Friday, February 8, 2013

"Tyranny of Political Economy" by Dani Rodrik -- a brief critique

Today Professor Dani Rodrik of Harvard published an article criticizing economists' traditional political economy models which emphasize vested interests, and advocated for the role of ideas in shaping government policy. I enjoyed the article, but at the same time I think it is overly optimistic about the role of economists and completely ignores the role of voters.

A snippet of his argument:
If politicians’ behavior is determined by the vested interests to which they are beholden, economists’ advocacy of policy reforms is bound to fall on deaf ears. The more complete our social science, the more irrelevant our policy analysis.
...By endogenizing politicians’ behavior, political economy disempowers policy analysts. It is as if physicists came up with theories that explained not only natural phenomena, but also determined which bridges and buildings engineers would build. There would then scarcely be any need for engineering schools.
Almost ironically, this stance seems to be driven by his own vested interest. "If vested interests drive politics, there would be no need for the type of courses that I teach. I know that the courses I teach have value, so it cannot be the case that vested interests drive politics!" It cannot be because it must not be. 

If we start from the assumption that what economists teach is both true and useful, this is a valid point, but those assumptions are not verified a priori: it is perfectly plausible that what economists say is true but of no use at all in the realm of politics. It would be unfortunate, but possible. It's premature to rule out policy irrelevance.

Of course, as Dr. Rodrik rightly notes, there are many examples of politicians responding to ideas rather than solely to vested interests. I agree that models which solely focus on the venality of elected officials are missing part of the picture. But are ideas alone enough to fill that gap in? He goes on to say:
There are three ways in which ideas shape interests. First, ideas determine how political elites define themselves and the objectives they pursue...
Second, ideas determine political actors’ views about how the world works...
Most important from the perspective of policy analysis, ideas determine the strategies that political actors believe they can pursue.
This is all true, as far as it goes. But where do the voters factor into this account? If voters are rationally ignorant or, even worse, actively irrational in their policy preferences, the ideas that politicians respond to may not be good ones.

Suppose that tomorrow there was suddenly a 100% consensus among economists that open immigration would boost national GDP and make the general public better off, and that every politician was made aware of this fact. Would that be enough to overcome the public's anti-foreign bias, which makes open immigration a quick ticket to the unemployment line for elected officials? Probably not.

Tellingly, Dr. Rodrik's examples of policy revolution due to the role of ideas - China and South Korea - are/were not particularly democratic states. So bringing good ideas to the ruling elite can have great results, but only if you can bypass all the terrible ideas brought by the general public, which is not an option available to us living in a Western democracy.

In this respect, the "vested interest" story is more optimistic than the "ideas" story. Even if the steel industry gets its way and extracts some rents from the general public through higher prices, they also care about keeping the overall economy functioning. If politicians respond to ideas, they're probably bad and wrongheaded, which is much more likely to crush our economic output.

Arguably, the best social role for political economists is advising the vested interests in how to rent-seek in the most inoffensive way possible. It's less noble-sounding, but a much more direct route to policy relevance. There is still a role for teaching good economic principles to students, but expecting that to trickle-up into better policy is optimistic in the extreme. Given the choice I'd rather speak to the captains of industry, rent-seekers though they might be.


  1. "Suppose that tomorrow there was suddenly a 100% consensus among economists that open immigration would boost national GDP and make the general public better off, and that every politician was made aware of this fact. Would that be enough to overcome the public's anti-foreign bias, which makes open immigration a quick ticket to the unemployment line for elected officials? Probably not."

    One of the reasons people have an anti-foreign bias is because they know that many people will suffer. It might be better for the majority, but the groups with the biggest problems today will get even bigger ones in the future (e.g. low skilled labor).

    But even if we would assume it would be to the economic benefit of everyone, it is the right of the public to reject foreign workers even if they would give up growth. Sometimes democracy trumps economics (e.g. equity-efficiency trade-off, health care...). It is only a problem so, if people are not informed about the costs of their choices.

    Also as are politicians is the public opinion shaped by ideas (and many of them are economic ones). Look at the tea party movement or just the "average" republican voter. They strongly believe taxing the rich will be bad for them even if they would get more benefits for themselves. What better proof for potential sanity of the electorate can you have if the biggest beneficiaries of public transfers (southern states) vote to reduce them. In any case are the people much more receptive to economic ideas than you give them credit for.

    Rational choices could probably be improved further if the political system would be improved. And suggestions how to do that is what I am missing from public economists. Complaining about inefficient government and not suggesting solutions how to improve it is not what I consider helpful.
    Calling for less funding to the government or asking it to drop tasks that have been captured by interests (e.g. financial regulation) or are run inefficiently (e.g. health care) is not really a solution in a fraudulent political environment.

    1. Some people in the U.S. might suffer from open immigration, but many more people (outside the U.S.) would benefit greatly. If our only criteria is the well-being of Americans then immigration restrictions are defensible, but that in itself is an expression of anti-foreign bias: why should our moral standards change because someone was born on the opposite side of an imaginary line?

      Setting aside the immigration example, there are many other economically backward policies the public supports - trade tariffs, rent controls, farm subsidies - where the evidence for their harmful effects is very strong by economic standards, but that isn't enough to convince people they're a bad idea. Public biases against economic reasoning run deep.

      I agree, there are many ways the political system could be improved. Public economists might be lacking suggestions because either (a) they're only concerned with making positive analysis and stay away from normative positions or (b) their ideas are so unpopular they prefer not to voice them, knowing they'll be ignored.

      For example, because uninformed voting has large externalities for others, maybe restricting franchise for the uneducated would improve policy. But, there's not much point in defending that idea seriously because most Americans find it morally repugnant, or even if they don't, getting people to vote themselves out of having a vote seems near impossible.

      More generally, the sorts of ideas which could improve the political system are impossible to implement, given that we have a flawed political system. Its this catch-22 that I think motivated Dr. Rodrik's article, and I'm not sure I have a great resolution to it either.