nick Stern when the [amazon_link id=”0521700809″ target=”_blank” ]Stern Review[/amazon_link] was published. It’s a perfectly respectable argument to set out. Then he turns to what he describes as ‘happiness engineering’, where my sympathies are with him entirely. Government attempts to make people ‘happier’ are either obvious – ensure there are plenty of jobs, keep inflation modest – or intrusively paternalistic.

There’s a final chapter, which is too cursory, about the problem of using ‘scientific authority’ as the basis for public policy. “Experts are natural supporters of policies that draw on their expertise and thus naturally inclined to overstate the credibility and importance of their ideas,” he writes. Of course. But is not using expertise really better? Of course we would like policy to be genuinely evidence-based, and it is difficult to assess the epistemological status of proclaimed expertise. However, Coase’s pragmatism is more attractive than Whyte’s all-out scepticism, for all that Quack Policy flags up some good reasons for concern about how ‘evidence’ is used in actual policy-making.

This was a theme of another book I read recently, [amazon_link id=”0815793898″ target=”_blank” ]Government Failure versus Market Failure[/amazon_link] by Clifford Winston, which in this post I compared and contrasted with Hirschman’s writing on [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link]. How you devise and implement welfare-enhancing, effective government policies in complex societies with a wide range of interests bearing on politicians – it’s what we’re all about as economists (and other social scientists).

A new book reviewed by Peter Wilby in The Guardian this weekend looks highly relevant too: [amazon_link id=”1780742665″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe.

[amazon_image id=”1780742665″ link=”true” target=”_blank” size=”medium” ]The Blunders of Our Governments[/amazon_image]

I’m sceptical about a lot of government interventions and also sceptical about leaving everything to the mythical market; it seems the only evidence-based possibility. We should demonstrate due humility by avoiding overclaiming either way.

 

 

What works?

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Towards the end of a holiday I always try to read something a bit more work-related to get myself ready for the return to normality. This year I ended with a pair of books which, by coincidence, shed great light on each other. One was Albert Hirschman’s [amazon_link id=”067476868X” target=”_blank” ]Rhetoric of Reaction[/amazon_link], prompted by reading the wonderful biography of him by Jerry Adelman, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher[/amazon_link].

[amazon_image id=”067476868X” link=”true” target=”_blank” size=”medium” ]The Rhetoric of Reaction: Perversity, Futility, Jeopardy[/amazon_image]

In it Hirschman describes three types of argument deployed by those who want to debunk ‘progressive’ or interventionist policies. He calls them the perversity thesis (interventions backfire, they turn out to have perverse effects, often the exact opposite of what was desired); the futility thesis (any attempt at change will fail because it is too hard to accomplish – plus ça change, plus c’est la même chose); and the jeopardy thesis (change is desirable but to achieve it will endanger other things that are highly valued, change is too destructive). He notes that the futility thesis does not sit comfortably with the others and tends to be made by different people. But all three are somewhat plausible as soon as you acknowledge, as an honest person must, that the world is a complex place with cause and effect hardly ever clear. So all three rhetorical strategies have great success.

Straight after this I turned to [amazon_link id=”0815793898″ target=”_blank” ]Government Failure versus Market Failure: Microeconomic Policy Research and Government Performance[/amazon_link] by Clifford Winston. This is an interesting survey of the empirical evidence on several areas of government policy in the US, including competition policy. To my surprise, the book cannot find empirical evidence that the consumer benefit of anti-trust enforcement outweighs the enforcement costs – the book’s overall conclusion is that “the welfare cost of government failure may be considerably greater than that of market failure,” and it concludes this is so even for competition policy aimed at enhancing the functioning of markets. I didn’t find this persuasive because I don’t believe comparative statics – the Harberger triangles –  capture the dynamic effects, which can be very much larger. An analogy would be with Robert Vogel’s famous conclusion that the railroads didn’t do much for the US economy if you look at the incremental GDP growth. On other areas of policy such as agricultural support, Winston is very convincing, however.

What particularly struck me though was that the book is a good example of the kind of rhetoric or framing that Hirschman described as the perversity thesis. Winston writes:

“Government failures appear to be explained by the self-correcting nature of some market failures, which makes government intervention unnecessary; by the short-sightedness, inflexibility and conflicting policies of government agencies; and by political forces that allow well-defined interest groups to influence elected and unelected officials to initiate and maintain inefficient policies that enable the interest groups to accrue economic rents.”

[amazon_image id=”0815793898″ link=”true” target=”_blank” size=”medium” ]Government Failure Vs. Market Failure: Microeconomic Policy Research and Government Performance (AEI-Brookings Joint Center for Regulatory Studies)[/amazon_image]

My final read, on the plane, was [amazon_link id=”1849904936″ target=”_blank” ]Parade’s End [/amazon_link]by Ford Madox Ford, a brilliant, epic novel on the way the First World War changed everything. The protagonist, Christopher Tietjens, is a government statistician. He makes the mistake of telling his superiors what he can prove to be true about government policies and actions – an early example of the evidence-based or “what works” approach to policy. Not surprisingly, they take a great dislike to him. An early example of what politicians will make of being told “what works” by experts?

[amazon_image id=”1849904936″ link=”true” target=”_blank” size=”medium” ]Parade’s End[/amazon_image]

Economics and authoritarianism

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After a two-week reading fest on holiday in the Italian countryside, I’m back with a fistful of reviews. As it was a holiday, the books I took with me were not as directly economics-related as my everyday reading, but of course there’s economics in everything.

The first two I happened to read were [amazon_link id=”0713998687″ target=”_blank” ]Iron Curtain: The Crushing of Eastern Europe 1944-56[/amazon_link] by Anne Applebaum and [amazon_link id=”0857208861″ target=”_blank” ]The Arab Uprisings: The People Want the Fall of the Regime[/amazon_link] by Jeremy Bowen.

[amazon_image id=”0713998687″ link=”true” target=”_blank” size=”medium” ]Iron Curtain: The Crushing of Eastern Europe 1944-56[/amazon_image]

[amazon_image id=”0857208861″ link=”true” target=”_blank” size=”medium” ]The Arab Uprisings: The People Want the Fall of the Regime[/amazon_image]

The latter is reportage by the BBC’s distinguished Middle East editor, and it combines his clearly extensive knowledge of the region with the edge-of-seat quality of reportage from the extraordinary events that started in Tunisia – it already seems a long time ago. The subtitle is a slogan that has appeared frequently in the countries where uprisings have occurred. However, the hope of the early ‘Arab Spring’ has given way to the horror of civil war in Syria and increasing violence in Egypt; of course, no book can keep up to the minute. I can’t say it left me feeling optimistic.

On the face of it, Anne Applebaum’s detailed and authoritative work on the descent of the Iron Curtain on Europe in the post-World War 2 years is entirely different. But one commonality struck me between the two books, namely the way that apparently endless and powerful authoritarian regimes are hollowed out by economic stagnation, no matter how violent they are. One day, it seems nothing can ever change, and the next day the whole edifice has collapsed. Sometimes, when it’s the secret police versus the economy, the economic forces win. This brought to mind Ben Friedman’s powerful arguments in [amazon_link id=”1400095719″ target=”_blank” ]The Moral Consequences of Economic Growth[/amazon_link].

The main part of Applebaum’s superb book is not, though, the collapse of Soviet-dominated Communism but rather its construction in the first place. It is going to be a standard reference on this time and place in history, a companion volume to Tony Judt’s [amazon_link id=”009954203X” target=”_blank” ]Postwar: A History of Europe Since 1945[/amazon_link]. She details the methods by which communist parties –  assisted by Soviet military dominion in the post-war years, and by the collapse of order after the Nazi defeat – systematically destroyed all institutions and aspects of society that were not part of the state apparatus, even extending into family life as the years went by.

The violence and inhumanity documented are simply horrifying. So is the ‘total’ in totalitarianism: “No-one could be apolitical: the system demanded that all citizens sing its praises, however reluctantly. And so the vast majority of East Europeans did not make a pact with the devil or sell their souls to become informers, but rather succumbed to constant, all-encompassing everyday psychological and economic pressure. The Stalinist system excelled at creating large groups of people who felt nevertheless compelled by circumstances to go along with it.” The idea of there being no private space even inside one’s own mind is intolerable.

If I have one complaint about the book, it is that there isn’t more of it: Applebaum has spent years interviewing people around Eastern Europe and I would have liked to hear more from those interviews. Although the book does not cover the post-1956 or post-1989 periods, it is an essential read for anybody interested in the shadows East European history continue to cast.

Worldly Philosopher

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As I’ve already confessed, I’ve read very little by Albert Hirschman. By the time I was learning economics, he and the mainstream of the economics profession had moved quite far along divergent paths. The mainstream was embracing mathematical techniques for modeling and – more significantly – the reductive assumptions about human behaviour and social context that made this approach feasible. Hirschman became increasingly interested in the connection between economic policies and politics. The one book of his I had ever been introduced to was [amazon_link id=”0674276604″ target=”_blank” ]Exit, Voice and Loyalty[/amazon_link], and possibly as part of my politics reading rather than economics.

This means Jeremy Adelman’s superb biography, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher: The Odyssey of Albert O Hirschman[/amazon_link], has been a real education. Its 600+ pages never flag; this is a very enjoyable book to read. It also means I’ve got some of Hirschman’s other books on the in-pile now, for the great lesson of recent years is that economists need to stay alert to the politics and the human behaviour that define the possibilities of economic choice; and that political scientists and other social scientists for their part need to pay more attention to economic incentives and to the domain of economic choice. Hirschman emerges as above all a careful observer of actual societies and economies, who therefore was multidisciplinary to the marrow.

[amazon_image id=”0691155674″ link=”true” target=”_blank” size=”medium” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_image]

The biography begins with his extraordinary early life in the tumultuous Europe of the 1930s and Second World War. A second chunk concerns his work in and on Latin America and economic development more generally, based in a variety of institutions. The final leg covers Hirschman’s more settled period, mainly at Princeton’s IAS, as a distinguished political economist and author of a number of classic books. The book covers in some detail The Passions and the Interests and also his last book, [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link].

Hirschman’s conclusions about the nature of capitalism and economic growth have real resonance for the current situation. His reading of the classics, including Adam Smith, made him one of the first people to reclaim (from Milton Friedman and other economists) the wiser Smith who understood that “moral sentiments” as well as self-interest determine people’s behaviour. Adelman sums it up: “The rule of passions could lead, without checks, to horrible utopias; the rein of interests to soulless pragmatism.”

Hirschman argued against the kind of theorising that insisted on pre-determined outcomes from given pre-conditions, insisting instead on the number of possible paths depending on happenstance and unintended consequences. I suppose we would call it pervasive path-dependence; it contrasted greatly with both the mainstream and the alternative or heterodox approaches of the time. He also identified the way that beliefs or expectations constrain outcomes – in the context of developing economies, he thought that policymakers and economists fettered themselves by their own perceptions of insurmountable hurdles or cultural inferiority. Latin America in the 1980s, he thought, was imprisoned by clashing intellectual paradigms, the false dichotomy between free market ‘neoliberalism’ (as we call it now) and Marxist revolution. He wrote: “The obstacles to the perception of change thus turn into an important obstacle to change itself.” Many economists point out the importance of expectations for economic outcomes, but usually in a rather abstract way in a model; expectations are what people believe to lie in the realm of possibility, and are shaped by intellectuals and economists and policymakers, among a whole host of others. We live in a world shaped by ideas, both embedded in technologies and embedded in policies and beliefs.

As the years went by, Hirschman turned increasingly to reading the classics of economics and the Enlightenment. As Adelman writes: “The pathway to recasting self-interest in a way that did not make it incompatible with the public good required going back centuries to the founding of its modern meaning.” His final book, [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link], is now at the top of my reading list. Although seen as a response to the politics of the Reagan era, Adelman argues that it should be read in a broader way as concerned with the kind of public discourse that sustains democracy. The rhetorical habits Hirschman describes in the book have not only become pretty pervasive, but are also amplified by online media. The state of civic discourse is a vital question in itself and because it shapes beliefs and therefore economic possibilities.

In these comments, I’ve picked up themes that interest me particularly, including the light cast on the state of economics. [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher[/amazon_link] has a lot for readers with other interests too, particularly development economics (I touched on this in an earlier post). It’s also the well-told life story of a fascinating and obviously charming man. Half way through 2013, I’m sure it’s going to be one of my books of the year.

La trahison des clercs

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I’m about a third through Jeremy Adelman’s superb biography of Albert Hirschman, [amazon_link id=”0691155674″ target=”_blank” ]The Worldly Philosopher[/amazon_link], and thoroughly enjoying it. We’ve got to the end of the second World War, by which time the young Hirschman had already had a lot of History to contend with, in the shape of the rise of the Nazi party in Germany, the Spanish Civil War, running with Varian Fry an escape route for Jews through Marseilles, Spain and Lisbon, and his own flight to the US and re-enlistment in the US army – alongside learning economics, reading widely and speaking several languages fluently, and getting married to a Russian-French-Californian intellectual and beauty.

[amazon_image id=”0691155674″ link=”true” target=”_blank” size=”medium” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_image]

Needless to say, I’m particularly interested in reading about Hirschman’s reading. He was a fan of Camus, but not Sartre – definitely the right preference ordering. When fleeing Vichy France as the authorities closed in on his escape route, and able to take only one book with him, he chose Montaigne’s [amazon_link id=”B0081LMNKA” target=”_blank” ]Essais[/amazon_link].

[amazon_image id=”B0081LMNKA” link=”true” target=”_blank” size=”medium” ]Montaigne – Les Essais (French Edition)[/amazon_image]

There is an interesting passage about Julian Benda’s attack on the abandonment of Enlightenment reason for nationalism by European intellectuals, [amazon_link id=”224601915X” target=”_blank” ]La Trahison des Clercs[/amazon_link].

[amazon_image id=”3640206096″ link=”true” target=”_blank” size=”medium” ]Julien Benda – La Trahison Des Clercs[/amazon_image]

Reacting to the argument, Hirschman wrote of the “hybrid position of intellectuals in the modern world: neither masters, nor prosecuted, but technicians.” Most saw their role as working out the most effective means for politicians to achieve the ends they selected, but this meant intellectuals had abdicated the responsibility to study “the thirst for power and domination.” There is no possibility of pure technocracy, he argued – that in itself is a political choice. An interesting reflection given the return of technocracy in Europe post-crisis.

I’ll do a proper review when I’ve finished the book, which is going slowly because it’s too big to carry around. There have been other excellent reviews, such as this by Justin Fox and this by Cass Sunstein.

Meanwhile, I want to honour the name of Hiram Bingham IV. I’d never heard of this State Department official. This rich and well-connected diplomat, based in Marseilles from 1939, had become disillusioned with the Department’s policy of doing little to nothing to help refugees from Europe reach the US, and so embarked on his own freelance mission to issue thousands of US visas, both legal and illegal, to help the Varian Fry and Albert Hirschman rescue operation. The beneficiaries included Hannah Arendt and Marc Chagall as well as hundreds of people lacking the protection of fame. The State Department retaliated by posting Bingham to Argentina, where he turned his attention to tracking Nazis. He resigned from the foreign service in 1945 and didn’t speak of his wartime work again.